I recently returned from the Inman News real estate technology conference in New York City invigorated with a thirst to champion positive change in our slumping industry. It must have been something in the pizza, together with spending three tech-filled days at the Marriott Times Square!

I recently returned from the Inman News real estate technology conference in New York City invigorated with a thirst to champion positive change in our slumping industry. It must have been something in the pizza, together with spending three tech-filled days at the Marriott Times Square!

The Inman conferences are famous for bringing leading-edge technology providers and real estate practitioners together for a blitzkrieg of fresh ideas, color and characters. One such panel discussion left an indelible impression on me concerning an issue I have been studying as an academic, Realtor and technology marketer for some time now: What is the cost of real estate leads, and how much do we pay for them?

At a session entitled, “Leads: How to Find Qualified Home Buyers in a Changing Market,” I was amazed when I heard the moderator ask the panel if they thought Realtors should pay for leads. The question seems rhetorical at first glance, but it speaks volumes regarding both real estate agents’ business management practices and the technological change still sweeping the industry with regard to lead generation.

In my last article, “When is a lead a lead?” I tried to lay out objectively the competitive spectrum of lead providers and the methodology by which online leads are generated, catalogued, qualified and distributed. I did this so that real estate brokers and agents might have a better understanding of the “lead generation technology process,” and therefore be able to modify their behavior for best results, and navigate and make informed decisions regarding their desire to effectively modernize with online marketing and prospecting efforts.

The moderator could not know the irony that his question begged in me because of the research I have been conducting over the past three months. I have been interviewing a number of Realtors, including some who work with online lead providers and some who don’t. One glaring common thread emerged as a result of these interviews.

In nearly all cases, both brokers and agents could not quantify their client acquisition costs. That is, how much money did they spend to acquire a client; a home buyer, home seller, or both — one client as buyer and seller?

In business school we studied acquisition cost at great length in both cost accounting and marketing, and we had it drilled into us that knowing acquisition cost is a core fundamental “best practice” to all successful business models. Hence, my dismay at the moderator’s question, “Should Realtors pay for leads?” All businesses and business professionals pay for leads. As any business consultant will tell you, both fixed and variable costs must be amortized over a given firm’s annual transaction base. 

What does this mean in the case of real estate brokers or agents primarily employing traditional offline marketing methods? Simply stated, it means that the cost of maintaining an office, an automobile, health insurance, communications equipment, licensing, errors and omissions insurance, non-property-specific advertising (benches, general print advertising, calendars, magnets, etc.) and others define a broker or agent’s fixed costs. Given variable costs can include trade-area general marketing such as new business postcard mailings, social networking events and costs associated with an agent’s “sphere of influence.”

For example, I race sailboats — something of an oxymoron living in Denver — and I spend money doing so; also I source new business as a Realtor from this “sphere.” This is my recreational “sphere” per se, but the cost point holds true for all agents whether that agent rides horses, plays golf, skis or goes bowling. There is a cost associated with developing business from a given “sphere,” and it is often more expensive to do so than one thinks. In the case of recreational and social pursuits, however, those costs of developing business often do not fully amortize their associated expenses, nor should they.

As such, for every client (whether that client results in a closed transaction or not) a given agent or firm has spent money to acquire that client. No matter how you look at it, that is paying for leads. 

It isn’t my intent to seem flip about spending money to acquire new business. Rather, I discussed expenses at great length in my first article mentioned above. Firms and agents today need to develop a comprehensive marketing and prospecting plan and work that plan; in the 21st century it’s awfully hard to ignore online marketing and prospecting. Online marketing can be a more effective tool than some traditional methods. Client acquisition costs are easily quantified when marketing online, especially with online lead generation. That said, no such coherent marketing strategy can be evaluated for its effectiveness unless fixed and variable costs are defined and quantified, and unless all prospecting channel metrics are evaluated and managed to best practices.

So, in response to the question of whether Realtors should pay for leads, when did we ever stop?

Kyle Cascioli is an adjunct professor of real estate in the Burns School of Real Estate, part of the Daniels College of Business at the University of Denver. He is also manager of Real Estate Services at HomePoint.com, which provides vendor, marketing and agent-referral services in selected markets across the United States. Cascioli is also the broker-owner of Barrett Associates.

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