Real Estate: Why we're still living in the Dark Ages
Musings on Medieval Feudalism and the Business of Modern American Real Estate Ownership
Feudalism is alive and well in America and the world in general. We call ourselves "modern man" and somehow think we have evolved mentally beyond where we were a thousand years ago but the evidence is just not there. We may have much cooler toys than we did in the Dark Ages and we may have better health and a better standard of living but there is one concept that has remained the same; he who owns the land makes the rules.
I remember when I was young... I was obsessed with the Dark and Middle ages... Medieval Times. The days of Lords, Ladies, Knights and Kings. The days of peasants and serfs, castles and cottages. I remember reading about the serfs and thinking "wow, I'm so glad we live in a free country where this sort of thing doesn't exist anymore and we have the freedom to live and do whatever we want." Well that wan't necessarily the case.
For those of you who have never delved into the interesting world of the Middle Ages, here are a few concepts to get familiar with so you are not lost by this post:
Does that sound familiar at all to you? Fast forward to modern day United States of America. You need a place to stay closer to work so you jump on Craigslist.com or Apartments.com and seek out a place that is a bit more spacious and closer to your job. You'll only be paying your Landlord about 1/3 of your monthly income to stay there. It's in a nice apartment complex with an elevator. It has a security guard on staff and is super close to the local grocery store. The terms of the least state that you have to keep the common areas clean and a portion of your rent goes toward common area cleaning and maintenance.
We are living in a modern day Feudalistic Society. The importance of the Lord or Lady depends on the amount of "in demand" Real Estate that he or she owns. The Tenants (Serfs) pay tribute to the Lord or Lady on or before the first of the month... and if they don't, they will face exile from the land and may have a rough time finding another Lord or Lady to take them in.
Now, let's talk about the brighter side of things...
One of the huge advantages of the Modern Feudalistic Society that we live in is that we can actually choose whether we would like to be a Lord/Lady or a Serf.
When you decide to rent a place, you are a Serf. No questions about it. You are paying a Lord a large chunk of your money to live on his/her property.
When you buy a house to live in and use a mortgage for the purchase, you have made the decision to be a Serf. "But wait!" You may be saying. "If I bought the house, then I own the land and I am a Lord." Not unless you have paid off the mortgage. Until you pay it off, you are Serfing it up for the bank... oh yeah, and the tax man. Once your mortgage is paid in full though, you can't really be a Lord because you have no Serfs. So we'll call you a Baron.
Okay, so I'll buy a house to live in but I'll also buy a duplex to rent out to tenants. Now you are stepping in to the realm of the Lords and Ladies. You will have 2 Serfs under your wing.
The funny thing about modern day Feudalism is that even the Lords and Ladies tend to have a Lord or Lady above them, usually a bank, investor or mortgage company. So maybe we call the banks and lenders the "Kings and Queens" of our modern Feudalism.
There is no denying however the fact that a smart Serf can make his or her way into Lordship without investing much money or having been born in to that status. Those of us who started this game as peasants have a significant advantage over our historical counterparts and we can choose to leave this game as Lords and Ladies and give our children a head start in the world of Feudal America.
Would you like to learn how to become a landlord with little to no money? Tell me what you would like to read next in the comments below!
But your a big-shot rich Real Estate Broker... right? Yeah sure, mentally I'm rich.
One of the biggest misconceptions I've run into as a Real Estate Sales Team Owner, Real Estate Investor and Real Estate Property Management Company Owner is, well, it looks like I own a lot of things that would surely make me a fortune. So people assume I'm "rolling in it." I can tell you that for most entrepreneurs and small business owners "rich" is a mindset first and the money comes later. As the businesses grow the owner experiences "growing pains" which is the ebb and flow of money. At some point, if the business is growing, you will hit a ceiling that can only be achieved by spending more money (investing) in the business. This comes usually in the form of purchasing some sort of system or software or hiring a new employee who will either generate more business or allow your current employees to handle more business by assisting them.
So what do the numbers look like in a Real Estate Sales Business?
First, I would tell you to read the The Millionaire Real Estate Agent written by Gary Keller, Dave Jenks and Jay Papasan (Gary you can thank me for this plug later). Now, if you work for another broker you may be thinking right now "Ohhhhh, I see, this is just some BS where this guy tries to recruit me." To that I say, If you don't read this book merely because it's written by the founding father of Keller Williams Realty and you're afraid it's going to be a recruiting pitch, you are an idiot. This book can teach ANY ENTREPRENEUR in ANY FIELD how to create and build a very successful business. The models work whether you sell shoes, nuts or houses.
Okay, back on track...
When you read the MREA book you will notice in the Budget and Economic model that the lead agent of a successful team is supposed to net around 40% (the key word here is "supposed"). That means that if your team grosses $1,000,000 in commissions, you as the owner should take home $400,000 before taxes. However the MREA book also assumes that your agents are preforming substantially above-average... we're talking Listing Agents selling over 100 properties a year and Buyer Agents selling 36-50 per year. In reality most of the top-performing Real Estate Teams in my region (NJ, DE, PA, MD) are closing anywhere between 12 and 18 transactions PER TEAM MEMBER. This shows that in reality you will not get as much production out of your team on average as the MREA model suggests. The original MREA model does not appear to be scale-able nor does it meet real world production numbers. I feel that with the release of the MREA 2.0 we may see some of these issues addressed.
If you would prefer to make the most of leverage sooner, you may find out that you are actually netting 30% or even 20%. If you work in a market where the average sale price is very low, you may find that you have to compensate your agents on a higher split than other higher-priced markets in order to ensure they are making enough to survive and feel fulfilled in their position. This also chews into the bottom line. I'm fortunate (sarcasm) to be dealing with both scenarios. I would rather leverage people sooner and earn more time faster rather than earning more money... I mean ideally I want both but when you're starting out you have to choose which you want first. I also happen to be in a lower market than most areas of the country (at this time the Pittsburgh average sale price is around $200,000 where as the national average is $230,000+). Our numbers show this as well. The profit margin on my sales team is running only around 20%. So on $500,000 in team commission I take home roughly $100,000 after expenses and before taxes if I didn't close a transaction myself that year. The advantage of this set up is that it is very scale-able and allows me to focus on more recruiting, training and system creation activities rather than day-to-day rat-race sales activities.
Let me know what you would like to hear about in my next post in the comments below!
The truth behind Real Estate business ownership- In a nutshell I can tell you "it ain't all it's cracked up to be"... and then again, sometimes it is.
Today a friend told me that her husband had just gotten into Real Estate Sales in another state and that he was seeking work-life balance and she was seeking advice from little ol' me. She thought it would be good for us to chat and that her husband likely could use an accountability partner. The mention of "work-life balance" kind of put a smile on my face. As a broker who has been licensed now for closing on a decade I am still seeking work-life balance every day. It's like a teeter-totter though, ... true balance is never really achieved. You're usually at one extreme or the other.
Many outsiders to the Real Estate world look at it and they only see the smiling face of it and it's very enticing. They watch the HGTV channel and see some young guy who woke up at noon, threw some clothes on and sold a $2,000,000 property to walk away with a $80,000 commission check and they say "wow, that looks super easy... I want to do that so I can make my own schedule and make a ton of money and have a ton of fun."
Real Estate can be very lucrative financially. It can provide you with a lot of money for the time invested which therefore can free up your calendar for fun and exciting ways to spend that money. When you hit your goals it can provide you with a very rewarding feeling at the end of the day, week, month or year. And what I've noticed is that the people who are successful at it tend to display those glowing aspects of this career to the public but they rarely address the hard work and failures that had to occur in order to make those achievements.
So here's a little bit of the truth...
The Real Estate business can destroy you financially. It can suck money right out of your pocket and your accounts before you even knew it. It can suck the time right out of your calendar until you become a slave to the business. It can break your spirit when you worked your ass off and it still wasn't enough to hold the deal together and your mortgage payment is already late. But it's just like the work-life teeter-totter, if you have the persistence, the will-power and the financial means to hold it all together and focus on the end goal, the good will overpower the bad. If you're smart, you learn from the bad and you don't repeat those mistakes again.
Here's what work-life balance looks like for a Real Estate Business Owner:
... So how did that all sound to you?? Work-life balance? Or total chaos?
It doesn't have to be like this of course. My 2016 example is an extreme of what happens when you lounge around in the "Life Quadrant" for too long. If you're trying to juggle you can't ignore the ball and then expect it to be where it was a minute ago, right? Is it ironic that hanging out in the "Life Quadrant" for too long can actually have serious negative impact on the "Life Quadrant" because it screws up the "Work Quadrant"? But it's a catch 22... spend too much time in the "Work Quadrant" and your "Life Quadrant" can suffer too... which will then come back to impact your "Work Quadrant".
Everyone has his or her own tolerance for risk and I would say that most people will not put that many irons in the fire. Whether you want to multi-task or not, own 12 businesses or just one, develop a real estate team or work alone, you will still face the everyday teeter-totter of trying to find that work-life balance. It's when you realize that equilibrium is never achieved, it's just a pendulum swinging back and forth between overworked and not enough work... and when you accept that and swing in stride... that's when you actually "feel" the work-life balance.
Interested in a Career in Real Estate?
Dustin Nulf is an Associate Broker for Keller Williams Realty in Pittsburgh Pennsylvania. He has been in Real Estate Sales and Investing since 2008 and has had his hand in over 500 real estate transactions since then. Dustin is the CEO of The Dustin Nulf Team and acts as a coach, trainer, mentor and adviser to sometimes hundreds of agents a year.