What kinds of effects does fee discounting have on your agency? Whether in sales or property management the end result is the same, but as the rent roll is where the majority of capital value lies for a real estate agency, we will be looking at the effect of discounting fees in your property management department.
Many agents build their rent rolls and business on discounting fees! It is an easy road to take, but it does lead to lower profits, higher operating costs as a percentage of income, and an inability to efficiently provide quality service. At the end of the day your rent roll will not be attractive to purchasers and from our experience, can even make it unsaleable.
So, what is the answer? It is simple, ensure that you build your rent roll and agency practice on being the best you can, and charging for your services accordingly.
The key is in the gross income each property produces for you in income, each year. The higher the annual income per property from your rent roll, the more profitable you will be.
Let do a simple example:
Average rent $350.00 per week, average management fee 5%, yearly income ($350.00 x 5% x 52) = $910.00
Assume 25% of other fee income (letting fees etc)rounded to $230.00 per annum providing a gross income of $1,140.00 per property per annum.
If you have 300 properties that equates to $342,000.00 in gross income.
Assume you have one staff member for 100 properties that equates to 3 staff, at let’s say an average of $55,000.00 per annum + on costs of say $10,000 each, giving a total salary cost of $195,000.00.
This equates to 57% of your gross income.
If you did the same exercise with a 7% management fee and 25% other fee income, we end up with a gross income of $1,592.00 per property per annum.
If you have 300 properties that equates to $477,699.00 in gross income. An increase of $135,600 per annum.
Having the same staff doing the same amount of work their salary cost as a percentage of gross is down to 41% leaving 16% of the higher income on your bottom line. (16% of $477,699.00 = $76,430.00 extra to work with or let it go to the bottom line). Remember you have increased income, while cost have remained the same!
Strong fee income must be accompanied with constantly working at improving your service levels, brainstorming with staff while looking at each segment of your agency practice to find ways of improving the service you supply to your clients. As you improve in this area you will find that you can then improve your fee structure without fear of losing business. People will pay a premium for top quality service and even more so when they are dealing with their most expensive asset, selling the family home or renting their investment properties.
I’ve written before about the Japanese concept of “Kaizan” the philosophy of gradual but continual improvement. It is similar to setting your goals so you know what you want to achieve or where you want to be business-wise in 12 months time. Breaking those goals down into small daily activities that move you towards achieving those goals, is a concept that is so successful because you are working on small achievable goals each day, each week, each month, so that at the end of the year you have taken a giant step, without hardly realizing it.
Remember, the fee you charge must be commensurate with the service you give if you want your client to stay, or come back to you again.