A New Business Opportunity

Recently, Jan and I have been approached about joining a small group (3 others) that are strongly considering starting a new real estate brokerage here in town.  This group of 3 all work together at a fairly large national brokerage out of their Scottsdale office.  However, ownership for their current brokerage is in flux (the old owner was ousted by the national guys) and new ownership is not yet in place.  The longer this takes, the more disenchanted everyone gets.  Many have already fled, but a core group of perhaps 20 agents are still hanging on to see what happens.
NoName RealtyThis small group of 3 is considering seizing the opportunity to create something new (lets call it NoName Realty).  They believe they will be successful recruiting from the old firm and thus will be able to hit the ground running.  It all sounds like a golden opportunity on the surface, and they’ve approached us to see if we want in.  The reason they are considering adding us to the mix (who wants to divide the pie 4 ways, when 3 is enough?), is because we already have a real estate office.  It’s built, up and running, but with a very low agent population.  We could certainly absorb everyone they have and then a bunch more (I conservatively estimate our office could handle 50 agents).
The catch (at least from our end) would be, they’d really like us to become part of this new company, and thus we’d have to leave Realty Executives.  That alone is almost a deal breaker.  I work for the #1 brokerage in town.  I have the best broker support I know of, with what is widely believed the most experienced brokers in the world, having reviewed more contracts than anyone else on the planet.  And personally, I love being a part of it.
Still, I never want to close a door before it’s even opened.  So we had a sit down with the guy we know the best (we’ll call him Sam for now).  Sam shared the business model along with the earnings projections.  If the business could live up to the projections, and the anticipated costs were accurate, it was a compelling case.  But then I dug into the details a bit deeper and compared them with our Realty Executives satellite office. 
NoName Realty would be a franchise as a way of getting off the ground quickly and minimizing back office development costs.  The franchisor has back office support designed to make it easy for brokers as well as agents.  Unfortunately for me, it’s a significant step backward.  It’s certainly better than the average brokerage provides, but honestly not state of the art (ie, no blogs, no real time MLS access, and everything appears in the company’s name). 
I determined that the combination of Executive Edge for managing my marketing and a Superlative website was more effective than this franchise setup, although admittedly at a bit higher cost (though not tremendously higher).  The only negative is that I visit 3 websites to do what they have piled together under 1 website.  Still, that’s not compelling enough for me.  Add on my blogs, and I’m blowing away what they have.
The other big sell is the financials.  Realty Executives is essentially a 100% commission company.  They pioneered the concept.  RE/MAX is the other big player in the 100% model, having copied the concept well, and probably done a better job in brand marketing.  However, a couple of years ago, the balloon must have gotten too expensive, and RE/MAX is now a 95% company.  At any rate, the way a 100% company works, is they charge a fairly significant monthly office fee.  An agent pays the monthly fee, and then all of the commission earned goes to the agent.  Each of my commission checks has just 2 very small deductions:  $50 for E/O insurance and $25 for advertising.  That’s relative peanuts. 
In basic numbers, a Realty Executive agent with Gross Commission Income (GCI) of $60K per year will net about the same as if they were at a traditional office with an 80/20% split.  Once GCI goes above $60K, the Realty Executive agent will always net more than a traditional agent with a split.  To compete with this, traditional firms typically share in the cost of marketing and/or providing leads to the agents.  It’s the leads that typically are what retain agents.  Agents with a poor marketing plan tend to rely on the brokerage feeding them leads.  But those leads always come with a very high commission split.  Sam reports he gets only 39% of the gross commission for his brokerage supplied leads. 
Successful agents are easily making more then $60K per year.  Realty Executives understands it’s the destination for the successful REALTOR.  We have the best of the best, and as a consequence we have a very good reputation.  This is another of the many reasons I would have a very hard time wanting to leave.
As a satellite owner, I can recruit agents to work in my office.  I am free to set any monthly fee or commission split I would like between myself and the agents.  Regardless of this arrangement, I have a set monthly fee I pay to the broker for each agent.  The franchise agreement for NoName Realty also has a monthly fee per agent, along with a 1% of GCI franchise fee.  As I did the numbers, being a part of NoName Realty would save around $150/month over the Realty Executive model for a $75K GCI agent.  Higher producing agents would save less.  And superstar agents would cost the brokerage more at NoName Realty than being at Reatly Executives.
DecisionsSo, the choice is whether it makes sense to save $150/month per agent to be at NoName Realty, or stick with the Realty Executive satellite office model.  Honestly, it’s a no brainer. 
So now I have toughest part of all of this.  Trying to convince my friend Sam he should join our satellite, and bring along his gang.  Everyone he brings will make more money if he does.  We’ll have to work out a bunch of commission split agreements, and possibly develop a marketing coalition to develop a stream of office produced leads, but the end result will be more net revenue for everyone.