When Roy Almog decided to sell his eight Alberta rental houses in 2006, he was upset by how much in commission he’d be on the hook to pay. Almost every real estate company in the province uses the 7/3 formula: 7% on the first $100,000 of the selling price and 3% on the rest. But Almog figured that Edmonton realtor Jon Hull would cut him a deal. After all, Hull had been his agent when Almog bought these properties.
Hull wouldn’t budge. He worked for a brokerage that, like most, was a stickler about charging the standard rate. Almog tried selling one of his houses himself, but his corporate job made it hard to accommodate requests for showings. So, he caved. He went back to Hull, who quickly sold the house for $300,000. Still, it stung Almog to pay $13,000 in commission. “I was sure there had to be a better way,” he says.
2 Percent ranked No. 75 on the 2013 PROFIT 500. Think you’ve got what it takes to make the 2014 ranking? Apply now!
Almog didn’t just join the angry chorus of home sellers complaining about fat fees. Instead, with 2 Percent Realty Inc., he invented a new kind of real estate sales model that delivers all the services of a traditional brokerage but for a flat 2% commission. (The standard commission is 5% in most provinces.) He already has proven his approach can be profitable. According to Don Campbell, founder of the Real Estate Investment Network, an information service for investment-property buyers, “It’s absolutely the way you’d design a brokerage from scratch to suit today’s market.” Now, as Almog starts to scale up his operations significantly, he has the potential to become an important part of the disruptive wave sweeping the real estate sector.
When Almog hatched his idea, realtors warned him that he wouldn’t get enough revenue for a sustainable business. “But I had run the numbers, and I knew I could charge 2% and still be profitable and grow,” he says. The trick was to run super-lean, leverage new technology to the hilt and recruit brokers who would accept a smaller cut on each sale in return for a wealth of leads.
Almog launched 2 Percent from his Edmonton home in 2007 and, despite only 18 sales that first year, managed to eke out a profit. Two years later, he opened a Calgary branch that he made his headquarters after he married a Calgarian. By 2012, revenue from Almog’s Edmonton and Calgary offices, plus royalties from nine franchises in B.C. and Alberta, totalled several million, and the firm was solidly in the black. With five-year growth of 923%, 2 Percent ranks No. 75 on the 2013 PROFIT 500.
But this is just the start. Almog has recruited Canada’s master of real estate franchising to lead an expansion from almost 80 realtors today to perhaps 20 times that many by 2018.
Campbell says Almog is well positioned for dramatic growth. “Consumers feel they’re paying too much to sell a home and this is an industry in which you can’t get a deal,” says Campbell. “Roy Almog identified this anger point and came up with a solution to it. He touched an open nerve.”
Realty franchising legend Robert Dymont came out of his retirement to help 2 Percent expand because ‘this is the future.’
2 Percent’s fast growth is adding to intensifying pressure on the real estate industry to change how it does business. Regulators have eroded brokers’ stronghold on property listings and technology is increasingly empowering consumers. Homebuyers now scour through the Multiple Listing Service (MLS) online and use smartphone apps to view key data on homes for sale as they drive by them. “For sale by owner” websites such as ComFree and PropertyGuys.com offer low flat rates to list properties on MLS for sellers willing to do most of the work themselves. The majority of consumers still are prepared to pay realtors for services such as hosting open houses and advice on list price and negotiating tactics but are increasingly irked that the rates traditional brokerages charge don’t reflect their diminished role in the transaction process.
Toronto mortgage broker David Larock believes top agents deliver plenty of added value, such as deep knowledge of a neighbourhood and personal contacts with potential buyers. Still, he welcomes seeing the sector disrupted by discounters providing an option many consumers want. “The two models can and will coexist,” says Larock. Discounters have ample room to grow at the expense of the many mediocre realtors who don’t earn their high fees. “As in any industry that has operated in a monopoly environment for a long time, there is a percentage that is not deserving of the income it generates,” says Larock.
Still, delivering on the promise of full service at a cut rate isn’t easy. Almog does so in three key ways.
One is to run very lean. 2 Percent has few management layers, operates out of humble offices and practises incessant penny-pinching. For example, the firm is diligent about using as little paper as possible in a sector that’s still drowning in the stuff, and now does 95% of its transaction work on iPads. And while most brokerages continue to employ conveyancers to fax or courier reams of documents when a deal closes, 2 Percent’s realtors do this themselves electronically.
The second key to the model is attracting enough volume to make up for the low margins on each deal. 2 Percent does this by exposing consumers to its most important marketing tool—its enticing name—then counting on word of mouth and referrals. Almog says that his firm typically lands clients when home sellers review MLS listings in their area, see the firm’s name and call a 2 Percent office to inquire. As with any brokerage, clients happy with the service when they sell usually hire the same realtor for their next buy.
The third key is getting realtors to accept slimmer commissions. 2 Percent allocates 1% each for the selling and buying brokers. Why would a realtor settle for this rather than the 1.5% to 2.5% from a traditional brokerage? Almog says agents typically spend between $5,000 and $40,000 per month on marketing to attract clients. But 2 Percent gets so many calls from consumers drawn to its low commission rate that it feeds plenty of leads to its realtors, almost all of whom spend nothing on marketing.
Now that Almog’s business model has been tested, he plans to scale up his network aggressively by adding more agents at existing offices, awarding new franchises in B.C. and Alberta, and expanding eastward—first into Saskatchewan and, by 2015, into the Toronto area. In all, he expects to have about 1,500 realtors within five years.
To keep them busy, Almog will have to lure thousands of consumers. His core target is tech-savvy bargain hunters ranging in age from their late 20s to early 40s who buy and sell homes several times over their lives as they trade up. Almog mainly uses Google and Facebook ads to drive this target to 2 Percent’s website, “and [the model] is pretty self-explanatory once you get there,” he says.
2 Percent also uses Facebook to recruit realtors, running sidebar ads on the profiles of people who list their job as realtor or real estate as a hobby. Almog concedes that agents are a tougher sell than consumers: “We need to change the mindset of realtors. We’ll by no means beat out RE/MAX or Sutton, but there are lots of new realtors entering the business who are attracted to our model.”
To build momentum among realtors, Almog has to position 2 Percent as the right model for the times. He already has signed two former top producers at big brokerages as franchisees. And now, Almog has a heavy hitter on board to help with this task: Robert Dymont. During the 1980s, as RE/MAX’s director of franchising, Dymont helped to lead the firm’s ascent to the top-selling realty company in Canada. Then, as CEO of Sutton Group, he led that firm from upstart to No. 2 in the country. In 2010, Almog persuaded Dymont to come out of retirement to lead 2 Percent’s expansion as director of franchising and recruiting.
Many other real estate firms tried to win over Dymont. He turned them all down, he says, “because they were trying to reinvent the wheel. But 2 Percent is different—this is the future.”
Jon Hull agrees. Two years after refusing to give Almog a discount, the Edmonton realtor joined 2 Percent, and is now one of its top producers.