Your broker isn’t going to tell you how to make a profit. You are kind of like a backyard chicken, and your broker needs you to produce, so managing your money is up to you. Here’s what you should keep in mind.
Teresa Boardman is a long-time columnist with 400-plus Inman columns under her belt. She writes about her real estate observations and experiences as an officeless indie broker in Minnesota.
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Your broker isn’t going to tell you how to make a profit. You are kind of like a backyard chicken, and your broker needs you to produce, so managing your money is up to you.
There is a lot of emphasis on how many “deals” real estate agents have each year and a lot of emphasis on commission splits. It’s possible for a real estate agent to have a lot of deals and still be broke.
Some real estate companies have three times as many agents as they have listings and one pending sale for every two agents. The math on that doesn’t make sense to me, but the fees those agents pay each month help keep the office profitable. For some companies, even the Errors & Omissions insurance is a profit center.
When I ask real estate agents if they have a budget, the answer is usually no. If I ask a peer what kind of a return they are getting for their lead capture or generation expenditures, I get a blank stare.
Some people know how to sell a house but don’t know how much they spend to be in business each month. The first time I added it all up, I was surprised. Now I have a number for my fixed expenses.
It’s common for agents to not have enough money to pay their income taxes or to skip buying health insurance for a few years to help make ends meet. At the same time, owning an expensive car is a must for many. Education for agents about money management is rare.
The agent who was so enthusiastic about leads through (fill in the blank with your favorite lead provider) last winter, doesn’t do more sales this year than he did last year but is still very enthusiastic about the program, which is probably his single biggest monthly expense.
It’s hard to say how many months or years he will keep paying and hoping that the business will come.
There are far more leads than there are home sales in my area, and there are many times more real estate agents than there are home sales.
Shiny object syndrome
We all buy things that don’t work out. We all use a little trial-and-error before we figure out how to make money. Knowing when and how to cancel is an important life skill. Sometimes we kind of fall in love with our own mistakes.
It is tempting to try every shiny object. We buy stuff that we use a few times or not at all, but seem convinced that we need it. This is a good thing for the numerous vendors who tell agents what they need and sell it to them, or they tell agents what consumers really want and sell that to agents.
Each year, products that are similar to last year’s big thing are being rolled out and sold to agents everywhere as something new that will make us all rich. It isn’t the agents who are getting rich.
Having a budget and understanding which expenditures are generating revenue — and which are not — is just as important as counting sides and deals. Budgets are not very sexy, and they aren’t even shiny, and just like a business plan, there is a difference between having it and using it.
What agents really need
Agents need computers, phones, printers, scanners and cars. They all wear out. Part of an agent’s budget should include a replacement plan for hardware. A laptop that doesn’t work, a car that doesn’t start or a dead phone can ruin a relationship with a client.
Keep a record of when each piece of equipment was purchased, and plan for a replacement date. Each yearly budget should include money for replacement equipment.
Just because something is a tax deduction, doesn’t make it alright. Maybe attending a conference has a higher ROI than buying a new computer or maybe not. When you can’t afford both, you have to make good choices.
Without a good system of tracking expenditures, nothing is tax deductible. It took me a few years to figure out that there is a huge return on my investment when I hire a professional tax preparer.
Agents who are just getting started should have enough money in the bank to pay for a year’s worth of expenses. A commission check isn’t like a paycheck. With each commission, a percentage needs to be set aside to pay for taxes — and to put back into the business.
During a lean year, it’s important to know which expenses to cut and which ones to keep. Usually, it isn’t the big expenses that get us; it’s the monthly fixed expenses. The $100 spent each month because we forgot to cancel a service that we don’t use after the free trial period ended or the phone bill that could easily be reduced by changing to a newer plan.
Knowing exactly how much it costs to run a business each month is an important first step in getting everything under control and creating a budget that works. There are fixed expenses that happen each month even in the months when there is no income.
If you don’t have a budget or a plan, you can always make one today and start tracking your expenses. And there isn’t anything wrong with keeping track of income, expenses and tax deductions all year long instead of playing catch up at tax time.
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