Real estate market cycles

Written by Posted On Tuesday, 24 November 2020 19:55

Real estate market cycles

We are going to structure this article by analyzing the evolution of the real estate industry in recent years, the cycles that have occurred, some success stories that have occurred in adverse markets and we will do so by analyzing their differences with respect to the agencies that failed survive. We will conclude by drawing a series of conclusions about what we can do so that, regardless of the market situation we are going through, we can guarantee the profitability and stability of our real estate agency.

  • Real estate market cycles
  • Situation crisis. When the market controls my business (crisis 2007-2013)
  • When the entrepreneur controls his business and is able to survive and grow in a crisis situation (2007-2013)
  • Factors and their degree of influence on the development and results of our agency
  • Neutral factors in the success and profitability of our real estate agency.
  • Influential factors in the success and profitability of our real estate agency.
  • Key factors in the success and profitability of our real estate agency.
  • Summary
  • Cost effectiveness
  • Stability

Analyzing the evolution of the real estate market from the different market cycles that have occurred since 2000 until now and taking as references some examples of very successful agencies that have occurred at the same time that thousands of real estate agencies disappeared in the stage of the previous crisis in the sector, which runs from 2007 to 2013, we are going to define the factors that are determining factors in order to have a profitable and stable real estate business regardless of the market situation that we may encounter.

The first question to ask is:  are they can "plan" a successful business? Or can its failure be "prevented"?

The crisis generated by the COVID-19 pandemic shows us that it is not possible to do it with certainty, nobody could foresee a crisis like this and what consequences it would have for our sector.

I. Real estate market cycles

In the previous graph we can see the evolution of home sales from 2004 to 2019 and at the beginning of this year and after several years of recovery in the economy and the real estate market, the maximum that we ventured to forecast for 2020 was a market downturn with a slight drop in sales and house price readjustment .

Today we know that this "situation created by the pandemic" will bring us more serious consequences than those that would occur due to the "development of the normal course of the economy" and among which are included forecasts of the drop in GDP from 8% to 13 %, falls similar to those that occurred in a six-year period during the previous crisis, but cumulatively for this year. There is talk of unemployment rates above 20%, falls in sales that fluctuate between 20% -40% depending on types of markets and falls in house prices of between 10% and 30%. The reality is that we have no certainty about the limits that will reach the consequences caused by this pandemic

What we do know is that the real estate market moves in cycles and knowing that this occurs in this way allows us to have a certain predictability about the future . In the graph we can see  at least three market cycles, although not complete:

The final part of the “real estate boom” (2000-2007) and which at its peak is close to one million annual sales, a volume never seen in the real estate market in our country

A change in the cycle in the second half of 2007 when the biggest real estate crisis began and that lasted until 2013, with a drop in sales very close to 70% of those made in 2006

In 2014, a new cycle of slow market recovery begins that lasts until 2018 , with 2019 being the inflection point in the upward trend maintained until that moment.

And, although this cyclical movement of the market allows us a certain predictability  , unpredictable events can occur, such as the one we are experiencing due to COVID-19, which can leave us bewildered and unable to react to the consequences caused by them.

In short, although we cannot foresee everything that is going to happen with certainty,  if we can prepare our business  to, at the very least, be able to survive and stay in an adverse market situation without being swept away by each new crisis and as best possibility that we can even grow up in those situations.

This will depend on the type of factors that control our business:

  • Factors external to my company. I have no control over them.
  • Internal factors to my company on which I have the capacity to act.

I will cite a clear example of each case.

II.Situation of crisis. When the market controls my business (crisis 2007-2013)

Between the years 2000 to 2006 we lived the period with the highest number of real estate transactions in the entire history of our country . In 2006 alone, about a million properties were sold and during this phase of market growth, thousands of real estate agencies appeared. Without knowing the exact number, there was talk of the existence of between 70 and 80 thousand real estate agencies.

Let us remember that from 2000 to 2007 there was a great economic recovery, there was a high level of employment, financing from banks was fluid, in short, there were all the characteristic ingredients of an upward cycle of the economy and the real estate market.

In 2013, just seven years later, we see a radically different situation. The sale of properties had fallen by 70% over those made in 2006 and in the next few years between 60% and 70% of the existing real estate agencies would disappear

Factors such as the economic crisis, the lack of financing from the banks for the purchase of properties, the decrease in immigration, the disappearance of investor clients that occupied a significant part of the purchases up to that moment, all of them factors external to the agencies themselves they decided the fate of almost 70% of real estate agency owners and many thousands more of their agents, who were simply "swept away" from the market.

III. When the businessman controls his business and is able to survive and grow in the midst of a crisis (2007-2013)

I also want to give an example of the opposite, it is an example that I know very well and that shows the development carried out by one of the best REMAX Today your office is among the top ten RE / MAX offices in Europe, by billing, out of a total of more than 2,200 offices.

In 2007 this broker had 29 agents in its office and seven years later, in 2014, it had 60 agents and had gone from a turnover of € 400,000 to almost 2 million. In those seven years, he had doubled his team of agents and almost quintupled his turnover.

The question we must ask ourselves is what did this broker do, different from the 70% of those who disappeared in that same period? .

IV.Facters and their degree of influence on the development and results of our agency

We will find the answer to this question by analyzing the factors that can influence the "future" of a real estate agency. I have classified these factors into three categories based on the level of influence that I believe they can exert:

  • Neutral
  • Influencers
  • Determinants

Neutral factors that can influence the profitability of a real estate agency

They are the easiest to analyze. They are the formal aspects and are practically the same that every type of business has to comply or have covered. Its influence on success in failure, of the same, is very little if not nonexistent. Among them we will highlight the following:

Normative; professional, legal, tax, insurance etc.

The requirements to develop real estate brokerage activity are minimal. Activities of real estate may be freely exercised without the need to be in possession of any title or membership in any official Association" both by a NATURAL person or by a LEGAL person ". Without a doubt, this absence of "requirements" for its exercise is not the best situation. We all hope that in the future we will go towards a regulation of our profession that increases the demands and requirements that result in a more professional performance of it.

  • Creation of the company and all the procedures that its creation implies ; requesting the name in the Mercantile Registry, opening a bank account, etc.
  • Requirements on the premises in which the activity will take place; building license, opening license, occupational risk report, etc.
  • Compliance with insurance regulations: hiring a Professional Civil Liability and Employer Liability insurance and in some communities a Surety insurance is also mandatory.
  • Compliance with regulations on data protection and the Law on the Prevention of Money Laundering.

As capital smart city said at the beginning of this section, compliance with these factors that I have called "neutral" is necessary, but they have little or no influence on the success of the agency.

Influential factors in the success and profitability of our real estate agency

A second category of factors that we will call "influential" are those that will exert a significant level of influence on the development and results of the agency but in no case will its success or failure depend on them. Among them we can mention the following:

  • • The market : knowing the characteristics of the market in which the agency will carry out its activity will be very important. Know the volume of annual transactions carried out in it, if the transactions are for sale or rent, the type of properties in the area, whether they are residential, commercial or luxury residential properties, the average price of the properties, usual fees in the area etc. Having a good knowledge of all these aspects of the market will help us to correctly size the commercial team, the structure that we will need to service it, the type of specialization that these agents should have depending on the type of transactions and properties that they will handle. , the type of training they will need, etc.
  • • The office: the location of the agency, its visibility, its image and ultimately, any of the physical aspects of the office can become either a facilitating and accelerating element or a slowing down and hindering element for the development and success of the same.
  • • Competition: among the many factors that we have to take into account for the success of our business, there is one that is knowing our competitors well. Know who they are and where they are located, what services they offer, what they do well and what they do poorly, what their strengths and weaknesses are, whether they work exclusively or openly, what fees they charge for their services, what image they have, what tools they use , etc. This will help us define the most effective strategies and tactics, as well as a more compelling value proposition. for our internal client, the agent and for our external client, buyer and seller. Constantly monitoring the activity of our competitors will serve as a permanent learning and evaluation tool for our own company.

ll these factors are going to have an important influence, but are not decisive, in the final result of the business.

Key factors in the success and profitability of our real estate agency.

Finally, we are going to see the key factors. Those that are not only going to influence, but are also going to be decisive in the success and profitability of our agency . They are the ones that truly make the difference between some agencies and others and, luckily for us, they are the ones over whom we can exercise greater control.

  • The definition of the mission, vision and values ​​of your company.
  • The strategy
  • The role of the broker
  • Business model
  • Traditional business model
  • Shared cost business model
  • The value proposition.

1. The definition of the mission, vision and values ​​of your company.

We must begin by clearly defining the mission, vision and values ​​of the company. The clearer and more shared it is, the easier it will be to define actions and strategies. Most importantly, it must enable us to successfully create a connection with our internal customer, our agents, and with our external customer, buyers and sellers. If we can get our team of agents to share the mission, vision and values ​​of the company, it may be much easier for us to remain loyal to our business for life and the same will happen with buyer and seller clients.

  • Mission: clearly explain what the purpose of your company is, why you created it. Remember that people don't buy what we do, they buy why we do it.
  • Vision: how should your company be? Where do you want to be in a deadline? It allows you to visualize the future of your company in a term. With it you describe where you are going. If your team of agents does not share that vision, it is very possible that you will not reach the goal.
  • Values: finally, you have to define well what are the principles on which you want the culture of your real estate agency to be based because these values ​​are going to be the ones that mark the behavior guidelines of your agents and your own. Keep in mind that these are the values ​​on which the “difference” of our company is based above the brand and other aspects.

2. The strategy

The strategy is the starting point of every project and of every entrepreneurial process and it is the way in which you have decided how you are going to create value for your internal client, the agents and for your external client, the buyers and sellers. The strategy you choose will define two very important things; your “role” as a broker and “where” it leads.

Among many possible, at Blue World City , we always talk about two great strategies that differentiate the most successful brokers from those that are not:

Work "in your business" . This is the strategy followed by more than 90% of the people who decide to open a real estate agency in our country. They create a company in which they work "within" the business, they are the business; They are managers and also agents. They are recruiters and sellers, clerks and advertisers … and as a result they tend to have a very small number of agents, if they don't end up being a sole proprietorship. The result of this strategy is that they have a "job" and not a business. A “micro-enterprise” that is highly dependent on its own work as an agent or that of very few people, with limited capacity to grow and with low stability.

Work "on your business" . Only a small number of brokers understand that the best strategy is to work “on the business”, that is, to dedicate their talent and their efforts to building a business, dedicating themselves to recruiting agents, developing them and providing professional services so that they can be successful in their business. work, allowing him, all this, to retain the best producers. The end result of this strategy will allow them to have a "business" and not just a job. A business with great billing and growth capacity.

3. The role of the broker

The chosen strategy determines the “role” of the broker, that is, what it is going to do. People who decide to work "in your business" focus their activity on one of the following objectives:

  • Sell ​​houses. They become independent sellers and their income depends entirely on their activity as agents.
  • Create a small “real estate agency” with a small number of agents that help them improve the results they obtain as agents, but they still have a job or at most they manage to have a subsistence “micro-business” with a high probability of disappearing before any change in the market.

In both cases these brokers "create a job" with a limited capacity to grow and highly dependent on what they do as agents.

Now, when you decide to work "on your business" the goal is very different and the results are too. Your role is not to dedicate yourself to agent functions but to build a company with a structure and services that allow a greater number of agents to develop their own business with your support and that provided by your office.

4. Business model

There are three elements that a " good" business model must have :

  • Cost effectiveness; give benefits
  • Scalability ; strong growth potential
  • Repeatability; easy to replicate

In any case, the business model that we define to develop our company must allow us to have a business that is not only profitable, but also allows me to maintain that profitability in any market situation.

Traditional Model

Most real estate agencies operate on a "traditional model" characterized by working with employed agents. They are offices with a high level of fixed expenses and in which the business risk falls exclusively on the employer (real estate broker). Hiring for someone else makes agents a "liability" for the company and each new agent that joins increases the fixed expenses of the business. This situation means that many agents cannot be hired due to the risk implied by the increase in fixed costs and finally sentences most real estate agencies to have very few agents. We can state that more than 90% of the agencies in our country have less than ten agents.

The most common result of this model is real estate agencies with few agents in which the broker has no choice but to act as agent, among many others , if he wants the business to remain viable. A company in which all expenses fall on the employer and in which production is concentrated in very few people has the necessary ingredients to turn it into an unstable business and high possibilities of disappearance in the face of adverse market situations that may arise.

The strengths:

It is a model that has proven to  work well in expanding markets . It is sustainable in markets where sales are growing and this is demonstrated by the thousands of real estate agencies that open in the boom cycles of the real estate market and that despite bearing very high fixed expenses, they remain as long as the sales trend does not change .

Agencies can be viable and have an acceptable profit margin with medium-low office billing levels since the broker retains a high percentage of the fees generated by its agents in order to meet all business expenses.

It is a model that is well adapted for people who value the security of a salary compared to the opportunity to earn more, but taking risks.

It is better suited to brokers with a more managerial profile, allowing them a higher level of control of everything that happens in their business by working with a type of agents who need a higher level of technical and organizational instructions.

Weaknesses

  • • The real estate “agent”, in this model, becomes a liability for the company . Each new agent that I join the agency increases the broker's business risk and that limits the business growth capacity.
  • • With few agents it is not possible to achieve the necessary turnover so that they can retain a higher part of the profits they generate from their operations. Generally, agents earn a base salary plus a very small variable that is between 10% and a maximum of 20% of the fees they generate. This agent compensation model does not allow you to retain the best agents who want to earn more.
  • • In a model in which spending is concentrated in the figure of the broker and production is concentrated in very few people and the loss of any of the most productive agents can cause the agency to go from having benefits to having losses immediately .

All these characteristics make the agencies that base their construction and development on the traditional model to depend to a great extent for their results on external factors that are not controllable by the company itself and therefore have little capacity to influence the results that they can obtain. .

Traditional Model

At Skymarketing we apply a business model radically different from the traditional one: the shared cost model.

As essential differences, this model works with autonomous agents who assume certain business expenses , therefore, it is a system in which the business risk is shared between the broker (entrepreneur) and its associated agents. This feature allows a greater ability to grow and hire new agents without increasing overhead. The figure of the "agent" becomes, therefore, an asset "for the company, being able to multiply its productive capacity while maintaining, the employer, a controlled risk at all times.

The most visible result of the application of this model are real estate agencies with teams of agents much larger than the vast majority of traditional agencies that exist and that allow them to achieve higher levels of billing and therefore a higher level of profit both for the broker and the agents.

Another benefit of this system is the “ diversification” of production among a greater number of agents , which translates into greater stability for the business , since in the event of the loss of a “productive agent” the percentage by which the turnover will decrease of the office will not be significant for the same and this will not be affected in its financial stability.

Building an agency in this model implies a change in the “role” of the broker , that instead of dedicating itself to attracting and selling properties as just another agent, its functions will be focused on growing their business, recruiting agents and providing them with the best services to help them. to be successful in the business and thus achieve the retention of the best.

The broker's “leadership” style also changes. Working with freelancers means that you manage people who bear their own expenses in the business and who have a “more entrepreneurial” mentality and therefore who make their own decisions and will demand greater management independence. This means that office agents work “with” and not “for” as in the traditional model and that the management style must be more participatory and non-directive.

Other notable positive aspects:

  • • Greater capacity to adapt to any market situation. Lower fixed costs and shared with agents allows the office to maintain its ability to continue growing even in adverse market situations.
  • • Larger teams of agents make it possible to reach billing levels that make it possible to reward agents with higher percentages than those they can receive in any other agency, which will increase the ability to retain the most productive.
  • • It allows you to have a business and not just a job. Your income does not depend on the work that the broker does as a seller but on that of a much larger team of agents

Some weaknesses:

  • • It is not suitable for those who want to have a team with few agents . If your goal is to have a small agency with 3, 4 or 5 agents, do not choose a shared cost model because here you retain, as a broker, a lower percentage of the fees generated by your team and you will not be able to assume all the fixed expenses of the business anymore. while maintaining a good level of profit.
  • • Does not offer good business profitability at low office billing levels
  • • It is a more complex model to handle. It requires a greater development of leadership and management skills in the broker who has to attract good agents to his office, not offering them a salary but a value proposition that convinces them that it is the best possible place where they can be to develop their own business.

5.The value proposition.

The value proposition is made up of the advantages or differentiators that your company offers to your clients; to agents and buyers and sellers

As a real estate broker, the value proposition is what your internal client, your future agents, will be willing to choose and pay for. Numerous elements are part of your value proposition:

You, the “broker”, are an essential piece of your agency's value proposition. Agents will decide to work with you or not depending on the type of leadership you exercise over them and over your company.

The brand ; In addition to the trust and reputation that your brand offers, it should mean greater business opportunities for your agents. It must allow them to reach buyers and sellers they would not have access to on their own.

The network to which you belong; It should offer you more possibilities of shared business and access and knowledge of the best business practices used by the most successful brokers and agents of the same

Training and education: that allow you to help your agents to be successful in the business

The best professional and service environment in which agents can develop and grow that offers them the best support and tools (technology, marketing tools, etc ...)

A broker that does not limit their growth : that allows them to grow while retaining a higher part of the profits they generate, that allows and helps them to create their own teams and develop their own personal brand, to have greater management independence and have greater control over your clients and their decisions, etc ...

In short, before the value proposition that you offer to your agents, they will always establish a comparison between costs and benefits and only if the result of this is balanced will they accept it and join your project.

As a broker, you have to be very clear that the value proposition is the commitment that you are going to establish with the associated agents in adding value to their lives by responding to their needs and motivations.

V. IN SUMMARY:

The confluence of all these factors that I have called key should lead us to two fundamental objectives:  profitability and stability.

1. Profitability:

There are two ways to increase profits: reduce expenses and increase income.

Cost reduction:

Not all ways to cut expenses are going to be good for my business. If reducing expenses implies reducing the production structure , that is, the team of agents, the result will be to have less expenses, but in all probability, also, less income and benefits. A "contraction" strategy of the commercial structure of an agency can be a good short-term strategy to withstand expenses in difficult times, but it will also imply a reduction in your productive capacity and in the medium term it will not serve to save the business . A very clear example of the above is what happened to thousands of agencies between 2007 and 2013, which reduced their teams to a minimum, and which eventually ended up disappearing.

The alternative way that will allow me to reduce expenses without giving up maintaining or even increasing my productive capacity is to work with a “shared expense” model . I can grow agents without increasing overhead.

Increase turnover:

The two variables that allow an agency to increase its billing is to increase the number of agents and their effectiveness and to work with the maximum profitability per transaction.

How can the number of transactions be multiplied?

Growing in number of agents and in order to do so I need to have a spending model that allows me to do so without collapsing my ability to deal with fixed costs

Increasing the effectiveness of agents and to achieve this I need to be able to offer them support, professional services and tools.

How to work with the highest profitability per transaction? Offering seller and buyer clients the services that allow you to work with the percentage of fees necessary to have a good profitability in your business and that the client is willing to pay in exchange for the services they receive.

2. Stability

We could not consider an agency as "a stable business" if it only allows us to earn money at very specific moments in the market or when factors external to the company are favorable. It will be when it allows us to continue to have benefits in any market situation.

The stability of an agency has to do, generally, with two concepts; volume and diversification. In an office with few agents, the loss of a productive agent may mean losing a high percentage of total turnover, while in an agency with many agents, in which production is highly diversified, this loss will have a very small impact on the results.

In summary, with a shared cost model I can have more agents, a larger portfolio of exclusives and, therefore, more sales. If I have greater benefits, I can implement more and better services for my agents and my value proposition will be more attractive to attract new agents to my office. This process allows taking an agency to a new level of development and turning it into what we call a "real estate industry" capable, not only, of achieving high profitability but of continuing to generate profits in any market situation. We call this "stability ."

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