Why Generating More Business Will Never Increase Your ROI Percentage
I am not sure about you, but I did not go to business school or university. I have had to work things out the hard way. Or I should say, I learned on the job, the practical method, not theoretical.
When I first got into the business, the only advice I got about getting started was some very simple. Just think of it like you have two potato sacks. One sack is for money coming in, and the other is going out. Keep it as simple as this, make sure you have more money coming in than going out, and you will be fine.
This was good advice to get me started because I had messy books, but I had enough money coming in to fix any problems. If I had gone the traditional route and written a beautiful business plan and had perfect books, I would have gone broke. But at least I would have been able to see precisely why with my excellent books!
My point is that starting a business requires more grunt than planning. However, once you get through this stage you can then begin to look at the way you do things. From a 30,000 foot view, you can start to think that there must be a better way of keeping more money in your pocket.
You probably already know that this is called ROI – return on investment. When I looked at the money I had coming in, and the money going out, I learnt that I was averaging around a 15% profit margin. So, for every $10,000 brought in, the company only got to keep $1500 after all expenses.
I was still pretty new to this, but to me, this did not sound right. I spoke to other business owners in the real estate industry and found that most were between 10-20%. Rather than thinking, right, okay, this is normal, instead I thought there must be something wrong with the traditional real estate business model.
Before I started to explore new models, I just did the most straightforward thing I could. I worked on ways to generate more business to test whether this would affect the percentage return. I implemented new prospecting methods, new business development strategies and started skilling up the team to close more deals. There were some fluctuations on the ROI, but ultimately, when I worked it out over a quarter, it was still pretty well the same. The conclusion I came to was that getting more business in will not necessarily change the actual profit margin.
When asking other directors where most of their expenses were, I found they were all in the same areas as mine, and that they were all rapidly increasing. They talked about a time which I will call the “good old days” where the percentage return was 30-35%. What I discovered from these conversations was very interesting and it became quite clear where this expense creep was coming from!
Here are a few for you:
- Agents commission splits
- Portals constantly increasing prices
- Ridiculous insurance costs
- Property managers wage expectations
- Tech for all different parts of the business
There are so many more costs that have come along in the last 10-20 years that were not an issue in the “good old days.” The other factor which is putting a ceiling on your ROI is the downward pressure on fees in property management and sales. The consumer expects to pay less and get more.
So, what can we do about all of this to build a more profitable real estate business and still deliver what the consumer demands?
My previous business mentor, Mark Dwyer, explained something to me. Real estate agents will continue to want higher commission splits while they have to find the prospect, list the home, reduce the price, show the house, negotiate the deal and all of the rest. To an agent, this feels like 100% of the work, so what do you expect? If you ask a sales agent what they spend time on almost all will say prospecting. So, if you take this away and start to produce listing opportunities for them on behalf of the company, maybe their expectations may change? He was 100% right! As soon as my company bedded down a lead-gen strategy that produced listing opportunities for my agents, I could retain more of the fee for the company. My highest split paid to one of my agents was 41%. Now we had the power as we had a unique offering for agents where they got listings booked for them to go out and list. In our office, real estate sales agents only did the things they enjoyed most – listing and closing deals!
In the property management department, there was a similar situation. There were no bonus incentives, and yet staff had to manage more and more properties. Looking back now, I realise that I just looked at what others did and copied them. Copying other agencies was crazy considering When They Zig, You Zag was one of my favourite books at the time. My answer was a model that gave the property managers a way to be invested in the business and take all the stuff they hate doing off them. This seemed to work well! Our return in the property management department steadily climbed!
By now, you are probably thinking, well this all sounds well and good. But who has the time to build this out? Plus you would have had to hire a tonne of staff to facilitate the plan.
Well, you are 100% right. There is no way you can build a lead-gen machine that generates 30 listing appointments a month and without having a large organisation. The solution was to have a large team, but why do they have to be located in my office?
The discovery of real estate virtual assistants was a game-changer for my real estate business. At first, when starting the process, I was not very good at getting offshore staff to work as planned. You can read all about this journey in my eBook The Offshore Tipping Point. However, once I got better at it, it took off.
First on the hitlist was moving all administration to the offshore team. We built very detailed processes to make sure it was a bulletproof system. We clawed back huge chunks of time and lowered some in-house wage costs. Now, before you freak out and think that we cut heads in our office, let me assure you that that was not what happened. The internal staff member whose role got replaced did not get moved on; they stepped up to become a buyer manager! Sales agents now did not have to show buyers and attend building and pest inspections. These improvements gave our agents time and happiness, which allowed them to perform at a higher level.
In property management, it was simple. I told our PM that I was giving them an assistant. I knew that she was already under the pump. Likewise, she knew that we needed to grow, but hiring another PM was a vast expense and a barrier to growth. I explained to her that the only flip side was that her assistant was not going to be in the office, but that she could train them to do all the things that she hated doing or should not be wasting her time doing.
By presenting it like this, it was a no brainer for our property manager. What happened from here was truly amazing. Our property manager was now able to handle 200+ properties working in conjunction with our property management virtual assistant.
Now that all the admin was taken care of, I started to wonder what other skills I could hire offshore. I wanted to redo the website and put in an SEO strategy to help us rank first page for all the keywords we wanted. This had always been a pipedream, but with offshore staff it could became a reality. We had loads of ideas around social but were always let down with design as we could not afford a graphic designer. This was no longer a problem. I was surprised at what I could get done and achieve for such a low cost. The team I had would have cost me $300k a year if hired locally, but they cost only ¼ of that by using offshore staff. With all the new business we were generating due to their output, I found that they paid for themselves.
Sometimes I do make using offshore staff sound straightforward. But it is definitely not just plug and play. You must have a clear vision of what you want to achieve before you even attempt what I have discussed in this article. I can assure you, though, once you get it right, you will be at a 30% return on investment in no time and will be able to thrive through the ups and downs in the market with ease.
I hope that you obtained some value from reading this article. I love helping real estate agencies implement offshore staff into their business because I know that it saved mine. So do not be scared to reach out to me if you have any questions.
Add me on LinkedIn and send me a message so we can chat. Thanks for your time.