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RISMEDIA, December 12, 2009—As 2009 comes to an end, it is crucial for real estate professionals to prepare themselves for the future so they can hit the ground running in 2010. While the business model of the past no longer applies to today’s real estate market, Sherry Chris, President and CEO, Better Homes and Gardens Real Estate LLC discusses why nothing should go unchallenged when thinking up a new model.

Sherry Chris
President and CEO
Better Homes and Gardens Real Estate LLC

Those who are waiting for the good old days of the real estate market to return may be surprised to hear that those days will likely never return. The fundamentals have shifted the business so dramatically in recent years that you are better off waiting for telegrams to make a comeback than to expect a market upturn to deliver the business model of old to your doorstep.

Consider this: while times were good earlier this decade, the average broker was making a solid living despite the fact that most of their other fundamentals that determine their profitability were doing poorly.

There are three main drivers of revenue: the average price of sales; brokerages’ take after the agents’ commission splits; and the amount (in percentage) received per transaction (ABCR). For the vast majority of brokerages, only average sales price—the driver they had least control over—was increasing.

Despite a market that was churning out more sides, the number of agents and brokerages in the marketplace increased dramatically so that the pie was split ever more. Most brokerages were barely able to keep sides steady during the upswing. At the same time, competitive and consumer pressures were driving percent retained and ABCR down. But price kept saving the day, so the good times rolled.

When price turned, the average broker’s P&L very quickly fell apart. Since the shift, the average broker has cut and cut, but there simply hasn’t been enough to eliminate in order to offset the revenue crash and get to profitability.

And, although Fannie Mae expects sales volume to bottom out this year, improve only marginally next year and grow at an increasing rate from 2011 through 2013 to 33%—better than 2008 levels—without fundamental changes there’s a good chance the return to profitability will be delayed, at best, for many years after the market improves and, at worst, will be beyond reach.

Looking ahead, we must address each of the basic revenue drivers as well as new revenue streams and take a good hard look at the existing expense structure. Nothing should go unchallenged when thinking up a new model.

Specifically, we need to be considering how to do the following:

1. Maintain ABCR by constantly updating and improving the value proposition to consumers.

2. Increase average agent productivity.

3. Increase percent retained through brokerage-generated business.

4. Generate a far higher output per square foot of office space.

The above are necessary to achieve success as a Next Generation Brokerage, something we all should be and need to be working to obtain.

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