Most agents don’t have a quick test to see how they are doing in their business. They don’t have a series of numbers to use that show them the health and prosperity of their business. You must realize and accept that sales is a margins game. The margin is between the investment of resources, time and capital with an expected return in money and satisfaction.
We need to have a vehicle we use to test the margins easily and effectively. Why I developed the seven key numbers in a real estate agent’s practice was because so many agents struggle to control their business, control their time and control their money with the outcome of a controlled quality of life.
Hourly rate
It’s the amount of money you generate with every hour that you invest in your real estate sales business. Multiply your hours you work in a day by the days you work in a week by the weeks you work in a year. You will arrive at a total numbers of hours worked between 1,500 to 4,000 hours. Let me give you a hint – 4,000 hours is a bad number, but I have seen it. Divide gross commission income you earn by the total hours. This would be your hourly rate or hourly value. Be sure to use gross commission income, before expenses or company split. In business terms, gross commission income is equivalent to gross sales or gross revenue. Use the gross because you create that level of income into your company.
Average commission check
We need to know our average commission check or average earnings per sale. To write an effective business plan and create sales projections, you must know your average commission check. If we want to test our sales margins or revenue versus expenses on a per transaction basis, we need to understand our average commission check. If you ask any good restaurant owner what is the average spent per person on a meal, they would be able to tell you. The casinos in Las Vegas know what the average person spends when they come to Vegas at the gaming tables. Their goal is to create attractions and promotions that cause more people to come. Take the gross commission income again and divide it by the number of units you close. Be sure if you represent the buyer and the seller in a transaction to count that as two transactions.
Average sales price
The average sales price will tell you what one or two segments of the marketplace you generate the most business from. As an example, if your average commission is low, you work most often in the entry level or lower middle of the price point. It will demonstrate where you are currently more effective investing the bulk of your time or where you are investing the most marketing dollars. Once you determine the number by taking your gross sales volume (again counting sales volume twice if you represent the buyer and seller) and dividing that by the number of transactions you do, you will have your average sales price.
By knowing your average sales price, you can consciously move it higher or lower depending on the market conditions and the return on investment you desire. This number also will illustrate how effective you are at proving your value to a client. When you divide your average sale price by your average commission check, you will know what you charge on average for your services. It’s a fast and easy way to know how well you are at defending your fee structure. If the average percentage is lower than you want, you will need to take corrective action. Too many agents are finding out much later that they are giving their fee away in most transactions.
Cost per transaction
This is one primary number in an agent’s practice, but over 98 percent of all agents haven’t any idea what the number is. The average cost per transaction will tell you how successful you are as a business owner and how much net profit you should expect. To calculate, take total costs of your business, i.e.: your cell phone marketing, advertising, signs, gas, car, insurance for car, business, and even health (it’s a deductible expense), your assistant’s compensation, anything that is a legitimate business expense, and add them up. Then, divide the total expenses by the units you do. That will create a cost per transaction. Your cost per transaction will go down as your units increase. You sit down with any McDonald’s franchise owner in the world and they would be able to tell you what it costs to make a Big Mac. They know down to the penny. Now that’s the owner of a business.
Marketing cost per transaction
We want to check to make sure that this number isn’t too high. We can’t spend more than a couple hundred dollars exposing a low end property and still turn a reasonable profit. What do you spend in marketing and advertising divided by the number of units you close? A listing agent will have a larger number here than an agent that works predominantly with buyers.
Time invested per transaction
What do you invest on average in your time for every transaction? I believe a real estate agent wears two hats in their business. One hat is lead salesperson, that is the hourly rate you should be paid. It’s what you are worth per hour. You are also CEO or owner of the company. That person deserves a profit for their work. The profit is what is left over after everything is paid for including your hourly rate. You will live and spend your hourly rate. It’s in essence, the wage you earn. The creation of wealth and financial independence comes from the profit you generate. Let me give you some examples of how these numbers work;
Average commission check:
$3,900
Average cost per transaction:
$1,184
Revenue after expenses:
$2,716
Time invested per transaction:
$975
Net Profit:
$1,741
I have just shown you my actual breakdown of numbers when I sold real estate. The average commission check was lower than today due to sales price. My time invested on average was threehours in a transaction between, prospecting, lead follow up, qualifying, preparation for the appointment, conducting the listing presentation, signing the documents, negotiating the contract and managing the closing. I am sure that three hours to some seems small. Remember, I had a couple of people that helped me reduce my time invested in the PSA activities that most agents spend 80 percent of their day on. I made $325 an hour, so that’s why the time invested per transaction was $975. If I were selling today, at today’s prevailing sales prices, my hourly rate would be triple what it was then because my sales price would be triple. I would make close to $1,000 per hour.
Net profit goal per transaction
I believe you must have a goal of what you will net on average for every transaction you enter into. We can’t afford to leave this net profit to chance. My goal was $1,500. It would be high today because of the average sales price increase. If I couldn’t net $1,500 from a transaction, I referred the opportunity to another agent. Maybe the client wanted to overprice their home, which would increase my marketing cost per transaction, days on the market, and my time invested to talk with them week after week about lowering their price. All those factors would drive my net down dramatically.
The client might be a high maintenance type of client. They want overkill on reporting, calls and customer service. These expectations were outlandish. This again would increase my time invested per transaction, reducing my net profit. I am only going to make about $1,500 net dollars in profit. I have to determine could my three hours of time invested create a higher net profit somewhere else. By referring the prospect, I know that I can generate a 25 percent referral fee of $975 with about 10 to 20 minutes of my time invested with limited other expenses. With a high demand, challenging, even problem client, I am better off to refer rather than represent.
Dirk Zeller is a sought out speaker, celebrated author and CEO of Real Estate Champions. His company trains more than 350,000 Agents worldwide each year through live events, online training, self-study programs, and newsletters. The Real Estate community has embraced and praised his six best-selling books; Your First Year in Real Estate, Success as a Real Estate Agent for Dummies, The Champion Real Estate Agent, The Champion Real Estate Team, Telephone Sales for Dummies, Successful Time Management for Dummies, and over 300 articles in print. To learn more, please visit: http://www.realestatechampions.com.