The 'ownership' Factor
LOTS OF HIS COMPETITORS assume that they understand what Dave Liniger is doing with Re/Max International Inc., his internationally franchised real-estate business. Their assumptions, however, in many cases mislead them.
Likewise others outside of real estate have concluded that what they think this transplanted Hoosier is doing in his business wouldn't work in their own. They ought to think again.
Liniger has built his company around a compensation system that appears to attract the best industry breeds into his business -- and to hold them there. Sixteen thousand Re/Max agents are, as Liniger likes to say, in business for themselves but not by themselves. Few have any financial incentive to leave Re/Max to set up a competing firm.
The skeptics' premature dismissal isn't hard to understand. The Re/Max compensation concept sounds terribly simple: the agent who handles the sale of a property keeps the commission -- all of it. He doesn't split it 50-50, or even 80-20, with the owner of the real-estate agency. He just keeps it -- and pays the expenses incurred.
"Oh," says a competing broker whom I asked about Re/Max, "you mean rent-a-desk? They never work."
Right, they don't -- at least not for long or very well. Liniger borrowed his idea from a rent-a-desk agency that he once worked for. It's still around but hasn't grown substantially. Between a rent-a-desk operation's owner and his agents there's no support, no encouragement, and no soul to an association that is strictly contractual.
So how come Re/Max is doing so well? Why, with only 22 of the 5,000 real-estate agents operating in Orlando, did one of the Re/Max agencies there account for 3% of the transactions completed during February? Or how come in the Denver market and in parts of Canada, where it's been established the longest, Re/Max handles 20% and more of the residential housing sales? And how come last year Re/Max, which wasn't even doing business yet in New York City and had only a toehold in other Northeast markets, accounted for 287,500 completed residential real-estate transactions, behind only Century 21 Real Estate Corp.'s 700,000 and Coldwell, Banker & Co.'s 313,850?
Maybe people don't appreciate what Liniger is really doing because the concept, while it is a radical departure from the way most service businesses compensate their employees, is too simple -- misleadingly so. But given the numbers he has produced, it seems odd to argue, as many conventional brokers do, that Liniger's compensation plan just doesn't work. Re/Max International sure looks like a success. You'd think the doubters would at least wonder why.
Since Liniger opened the first office in Denver in 1973, Re/Max has grown, as of February, to 14,909 sales associates working from 1,017 franchised offices in the United States and Canada. By Liniger's count, Re/Max agents participated in residential real-estate transactions worth $24.4 billion last year, a 55% increase over 1985. Liniger and his wife, Gail, own 97% of the Denver-based franchisor, Re/Max International. Its gross revenues, which depend more on the number of agents in the Re/Max system than on the value of the Commissions they generate, exceeded $7 million last year, by INC.'s estimate. Liniger will say only that they continue to grow 40% to 50% annually. He claims the company has shown a profit each year save one since 1977.
When you ask Liniger, chubby and scrubbed-faced at 41, what makes the company work, he sits you down at the end of a long, polished wooden table in his commodious conference room, dims the indirect lighting, and presses a single button. A curtain slides open and nine computer-controlled rear-screen projectors silently throw to the wall a mosaic of images and graphics that fade into one another, overlap, grow large, disappear, reappear again. Re/Max, the wall would have you believe, is the corporate hot-air balloon fleet, a slogan ("Above the Crowd"), conventions, advertising support, franchisee services, referral networks, relocation programs, training, seminars, and awards banquets.
Very impressive and the wall doesn't lie. Re/Max is all those things today -- just like other real-estate franchises that distinguish themselves by the color of their blazers or the design of their signs. But those things can't account for Re/Max's growth, because 10 or 12 years ago, when the growth was just beginning, the company had none of them. All Liniger had in his kit back then was a compensation concept. After the slide show, when he talks without the fancy packaging, you find that that's what he's still selling today.
His market? Not the real-estate buying-and-selling public, but the brokers and agents who service them. "We're in the real-estate salespeople business," says Liniger. The distinction is an important one.
To appreciate the appeal -- to broker and agent alike -- of the Re/Max system, you need to spend a minute with the microeconomics of the real-estate business.
In a typical residential sales office, agents, or sales associates, work on commission. Actually, they work on partial commission. When an agent generates a commission in a transaction, she or he keeps roughly half of it. The other half belongs to the house -- the broker who owns the agency.
How much does a sales associate take home? The National Association of Realtors (NAR) doesn't calculate an average annual gross income figure for agents, but the Washington, D.C.-based trade association does publish extensive survey-generated data. Using the NAR numbers for 1985 (the most recent survey), you can figure that the average (full-time equivalent) agent's share of the commissions she generated that year was $14,475.
The other half of the commissions went to her employer, who, after expenses, earned an average of $58,543 in 1985. That figure includes the firm's entire net income and the employer's own salary but none of the commissions income he might have generated himself.
So, according to the NAR survey, the average real-estate agent is probably shopping with food stamps, and her boss, while doing considerably better, is in no danger of achieving a perch on the Forbes 400.
Some sales associates, however, earn a great deal more than the average. Verna Parfeniuk, for instance, took home $160,000 last year, which was extraordinary even for Parfeniuk, the top producer in the Winnipeg, Manitoba, agency where she had worked for 14 years. More fortunate than most agents, Parfeniuk enjoyed a 60-40 commission split. But it still galls her that she had to hand $4 of every $10 she generated in commissions over to her agency -- even after she had more than covered the expenses that the agency had incurred on her behalf. What were those expenses?
The NAR survey found that each agent a broker-owner employs costs, on average, $12,618 annually in expenses (which includes the brokers' own salary). But Parfeniuk handed her boss $80,000 last year. "I got tired of giving so much of my [commissions] to the broker," she says. After all, he didn't spend very much more to support her aggressive and effective selling than he spent on other agents generating half or less of her commission volume.
If agents such as Verna Parfeniuk are bringing four, five, or more times the average commission income into an agency, other agents must be contributing far less. Hotshots like her, in other words, not only carry their own shares of the expense and profit burden, but they must subsidize the schmoozing of the less-than-average agent and the training of the newcomer as well. About 80% of new sales associates don't renew their licenses after the first year. "There were always so many new people," Parfeniuk says, "and after 14 years I decided to do something for myself."
The something she did was jump over to Re/Max, where sales associates keep 100% (or, in some offices, 95%) of their commission income. If she had been there the year before, instead of earning $160,000 on a 60-40 split, she'd have kept $240,000.
But she would have had to pay the expenses that the broker had picked up for her. OK, let's say she pays what NAR figures it costs a broker to keep an agent employed, $12,618. She still nets $227,382, which is substantially more than the dollars she actually took home. Or, say her expenses are twice -- even five times -- the average. She still takes home more.
In the dollar department, the high-performance sales associate clearly comes out ahead when she can bank all (or substantially all) of her commission income net of expenses. Re/Max, with an average of 12,000 agents on board last year, claims that it generated commissions of $816 million -- meaning that the average Re/Max agent grossed $68,000 before expenses and management fees, or about $53,600 net of those items. That's a lot more than the $14,475 that the average agent took home.
It would be fair to say, then, that one reason Re/Max works is that Re/Max agents earn more.
But what about the broker? What does the 100% commission concept do for him when his agents appear to be getting all the money?
"Oh," says Mike Stefonick, a Re/Max broker-owner in Blue Bell, Pa., since 1978, "it solved all my problems." All his problems?
In exchange for their keeping the total commission, Re/Max agents pay their brokers monthly fees and expenses. These vary among offices. Typically, however, they include the following:
* Their pro rata share of common office expenses, that is, basic telephone service, rent, secretarial help, utilities, and insurance. Associates, however, control these costs. They and the broker-owners decide by vote whether to buy a new office computer, replace the carpet, or hire a second receptionist. These costs can run between $500 and $1,000 or more per month.
* All of their personal expenses, which includes long-distance calls and special advertising or marketing costs;
* A monthly $50 joint-advertising fee, most of which is spent at the regional level for high-dollar-cost programs such as TV and billboards; and
* A management fee, usually $300 to $600 a month, negotiated annually and fixed by contract.
And how does that solve all of Stefonick's problems? First, he says, if you own a conventional real-estate office, everyone gets paid before you do. "Here, I have no overhead." The agents, he says, pay all of it in their shared expense fees.
"In a conventional office, if my top performer takes a two-month vacation," he says, "my cash flow suffers." Re/Max agents must pay their bills whether they're having a good month or a bad one, so the Re/Max broker's cash flow is more predictable. Stefonick says he doesn't have to leave money in the till to pay his expenses, because the cash rolls in every month.
And most of the monthly management fee each sales associate pays, Stefonick points out, is pure net profit to him, just like a salary.
"So," he boasts, without any embarrassment, "I operate for free out of an office with a guaranteed profit and get to keep everything [in commissions] I make."
If, as Re/Max claims, it had 14,909 agents working from 1,017 offices in February of this year, then each office had, on average, 15 agents. The average agent pays his broker a monthly management fee of $400, about 20% of which the agent passes on to the Re/Max regional office. In turn, about $20 of this goes to company headquarters. The typical Re/Max broker-owner can expect a gross income -- before his own commissions, if any -- of $4,800 per month, or $57,600 annually. That looks all right compared with the National Association of Realtors survey finding of $58,543 for the average (non-Re/Max) broker, but it's not exciting.
This calculation, however, penalizes Re/Max for its high growth rate. Many Re/Max offices, only recently opened, haven't yet recruited their full complement of agents. You get a better idea of the average broker's earnings by looking just at Re/Max offices that have been open for at least two years. These, on average, contain 28 agents, giving the broker a more respectable income of $107,520 after regional fees and before his own commissions.
Then not only are Re/Max agents banking more than their peers in conventional agencies, but Re/Max brokers are making more, too. How can this be?
Re/Max commission rates on property sales are no higher than any other real estate company's, and Re/Max agents handle the same kinds of property sales -- high end and low end -- as other agents. Where in the world is the money coming from? The explanation lies in the fact that they just handle more of them.
According to the 1985 NAR survey, the average agent collected commission income on 15 transactions that year. Re/Max claims that its average agent, on the other hand, was involved with 24 transactions in 1986. The average Re/Max agent, in other words, handled 60% more deals than his conventional-agency peer.
That difference would explain why there is so much more revenue for Re/Max brokers and agents to split. Of course, it doesn't explain how the agents were able to generate all those transactions. Could it be that Re/Max sales associates are, on average, better producers than the typical real-estate agent?
Re/Max agents handle more sales and generate more commissions, founder Liniger suggests, because they have, on average, four more years' experience than the typical agent. They tend to be the best performers in any area. They have to be, he says, or they couldn't survive at Re/Max.
When an agent signs on with a Re/Max broker, she or he immediately confronts a monthly nut that can run from $1,200 to $2,000 or more in management fees and expenses. Not many trainees or part-timers will willingly assume an obligation that large. There are no spots in a Re/Max office for part-time agents, neophytes, sluggards, or anyone else who can't generate enough commission income to meet expenses. Consequently, Re/Max brokers, as a rule, won't hire -- indeed, can't hire -- any but veteran, high-producing agents. These are the only ones who can afford to work in a Re/Max office. And consequently, Re/Max brokers and their agents are governed by a relationship that is subtly but profoundly different from the relationship between a conventional broker and his agents.
"The broker's job," says Re/Max vice-president Bob Fisher, "is to make sure his agents stay with him by making them as happy as possible. That's why we say we're in the sales-associate business."
By contrast, a Century 21 broker with a conventional office says that his job as broker-owner is to be a motivator and a teacher. "People come to me with no knowledge, no investment, and I train them. . . . I give them all my leads, all my expertise." And he hopes that, with his help, they become good agents. The commission they share with him will, eventually, return his investment and then some. "What I'm about," says the broker, who doesn't want his name used, "is creating leaders."
His problem, though, you'll remember, is that 8 out of 10 agent recruits don't stay beyond a year. Consequently, much of his teaching -- and his office overhead -- is lavished on short-term assets that are really liabilities -- trainees who don't yet pay their own way. And then, when he does create a leader, the idea of who needs whom in this relationship gets turned on its head. Good, experienced agents don't need teaching. What they need is motivation and office support, but half of their commission income is a heavy price to pay for that. To protect his investment and his cash flow, this particular Century 21 broker requires new agents to sign a noncompete agreement. And noncompete agreements do not happy agents make.
The Re/Max broker, on the other hand, can think of his agents as clients, not investments. They come to him trained and experienced, and what they want is good support -- which they're willing to pay for with their management fees. To the extent that the broker provides it -- in the form of well-managed office services, a pleasant working environment, and exposure to equally professional colleagues -- he'll retain his client base.
San Crandall, an experienced sales associate, joined a new Boston-area Re/Max office last year. She likes it. "You're not working with prople who don't know what they're doing," she says, "so you can turn something over to a colleague and not have to worry about it. . . . We have a manager who's there to fix any problems that come up. We get good feelings from the broker at the top. When we have office meetings we're always telling one another, you did a great job on this one or that one.
"It's really like being in business for yourself without having to be on your own. The person who wouldn't come into this environment is a person who doesn't feel confident, who is not in control."
Re/Max International, the company that Liniger started in Denver in 1973, is no longer in the real-estate business per se. Now, it's strictly a franchisor producing products and services -- training programs, awards banquets, corporate relocation, a referral network, advertising research, publications, and the like -- that it can give or peddle to its broker-franchisees.
Like most franchisors, when Re/Max was young it depended on growth -- the revenue generated by franchise sales -- to survive. No more. Last year, according to Liniger, just 15% of its revenues came from franchise sales or renewals, a proportion that Liniger expects will continue to shrink.
In fact, Re/Max International could stop growing tomorrow -- never sign up another agent or sell another franchise -- and still survive quite well. That's partly because Liniger has kept the company private: its level of profitability matters only to him and the Internal Revenue Service. And partly it's because the company is financially structured -- from international headquarters to individual brokerage -- to live off its operating income.
The bulk of the franchisor's annual cash flow comes from the $250 annual dues each sales associate remits to the Denver headquarters, plus an override of about $20 per associate per month from each broker. With an average of 12,000 agents on board last year, Re/Max International should have grossed from dues and overrides alone nearly $6 million. That is, as Liniger points out, a steady income stream, not directly tied to the amount of commission income that Re/Max agents can generate. If Re/Max agents have a good year, they pay no more, but in a bad year they pay no less. Thus Re/Max International, like its broker-franchisees, thrives to the extent that it manages to satisfy, and retain, its agent-customers.
In 1973, the company consisted of a few understaffed Denver-area offices, each with a broker-manager. It was not the immediate success. Liniger had fantasized. "I assumed," he says, "that every good agent would want to work for me. They didn't." The best of the agents he hoped to attract weren't interested in moving, no matter how much money he promised, from established firms to what might have been a fly-by-night. In the first month he interviewed 204 potential sales associates. Four agreed to join him.
Competing conventional brokers badmouthed the concept. When Stacy Burton left a conventional Atlanta agency to join Re/Max, his wife began getting anonymous phone calls at home. "I wouldn't say they were threatening," says Burton, "but they wouldn't leave their names, and they'd tell her, 'He's crazy,' and 'He'd better watch what he's doing.' It only egged me on."
Thinking at first that he could build a system of company-owned agencies, Liniger had opened eight offices by the end of the first year but recruited only 21 agents. Losses accumulated, generating several hundred thousand dollars of short-term, mostly trade, debt to suppliers and advertising media. A group of investors that he had counted on for capital pulled out when its suburban real-estate development ventures failed, victims of the 1973 OPEC oil embargo. It took him another full year to find 21 more agents, and more than three years before the roster topped 100.
In 1975, Liniger abandoned the company-owned office strategy and sold his first franchise to expand beyond Denver. But growth was still slow. He was making a mistake, Liniger finally realized. "I was targeting the wrong people." He'd been trying to persuade brokers with existing agencies to convert to Re/Max and getting very few sales. Eventually he figured out why. "They'd have to fire 80% of their agents, all but the top performers, to get the concept to work," he says, "and they weren't willing to do that." So Liniger shifted his focus to wooing other brokers' sales managers and top agents -- people ready to go out on their own. The results were dramatically better, and those kinds of people are still buying Re/Max franchises today.
Tenacity has its rewards. Early this year Re/Max moved into New York, the last major state to approve its franchise documents. It's already the number-two agency in Canada. What next? "All we want is half of the top 20% of the real-estate agents in the United States," Liniger says. That would be roughly 78,000 sales associates (and another 12,000 in Canada), which doesn't seem a completely outrageous goal. Century 21, with 75,000 full-time U.S. associates, is currently number one.
With success comes challenge, from inside or out. In what ways is Re/Max vulnerable? At least three threats exist: the real-estate market could take a dive; the competition could outmaneuver Liniger; or he could grow smug.
What if the market collapses and residential sales fall off by, say, a third?
Falling commission revenues would hit sales associates in their pockets, but how badly? The average non-Re/Max agent, who takes home only $14,475 now, would be living -- if you could call it that -- on just $9,650. On the other hand, two-thirds of the average Re/Max agent's $68,000 annual gross revenue is still $45,000. If her expenses hold at $1,200 a month, the agent has $31,000 to get by on. If she took her $45,000 in commissions to a 50-50 agency where the broker covers expenses, she'd take home only $22,500 -- no reason to leave Re/Max.
And logic suggests that it might not even come to that. If it's true that Re/Max agents are more experienced and better producers than the typical agent, they ought to outperform the market in a downturn. In the early 1980s, when mortgage rates topped 15% and residential sales declined, Liniger says the Re/Max market share per associate actually increased.
Up the line, Re/Max brokers and the franchisor itself are cushioned, but not isolated, from market shrinkage, since their revenues depend not on commissions but on the flat fees that agents pay. Only to the extent that in a market downturn agents either don't pay their bills or leave the company does Re/Max or the brokerages suffer. During the 1981-83 real-estate recession, Liniger says, they didn't write off any agents' management fees, but they sometimes stretched collection. And would a Re/Max agent want to leave?
Say the market really took a hit, falling by half. The Re/Max agent who stayed on would pay the same fees but generate just $34,000 in commission to cover them. Her net: $19,600. What if she moved to a 50-50 agency where expenses were covered by the broker? She gives half her $34,000 in commission to the broker and keeps $17,000 -- still no reason to leave Re/Max.
OK, so the market threat doesn't seem substantial. What about competition? From whom? Conventional agencies can never beat Re/Max in agent compensation. Suppose a sales associate in a conventional agency keeps half of the first $100,000 in commissions she generates and 80% of the excess. If she brought $200,000 into the agency, she would net $130,000 -- $50,000 plus $80,000. Not bad. But the Re/Max agent would keep $185,600 net of expenses, quite a bit better. Besides, the conventional broker can't afford to be too generous with his top agents, because it's their commissions that subsidize the agency's recruiting and training.
A large conventional-agency organization could always convert itself to the Re/Max format, but that hardly seems likely. It would have to shed too many people. And as for a start-up modeled on his own plan, Liniger says that could happen, but Re/Max enjoys a tremendous lead.
And that leaves smugness, the third threat. Take your market for granted, succumb to the arrogance of success, or mistreat the people you sell to, and you'll be supplanted no matter how clever your concept. So far, Liniger talks like a man who respects that truism.
"You have to be careful," he says, "of getting hardening of the attitudes, of thinking that yours is the only way. This year Gail and I went to the Re/Max Colorado state convention like we always do, but we decided not to stay. We'd been to so many, you know. We were driving home that night, and I thought, 'No, we can't do this.' I told Gail that somewhere there's another Dave and Gail, and they're out talking to their operating people while we're going home to sit on our butts. That's how companies fail. So the next day we drove back and rented a hotel room. . . . We're not to the point that we know it all yet."
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