The builder went in-house at month nine. That cost me $141k.

Construction is what I know, so when I got my broker license the plan was obvious to me. A brokerage specializing in new construction resale and inventory listings, staffed by agents who can read a spec sheet and talk to a superintendent without embarrassing themselves.

I had a handshake relationship with a regional builder doing about 140 homes a year across four communities. Not a contract. A relationship, built over eleven years of me being on their sites in a different capacity. They were listing spec inventory with two different agents and complained about both.

I signed a 36-month lease at $3,100 a month for a small office near their newest community. Hired three agents and put them on draws of $4,000 a month against future commissions for six months, because none of them had the reserves to wait out a new construction pipeline. That's $72k committed on day one. Plus buildout, signage, and a coordinator part time at $2,100 a month.

Month nine the builder announced an in-house sales arm. Two of my three agents were recruited into it directly. The draws were technically recoverable and I recovered about $9k of $72k, because you can't collect from people with no production.

Wound down at month 11. Lease buyout $18,600, unrecovered draws $63k, everything else about $59k. Roughly $141k of my own money.

What I'd do differently: no single source of inventory above maybe 30% of projected revenue, and a written listing arrangement before a lease. I'd also do draws as a loan with a note rather than a recoverable advance in an IC agreement, if my state allows it, which is a question for an employment attorney and not for me.

6 replies

2aliyah_bAU2APRO6

The draw structure is what I'd fix first, ahead of the concentration. $4,000 a month for six months to someone with no closing history is you funding their runway with no security, and recoverable in an independent contractor agreement usually means recoverable in theory. You recovered 12.5%.

A smaller draw with a step-up tied to closings would have cost you maybe $30k for the same nine months and told you by month four which of the three was going to work.

1jordan_ellis2ActivePRO6

Eleven years of relationship and no listing agreement. That's the sentence I'll remember. Did they give you any warning before the announcement, or did you find out with everyone else?

3jessreyes12AU1APRO8

What's a draw, in this context? I've gathered it's money paid up front against commissions the agent hasn't earned yet, but who's on the hook if they never earn them, and does the agent owe it back like a debt?

3omar_haddadActivePRO11

tally, the draws made the loss bigger and the concentration made the loss happen. Two different problems.

girder, I did the renovation version of this. Eighty percent of my volume came from one investor client for three years and I told myself the relationship was the moat. He hired a project manager and the work went to zero in one phone call. Concentration risk feels like efficiency right up to the day it doesn't, and the tell is that it's the thing you'd be most embarrassed to write on a page as a percentage.

1luis_carrera Get yours

I'm asking because I want to know, not to score points. Did you write a downside case before signing the lease? I over-model everything and it's a problem, but a single page saying "builder goes in-house at month 9" would have told you the 36-month lease was the wrong instrument. A shorter term or a sublease clause turns $18,600 into maybe $6,000.

1samantha_ruizAU4APRO6

The recruiting part is the piece I'd sit with. Two of your three agents left for the counterparty that took your business. That means they were loyal to the inventory rather than to your firm, which is what happens when the firm's only offer is access to listings. The shops I see holding people together have something the agent can't get by walking, training that's actually good or a lead flow the agent couldn't rebuild alone. Hard to build that in nine months while you're bleeding $10k a month, though.

The builder went in-house at month nine. That cost me $141k.

6 replies