Speaker 1 (00:00):
Andy Mulholland spent a decade building and running a successful real estate team. Now he and his wife Ellen, run the books for many top real estate teams. He joins us here on Real estate team os to help you master your real estate business, financials, your p and l, your net profit margin, and he does it with a focus on simplicity, why we're so focused on top line numbers, why we're confused about our net profit margin, why we must align our economic model with our operating model and what the three main models are. How to define your goalposts rather than a very specific target and why reinvesting profits is just spending too much money. All that and much more with Andy Mulholland right now on real estate team os

Speaker 2 (00:43):
No matter where your business is today or where you want to take it, you'll get there faster and more profitably with an operating system. Welcome to Team Os, your guide to starting, growing and optimizing real estate team. Here's your host, Ethan Butte.

Speaker 1 (00:57):
Andy, you've built a high performing real estate team yourself. You've seen the books and done the books for many high performing real estate team leaders. I'm really excited for what you've got for us. Welcome to Real Estate team os.

Speaker 3 (01:09):
Thanks for having me, Ethan. Excited to talk.

Speaker 1 (01:11):
Yeah, I love your passion for this. We're going to find out kind of how you got passionate about or how you discovered this passion, but we're going to start with our standard opener, Andy, which is what is a must have characteristic of a high performing team?

Speaker 3 (01:26):
I would say clear communication is probably key in my opinion, and that can just meet a whole host of different things I think. But clarity is kindness and I think a lot of times we want to avoid things. We want to, and maybe it's just as we grow as leaders, we realize how much lack of communication can cause so many problems in the business. And so being clear, being clear to the customer, being clear to the agents, being clear to our staff people being clear to our vendor partners, being clear to everybody on just everything. And it is what I love about numbers and financials and tracking data points because the numbers, they're the most pure form of communication possible. They do not lie, they do not have emotions you can't hide behind them, but I think communication is just so important.

Speaker 1 (02:17):
Yeah, I completely agree and I'll just add one thing to your list there. The idea that sometimes the team leader in a rush and constant rush perhaps isn't even clear with themselves, so it's difficult to communicate clearly when you don't yourself have a clear picture of what's going on. We think that maybe sometimes it's between me and the recipient and the way that I'm communicating something, but I would add that it starts with yourself if you're not clear on what you want to communicate why or how you're setting yourself up for a lot of communication, failure and urgency, and I think this also starts to bleed in a little bit to the emotional regulation conversation at some level to the degree that that's part of it as well. Does that trigger anything for you?

Speaker 3 (03:00):
Yeah, no, I mean I agree and I'm glad you said it. I do agree with that. It seems like that's the core of all communication is the team leaders that I find and work with and looking back on my business as I built a team and made a lot of mistakes, it was back when I was unsure of myself, unsure of where I was, mentally unsure of how I felt about something or the direction I was going or the vision I had and then, yeah, it's so hard to communicate when we're not, as you mentioned already clear up there for sure.

Speaker 1 (03:28):
Yeah. Well, I don't want to spend a ton of time here, but I am curious to get a little bit of detail and I would love the context for the listers because I really want to get into what advice you've got and insights you've got and all of that in terms of real estate team leaders building profitable businesses. But tell us a little bit about your own team building journey, and I'll just kind of characterize it a little bit. One of the most interesting things about what you've done with your real estate team is that it really was in parallel with what I would observe as the rise of real estate teams. The era that you were doing it was really I feel like the most foundational part of the last 30 years of the dawn and development of real estate teams. So with that, anyway, A, do you agree or would you observe similar then B, share the story of your team

Speaker 3 (04:13):
Team? Yeah, it's funny you say that because I remember this was probably my third or fourth year in business. I'd just gone from the brokerage I had started with to a different brokerage and the traditional big name brokerages, big box brokerages, and man, the environment in the office was looking back on, it was so gross and just not good. But I remember someone, one of the traditional agents coming into my office and at that point I'd hired an admin and I think I'd brought on my first buyer's agent and was just trying this thing out. Was marketing at that time, still the newspaper? I remember having an ad in the newspaper and it wasn't even that long ago really, but back then in my semis, small market newspaper was still a thing. He just came in and said, people don't want to work with your team members, they want to work with you.

Speaker 3 (04:58):
He was stuck in that mindset and I had to fight it because I remember almost believing him at one point because yes, that was when the top agents in any community were these high level agents, these top producing, highly leveraged with admin and deep relationships in the community. That was the business model to run, and so anything different than that was just not going to work in most people's minds. And then you add in the fact that that was 2008, 2009 coming out of just a very tough market and putting those two together. Looking back on it, I'd never even thought about this until you said it like it was really an uphill battle for those two reasons for sure.

Speaker 1 (05:43):
What was going on in your business when you brought those, a couple other folks around you?

Speaker 3 (05:48):
Yeah, I mean originally bringing in an admin was, I remember having a conversation with my wife at that time, my very first year. I was fortunate enough to be the rookie of the year in my market, sold almost 30 homes. I never made six figures in my life, never thought it was possible. The money was awesome, but the lifestyle was awful and I was newly married, had a young son at the time, we now have four, so a family was definitely something we wanted to prioritize. My wife was a nurse at the Mayo Clinic, a transplant nurse, so was very busy working 12 hour shifts evenings and weekends. Actually before I got in real estate I was also doing a second job of driving a limousine and is doing all kinds of crazy stuff and thinking, okay, I'm making the money now, but the lifestyle is more crazy and ridiculous than it has ever been and it's just not worth it.

Speaker 3 (06:42):
It just wasn't worth it for me. And so we had a conversation that just said either we're going to figure out a different way to do this or I'm walking away as good as the money was not worth it long-term in my brain, I didn't see an end in sight. I remember going to the original brokerage, I went there because the top agent was somebody I wanted to learn from and I quickly realized I didn't want their business every Saturday morning all day Sunday he was there calling Fizbos and expires and I'm just thinking, I don't want that. It's not that important to me. Went to the next brokerage thinking I'm going to go follow this next agent at that brokerage. They must do things differently. Same story. So that's when it clicked for me and I said, we got to do this different or we're going to walk away, and we both agreed that's what we were going to do, so it was time to figure out how to leverage myself. I didn't even know what that word meant necessarily in this business and just started plucking off the lowest dollar productivities that I was doing and hired a part-time admin, went to full-time, quickly realized now that that's all off my plate, I've got all this opportunity, these leads, these referrals, people, whoever they were, that I can't get to everyone. And so rather than just say no, it was time to bring on an agent. And so we did that and it failed miserably the first time, brought on another one and kept going from there.

Speaker 1 (08:03):
In hindsight, when you talk to people about things besides bookkeeping and accounting and financial strategy, and you're talking about some of these early days and some of the lessons learned, any takeaways from the team building process that you think are informative for people today?

Speaker 3 (08:20):
Yeah, I think it's a lot of the same stuff that I've learned from so many other people along the journey in just how important the people that you bring alongside you are. I think as I've gotten more into the financial side of things, it's really understanding the different economic models and how important it's that they match your operating model and I was off in the beginning, I was running the wrong economic model for the type of team I was building, and so that had to get corrected and unfortunately it was a little painful to go through that, but I think those are some of the big things. I think having patience, man, I think we're so used to things happening so quickly and we're willing to sacrifice a lot of stuff to get there, to get there quickly when all along really what we needed to do is just be patient and keep moving forward. This takes time and I think that's the biggest challenge for a lot of team leaders it seems is just we want it now and

Speaker 1 (09:17):
Yeah, I should have more and I should have more momentum and this should be happening faster when in fact if

Speaker 3 (09:22):
Not, I'm doing something wrong

Speaker 1 (09:24):
And they're not doing anything wrong other than just giving it more time. Yeah. Well, there are a lot of people out there that want to sell you a solution that needs a problem, and so you're just going to maybe assume it's yours. Okay. One last question as kind of a bridge into the real topic that I know is going to be super valuable for everyone who watches and listens to the show, which is, well first of all, when did your wife join you on the team as CFO and make that transition and when did you blend it? When did you realize that finance and bookkeeping was going to be your kind of legacy contribution to this industry?

Speaker 3 (10:01):
Wow. Yeah. When did she join? I don't even remember when it was. Honestly. She joined when we were 17 years old because we've been together since we were juniors in high school, and I remember trying to balance a checkbook and overdrafts and had no idea how money worked and she kind of whipped me into shape and so that was when it first I realized, wow, she knows what she's doing here. Once we started the real estate team, it was probably halfway into my building. My team a few years in where she jumped in just mostly because we had a CPA who was a great person and could file our taxes but did not understand the nuances of a real estate business and the pain points that I need to be aware of and that my numbers could tell me those if they were included in my books. And so she learned the hard way right along with me, which was just trial and error, figuring it out, what worked, what didn't, learning from others, reading, investing in that, and she was doing those books. And then if you asked me when I was building my real estate team or at any point previous to that in my life that I would be running an accounting firm zero chance ever that that would be happening and yet here I am.

Speaker 4 (11:13):
That wasn't your vision for yourself as you were driving the limousine?

Speaker 3 (11:17):
Not at all. And part of it is because when I think about it, I am not an accountant. I don't run an accounting firm. I run a clarity firm, I run a company that brings confidence through clarity for real estate team leaders. I just feel like for so many years I would just be guessing on what was going on in the business and that is just not a way to run a business. And now that's what I feel like I do is help people make sure that they're making the right decisions in their business. There's a wise man said once that most business people will make decisions either by guessing or using their gut, and either way they're going to either be lucky or wrong, and so we want to avoid that and that's how we do that. And it all kind of happened because top teams, actually a top team in Arkansas reached out to us because we had been in masterminds with them and they said, Hey, your wife did a great job of helping you get structure in your financials. What did she do? How should I said, you know what? Let's just have her connect with you. And she started doing books for them and then they told someone else and they told someone else. And our business has exploded over the last five years completely through that word of mouth referral-based business because really her passion around helping others and then my experience in just running a team personally,

Speaker 1 (12:40):
And this speaks to the fact that this is a real problem, it's a common problem. One of the things that I hear often is, Hey, I just saw this person do this massive webinar, get off this massive stage, and I know that they're not running a profitable business. I hear that all the time. So I guess I'll turn that into a question just to kind of get us moving in this direction a little bit. I feel like in general we have a celebration of and perhaps fascination with top line numbers, growth oriented numbers versus scale and deficiency, which is kind of like the real guts, the real insight. It's that parallel match which I want to spend more time talking with you about between what model are we running and is our operating system designed for it that are we running something that we've designed from the ground up and attracting the right agents into it, et cetera? Separate topic, but here it's agent count, it's units sold, it's sales volume. These are the things that people tend to celebrate and orient themselves toward. Why do you think we have so much of a fascination with the top line and the bottom line somehow and everything that falls down toward it is such a mystery to so many people, even accomplished people.

Speaker 3 (13:55):
Yeah, I think because the easiest thing to do is increase your top line and add agents. That's easy to do. If you add agents, you're going to increase your top line in most cases. I mean that's the relatively easy thing to do. The hard thing to do is run it in a way that everyone is served well and you can be left with a net profit. I think that's the challenge that is if you're thinking about what is building a real estate team, what is the mission, what is the goal? I mean that really is what it is. How can I make money be able to exit production of my own to be able to support my family, which by the way is the number one reason we do this just like for me was to gain freedom to avoid that typical real estate agent lifestyle. How can I do that where the client is served at the highest level and my agents can make more money than they've ever been able to make in their life without just being a traditional real estate agent themselves, still being fully leveraged with people and systems, but I can still make a profit that keeps me out of that production. That's the name of the game and that's the challenge in front of us because

Speaker 1 (14:55):
Of the, I'm going to the challenge here, is it because of the complexity and nuance of it is because again, with regard to the model that we're running and the operating system we have underneath that model, all the potential inconsistencies there, is it just a general kind historical blindness to financial strategy? Why do you think it feels so complicated?

Speaker 3 (15:17):
Yeah, I mean part of it also is just as an industry, think about who has been rewarded by top line growth and not net profit the brokerages, so who do they put on stage, who have they praised, who have they interviewed, who have they done all these things to? It's that top line person. Part of it is there's a sensitivity to the net profit side of it as well, which is understandable. Not everybody's easily willing to share those numbers,

Speaker 3 (15:41):
So if that's part of it as well, but I just think honestly because just harder to get there and I can tell you firsthand, you talked about people being sickened sometimes by certain people being on stage touting certain numbers and knowing all well that behind the scenes it is not a business we would want. I was that agent. I was that team leader. I remember standing on stage at a brokerage conference getting an award in my third year in business for top this and top that and people coming up to me afterwards and me thinking, you don't want the business that I have. If you could see behind the curtain, and I think it's just because that top line an agent count is just the easier side to accomplish. It takes more discipline and patience to build it profitably and I think as humans, we're not wired that way.

Speaker 1 (16:33):
Okay, let's go to some. If someone is, well, I kind of got a handle on it, but I'm mostly, my bookkeeping is primarily about taxes, so I'm just really following the lead of my CPA and giving her or him whatever they need or want and I kind of know what's going on, but I don't, let's break things down. I mean I know that adjusted net profit is probably the most important number from your perspective. I know that top line revenues we already established followed by cost of goods sold, followed by gross profit, then all the operating expenses, getting to that bottom line, net profit are all those are probably the main things to have an understanding of. I'd love for you to walk through that, give someone kind of the 1 0 1 and then we'll move into some higher level stuff maybe or some more nuanced stuff anyway, but share your philosophy or perspective for someone who's like, Andy, I've got a problem. Like you had three years into your business. I know you solved it and I know you're solving it for other team leaders. Help me, where do I start?

Speaker 3 (17:36):
Yeah, I mean starting is always knowing what model you're building and then digging down deeper from that. So there are different models that are out there. We all know the Team Ridge model. Then there's the high performance team where everybody's kind of operating like a Navy seal that approach. I call that the school of fish. Everybody's swimming in the same direction. When we all turn and do something different, we all do it differently, different than a team reach where we're all just more of a collection of agents, maybe sharing marketing and some resources and then you've got another model or a certain type of model where it's a high producing solo agent with some, I call 'em the shark with feeder fish. It's like we got this shark who's always going to be out there eating and killing, and then there's some agents that get the leftovers.

Speaker 3 (18:19):
Well, guess what? The economic model for every one of those is different. None of those are wrong models. I've heard you say it before too. There's a lot of different ways to skin the cat when it comes to building a real estate team, and there's even more than those three, even though I think those are kind of the three main types the economic model has to match, especially if the agent truly wants to build it like a business where they want to be profitable without their own personal production or if they were to step out completely.

Speaker 3 (18:50):
I think here's the thing, the biggest problem I'd say for people is that there's confusion around net profit. There's confusion around what that number actually is for a couple of reasons. One is because they aren't viewing their financials through the right lens. I tell people there are two lenses you can view these through. You already alluded to one of them, which is the tax lens, the IRS lens. How do they look at the numbers? Well, your CPA is going to balance risk for themselves and then also getting your taxable income as low as possible. There's that balance and that's how they're looking at it. So that's how your numbers are typically reflected through their reports. That's great, but that's really only half the equation here. The other side of is really truly looking at it from a health perspective. One side is all about taxable liability.

Speaker 3 (19:41):
The other side is all about the health and making business decisions, and we need to see that side as well and it gets confused because we run a lot of indirect expenses through our business to decrease that tax liability, right? Our CPA is telling us to run this through, run that through some will have take more risk than others, and then all of a sudden our net profit looks different and we wonder why we can't understand what our numbers are telling us about our business. So that's one reason we are confused about the numbers. Another reason I think probably just as big or bigger in fact is owner production where we have a zero split. I would say this is the critical, most critical issue in most people's bookkeeping and their analysis of the true health of their business is they do not understand that their gross profit is dramatically affected by the percentage of production done by the owner versus the team.

Speaker 3 (20:37):
And there's this tipping point when you're a solo agent and you go from solo agent to team, there's this slow tipping point and a lot of people, I was one of 'em, get stuck in the middle because on paper it looks like they have a healthy business, but when they go to their bank account, they say, this can't be healthy, and if it is healthy, I'm going to retreat and go back to being a solo agent. I don't want anything to do with that. What they're missing is that their business isn't as healthy as they think because their production dollars, the money coming from their personal deals where there's a 0% split on that, a 0% cost of sale skews the numbers. It makes their gross profit look so much more healthy than it actually is and they think they've got a great business. All of a sudden they want to start to scale back their business and do less deals on their own and the money's gone. Yeah, it feels like you're walking into the trap that you set for yourself a hundred percent. I've

Speaker 4 (21:30):
Felt

Speaker 3 (21:31):
It and it's the worst place to be, but sometimes we got to get there to realize it, but hopefully our goal is to help people realize that way before they ever get there with true numbers and really adjusting their numbers for that owner production that or teaching them to pay themselves just like an agent, right? One or the other. And then the third thing I would say is also owner salary. I see that confusing people because from one team to the next profit, margins could be different and somebody may go to a conference and hear a profit number on stage by somebody, a margin, a percentage of profit, and they look at theirs and they say, something's not right. I'm not where they are or I'm better than they are, but they're not considering what I just talked about and how much is that person paying themselves in a salary?

Speaker 3 (22:17):
And I hear the argument, well, I pay myself a salary because if I ever wanted to replace myself, I want to budget for that amount already in the books. That's great. However, I find most team leaders never do replace themselves in their business, so the real reason they're paying it themselves a salary is to keep the IRS happy going back to that tax lens. So we really got to strip all that stuff out to really truly understand what our adjusted net profit number is. And I think as an industry, if we all did that, we'd be surprised by some people we think are super profitable, others we think that aren't, and we really look at an apples to apples adjusted net profit comparison all of a sudden things look dramatically different. Really great run through

Speaker 1 (23:02):
There. I want to hit a few things maybe in order if it makes, I mean you understand this much more deeply than I do obviously, or else this would be a monologue episode on my part, so maybe lump them together if it makes sense to, but I would love to hit health, which was a theme throughout right off the top, how do you regard a healthy business? I want to get into direct versus indirect expenses and kind of peel that apart a little bit. Maybe give people some simple buckets to consider and then really double back into paying yourself like an agent or making sure that if you're still in production, you're accounting for that the right way and then the salary versus no salary piece. But when you talk about a healthy business, how do you regard health? I mean obviously it's on a spectrum. This is completely unhealthy to this is incredibly thriving and healthy and it's a continuum, but in general, if someone is in a healthy state, what are some of the most obvious signs of this or how do we move ourselves up the continuum?

Speaker 3 (24:01):
When I ask someone why, if they are still in production personally, I say, why are you still in production? And if they say, because I love it and I always want to do it, I say, great, then we need to consider that when we look at your net profit number. But most of the time people that are looking to build a team are looking to either scale back their production or get out completely or at the very least, be profitable not considering their production, but they're stuck in production because of the financial aspect. That's an unhealthy business if you have to produce to keep the lights on, we've got an unhealthy business period. So that's number one. I guess number two is I always ask again, what model are you building? Because to me that's the biggest determining factor in whether someone's running a healthy business or not.

Speaker 3 (24:45):
If they're running a team range and they're okay with a five day percent net profit or a 10% net profit, whatever the number is, then guess what? We're healthy if we're there. But if I'm talking to somebody else who's not building it that way and they say, I want to exit production, maybe I live in a small to medium sized market, I'm never going to have 200 agents. I just want a small tight knit team of people, but I still want to be profitable to the point where I could exit production, I'm going to say, well, you're going to need to hit a much higher net profit margin. And then you've got the solo agent who just really just doesn't want to lose out on extra deals that he couldn't handle he or she couldn't handle. So they kind of just hand 'em off to a couple agents on their team and they're running that shark with feeder fish model. Well, they better have a really high net profit margin because they have a very low cost of sale because they're doing and always will do the majority of the deals. So it depends on the model that they're building, but I think that if ever someone is stuck in production for a financial reason, that's the first indicator that we have an unhealthy business, very

Speaker 1 (25:46):
High level observation. Is this business doing what you need and want it to for you and are you clear on what model you're running? Is the this is where we can start looking at a net profit margin and saying healthier, unhealthy because 15 is fantastic in one situation and terrible in another. And again, if your business and its profitability are restricting you from living the life that you want and running the business the way you want to run it, that's a sign of ill health. Talk a little bit more about direct and indirect expenses like when we're getting into operating or maybe even cost of goods sold, but operating expenses in particular, what are some tips you have for folks to make sure that we're including the right stuff in the right way and that we understand it clearly enough?

Speaker 3 (26:31):
Yeah, I mean number one is talk to your CPA and make sure that you're clear on what you should be running through the business and what you shouldn't be. I always suggest that, but from a health perspective and understanding it, it's just asking the question, what was the intent of the dollar spent? And if you can answer that question as the intent was to grow or invest into the business, then it's a direct expense. If it was because I wanted to decrease my tax liability or any other answer, then it's an indirect expense. I see people get a lot of confusion. Again, this goes back to non-real estate specific bookkeepers so they don't understand, for example, revenue or profit share and they include that in the top line revenue of income and all of a sudden it makes our business look way healthier than it is, and if we strip that revenue share out, our business is not looking so good and we're running a really unhealthy real estate team, but a really healthy profit revenue share business and we mash 'em together, or maybe it's our real estate team and our rental properties altogether, whatever it is, separating that stuff out as either indirect expenses or on a whole separate p and l is so critical, and I think those are some of the bigger things I see with direct and indirect, but travel, I go to a real estate conference and I stay a couple extra days with my family.

Speaker 3 (27:46):
Okay, maybe you can get away with running that through as a business expense, but it really isn't what was the intent of that dollar? It was to spend time with your family going out on a meal with your spouse on a date night and you happen to talk about business for a minute or two or half the time, whatever the rule is, and we're going to run it through the business, but the intent of that was for time with my significant other not to run a business meeting. And so those are the things that I think can get all of a sudden lost in the numbers and then it doesn't bring the clarity that we need to really understanding how much we're spending in the business.

Speaker 1 (28:20):
In those cases, are you recommending to folks essentially running two sets of books like for tax purposes, you can do whatever you want to do over there. That's between you and your CPA and your comfort with risk and your interpretation of the law. But if you want a real picture of your business, you need to run a parallel set of books where you're much more disciplined through that lens.

Speaker 3 (28:43):
The only time we suggest they run a separate set of books if it truly is a separate business, so we have a lot of high level revenue share teams that we do the books for, and the team leader also not only generates a lot of revenue share income, but also has a significant amount of expenses tied specifically to generating that revenue share downline business. That comes to a point where we need to separate these books. If it's just revenue, we can use a couple tools and tricks in QuickBooks. One is called using classes where we can actually have two columns right next to each other in a set of books where we have only your direct column and then we have your indirect column, and then we have a third column, which is what the IRS sees, which is everything. But that way when we're analyzing the books, we can say, forget about taxes. Let's just look at your direct column and look at your direct net profit. And then there's a couple other tools we can use to separate it, but essentially we use those tools in QuickBooks to get more clarity on the difference between those direct and indirect expenses.

Speaker 1 (29:42):
Cool. I've heard you say elsewhere that if someone wants a simple snapshot of their expenses, their operating expenses, we've got people expenses, we've got marketing and lead gen, and then we've got everything else one, did I hear that correctly and two why? I mean it strikes me as pretty clear, but any thoughts on why those are the three buckets

Speaker 3 (30:08):
To keep it simple,

Speaker 1 (30:09):
Yes.

Speaker 3 (30:11):
I would get so frustrated when I looked at my numbers because they would mean nothing to me and they had more detail than they needed and that's why they meant nothing to me. So there's clarity in simplicity. It's why we're called simple numbers. You've got to keep it simple, and I just think there's so much more value out of that. Now we can dig into the details as we start with that high level overview. For example, I can look at a p and l within five minutes. I can find out what the major issues are in that business. I can usually determine if they're not holding their agents accountable because I can see that their cost of sales too high on the buy side of the business and most of the deals are coming from the agents SOI, which is a different split than a company generated lead, and I can see it right in their books and I say, I'm guessing you're doing more production. I can see that in the books as well. You're doing a significant amount of the production, so I'm guessing you don't have time to sit there and hold the agents accountable and you don't have a sales manager, so guess what? Nobody's doing it and therefore your cost of sale is off because your agents are out finding their own business and you're not providing enough for them through accountability and training and lead conversion. And so guess what? Your margins are off and you might have a retention problem

Speaker 4 (31:26):
Soon.

Speaker 3 (31:27):
Yeah, it's right. It's coming. And so you got to look out for this and it's what I love about the numbers. People think numbers are boring and I did for years as well, but man, the strategy we can pull out of our numbers very quickly is amazing if we're there set up correctly, and that's where I think keeping it simple is just so important. When I look at a p and l, I tell everyone, look, if your net profit is not where you want it to be and only you can determine what you want it to be, we'll help you figure out what model you're running and what it should be generally, but it's still just a goalpost. We're just trying to get it in between the goalposts. If you're not where you need to be, there's one of two places. It's either one or both.

Speaker 3 (32:08):
It's either your cost of sale too high or your operating expenses are too high if it's your operating expenses. The great news is we got three places to look. You're either overspending on lead gen marketing, overspending on people or overspending on overhead. Everything else, once we identify which of those three or all three, whichever it was, we can start to dig in. It's okay, it's lead gen marketing. Maybe your goal is to be at 30% operating expenses, 10% on each, and we're at 15% on lead gen marketing, so we need to dig in there and find 5%. Now we dig into lead gen marketing. Now we can go into the subcategories and sub subcategories and drill it down into that mailer you sent to that one neighborhood who had no return on investment, and that needs to be cut immediately. So start high level and we can drill down deeper.

Speaker 3 (32:51):
The problem I think with CPAs and bookkeepers, they're trained to think like a CPA. They know frankly, not to brag on us, but it's one of our values is because we were not trained as CPAs. We were trained as entrepreneurial real estate minded people, and that's how we look at the numbers. The great news is our books can still be used for the same purpose for the tax purposes, but we get so much more value because of that different way of looking at it. CPA typically wants to just overcomplicate confuse it because frankly, that's just how they see the numbers.

Speaker 1 (33:28):
A number of really helpful things in there. First, I just want to observe this going back in just a couple of minutes. The idea of can I afford a sales manager can be answered in the way that you just described, or where do I need to get before I can afford a sales manager? Really, I just wanted to raise that for anyone listening or watching as an example of a decision that really understanding your books can help you with. I would love for you, Andy, to give another go to cost of goods sold. What goes in line there? I have a feeling you tell me if this is the case that some of that winds up being mashed in and it's not parsed out clearly enough where we can make decisions based on this is a cost of goods sold, not a general expense to the business, but give a swing at cost of goods sold. What does it include? What doesn't it include and what are some of the mistakes that you see around that?

Speaker 3 (34:20):
Yeah. Well, I'll tell you what I think. I will tell you frankly, at the end of the day, it doesn't matter what you put in cost of goods sold, it does not matter what you put in lead gen marketing overhead. People get so hung up on what category should it go in. It's like, listen, it doesn't matter as long as you're clear on the goal and what your margin should be. So for example, cost of goods sold. Typically, I think what needs to be in there is broker costs, agent costs and referral costs. That's it. Possibly an ISA. If you're paying them at a closing versus a fixed salary, maybe you pay a little fix maybe whatever it is, but people will put in, for example, their per transaction closing coordinator. I'm not a fan of that in cost of sale, I'm sorry, because that is a people expense that you just happen to be paying on a per transaction deal until you scale to the point where it makes sense to bring them in-house a people expense.

Speaker 3 (35:16):
Same with I see this happen with certain referral costs where we can do it different ways, but I think that at the end of the day, costs of sale typically is going to be those broker and agent and referral costs. That's what we need to look at. How much is going out at the closing table to someone else as part of that commission, and that's how we look at it. I see some people want to put their listing costs in cost of sale, their sign costs. Why? Because again, on paper or by definition by the book, if you ask a CPA, that is a cost of sale because the definition of cost of sale is anything that's tied to that specific dollar that came in and that on paper makes sense. But in reality, if you think about it, what's the intent of the spend for those listings, those dollars, it's to market you and your team and your business how good you are. I take awesome photos and drone photos and all these crazy things and put really nice signs in the yard. Not for my seller, the house is going to sell either way. I put it there so that the neighborhood thinks I'm awesome and calls me to list their home next. Same with the mailers that go out. It's not a cost of sale, and I think that's probably how I tend to look at how we need to set that up.

Speaker 1 (36:30):
Okay. I want to double back into what you already did, like a nice drive by on which is paying yourself like an agent and paying yourself a salary, and that's before leaving production and after leaving production, if that's what's something that someone wants to do. So I'd love just to get a little bit more detail in there and I'll just give you a scenario. I am a producing team leader. I have four other agents around me, one staff and then a couple VAs that are part-time supporting different functions here. How should I be paying myself on my deals or how should I be thinking about accounting for my own production so that when I make the decision to cut back 50% on homes, I'm listing that I'm not going to be blindsided by the way that I've been thinking about it and tracking it.

Speaker 3 (37:25):
The right way to do it in my opinion, is to pay yourself just like any other agent on your team to start with. If any other agent on your team did that deal, what would they get paid? And that's the amount you should literally at closing transfer to you personally. Now, here's why most teams don't do that is because they want to use that money to scale their business and they reinvest that money back in business. I'm not a fan, I get it, but I see people getting more and more trouble doing it that way. The problem is once you've done it that way and you've established a baseline expense model, it's really hard to just stop cold Turkey and start paying yourself that money now. So that's the challenge with it. We use, I don't want to get too technical here, but we have a pretty nice, we call it our freedom formula.

Speaker 3 (38:11):
Basically it's a mathematical formula you can use based on your production in the business. It basically accounts for the cost of sale you would have had if you had paid yourself like an agent so that you can see while I'm in production, how much should I have in net profit so that if I did scale back, I would still be at my goal profit. It's probably more than we want to go into on this call, but there is a freedom formula that's very simply helps you determine that you have to do it one way or the other. Either you need to pay yourself like an agent and then you'll have your true net profit at the bottom or you need to account for it and make sure that your net profit adjusted for the amount of production you're doing as if you would've paid yourself like an agent.

Speaker 3 (38:51):
So I think it needs to be one or the other. I think you should pay yourself in three ways. If I went back and did it myself, there's three ways I would pay myself. I would pay myself that split as an agent. I would pay myself a salary for being a team leader in that staff position, or maybe I'm in the operations director role or whatever. I'm in some sort of behind the scenes role, and then as an owner, I would pay myself profit distribution. So I'd be getting split salary and profit distribution quarterly, and as I exited out of each one of those until I was only in that ownership role, my business would be set up profitably or I'd have a true number of what that profit looked like because I'd be accounting for those things.

Speaker 1 (39:29):
Good, really good advice. So let's go to the other side of it where I've got 41 agents, I've moved myself out of production. I'm probably still in some of those roles that you already described. Maybe I do or don't have a sales manager, maybe I do or don't have a director of ops or a COO depending on what type this is. Another fun thing about my seat on the show is that different team leaders are different types. We talk about the technical founder or kind of the sales founder of a SaaS company or something. There are different types of team leaders too. There's the ops, they're born to be A COO, but somehow they wound up in a sales role and did well enough that here they are. In any case, I've left sales production and I need to figure out how to pay myself in a way that is appropriate for the business and gives me a realistic picture of the health of my

Speaker 3 (40:19):
Business. Well, I mean, I guess to me, I don't know that I would do it any differently. I would do the same thing. I'd be paying myself in that scenario, a salary, a market based wage based on the different roles that I was in, and I would be doing that both for tax purposes. If I was an S corp, I would need to be doing that, but also because now I'm accounting for that role. If I were to replace myself in the future and I'd be paying myself quarterly profit distributions, I'm a big believer in the system of profit first by Mike ic, and I cannot imagine running a business without that in place, and that's more of a cash management system, just like a listing system. It's a management system for our cash, and that allows me to do some of those things, pay my have money for that salary, also have those profit distributions. So that's the system I would use to do it, but I would be paying myself those exact same ways. In this case, no production, so no split as an agent and that would make sure that it's handled correctly. Yeah,

Speaker 1 (41:15):
Let's just say I assign myself, I spend 15% of my time as an operations manager and there's a market value for that role. I pay myself or I spend 40% of my time as a sales manager on standards, accountability, tracking, driving, supporting, et cetera, and then I'm operating functionally as a CEO with whatever I left over my made up scenario here, 45% of my time is properly as a CEO where I'm casting the vision, I'm keeping the leadership team organized, whatever that leadership team looks like. Am I going with market rates on these things and paying myself a portion, so I'm paid 15%, like an ops manager, 40% like a sales manager and 45% like a CEO.

Speaker 3 (41:59):
Sure, if you want to get that specific in detail, but again, I think we can get lost all of a sudden. I love that you

Speaker 4 (42:04):
Went back to simple.

Speaker 3 (42:05):
Yeah, keep this simple, right, and do your best and stay in the goalpost. I think that's the key is we're not trying to, it's not this, we got to be at this exact number. It's like, no, no, we need to be in this range. There's a range. As long as the ball goes through the goalpost, we can call it a win. We can get our points, and I think the key though is what are the goalposts? That's the thing I find people missing. They don't even know what they're shooting for, and if they do know what they're shooting for, it's someone else's non adjusted net profit number that they're comparing themselves against and it's the wrong direction. They're going in the wrong direction.

Speaker 1 (42:39):
Yeah. Okay. You introduced earlier in this conversation something that I wanted to hit really directly anyway, and that's the idea that a lot of folks do want to grow their business. They want to add scale to their business growth, certainly can eat capital, and sometimes that's a really good idea and sometimes it's a bad idea. What is your thought on investing in growth at the expense of profit? How do we set ourselves up so that when we're making these investments and let's just say it's an ongoing one, I'm going to start spending five grand a month on this thing. How do we define these types of investments from the get go to know whether or not if we can stop them, we should, do I give this six months? Do I give this three months? Do I give this a year? Do I burn 60 grand? How are you advising people to think about significant investments in growth in particular, and if it's at the expense of profit, how long can we tolerate that?

Speaker 3 (43:33):
Yeah, so I'm not a fan of the entire premise. To me profits that you, I hate the word reinvest profits when it's this level of business. If you're a publicly traded company and you're working with other people, no, no. This is the difference between you going to your kid's soccer game or not. This weekend is determined oftentimes by how much profit we have because if there isn't enough, guess what we're doing? We're selling a house ourselves to keep the things running that CEO doesn't have to make that decision at that huge publicly traded company. He can reinvest profits to get greater returns for the people later. We don't do it. This is a small business, typically. This is how we need to structure this is profits reinvested is a fancy way of saying yes, spent more dang money. That's all it is. I overspent. And so we justify it by saying, I'm reinvesting my business.

Speaker 3 (44:26):
I'm not a fan, and here's why. I've been on so many conversations with team leaders who have literally shed tears on calls with me because they reinvested their profits and they've done it for too long. And to me too long is one day. So we have to avoid that. Why are we in this business? It's for our families. Every time I hear someone say why they're doing this, it's for my family. And yet we are willing to gamble, roll the dice too often with profitability, which is another word for freedom in this business, to find out if we can grow quicker and scale faster and get on stage like the next guy. And I just think that we need to be careful how we mentally look at reinvesting profits. I think a business owner needs to determine an expense model that they are willing to gamble with because that is profit.

Speaker 3 (45:18):
We're reinvesting it's gross profit, we're going to reinvest some of it. What's the level you're comfortable with? And it should be determined by what you want your net profit to be. Five, a 50% gross profit, and I want a 20% net and I'm comfortable with that and I can run my life off that and be okay with that. Then I got 30% to spend on my operating expenses and I better make sure that I'm running pretty close to that. And as soon as I go over, I'm reinvesting profits. And I think we just got to be really careful with it because too often I see people do that and get into some serious trouble and end up on a call with me in tears, and I just hate to see it. I would expect that

Speaker 1 (45:55):
Some of what you are guiding people to in the picture that it reveals is brand new to somebody. They haven't seen it so clearly, and it's about as, I think it's one of the reasons, going back to your response at the top of why are we only talking about top line openly? It's because there is some sensitivity here. There is some vulnerability here. And I think for some people they haven't had that honest a look at their business. I'm going to step back high level here as we kind of start to wind down, and that is your thoughts again, you were running your team, I think from oh eight to 2020 ish.

Speaker 3 (46:29):
I did about 10 years. So 18 is when I stepped out of production in late 14 personally, no more production for me. And then in 18 walked away from the business completely. Yeah.

Speaker 1 (46:38):
Okay. So I personally observe that that window of 2012 to 2018 was really when teams became very much more common. Some brokerages really began to support them and even encourage them while others were like, how's this going to work for us? But I feel like that was part of the explosion and the dawn of team as we know it today was kind of in that window. And so again, you're deep in the real picture and the clear language of a lot of top teams operating today. I would love any thoughts that you have, Andy, on the future of the team business model in real estate going forward over whatever period of time you want to project out, where are we going? Is this going to be more dominant in the future? What cautions might you have or what questions do you have about its ability to be an even more dominant model in the industry?

Speaker 3 (47:38):
Yeah, I mean, I think it's going to be a dominant model. I think that the solo agent, the shark with feeder fish model is not going to last just because those agents that there are going to realize that leverage is huge, right? It's not about the split. It's about that leverage. It's about also having a lifestyle in real estate that only teams can offer their agents and their staff people. I think the consumer gets a far better experience in those scenarios, especially when it's more of the School of Fish model where everybody's doing the same thing, not necessarily a huge Team ridge model. Those Team Ridge models are going to have some difficulty because I think too often they rely on others to generate the business, whether it's their agents or it's third party sources. And so we've got to be really careful that we are good at marketing.

Speaker 3 (48:33):
I have found the teams that have a profitability margin that makes sense, and they don't have to grow to this huge multi-office giant thing, controlled marketing. They do not rely on the agents to generate their own marketing, and they do not rely on third party sources. And that's getting more and more difficult to do. So that's my only fear for that School of fish model where it's an eight to 10 to 12 to 15 agent team, and we're all doing the same things. And high level of accountability and all these things is that they better make sure they continue to really dominate the marketing or they're going to have to shift to, I think that team rich model, which has very small margins, but doesn't have to deal with the marketing, and they rely on large outside entities to do that for them. But overall, the team idea is really in my, I'm surprised there still are many solo agents that either aren't part of a team or aren't doing their own team, just because I just think that it's obvious that's the better route to go long term.

Speaker 1 (49:38):
Yeah, typically. Well, I mean especially for new agents, especially for new agents just because of training, comradery, support, the same reason you made your first brokerage decision and changed brokerages. I want to connect with that person and learn more about how she or he does their business. I've heard that a number of times on the show. I've had a handful of agents on primarily team leaders and operators as guests on the show, but the agents, same thing. The first thing I did when I got here was went and scheduled lunch with the four top producing agents and became friends with them and they opened up and that was the key that opened up my entire real estate business. So really appreciate the perspective so much. Andy, I've got a bunch more questions for you, so maybe we'll do, this will be like a semi-annual visit because I love as much stays the same, a lot changes as well. And there's detail and nuance in everything we covered. We could have spent all this time in one or two of those topics alone, but with where we are, I'm going to give you my three pairs of closing questions. You can answer one or the other. Some people like to answer both. You can do whatever you prefer. What is your very favorite team to root for? Andy, besides simple numbers or what is the best team you've ever been a member of? Besides simple numbers?

Speaker 3 (50:55):
Well, besides simple numbers, my real estate team. But besides both of those, I would say my 10th grade high school football team, because I'm not a football player, I'm not a big guy. I play hockey. I grew up playing hockey and in 10th grade, just me and a buddy decided let's try this football thing. And we did. And it was a night and day difference. And I'll never forget that difference as I've now scaled other businesses and led teams in the hockey team was very much an individual culture. It was about that individual person and it's all about me. Football, I had no business being on that football field and those people welcomed me in. I was been on their team for years and I even joined halfway through the season and they just brought me into their huddle and it was like the most amazing thing I'd ever experienced. And so as far as being on a team, and so I think that's my answer to that one. What is one of your most frivolous purchases? You don't strike

Speaker 1 (51:46):
Me as a frivolous purchase a, but what's one of your most frivolous purchases or what's a cheapskate habit that you hold onto even though you probably don't need to?

Speaker 3 (51:54):
Oh boy. I feel like I could answer both. I mean, I am the spender, believe it or not. Ellen is, someone's got to be. It

Speaker 4 (52:01):
Sounds like she's got a deeper financial clarity than you.

Speaker 3 (52:04):
Yeah, she has helped me rein it in for sure. But I'm a sports car lover. I've loved Porsches since I was 15 years old. My dad bought his first, no, I was 12 when he bought his first one, and I rode around him with him in it. So I've owned a lot of different Porsches throughout the years and just love the story behind that company and just love the cars. And so I spend some money on some sports cars. I'm also a farmer, so we have a farm here in Minnesota, 150 acre farm, and we plant corn and soybeans and I spend money on farm equipment and it's just a fun thing for me to do. It's nothing like being in a tractor and having a nice tractor to drive around. So I would say those are my answers to that question at the same time, what could I spend more on that I don't, my daily driver vehicle, I drive a 2003 Chevy, 1500 Silverado pickup with rust on the bottom doors and I love it. And in Minnesota you kind of have to, because everything rusts anyway, so I just hate driving a nice new car on our country roads and see them just rust out. So I just drive one that's already rusty.

Speaker 1 (53:07):
Yeah, really good. How do you invest your time in resting, relaxing and recharging, or how do you invest your time? Learning, growing and developing?

Speaker 3 (53:17):
Yeah, the resting, relaxed and recharging. My family, we've got four kids, we homeschool 'em and we travel a lot. And we traveled in an RV for over months full-time in an rv, big bus rv. And so we love to travel over the road like that. And so that's my time.

Speaker 1 (53:34):
Andy, I appreciate you so much. I appreciate what you're doing. I appreciate that you found a spot where you're adding incredible value to some already incredible businesses. Thanks for spending all this time with all of us. If someone wants to learn more and follow up, where would you send them?

Speaker 3 (53:47):
Yeah, they can go to our website, real simple numbers.com and appreciate you having me on for sure. It's been fun. Cool. Thanks so much Andy. Have a good afternoon. Thanks Ethan.

Speaker 2 (53:57):
Thanks for checking out this episode of Team Os. For email exclusive insights every week, sign up@realestateteamos.com.