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Why be a Real Estate Consultant?

 

 

How Truly Profitable Is Your Real Estate Business?


In the wake of the mortgage meltdown and the foreclosure fiasco comes another industry coffin nail---the lack of profitability for real estate brokers and agents. But this really isn’t a new event.  In fact, during the housing market boom, profits were drifting lower year after year.  So here comes the “reality therapy”:  If the one-hundred-year-old business model can’t be profitable during housing market booms, it never will be!  It’s time to turn our attention away from solely focusing on gross percentage commissions, to methods that help us trim expenses while moving forward with new, more cost-effective consumer-centric business models to positively impact the bottom line on a consistent, permanent basis.

The First Step to Greater Profitability:  Eliminate Free!
The categories of free in real estate are legendary:  free property showings, free open houses, free broker opens with “free” lunches and the list goes on and on.  While we may have trained consumers to expect free, not all trust it.  In fact, when I polled more than two hundred consumer’s way back in 1998, many stated that they would pay for services that we offer for free if they could obtain them from an “unbiased party without the pressures of being expected to list or sell something to obtain the information they needed”.  In other words, our traditional sell-something-before-we-get-paid approach has many consumers leery of the salesmanship techniques we use.

It boils down to the fact that “free” in any industry is an oxymoron. Each and every activity/service carries its own degree of overhead for running the enterprise including insurance, marketing, employees, etc.  In fact, one of the most abused services is the amount of supposed “free” services squandered by real estate salespeople. Until each one of us determines what an hour of our time is worth and be willing to write a check for every hour spent (for most of us it’s between $75 and $200+ per hour), we will misguidedly attempt to compete with “free”.   And as verified by today’s revolving door in the industry, many real estate people are forced to leave the business not solely due to a lack of sales, but from the sheer cost and mismanagement of “free”.

 

The Second Step to Greater Profitability:  Determine Your Break-Even Per Transaction Side
Before you can prudently add profit centers and/or trim costs, you need to identify your break-even point for transaction sides in your current listing/selling business.  Here’s the formula:  1) Divide your gross annual expenses by the number of transaction sides you’ve closed over the past year (i.e. a listing is one side, a sale a second).  For example, say you had $47,200 in gross expenses and did a total of forty transaction sides.  $47,200 divided by 40 = $1,180 break even per transaction side.  In other words, until you exceeded $1,180 in revenue per transaction, there was no profit.  And to make it worse, it’s not just bottom-line profit that’s lost---you’ve been paid nothing for your time! This is one of the most overlooked aspects of traditional real estate sales---not penciling in a satisfactory line item to reimburse the most precious commodity we have and are hard-pressed to replace---our time and expertise.  The good news with new business approaches like fee-for-services consulting is that your personal time plus profit is factored into every activity as a line item, not an afterthought.  It’s indicative that new business approaches could generate stronger bottom-line profit.


The Third Step to Greater Profitability:  Determine What Percent of Your Gross Income is Attributable to Expenses vs. Your Time/Profit
Another gauge of where you are financially is to compare what percent of your gross income is attributable to expenses versus reimbursing your time and profit.  Let’s say that your annual gross income is $100,000 and your annual expenses are $47,500.  When we divide the expenses by the gross income, we find that they’re 47.5% (rounded to 48%) of your gross income ($47,500 divided by $100,000.)  In other words, less than half of what you generate goes to pay expenses---that’s pretty good in an industry where expenses often eerily up tick to as much as eighty percent of gross.

By examining these first three steps to greater profitability in your business, you’ll begin to analyze where to maximize your efforts, trim expenses, and add new, consumer-centric profit centers.

If you’d like to determine how to much one hour of your time is worth, check out "Show me the Money".



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