Selling Your Real Estate Brokerage? Either Way, Get a Valuation

Selling Your Real Estate Brokerage? Either Way, Get a Valuation

If you’re planning on selling your residential real estate brokerage, a valuation is an obvious necessity, since no serious buyer would consider purchasing based solely on the word of the seller. A comprehensive valuation can help the broker to discern what actions can be taken prior to shopping their brokerage to increase its fair-market value. But what if you’re not selling? Is there any reason to get a valuation in that case? An annual physical with a doctor is recommended for your measuring and maintaining your health, and the same is similarly true of a residential real estate brokerage. It turns out, valuations offer several benefits to your brokerage even if you have no intention of selling anytime soon. As the old adage goes, if you can’t measure it, you can’t manage it. Valuations can allow brokers to analyze their brokerage from a different perspective and make changes accordingly to optimize their business.

DETERMINE EXACT RECRUITMENT EFFORTS NECESSARY

Valuations will show a broker somewhat of an ‘X-Ray’ of their business. It will outline each agent’s transaction count, average GCI per transaction, and compare this to business expenses allowing brokers to effectively determine exactly how many agents are required, (by applying average GCI/agent), in order to break even, or how much recruitment efforts would increase the cash flow and profit of the brokerage given measurable recruitment expenses and expected outcome.

SPLIT EXPENSES INTO OPERATING AND NON-OPERATING COSTS

Valuations will additionally provide an actionable guideline with regard to where exactly brokers can cut unnecessary expenses. Any expenses deemed ‘non-operating,’ (not contributive to the bottom line), likewise don’t contribute to the value of the brokerage, and cutting or reducing these costs will increase the value of a brokerage. Any broker thinking about selling their brokerage will definitely want to identify these costs and make cuts where necessary to get the highest possible fair-market value for their company.

IDENTIFY POSSIBLE CUTS IN FULL-TIME EMPLOYEE SALARIES

Valuations can bring to light the agent to employee ratio as it’s applied to profit generation, and spell out how this margin is directly affected by each full-time employee. This allows brokers to first, recognize which employee duties are considered either non-operating costs or extraneous to the brokerage operations, and second, exactly how much this margin will increase by making according cuts and how much that will increase the value of the brokerage.

ANCILLARY BUSINESS OPTIMIZATION

Brokers may elect to include other business models to the operations of their brokerage such as mortgage lending, home warranty services, property management, etc. Often times additional income from these businesses will convince brokers that the functionality of their brokerage is above average by industry standards if the profit analysis of these other businesses is muddled with that of their brokerage. Valuations can help to not only identify where immaterial expenses have crept into their brokerage as a result of these misleading values, but determine how the expenses can be cut, and how to better optimize those ancillary businesses.

IDENTIFY WHAT TRANSACTION COORDINATION EXPENSES ARE NECESSARY

If a brokerage has transaction coordinators employed full-time, (they will soon no longer be allowed to hire them as independent contractors), they are likely lowering their EBITDA during down months when transaction coordinators are processing fewer files due to this excessive expenditure, and thus, lowering the value of their brokerage. Valuations can help brokers to determine if this is the case for their brokerage, and whether or not it would be prescient to consider an outsourced transaction coordination service instead.

Valuations not only provide an accurate assessment of the current value of a brokerage, but can help to point out practical ways to increase that value, and therefore, the profitability, which is a good business practice regardless of a broker’s interest in selling or not. To learn more about valuations and how one could benefit you and your brokerage, contact payton@realestatebackops.com for more information.

The AB 5 Employment Law For Real Estate Agents and Brokers: Anticipate, Don’t React

The AB 5 Employment Law For Real Estate Agents and Brokers: Anticipate, Don’t React

If you haven’t been keeping your pulse on the changing landscape of the real estate industry and the likely future of brokerage structures, agent payment, and transaction coordinator employment status, you may not be aware of the Assembly Bill (AB) 5, the important legal statute passed by California Governor, Gavin Newsom, that just went into effect this month.

What is Assembly Bill (AB) 5?

AB 5 is a bill the Governor signed into law in September 2019 addressing employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.

The ABC test is intended to address 3 requirements:

  1. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

  2. Does the worker perform work that is outside the usual course of the hiring entity’s business?

  3. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

How does this affect my real estate business?

As the real estate industry currently operates, agents and transaction coordinators are usually hired as independent contractors. Federal Law guaranteeing agents’ rights to operate as independent contractors will likely take precedence over AB 5, but the status of transaction coordinators will most definitely be addressed. Most brokerages hire transaction coordinators as independent contractors, and there’s an increasing trend of agents hiring personal coordinators as independent contractors directly. This will likely result in a tumultuous upheaval of business operations for brokers and agents alike for most in California, however, it presents a unique opportunity for those ahead of the curve to gain an edge on the competition. We’ll get to that soon, but first it’s necessary to go over the issue the unprepared brokers and agents will falter over.

What does this mean for transaction coordinators?

Of course, coordinators will no longer hold the opportunity to be hired as independent contractors directly by brokerages, but what about agents, (assuming they are afforded the privilege of maintaining their independent contractor status), who hire transaction coordinators directly? Independent contractors are responsible for paying their FICA taxes quarterly, (typically 15%), while employers of standard employees are responsible for paying half of these costs, and the employee the other half. Does this mean in the instance an agent contracts a transaction coordinator directly that the agent will now be responsible for half of the FICA fees incurred by the coordinator?

There’s no Federal Law in place advocating for the coordinator’s continued role as independent contractors, as is the case for agents, so someone, whether the agent or the broker, will now be paying this additional tax. If the broker has a degree of separation from these coordinators, since they hire agents as independent contractors, who then hire the transaction coordinators, the cost may very well fall to the agent.

How can brokers and agents capitalize on this impending shift?

While the future of employment status for agents is still an undetermined proposition at this time, there is good news for agents and brokers concerning the new requirement that transaction coordinators must be hired as employees. Outsourced transaction coordination services, like REBO, allow brokers and agents alike to circumvent these new incipient tax implications.

Transaction coordinators working for these services will uphold the new requirements as full-time employees, but they will be employees of these services, not of the brokerage or agent. Contracting these services, and allocating transaction coordination responsibilities from the broker and agent will effectively maintain broker and agent compliance with Assembly Bill 5, while passing the new tax costs to those services. It is apparent that these services are invariably the future of the transaction coordinator – agent relationship, and any broker or agent that resists this change breaks the law and invokes the wrath of the IRS at their own peril.

To learn more about adjusting the transaction coordination process of your brokerage or personal real estate business, contact REBO at payton@realestatebackops.com