State of Selling

State of Selling

entrepreneurs by Jean Gruss | Editor/Lee-Collier

Don't tell Art Darmanin this is a bad time to build a residential real estate brokerage firm.

Darmanin's company, Sellstate Realty Systems Network Inc., already has built a network of 45 franchises in 12 states and Washington, D.C., since he founded the business in Fort Myers in 2002. "We'll add another 40 by year-end," Darmanin says.

The keys to building a successful residential real estate company are to keep overhead low and give a greater share of commissions to agents, Darmanin says. Sellstate also lets agents take a small percentage of the commissions of any other agents they recruit, a powerful incentive to build the network. "Agents help you build the business and we wanted them to share in that," he says.

Darmanin, 56, who also is Sellstate's chief executive officer, is building the company based on past experience. The self-made entrepreneur rose from laboring in the Canadian nickel and copper mines to owning a real estate franchise in Ontario with 80 offices and 3,000 agents before moving to Florida to start Sellstate.

Despite the residential real estate downturn, Darmanin has been able to successfully grow his franchise. In addition to keeping costs down and letting agents take a greater share of commissions, Darmanin is working closely with a group of 900 agents who specialize in selling homes foreclosed by lenders. He expects selling bank-foreclosed homes will account for 30% of the company's sales growth in the next six months to one year.

It's just a matter of time before the market comes back. "Most astute business people know business goes down and goes up," Darmanin says. "It will get better."

This is not just lip service to generate transactions. The rap against real estate agents is that they're usually not buying or selling with their own money. But Darmanin recently bought a canal-front house in Cape Coral for $409,000 and is spending $80,000 to renovate it. He'll rent it until he can sell it when the market turns around.

In 2005, Darmanin says that house likely would have sold for $800,000. "I'm putting my money where my mouth is," he says. And he's counseled his son to pay $140,000 for another home in Cape Coral that listed for $340,000 when it was originally built. "How much more do you want to wait?" Darmanin asked his son.

More of the commission

The central theme of Sellstate's business model is to make sure the agents get to keep more of the commission than they would at rival firms. Typically, residential brokerage firms split the agent's commission: the agent keeps 50% to 70% and the firm gets the rest. At Sellstate, the agent keeps 95% of the commission and 5% goes to the agent who recruited them.

Instead of splitting their commissions with the agency, Sellstate agents pay monthly fees of $115 for overhead and $60 to process each transaction. Sellstate also takes a 2% marketing fee from the gross commission to promote the brand. A Sellstate franchise costs $20,000, but when you add in all the build-out and other expenses it can cost $60,000 or more.

One of the innovations Sellstate has created is what it calls the agent-asset development program. When one agent recruits another to Sellstate, the agent gets 5% of whatever commission that new agent receives. The money is placed in a fund that pays out in monthly installments but it only fully vests after seven years, giving agents an incentive to stay.

Still, under the program, an agent whose funds vest after seven years can leave and still receive 5% of any commission a Sellstate agent they sponsored. "Our agents helped us build this company," Darmanin explains. "There should be a reward system."

The Sellstate corporate parent makes money by selling franchises, keeping overhead low and automating as much of the real estate transactions as possible. "The biggest challenge was to persuade banks," Darmanin says.

Establishing a system that processed transactions electronically and paid agents as soon as they occurred was more difficult than he anticipated. Banks typically sit on the money for days before disbursing funds, Darmanin says. "Accounts receivable is the nemesis of any business," he jokes.

Sellstate's central-processing system is a key to efficiency because it does things such as pay commissions electronically and issue tax forms. It requires just two hours of training and allows Sellstate to manage far-flung offices with just 22 people at its Fort Myers headquarters.

Another key to keeping costs down is to limit the physical size of each office. Fact is, most residential real estate agents today work out of their homes and don't need an outside office. Sellstate only needs offices for marketing purposes, to provide agents with equipment such as copy machines and to occasionally provide meeting space for clients and business partners.

Because of that Sellstate offices are only 2,000 to 3,000 square feet in size. That's enough room for about a dozen people, but it can accommodate 100 Sellstate Realtors. At the height of the recent residential boom, there were 167 Sellstate Realtors using one 1,900-square-foot office in Cape Coral. "Because we keep overhead low, we can give agents higher commissions," Darmanin explains.

Even though Sellstate takes 2% from gross commissions for a marketing fund, its agents are responsible for their own promotion. That's appealing to many agents who prefer this relationship to one in which they have to split their commissions 50-50 with an agency that does all the advertising. And Sellstate will help its agents negotiate advertising and marketing discounts with publishers, signing contracts that are at times 40% lower than the going rate because of the corporate parent's purchasing power.

That's part of the ongoing support Darmanin says is essential to building a successful franchise. "We help them every step of the way," Darmanin says. That includes advice on everything from what computer systems to purchase to training agents.

From mines to real estate

If you listen to Darmanin carefully, you can still hear a hint of a European accent that's been mixed with intonations of Canadian English. Darmanin moved to Canada - "to find fame and fortune," he says - from the Mediterranean island of Cyprus when he was in his late teens. He ended up working in nickel and copper mines in Sudbury, Ontario. "It was tough; it was unhealthy," he remembers.

By age 23, he discovered the real estate brokerage business. It was the perfect enterprise for a young man with little money. You could go into business with little overhead and earn money without risking any of your own capital.

The young entrepreneur found he had a knack for the real estate business. Within two years he had his own real estate firm in Ontario with 16 employees and built Art Darmanin Realty to six offices.

Those early years were great training and Darmanin learned valuable lessons that would serve him well later. The most important lesson he learned was that growth for its own sake wasn't necessarily better. "Don't let your ego take over," he says. "I was more concerned about having the biggest company, but it wasn't the most profitable."

In the late 1980s, Darmanin bought into a new kind of franchise system called Sutton Group that emphasized low overhead and high commissions for agents. The idea for Sellstate grew out of that Vancouver-based franchise. He was joined there by Neil Cresswell, his partner in Sellstate today, and built the Ontario territory for Sutton, eventually owning and managing 3,000 agents in 80 offices. "That's how the idea of Sellstate was hatched," Darmanin remembers.

Darmanin refined the Sutton business model when he started Sellstate. The most important difference was building a strong system to support agents so they wouldn't get bogged down with mountains of paperwork that's so common with real estate transactions. The second was establishing an electronic means of collecting and distributing commissions and making them nearly instantaneous. Cheap technology and the ease of setting up home offices made the whole thing work.

Darmanin picked Fort Myers because he loved the Florida lifestyle and it was far from Canada, where he had agreed not to compete with his previous company. "We wanted a nice, safe community," he says. "In today's world, it doesn't matter where you start."

Rapid expansion

Darmanin's business model is catching on. Since he started the company in 2002, the firm now has sold 45 franchises in a dozen states. By the end of this year, even in this downturn, Darmanin anticipates selling another 44. "We came here with a mission," he says.

But Darmanin and Cresswell are under no financial pressure because their company is debt-free and profitable. "My business partner and I funded the whole thing," he says. "We didn't borrow 10 cents."

In the current economic downturn, Darmanin says there's significant opportunity to sell bank-foreclosed properties. He's signed a revenue-sharing agreement with the National REO Brokers Association. REO stands for "real estate owned," a banking term that refers to property banks have acquired, mostly through foreclosures. The organization has 900 members and Darmanin intends to help the group establish a retail division. He says the REO business will eventually account for 30% of the company's sales volume.

Meanwhile, Darmanin says he's seen some hopeful signs of a recovery as home prices plummet. "We're starting to see a turn," he says. "The transaction count has picked up." Notably, foreigners and Canadians in particular are scouting deals, buoyed by their strong currencies. "Canadians are euphoric," he says.

While many real estate firms are retrenching, Sellstate is expanding. "We're looking at a number of marketplaces in Texas and Tennessee," Darmanin says.

REVIEW SUMMARY

Company. Sellstate Realty Systems Network Inc.

Industry. Residential real estate brokerage

Key. Low overhead and bigger agent commissions are the keys to running a successful residential real estate brokerage firm in an economic downturn.