MODEL #1 – THE ECONOMIC MODEL
The ECONOMIC MODEL is the first of four models that we’re going to cover in the next month or so. So why start with figures? Here’s why: Numbers confuse a lot of people, so I thought if we face that fire right out of the gate it will ensure a faster path to success and eliminate any potential fear and excuses that can stand in the way of your sales goals. So let’s face 2020 head on and dive deep into the raw economics.
Everyone has different goals. I have some clients going for 25 sales annually and I have others that are striving for 240 sales next year. Regardless of your individual goals, this economic model works.
To drive this point home, I thought it might be fun to use the model based on a goal of selling 1000 homes per year. You read right, 1000 homes in one year.
In fact, we’re going use the 1000 homes sold projection in all four models that we’ll be covering in future articles. Even though leadership designed the models that way, some of you might actually be motivated to go for 1000 units after this.
This formula describes the way all business works. It is very much a business model and framework that for our purposes caters specifically to real estate sales. I’m sure most of you already believe in the power of models. Most successful business owners, Gary Keller and Warren Buffet included, swear by a sound model. .
Where the pyramid has the model at the base and the creativity on the top is stable. When you get “creative” and stray from the model – it becomes unstable and doesn’t work properly
Sound Economic Model v. Unsound
- Shows where your money comes from (GROSS Revenue)
- Shows where your money goes (Expenses)
- Shows how much is left (Net)
- Not sure where money will come from or when
- Not sure which expenses are critical and which are not
- Not sure how much will be left at the end of the year.
As I tell my clients, let’s learn the model then we can customize it with creativity to suit your individual specifications. This is why a sound economic model is a key starting point. Agreed? Good. So let’s get down to it.
First, find out how much comes from your gross revenue? Make sure it’s your GROSS REVENUE: The full commission from the sale before anything has been removed. The commission prior to royalty, prior to the company dollar, prior to expenses, prior to splits. The full gross amount. Got it?
Next, we’re going to use our economic model to show where the money is going. Since we are in real estate, we have cost of sales and we have expenses. Although those are two separate categories, in this model we combine them as one. Subtract that from your gross and write down that balance. I know it may seem simplistic but why over complicate things?
A sound model also depends on your ability to identify a good return on your 
investment – gauging a worthwhile dollar to be spent in the strongest place. Your economic model becomes unsound when you’re not really sure where your money is going, where it comes from or if you cannot decide which expenses are critical.
Another quality of an unsound economic model is not being able to estimate what your end balance might be. So we want to make sure that we have at least some clarity in that. Crystal balls don’t count, sorry.
The first key area of the economic model to focus on is the numbers that you “must” hit to make your goal. If you have ever read or listened to Gary Keller, you’ll know when the word “must” is used… it’s important.
Key Areas of the Economic Model
- Focus on the numbers that you must hit
- Focus on Appointments
- Focus on conversions rates (goal of 75%)
In this economic model it’s vital to know the numbers that you “must” hit and commit to that goal. It starts with tracking your appointments which are the number one lead indicator of whether or not you’re going to hit your sales goal. You’ll also want to monitor your conversion rates.
Goal = 1,000 Homes Sold in 2020
LISTING DIVISION
Listing Appointments 1,066 (75% ratio)
Listings Taken 800 (75% ratio)
Listings Sold 600
Average Sales Price $300,000
Seller Sold Volume $180,000,000
Commission 2.75%
Gross Revenue $4,950,000
BUYER DIVISION
Buyer Consultation 712 (75% ratio)
Buyer Agency Signed 534 (75% ratio)
Buyers Sold 400
Average Sales Price $300,000
Buyer Sold Volume $120,000,000
Commission 2.75%
Gross Revenue $3,300,000
To give you an idea, the average conversion rate on listing appointments to listings taken is 75%. Similarly, the conversion rate from listings taken to listings sold is also 75%. That makes it a little easier to remember.
If your conversion rate on listing appointments to listings taken is higher than 75%, great, but we still want to make sure you’re going on enough listing appointments – even if your conversion rate is at 90%.
Don’t make the rookie mistake of losing momentum once you’re ahead of your goal. Keep going out on all your appointments, maintain your original schedule and let your 
superior conversion rate grow your business. Superstars don’t fumble the ball in the third quarter just because they’re ahead. You can always be taking more listings overall – no matter what.
Similarly, if you have a higher than 75% listings taken to listings sold ratio – congratulations, you’re ahead of the curve! Ride that wave as long as is humanly possible and be that master surfer. But remember, even master surfers need to stay on top of their market trends and market data to guarantee their preparedness for any unforeseen shift in that arena.
If you have a conversion rate lower than 75% on listing appointments to listings taken, you’ll need to up your appointments accordingly to make your goal. Numbers don’t lie.
If you’re selling less than 75% of the listings taken, you might want to dive deep on pricing strategies, presentation, seller communication and price reducing. Maps coaches are always there to help with that.
No matter where you stand, be proactive and get both those numbers to at least 75%. Follow this model to the letter and the numbers will work for you.
O.K. Now it gets fun. If we base the model on the very ambitious goal of selling 1000 homes per year and we know that the average split is 60% of sales from listings and 40% from the buyers it goes as follows.
It’s time to break out the calculators. Using the 75% conversion ratio, in order to have 600 listings sold we would need to have 800 listings taken. You’ll find that number by taking the 600 listings sold and dividing it by 0.75. That will give you 800 based on the 75% conversion ratio of listings taken to listings sold.
The same thing applies to converting listing appointments to listings taken. So if we continue to work backwards from the 600 sold goal, you take the 800 listings and divide by 0.75. That will give 1066 listing appointments. 1066 listing appointments for 800 listings. 1066 – the year of William the Conquerer for all of you English history buffs.
Back to numbers. For the sake of this model, let’s work with the rough average national sales price of $300,000 per unit sold. Therefor, for a sold volume of 600 units from listings alone the earnings would be $180,000,000. Not too shabby. About the same take as a blockbuster weekend opening.
If we assume a commission rate of 2.75%, we get a gross revenue (remember that’s the GROSS) of $4,950,000 solely from the listings.
180,000,000 X .0275 = 4,950,000
Let’s look at the buyers side of the coin now. So if you recall the 60/40 split between listings and buyer sides, then 40% of 1000 would be 400 buyer sides sold. The 75% applies on both conversion ratios here as well. This means that in order to close 400 buyer sides annually, we would want to get buyers agencies signed by 534 people.
Same math different day. 400 divided by 0.75 gives you 534. In order to get 534 buyer agencies signed we’d need to hold 712 buyer consultations. Again, divide 534 by 0.75 to get to 712. Easy. Ready for the next step?
The average national sales price of $300,000 x 400 sold would yield $120,000,000. And since the average commission rate of 2.75 also applies to buyer sides, you’d end up with a gross revenue of $3,300,000.
120,000,000 x .0275 = 3,300,000.
Add the listings commission ($4,950,000) to the buyer sides commission ($3,300,000) and you get a total GROSS of $8,250,000 annually from 1000 sales. Not a bad take for a small business.
4,950,000 + 3,300,000 = 8,250,000
I hope this is a clear, simple and straightforward example of the basic elements of the economic model.
Focus on the Numbers You Must Hit
Listing Division Goals:
- Leads to achieve: 6,000
- Leads identified each week: 116
- Listing Appointments each week: 21
- Listings Taken each week: 16
Buyer Division Goals:
- Leads to Achieve: 4,000
- Leads identified each week: 77
- Buyer Consultations each week: 14
- Buyer Agency Signed: 11
As mentioned earlier, you want to focus on the numbers you “must” hit for 1000 sales per year.
Here are the numbers just for the listing division. The annual listing leads goal is 6000. We know this because we’ve been tracking it and we know the average percentage which is 10% of your leads closed. So can we all agree that we “must” take 6000 leads for 600 sales on the leads side. 6000, 600, 60% – you don’t need to be Einstein to keep track of those numbers.
If your operating within the highly recommended concept of a 10-month year – you’d need to identify 116 listing leads per week. This translates to 21 listing appointments taken each week to lock 14 listings.
On the buyer’s side it becomes 4000 leads for 400 sales which is 40% of your goal. To reach that goal you’d need 16 appointments taken each week. Each week the buyer division must have 77 leads and from those would likely get 16 consultations each week and sign 11 each week using the 75%,75% law of averages.
The next step in the economic model would be deducting your cost of sales and expenses from your gross to determine your net for 1000 sales.
$8,250,000 – $4,785,000 (58%) = $3,465,000 (42%)
How did we get those numbers? The average cost of sales is 29% plus your average expenses which also run at 29%. For those with a GCI of over $1,200,000 we recommend using 29% for cost of sales and 29% for expenses – a total of 58%. These figures change as earnings change and we’ll go over those soon.
So that was the economic model for 1000 sales per year. By the way, there are teams out there that meet or exceed this goal every year. In addition to following the economic model they clearly have great leadership and are doing many things right, but it’s attainable. It’s not as pie in the sky as you might think.
Goal = 125 Homes Sold in 2020
LISTING DIVISION
Listing Appointments 134 (75% ratio)
Listings Taken 100 (75% ratio)
Listings Sold 75
Average Sales Price $300,000
Seller Sold Volume $22,500,000
Commission 2.75%
Gross Revenue $618,750
BUYER DIVISION
Buyer Consultation 89 (75% ratio)
Buyer Agency Signed 67 (75% ratio)
Buyers Sold 50
Average Sales Price $300,000
Buyer Sold Volume $15,000,000
Commission 2.75%
Gross Revenue $412,500
Are you ready to revisit this model one more time? Great. This time, let’s plug in a new goal of 125 homes sold per year. I chose this number because many of my clients are shooting for between 100 and 150 and many of you might relate to that goal as well.
Let’s look at the listings sold first. In a listings driven business such as ours it’s a good practice to re-examine the percentage of listings that make up the total number of homes sold.
For example, Level 3 or level 4 teams looking to increase efficiency and profitability might strive for 70% listings sold and only 30% buyer sides. Working with a showing assistant rather than a buyer’s agent could help tip the scale in that direction. So with that in mind, you might want to mix it up a bit and play around with a 70/30 split. Your choice.
In the name of consistency, we’re going to stick with the traditional 60% listing 40% buyer split on the 125 unit annual goal. So 75/50 sold will be our goal numbers. Fair enough?
Focus on the Numbers You Must Hit
Listing Division Goals:
- Leads to achieve: 750
- Leads identified each week: 17
- Listing Appointments each week: 4
- Listings Taken each week: 3
- Assumes 44 weeks
Buyer Division Goals:
- Leads to achieve: 500
- Leads identified each week: 12
- Buyer Consultations each week: 2
- Buyer Agency each week: 1.5
So we start with the very nice round number of 100 listings taken to reach our 75 listings sold goal. 100 x 0.75 gives you 134 listing appointments. When in doubt, round up. We want to ensure success by rounding up to 134 listing appointments to take 100 listings.
Working with the average sales price of $300,000 will give us a listings sold volume of $22,500,000. At the average commission of rate 2.75% your gross annual listing revenue will be $618,750.
75 x 300,000 = 22,500,000 22,500,000 x .0275 = 618,750
As you know by now the same 75%/75% formula will apply to the buyers. You’ll want 67 buyer agencies signed in order to have 50 buyer sides sold. Therefore, you’ll want 89 buyer consultations to lock those 67 buyer agencies.
On side note: It’s understood that not everyone uses buyer agencies. Perhaps someone on your team represents your buyer division. If so, will you impart some of your leadership skills and guide them on how they can improve their numbers to meet your goals on the buyer sides?
Are they writing the offers that effectively hone in on property selection? Do they have the right showing skills? Are they able to close? Are they having any trouble getting offers signed? Do people want to work with them? Are they getting offers accepted? Do they drop the ball at a higher than 10% fallout rate? You get the idea.
It would be difficult to lead, guide and train your team member without the ability to diagnose where the issues might be. Once those problems, obstacles and issues are identified, you’ll want to go over your expectations before attempting a productive buyer contract conversation.
That said, no matter how you get there, your goal will be 50 buyers sales. 50 at the average sales price of $300,000 will give us a volume of $15,000,000. With a commission of 2.75, your gross revenue will be $412,000.
$412,000 + $618,750 = a total annual gross of $1,030,000 for 125 units sold.
Next, let’s break down how to get there. In order to achieve a goal 75 listings sold, you “must” get 750 identifiable listing leads. Assuming a 44 week work year, we take 750 and divide that by 44. That translates to 17 listing appointments each week and 4 listings taken each week.
This same formula applies to the buyer sides. 500 identified leads divided by 44 is 12 consultations per week.
Next we take our gross of $1,030,000 from the 125 sales and deduct expenses. Remember our deductions are cost of sale plus expenses. But those percentages have changed from 29%/29% to 31%/30%. I’ll explain.
The latest percentage formula for this goal of 125 units sold is 31% cost of sale and 30% for expenses. Why is it higher? Generally speaking, lower production has a higher deduction percentage because there are many fixed expenses that do not necessarily increase as your production increases – say to 1000 units sold. KW has calculated these subtle variations for this model.
As you begin building your team, you might hire an administrator for the first time, create training programs for new hires as well as a number of other start up expenses resulting in an increase in the percentage of your deductions.
So accepting those percentages as accurate: Your gross of $1,030,000 minus cost of sales $319,300 + expenses $309,000 would come to a total deduction of $628,300 leaving a net annual income of $401,700.
$1,030,000 – $628,300 = $401,700
In closing, I believe the clarity of this model can help you break your ruts and get you off of any type of roller coaster related to real estate that you might be on.
I want to thank you guys for joining me and I hope you feel that it was worth your time. I think this information would be great for your executive administrators as well as anyone on your team who you regularly rely on.
So, what do think about the economic model? Does it speak to you? Does it apply to you? Are you motivated to wisely increase your volume and lower your deduction percentage? What do you think of the listing buyer split and would you change that ratio? Are you a single agent who after exploring this model is considering becoming a rainmaker running a level 3 or level 4 business? Are you thinking of new ways to streamline your expenses? How does this fit in to your 3 year and 5 year plans?
I’d love to answer all those questions and more. Feel free to contact me anytime. Thank you so much.