A number of developer clients over the last 12 months have asked me about bringing the sales team in-house. It’s an interesting topic, so here is my experience doing residential sales just about every way thought possible.
If you have to sell or lease anything as part of your development project then you will come across a little line item called commission. Depending where you are in the world this can run as high as 6% of gross sales or 15 to 20% of the first year’s rental. It might even be higher if you are selling via some sort of pooled investment scheme. This is a lot of money and is something to seriously consider in-housing to improve development project profit. However, savings can be eroded if slow sales or lower sale prices result. When you are looking at a sales commission of 3%, hiring internally and paying them 1% seems appealing. But the cost must be compared to the potential issues. Weigh up the factors that concern:
- Managing a sales and leasing team
- Commission
- Motivation
- Negotiation and hustling
- Attracting and keeping the right talent
- Sales back office
- Sales channels
Managing a Sales and Leasing Team
Managing a sales team can be challenging. You have one or more emotional, living on the seat of their pants type individuals who go all out for the mighty commission. They are a different breed to the standard salaried employee and that often comes with higher maintenance. If you in-house, then look to an old experienced head to keep themselves and the team together. There are also legal and professional association regulations, all sorts of liability issues and accompanying paperwork that need to be considered.
Commission
Although you are paying an agency say 4%, the actual agent may only personally make 1.5% to 2% of that commission. The rest goes to head office. Remember that also includes overheads like administration, marketing support, office space that internally you will need to provide in one form or the other. So the true saving is not a drop from 4% to 1%, but somewhere in between.
Motivation
If you in-house, it is much easier to match commission to motivation. You can offer bonuses to move certain types of product. Or you could have a graduated commission structure that suits your project (as opposed to the external agency).
Negotiation and Hustling
External real estate agents spend a lot of their time pitching and hustling for listings. They are really in the listing business, selling to vendors as much as to buyers. Internal sales agents don’t need to do this as they have the product provided for them to sell. External agents are constantly negotiating with vendors to get the listing and then to get the price down, and with sellers to get them interested and get the price up. Hot markets might mean more listings but there are also more competing real estate agents. Competition also sharpens an external agent.
Internal sales consultants are often given a price list and told to sell from it. In hot markets internal sales people become order takers. If the market stays buoyant for long enough internal sales consultants can lose their drive. The money is still coming in and they don’t have to do a lot beyond turning up to claim it. Yes, internal sales consultants get to negotiate with buyers, but that doesn’t create the same negotiating exposure that an external agent has. External agents are also often exposed to many different types of deals and sets of conditions, which they can draw from to seal future negotiations. Therefore a balanced internal team with plenty of practice in different (especially tough) markets is important, and so is the occasional injection of some fresh enthusiasm and external agency experience when hiring. Relevant training and a collaborative approach between internal sales consultants can also help keep everyone sharp.
Attracting and Keeping the Right Talent
You also don’t want to attract order takers, or lazy agents wishing for an easy ride. You want them to have all the soft sales skills to influence and close. To attract the right talent you may need to provide a pipeline of product that will be sold, otherwise you will lose them if they see potential sales drying up and look to move elsewhere. You may also have to provide training and licensing, and access to industry events just like external agencies do so they stay relevant, up to speed and motivated.
Sales Back Office
If you don’t have any sales agency expertise, then it may be wise sticking with an external sales agency that can provide back office sales support services for you (typically administration, like contract preparation as well as advertising and marketing). Although, if you are going to be producing all the marketing collateral using an external marketing agency, the back office will be less burdensome to in-house.
Sales Channels
For some development product types established agency sales channels are all important. For example, if you are developing an inner-city apartment project suited to offshore investors then using an external agency who specializes and has done this for many years would be sensible. An internalized sales team would have a lot to do to get up to speed, let alone get overseas. Unless, of course, you grabbed an entire experienced team and in-housed them.
For other products, sales channel relationships come down to the individual agent, who he or she knows in the marketplace and has their trust. For example, the industrial leasing broker who has been in the same area for 20 years and knows all the business owners (future lessees) like they are relatives.
One thing to question: are you gaining access to sales channels because of the individual or the real estate agency? If the individual, then you need to in-house that type of individual. If it’s the agency, then you need to create the resource and support they need to enter that channel. If that is too hard, then you should stick with the external agency.
In a flat or declining market, with an already failed project, and no prior experience in managing an internal sales team I suggest stick with external agents. If the market is hot, and the product practically sells itself, then in-housing might be preferable, especially if the in-house commission saving can instantly translate into a price reduction that speeds up sales velocity. But there is also a middle ground.
At the turn of the millennium, I
was a manager developing terrace homes in up and coming city fringe suburbs. We
had an established relationship with one agent (working for a boutique local
real estate agency) who did all our selling. We wanted to bring him in-house. We
already had a junior working in marketing who wanted to get into sales (to make
the big commission!). Plus, we had spare administration capacity and for each
project we would create the display suite and marketing using other specialists
anyway. The agent didn’t want to jeopardize his long-term aspirations though.
For us, he was the talented go-getter that we must have. The win-win resolution
was we would set up our own real estate agency and he would be a director of
that and responsible for sales. We had a pipeline of projects and the theory
was he could grow the agency to sell on behalf of others as well. Financially
he would get paid a commission percentage comparable to what he was personally
earning at the external agency. That reduced our commission costs. If there
were new sales listings to unrelated parties, then we would get a cut of that
as well. This arrangement worked well for both us and him for a couple of
years.[1]
[1] Ultimately though the head agent moved cities and the team was not advanced enough to operate without that agent, so it was dissolved. Although we had taken enough out of the relationship that does highlight a potential problem of being tied too much to a single agent.
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