What some brokers did to weather the downtorn.

By Roger Cruzen

It’s Lesson No. 1 for most successful real estate agentsturned brokerage owner or manager: Your job no longer is tosell real estate—it’s to operate a profitable business.

That’s difficult enough to do when the market is healthy,let alone when you’re facing the prospect of another difficultyear. So how are California brokerage owners and operatorskeeping their heads above water?

California Real Estate turned to three seasoned broker/ owners to share what they’ve done to weather the current recession.

Dennis Badagliacco|CCIM, CRB
*Altera Real Estate, Silicon Valley
Three offices, 130 agents

“Looking back, 2005 was a banner year. Our average salesprice was around $780,000, and a lot of agents were able tomake a living doing only two or three deals a year. Then wegot to September ’07 and the bottom fell out. There was notransition–it was just going down, down, down.

“Eventually, it hit us that this was not going to go awayand that we needed to cut our expenses. We consideredeverything: leases, staffing … everything. At one office wewere spending $3,000 a month with PG&E, so we lookedat how we could reduce that cost. We cut salaries and staffso dramatically that if we cut any further, we’ll have to splita front-desk person with two offices. We outsourced ourconcierge services and closed our loan company, which hadbeen a profit center. I could see us bringing back some ofthose services, but I don’t think the loan company will comeback. There’s too much risk.

“Eventually, the foreclosures began to hit. Our price isdown from $780,000 to $500,000, which means you needthree times the sales. We had agents who hadn’t done a dealin 12 months, and I just couldn’t afford them, because itcosts between $15,000 and $25,000 to carry an agent. We’redown now to about 85 agents in our largest office.

“Today, we want agents with a minimum of two to fourtransactions, but prefer someone with six to eight who willbe able to get to eight to 10 with our system. And we’veinstituted coaching sessions with all our agents.”

*The Altera brand was co-founded by Dennis and Colleen (C.A.R. Past President) Badagliacco and Gary Thomas (C.A.R. Past President).

Karl Bundesen|GRI, CRS, CRB, e-Pro
Broker/Owner, CENTURY 21®-Bundesen, Petaluma
Single office, 33 agents

“My father was one of the first CENTURY 21 franchisees north of the Golden Gate. I got my license in 1984, and he brought me on as a partner in 1988. I learned the hard way back in the early ’90s about money management and have had a conservative approach to running a real estate business from that point. [Sacramento REALTOR ® ] Mike Lyon once told me, ‘Pay for everything with cash.’ That made a lot of sense. 

“2005 was like picking up moneyoff the ground, which was not a greattraining ground for when thingschanged. But I never anticipated it[the downturn] would be as bad as itis. I thought maybe we’d see a 15 to 20percent correction.

“What got some in trouble—and Isaw the same thing with agents that Isaw with brokers—was that they didn’tplan for a downturn of this magnitude.Some were living hand-to-mouth evenwhen the market was good.

“There came a point when I saidto some of my people who weren’tproducing, ‘I owe it to the people whoare producing and who are strugglingto feed their families to not havepeople who are just sticking their toein the water all the time.’ Four or five[agents] got out entirely, and a couplewent to other offices. I felt like it wasmy job to help them make a decision.That was helpful maybe in that some ofthem decided to ‘get in.’ That’s what Iencouraged them to do: Go one way orthe other. Don’t just sit on the sidelinesand watch.

“What have I learned? To have peoplewho handle a diversity of properties.We have people who do mobile homes,commercial, ranches, the upper end.We handle probates and trusts, whichcontinue regardless of the market. Wehandle fewer REOs as a company thanmost. A lot of agents were reluctant to getinto short sales and REOs, but a lot of theyounger agents, who were more flexible,did. And we have a good-sized propertymanagement company.

“How do I judge success? It’s reallypretty darn easy. You should be meetingall your obligations and still be able to putaway some money for retirement.”

Todd Olson
RE/MAX Olson & Associates, Northridge
Five offices, 228 agents

“I started as a salesperson in 1977.My father was one of the owners of alarge independent, Forest E. Olson Co.,which was sold to Coldwell Banker. Iopened my own firm in 1987 as a smallboutique and in 1999 signed on withRE/MAX. Since 2005, we’ve gonefrom 10 offices to five and 370 agentsto 228. The biggest hit we’ve taken is inactual sales volume and the income weearned from that volume. In 2005, wedid $1.3 billion in sales. That’s down toabout $776 million for 2008. However,our transactions per agent have actuallygone up to seven from five in 2005 …and [agent annual income] has droppedto $30,000 to $40,000. RE/MAXcharges agents a monthly fee, which isappealing to highly productive agentsbecause it limits their cost and theyknow what they have to pay everymonth. But a lot [of agents] couldn’tpay the monthly fee, even if it costthem more [somewhere else] at theend of the year in terms of percentageof commission. My guess is that 60percent [of agents who left his firm]got out of the business entirely and 40percent went to other companies.

“We saw the change coming in thefourth quarter of 2005 and sat downand talked about what to do. … Wewent after our landlords, renegotiatingleases or terminating or consolidatingleases. We initiated a no-hire policy anda salary freeze and eliminated peoplewho couldn’t pay [their monthly]fees. That was tough for a family-runcompany. Overall, I’d say we cut ourexpenses by about 40 percent.

“During this time, we were veryhands-on with staff. We held meetings witheach office and told them what direction weneeded to take the company in order to survive.I think they appreciated that honesty.

“Sixty to 70 percent of our market isREOs, so we became very proactive aboutREOs … they’re what kept us afloat.We had some people with longstandingrelationships with Fannie [Mae] andFreddie [Mac] and with asset managers.We dusted off our old training materialson short sales and how to sell REOs andwork with lenders and started trainingagents. We also did some motivationaltraining to keep people optimistic.

“In Q4 ’08, we had our highest volumein three years, so we are really encouragedbecause that’s typically a slow time. 2009is showing good signs of recovery, but wedon’t see an end to this anytime soon.”

Where to Cut

When it comes to cost-cutting, occupancy and general and administrative costs can have the greatest impact on brokerage profitability, according to a recently published analysis conducted by REAL Trends . The study, whichexamined two categories of incomeand five categories of expenses,concluded that the most profitablebrokerage models were thosethat limited occupancy expensesto less than 3 percent of grosscommission income (the high was9 percent) and held general andadministrative expenses to as lowas 1.8 percent (the high was 7.9percent). There was less benefit fromcutting advertising/marketing or employment costs.

Roger Cruzen is a freelance writer.