Why reducing your fees is not the answer

I recently attended a seminar presented by REISA, Macquarie Bank and BDO. Drawing from the research that was presented, I would like to share my observations on what is happening in the current market, and how you can prepare your agency for a possible downturn.

Let’s start with where we are coming from…

According to research by Macquarie Bank and BDO, it is surprising that after a very buoyant sales and rental market over the last few years, more than 50 per cent of respondents still expected their net profit to be less than 20 per cent this year.

This statistic was supported by EBITDA figures which showed that the average profit percentage for agencies is only 14.35 per cent.

In comparison, when surveying agents in the upper quartile, they reported an average profit percentage of 33.68 per cent.

That is a huge difference!

Average vs top-performing

Digging deeper into the numbers, I noted that to go from the average, to the top 25 per cent, did not require a huge increase in turnover or charging much higher fees.

For example, the average number of listings per month for the average agency came in at 3.6 versus the top 25 per cent that averaged just over five listings. That is a difference of only 1.5 listings a month.

The sales commission charged by the average operator was 1.8 per cent while the top 25 per cent charged 2.54 per cent – a variation of only 0.74 per cent.

This means that if you are not already in the top 25 per cent, getting there is most definitely not pie in the sky.

Discounting vs additional fees

The pressure on margins has reduced the cash coming into the average agency, contributing to the reduction in net profit.

A buoyant market may also bring about inefficiencies in operations, in that we get used to having extra income, so we spend more, and waste more – because we can.

With both sales and property management, discounting fees has become commonplace. The top 25 per cent however, would appear to be negotiating additional fees by selling on their service levels, rather than discounting.

The saving grace has been that strengthening rents and sales prices have enabled agencies to survive, even with the downward pressure on fees.

Although this increased income has made it possible to counter the inflation on costs, reducing fees will erode this offset.

With operating costs increasing from year to year, reducing fees is just not a sustainable strategy.

In terms of property management, if you increase your average management fee by 1 per cent, you could add 50 per cent to the value of your rent roll, with most of that extra income flowing through to your bottom line as profit.

Now that we know where we are coming from, where do we want to be in 12 months’ time?

The only way you can implement change is to be decisive, to set specific goals, and then to execute these goals, asking yourself three golden questions:

1. Why do I want to achieve these goals? (You will need to sell yourself and your staff on the why)
2. When do I want to achieve these goals by? (You will need to set specific parameters so you can measure results)
3. How am I going to achieve these goals? (You will need to break down your actions into bite size pieces, so you won’t be overwhelmed)

Set realistic increases in your fees and communicate these clearly and with notice to your existing clients. 

Make sure that you train your staff on how to deal with prospective clients who are pushing for fees to be reduced.

They need to know how to stand their ground and to be confident in what they have to offer.

Charging what you are worth

In order to be confident, you need to be convinced in your own mind that you are worth what you are charging.

I once sold a rent roll to an agent who had renewed the management agreements at a lesser percentage because they thought that what they were charging was too high. Yet their clients had already been paying those higher fees for years.

There are agents out there that focus on the value of the service they offer and believe that they are worth the higher fees.

I see agents that are earning $900 per property per year in management fee income, while others are getting more than $2,000.

Both are earning what they believe they are worth. It is their mindset that is different.

Don’t be scared to push the boundaries!

Remember that your rent roll is your biggest asset, and its sales value is based on the income it generates.

Buyers will pay a premium for a good rent roll with a strong fee structure, but not for an average one. 

My advice is to take advantage of the opportunity while you have it.

Work on a strategy to increase your fees and then make it happen.