If you would like to increase your income, one of the best ways to do it is to ask, "Who’s closest to the money?" and "What’s closest to the money?"
I earlier discussed how to determine "Who’s closest to the money?" An equally important question is to ask, "What is closest to the money?" In other words, which real estate activities will be the most dollar-productive for your business?
Prioritizing whom you work with is important. Equally important is determining which types of activities will yield the best return for your efforts. There are two key pieces to this puzzle.
1. What are your most dollar-productive activities?
There’s only one way to really know which parts of your business are the most dollar-productive and which ones are not. The simple answer is to track each one of your transactions and to treat it as a profit center. To do this, track how much time and how much you spend to close each transaction.
For example, track how much you spend in marketing costs for each of your listings, including brochures, Web advertising, open house supplies, etc. These are your actual hard costs that you should subtract to determine how much your net income is before taxes.
It’s also important to calculate how many hours you actually spend at appointments, on open houses, and closing the transaction. These costs are known as "opportunity costs." When you hold an open house, the "opportunity" to take out a buyer or call on an expired listing is lost.
To illustrate, if it takes you 10 hours of actual opportunity time to close a $200,000 property and 60 hours to close a $600,000 property because there are few buyers in that price range, your dollar-productive time will be higher for $200,000 properties.
Using these numbers, you could close six $200,000 properties in the time it takes to close one $600,000 property. In other words, you would close $1.2 million in focusing your time on $200,000 properties vs. $600,000 by working with fewer but more expensive properties.
Once you have calculated this for each closed transaction, look for patterns. Are your listings in one area selling quickly while others linger on the market? If so, those that are selling quickly are more "dollar-productive."
2. What are your least dollar-productive activities?
It’s also important to note how much time you spend on transactions that don’t close. Divide the people you have worked with during the last 12 months into buyers and sellers.
Next, determine what percentage of buyers and what percentage of sellers actually closed their transaction with you. As a rule of thumb, if you’re doing more buyer transactions than sold listings, it’s probably better to concentrate on buyers.
The second step is to determine which group was more profitable for you. For example, assume that you closed 10 seller transactions for a total gross commission amount of $42,500 and 18 buyer transactions for $48,000. If you just look at the number of transactions, it would appear that it is wiser to work with buyers because you closed 80 percent more transactions.
In this case, however, it would actually be smarter to work with more sellers. The reason is that your average closed commission for sellers is $4,250 vs. only $3,000. Working with sellers is more dollar-productive.
3. What types of real estate activities are closest to the money?
There are four primary types of real estate opportunities that most people consider to be "closest to the money." Those four categories are expired listings, for-sale-by-owner homes (FSBOs), referrals of someone who needs to buy or sell now, and tenants in occupied listings. While there are many other ways you can choose to spend your time, these categories normally yield the most closed transactions.
4. What market areas are the most active?
When agents evaluate where the opportunities are in their business, very few consider what is going on in other parts of their market. The temptation is to stay working in the areas you have worked in the past.
A better approach is to track what’s happening in terms of sales both on the multiple listing service as well as in your office. If you’re working in an area that has little or no activity, start prospecting and marketing in those areas that are active. It’s important to monitor this each month since market conditions constantly change.
5. Weaving it all together
Take the time to go through the steps in this column. Identify the areas and the types of clients that produce the most income for your business. Focus on expanding these. Also note what is not producing income. Dump or minimize the amount of time that you spend engaging in these activities. This simple approach is one of the best ways to consistently be "closest to the money."