Who wants to be a principal

Real Estate Business takes an in-depth look at these issues, talking with leading industry practitioners about what they offer, and how prospective principals should go about making this critical decision

Becoming a principal, or shifting from one agency model to another, is a big decision. But it’s often a decision that can get bogged down in confusion, self-doubt and complexity.

If you’re a sales agent thinking of taking a step up the business food chain, or an existing principal wondering what things are like on the other side of the fence, you have a lot to consider.

Real Estate Business approached a wide variety of real estate agent networks and independents in order to get the lay of the land for prospective principals. We talked to network leaders not only about what’s on offer in terms of business models, but also what makes for a successful principal.

To begin with, it’s important to outline the business models that are available.

According to LJ Hooker CEO and executive director L. Janusz Hooker, principals have three broad options to choose from.

“You’ve got the standalone independent, which can sometimes be a cluster of offices,” he says. “You can have the cooperatives, which is more of a pooled marketing organization. And then you have your stock standard franchise network. Some of them can be small, and some can be very big, like ours.”

INDEPENDENTS

Before we look at what some networks and/or cooperatives have on offer, perhaps the foremost consideration for want-to-be principals is whether being an independent is best.

“On the face of it, setting up an independent agency is easier than ever thanks to technology and on-line advertising,” says Peter Flynn, group franchise manager at Richardson & Wrench (R&W). “But slick marketing and a logo do not make a brand. A lot of effort and money is invested in establishing brand recognition which is critical in communicating the values and personality of the business.”

Flynn says independents face a heavy investment in developing websites and marketing templates, “all of which can be a prohibitive cost to an independent in a competitive marketplace.”

“It can be hard to get on the shopping list as an independent when vendors have so many good options to choose from.”

One perception Mr Hooker dismisses from the outset is the notion that strong, independently-minded people can’t work within a network/franchise structure.

“I look at our top operators, they’re very independent. People like [LJ Hooker Double Bay franchisor] Bill Malouf, they are their own brand within our brand because they dominate their market…but they work perfectly well under a brand...You want to work within a team because you can leverage it.”

Being part of a network allows Mr Malouf to focus his energies on what he does best, and that’s “selling the biggest, sexiest properties in their market.”

Douglas Driscoll, CEO of NSW-based franchise operation Starr Partners, says while there are “some very good” independents in the marketplace, much depends on their appetite for being involved in every detail of their business.

“Time is the most precious of commodities,” he says. “One of the benefits of being part of a group is it’s all done for you. It’s not that you’re good or bad at something, it’s [often] just the time you invest in doing it.”

Independents must also consider how they’ll find vendors and buyers. The recent decision by two independents in Ballarat, Victoria, to join the Ray White group (see sidebox) was put down to a desire for the firm to expand their client base, particularly in the commercial and rural arenas. Ray White said the team was keen to attract more national and international buyers, and they also wanted regular training and technology support.

Yet being honest with yourself is also key, says Stewart Bunn, national communications manager at First National. In what he describes as “brand bandits,” it amazes him how many people join networks only to seek changes to how things are run.

“Agents can’t have it both ways,” he says. “Those who find it difficult to suppress their creative instincts should think twice before joining a network.”

Century 21 Australia chairman Charles Tarbey says apart from the added cost, it’s important to consider the loneliness that can come with being an independent. He believes independents still crave company, and “will usually still try to belong to something, whether it’s an industry group or a group of independents.”

But, he says, there is one obvious benefit to being an independent; “they are able to maintain full control over every aspect of their agency.”

BOUTIQUE INDEPENDENTS

A step up from doing it entirely on your own is the ‘boutique’ independent, agencies that may have around 10 shop fronts that remain (largely) led by the head office.

Prue Jones, director at Victoria-based Woodards, which has 13 offices, says some agencies are offering either a percentage of overall gross sales commission through to a partnership with the parent company.

The latter sees the main infrastructure located at the parent company with the (new) office manned by sales and property management staff.

Then there is the purely head office-owned model whereby the principal has a manager role and minimal ownership of the office.

Realmark, an independent Western Australian group, says it has launched two new licenses in response to changes in the local market.

The first is an office-operating license, which sees the new principal establish his/her own shopfront, not unlike many other existing business models. The second option is a ‘micro-business’ license, which sees someone set up shop within an existing outlet. A micro-license holder may be an already well-established agent that has a few staff, setting up a sub-business within one of Realmark’s existing nine offices.

Realmark managing director John Percudani says his company has the space to incorporate new ‘micro-businesses’ as each office generally covers large geographic areas.

The change comes as the Western Australian real estate industry goes through a structural change, he says. Many of the older, long-term independent agents, of which there are many in WA, are struggling to keep up with rapid changes in consumer behavior and selling techniques. He believes a large number may retire rather than confront the structural changes they need to make to stay competitive.

Mr Percudani says Realmark’s new license options mirror what is already offered in Australia’s eastern states, where ‘boutique-style’ agencies are more common. He’s seeking to merge the cottage-type feel of smaller operations with the more systemised approach of bigger operators, without compromising on the “personal and caring” culture Mr Percudani believes is the bedrock of his organisation.

He describes the new approach as ‘collegial’ in feel, similar to (independent) medical practitioners working in the same medical practice.

Mr Percudani adds that he’s seeing an increasing number of 30-year-olds looking for a more structured career path. They want to work for companies that are prepared to invest in their career development.

BIG NETWORKS

But there can be safety in large numbers, and that’s where the bigger networks come into play. For those considering the network option, two of the more common offerings are franchises and cooperatives.

First and foremost, which model an agent chooses should depend on what their business goals are, says Mr Hooker.

“If you’re looking for a big support network…good tools, from marketing through to technology to education, then you’d probably need to go for one of the bigger franchise network,” he says. “But if you want to be somewhere in-between, and have some marketing support and some culture, then you could have something like a cooperative.”

“[But] what’s your five-year plan, and how quickly do you want to grow? If you’re with a big network, you’re going to have more tools to accelerate your growth otherwise you’re going to do a hard slog by yourself.”

Yet franchise models can be flexible, he continues.

For example, he says some LJ Hooker franchisees set up succession plans to allow key sales representatives to build up equity in their franchise. Or they establish a satellite office in an area that doesn’t directly compete with main franchise, but that ‘infills’ an area of need in the market.

Or, of course, a successful sales person can apply to set up their own franchise.

“We’ve had all of the above,” he says. “The key for us is that we want our top people to stay in the family, so we will find a solution for them.”

Jim Midgley, managing director at PRDnationwide, is forthright when it comes to what the franchise model offers, saying it provides more in terms of brand, systems and support. “It has generally been the case that a cooperative does not have the structures to offer in all of these areas,” he says. “Most were established as marketing cooperatives in the past to assist with receiving group discounts for areas of need.”

Peter Flynn says cooperatives can be imbalanced, where the needs of all offices are not equally served. Moreover, they still need to provide the same services as franchises without the same level of resources.

“Co-ops have to work just as hard developing new initiatives and often lack the time and ability to set the direction of the brand,” he says.

According to Mr Bunn however, cooperatives can be more flexible than franchise models. Moreover, he says most cooperatives don’t charge their members fees on rental department income, and administrative fees are often based on a ‘not-for-profit’ arrangement meaning members retain more of their revenue.

“As a result of this fundamental difference of purpose, cooperatives operate with policies set by their members, not by the corporate administration,” he says. “They therefore offer greater freedom of choice and, normally, more lenient membership contracts. They operate with the intention of delivering democratic management.”

But can networks really function effectively as democracies? Mr Bunn admits cooperatives need “strong, committed, decisive leadership and bulletproof corporate governance,” if they are to work effectively.

For Starr Partners, it was the inability to come to a company-wide consensus on key issues that saw them move away from the cooperative approach and towards a traditional franchise model.

“We have, as a group, sort of morphed into a franchise group over the last couple of years,” says Mr Driscoll. “We were probably more of a cooperative, coincidentally. There are obvious advantages [to cooperatives] but I would argue the disadvantages outweigh them. Trying to make serious business decisions as a committee is extremely difficult, if at times impossible.

“Feedback is everything, and franchisees should clearly have a say in the way the franchisor operates, but only to a certain extent. Somebody somewhere has to make the tough decisions.”

The franchise model does come with restrictions, however.

“Franchises typically are more restrictive - supplying a brand, marketing, technology, professional development and business guidance in return for a percentage of sales commissions and rent roll income – usually [at] around seven per cent,” Mr Bunn estimates.

Technology choice may be limited and additional levies may be required from “time to time,” he adds. Moreover, “if a franchisee’s turnover falls short of expectation, some brands will permit the commencement of a competing franchisee under the same brand in the same suburb.”

Contracts are usually for three to five years, he continues, and penalties for non-performance can be heavy. Franchise contracts usually place restrictions on the sale or transfer of businesses, although he believes this is understandable. “If a network has been meticulous in its choice of franchisee, why would it be less meticulous in the choice of a replacement?”

According to Mr Flynn, Richardson & Wrench’s franchise model aims to deliver the best of both approaches, striving to avoid what it terms the “cookie cutter” approach.

“Principals need to be free to adapt marketing campaigns to meet vendor and market needs,” he says.

In this and other respects, he says his company is looking to bridge “the gap between the boutique brands and the traditional franchise system.”

MONEY MATTERS

Money talks though, and it’s an important part of any decision when choosing between the bigger groups in particular.

One decision a prospective principal will need to make centres on whether to go with a flat fee or percentage of sales model.

Mr Flynn says Richardson & Wrench offers the flat fee approach.

“It is a model that was developed for growth and recognises that an entrepreneurial business person expects to reap the benefits of their hard work,” he says. “The flat fee also makes it easier to set budgets and stick to them.”

Professionals Real Estate Group CEO Glyn Morgan says their membership-based model was never set up to make money. Also based on a flat fee model, he says “it was set up to meet the needs of our members.”

“In our model, all the agency owners share a stake in the business and they all have a say in the services that we offer and how we go about our business.” He doesn’t claim to have the cheapest model in Australia, but Mr Morgan believes his company’s approach leaves more money in the member’s pocket.

“Our fixed-cost membership model means that once an agency has more than five strongly-performing salespeople on its workforce, the agency owner is much better off...this is because most franchisees are paying a percentage of their sales to the franchisors on top of their annual service fees.”

As for independents, costs can be high. Yes, they aren’t paying franchise or membership fees but they will incur numerous expenses.

“Networks of any substance deploy significant resources to develop proprietary technologies aimed at putting their agents ahead of competitors,” says Mr Bunn. “A quality website can cost $10,000 just for starters, and then maintenance and regular updates come at additional cost.

“Networks tend to either absorb individual offices into their website system or offer independent websites at greatly reduced costs.”

According to Mr Morgan, independents often pay much higher rates for the same services on offer at larger networks.

WHAT’S ON OFFER FROM NETWORKS

Real Estate Business focused on three key areas when investigating what’s on offer from the larger groups.

The first, training and education, is a key offering in most networks.

Mr Flynn says training must be relevant to the needs of the individual office. While he believes this is stating the obvious, he feels it’s a point that is sometimes ignored by franchisors. Richardson & Wrench surveyed its franchisees about what they wanted in terms of training.

“We operate on a user pays basis so franchisees pay only for what they need,” he says. “If the training program isn’t what they require for their specific market or staffing structure they have the freedom to bring in their own trainers.”

PRDnationwide’s Mr Midgley says what’s more important is how easily member and franchisees can tap into each other’s experience.

Mr Morgan says the amount of changes in the legal, political, environmental, social, cultural and regional spheres necessitates ongoing training. “Real estate professionals need to be aware of the latest updates in all of these areas to ensure they are providing the best service possible to their clients.”

Sheer numbers mean networks can also provide members and frachisees with more choice when it comes to training courses, says Mr Bunn.

Technology is another key component of what networks offer.

Mr Flynn says as real estate searches have migrated to the internet, an agent (or group) that doesn’t have an easy-to-use website is immediately on the back foot.

“The website serves two functions – one as a branding device, the other for listing and search purposes for rentals and sales,” he says. “A franchise group doing its job properly will engage in brand advertising that will benefit the entire network. More often than not the first point of access that follows from that brand awareness is the website which acts as a conduit to the agents within the group.”

For those attracted to snazzy-looking websites, Mr Bunn says there’s one thing to be wary of - search engine optimisation (SEO).  “It’s wonderful to have a website that offers a sublime customer experience but it’s not effective if it appears on page three of Google’s search results.

“It’s top ten or bust these days.”

Mr Flynn also points to how technology has made it easier for offices within the network to access marketing templates and build communications with their own databases through e-newsletters and other marketing collateral.

Ray White’s NSW chief executive Stephen Nell says while technology is important, principals need to remember the real estate business is about people.

“Technology is critical but real estate is a relationships business,” he says.

Mr Midgely highlights the importance of a good database. “This is just as important to a sales person as it should be to the business owner,” he stresses. “Again, it is another area where you can buy these systems off-the-shelf, but it is having the support from your franchisee that assists with the implementation of these into your business.”

Starr Partners’ Mr Driscoll says clean databases are now tangible assets.

“Clean data these days is everything,” he says. “It now has a dollar value. I know of at least a few real estate businesses that have sold in Sydney…on the basis of the cleanliness and the size of their database. The buyers were buying the database – nothing else.”

“Technology capabilities are a must, from iPhone applications and CRM programs to social media and search engine optimization,” says Century 21’s Charles Tarbey. “All are critical, and with the cost of these items, groups have a distinct advantage over independent agents and marketing groups.”

The final area Real Estate Business asked networks about was property management.

According to Stephen Nell, property management is the wealth creation part of a real estate business, forming the backbone of the entire operation.

“If you don’t have property management you’re not serious about a real estate business,” he says.

Mr Midgley says building a property management arm is critical as it gives the agency real, tangible value.

“Being able to receive assistance with this asset building part of your business is something that you should be look for in the group that you are with.”

Mr Morgan says The Professionals provides ongoing training in property management, a part of the business that often keeps agencies afloat during tough times.

“This allows agencies to keep key sales staff on board when they are going through a drought,” he says.

Overall though, constant innovation is what franchisees want to see from head office, according to Mr Hooker.

“We’re constantly innovating,” he says. “Usually, every two or three months we’ve released something out to the network that’s leading edge. In the last 12 months we had the first iPhone app, the first ‘real’ iPad app that integrated into a backend rather than just things you download.

“And recently we launched ‘My LJ Hooker’, which is the first loyalty program across the country, the first of its kind in real estate.

“By constantly innovating, we’re not sitting back and saying there’s one particular thing.”

SWITCHING NETWORKS

If you’re an existing principal who isn’t happy and is thinking of changing to a new network, it’s important to consider the ramifications for your clients.

“You need to be up-front about what’s in it for them,” says Mr Flynn. “You need a pre and post-marketing and communication campaign to ensure that you don’t lose contact with existing clients and to build awareness amongst potential new clients.”

Handled properly however, and it can be an “invigorating” experience, he says.

“It’s a great way to refresh yourself and your enthusiasm for real estate. It gets you back to grass roots, reminding you of the reasons you got into it in the first place...If it’s executed properly it can be the catalyst for attracting new business rather than upsetting the flow.

Mr Hooker says it’s not uncommon for agents to consider the switch when markets are flat.

“What you’ll find now is there’ll be a lot of people, because the times are relatively tough, looking over the fence for greener pastures. You see quite a bit of movement, a lot of people exiting the industry and moving between brands.”

He says a key reason they’ve added 500 sales people in the past 12 months, and opened 15 new franchises in August alone, is they’re a growing and innovative company, and an ‘employer of choice’.

According to Mr Midgley, changing brands isn’t as complicated as it once was.  “In the past, it was thought that the brand was the major reason that customers and clients chose who they would buy or sell through,” he recalls. “But it is now the case that sellers will follow an agent who they have developed trust and a relationship with over a period of time.”

“The important factor is that where they go must offer the support for the agent to get up and going again in the shortest period of time.”

Mr Midgley believes dragging the decision out can undermine your business.

“There is never an ideal time to make the change. If you’re not happy where you are, just make the move. It will affect your business in the short-term by not making the decision quickly.”

Century 21’s Mr Tarbey urges those thinking of switching to factor in the time it can take to get up and running.

“It can often involve moving on to a different operating platform or CRM system, which can take time to learn and have staff trained in. Clients and the local area also need to be informed that although the name above the door is changing, the same people are still running the business.

“The best way to manage the process is often to set a firm strategy that all stakeholders are aware of before commencing. For example – co-ordinate a neighbourhood letter-box drop with a local radio campaign on the day that your rebranded office reopens and your website changes over.”

Multiple regulatory authorities will also need to be notified of the change, says First National’s Mr Bunn.