In their 2010 book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy, authors Thomas Stanley and William Danko made some shocking discoveries about millionaires.
The biggest shock was that more millionaires had come from blue collar neighborhoods and middle-class jobs. They weren’t all from high-paying white collar jobs.
As well, one of the biggest discoveries was the habit those who became millionaires exhibited on a regular basis. Rather than spending money on luxury things that they really didn’t need or overspending on things that they did...they simply put the money away.
More specifically, it wasn’t what they made, it was what they kept. These millionaires kept more of what they made instead of spending it unnecessarily and unwisely.
This is a fabulous lesson for any real estate agent who would like to make their real estate business more profitable. In my experience, most agents spend money frivolously on things they don’t need or keep spending money on programs and systems that just don’t work.
By making knowing your numbers and adjusting how you spend your money, you can make your business even more profitable this year than it was last year, without having to sell any more homes.
Here’s a look at some things you can do to make your real estate business more profitable in 2019.
Look at what you spend
In my experience as a coach and mentor, I’ve come to realize that many real estate agents don’t really know their numbers.
Sure, they can tell you how much their car payment is and how much they’re spending on a lead source or two, but at the end of the day, they don’t know exactly how much money is going out the door.
If you want to be more profitable in 2019, you need to know how much is going out the door. That means you need to put a budget together; not just a budget of what you want to spend, but a budget of what you actually spend so you can carve off unnecessary and unwarranted expenses.
For instance, over 80% of the agents that have come to coach with us have at least one lead source they’re spending money on that is not yielding the results it should. In fact, poor lead sources, unfollowed up leads or poorly followed up leads is one of the biggest source of financial “bleeding” in many agents’ businesses.
If you want to be more profitable, you need to take a hard look at what you’re spending on everything and make sure that 1) it’s in line with what the expense should be for that system, process and/or product and 2) that you are spending the money wisely and getting at least a proportionate return on your investment.
Now, if you’re spending the right amount of money and you’re not getting the return you should, the issue may be you and how effectively you’re using what you’re spending your money on at the time.
You’ll want to take a closer look at your expenses and make sure that they’re in line with where they should be. Be sure to fix what’s not working, get rid of what’s not a good expense and most importantly, not spend money where it doesn’t need to be spent.
You need a solid budget if you’re going to make your business more profitable.
Look at what you’re making
Shockingly, a lot of agents don’t know exactly what they make, especially on a per-transaction basis.
What I’ve found is that they don’t take out the requisite amount of expenses from each commission check that comes in.
For instance, you should know how much it costs to sell a listing:
- Proportional cost of a yard sign
- Proportional cost of a lock box
- Cost to put a listing on the MLS
- Cost for marketing a listing
- Cost for property brochure design and printing
- Cost of staging and pre-inspection if you pay for it
- Cost to close the transaction
- Client gift after closing
- Your split, if any, on the transaction
For most agents, this cost is somewhere $950 and $1,200 per listing sold, If you’re not netting out ALL expenses associated with the sale of a listing, you are likely not getting an accurate accounting of your actual profit in a sale.
Now, if you really want to know your true bottom-line dollar amount for a listing sale, you can also take a look at:
- How many leads you need to contact to get a listing appointment
- How many leads you need to contact to get a listing sold
- The cost of each lead based on lead source
- The cost to convert those leads (your time or your ISA’s time)
If you know those numbers, you’ll have a true understanding of what it costs to sell a listing.
It’s worth the time, energy and mathematical gymnastics to do this on a buyer transaction and on any incoming referral. It’s especially worth it on any regular referral source you use that charges a high referral rate up to 35% or so.
Once you take out the 35% referral fee and all of your costs to do a deal, it might not be worth it to take the referral.
No matter what lead sources you use, be sure to look at what you make on each deal you do.
Create a P&L
A lot of agents don’t think they need a P&L (Profit and Loss Statement) for their business. In my opinion, that’s a false assessment on their part.
A P&L is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. And unless you’re just starting out or doing less than 12 deals a year, you should have a P&L.
Using a P&L gives you a detailed accounting of every penny you spend and earn and then shows you if you were profitable or not. It’s like having a rudder for your business that helps you steer your business towards activities and strategies that are profitable and away from those that aren’t.
If you’re company is smaller, you can use Quickbooks, which has an easy-to-use program for creating and maintaining a P&L. If you have a larger company, it may make sense to hire an accountant to help you with the P&L process.
No matter what method you choose, you must have a P&L if you want to know your total expenses, your total revenues and exactly how much you make each year.
How to make your deals more profitable
It stands to reason that the more money you make per transaction, the more profit you’ll be able to make on each transaction.
If you want to be more profitable this year, you may want to consider these elements of adding more to your bottom line:
- Increase your average sales price: The higher your sales price is, the more money you have to work with in your commission check. Increasing your average sales price starts with the decision to go after homes in higher priced neighborhoods and then doing it. Calling all the exprireds and fsbos in higher price ranges, as well as circle prospecting in those areas where homes are worth more, will certainly help you get bigger commission checks. Going after listings will help you achieve this result faster and easier than trying to secure buyers in a higher price range.
- Transaction processing fees: If you do more for your clients, you are legally, ethically and morally able to charge more for your services. One of the ways you can do this is to implement a transaction processing fee into your fee agreement. The fee will go towards the internal processing and handling of your clients’ transactions, which is over and above what you do to sell their homes. The fee needs to be for services rendered and it must be reasonable in nature.
- Negotiate a higher fee per transaction: Demonstrate more value in your listing presentations and hold firm on your commission rather than negotiating your fee down at the first sign of resistance. On the buy side, negotiate a higher fee with your buyer and then ask them for permission to negotiate any shortage in your fee with the seller in the form of a closing cost. Doing both of these things will add more commission dollars to your bottom line.
If you’re going to increase your profitability in 2019 and beyond, first take a look at where you are financially. Once you have a good understanding of that, then take the time to make adjustments to what’s coming and and going out the door so that it makes good financial sense.
The financial changes may be small or they may be sweeping, but in the end, they will lead to much greater profitability for your business.