This July, Inman’s editorial theme is Teams — what it takes to build and join one, how to optimize your team for summer 2020, and even when to consider leaving one. And if you’re not already a subscriber to our Teams Beat email newsletter, sent every Thursday, sign up now.
Ten years ago, as I stepped back into real estate production after serving in a brokerage leadership role, my approach to real estate was different than it had been before.
Earlier in my career, I was focusing my income goals solely around my gross commission as income. I realized that approaching my business as an actual business owner would allow me to step out of the production track while creating more profitability through multiple streams of income and real profit.
Here are six tactical steps I recommend to real estate professionals who are seeking to grow their business.
1. Have a profit target
Regardless of whether you are an individual agent or a team, you must set a profit target. As an individual agent, its possible to hit a 50-60 percent profit margin. As your business grows into a team or an expansion organization, your target will be closer to 30-40 percent.
As an individual agent, I ran my business as if it were a team, even though at the outset, it was only me. I created a profit-and-loss statement (P&L) and put myself on a commission split, realizing that if I considered myself a cost of sale, I could eventually replace myself in production.
Although my expenses were minimal at that point in my career, I still allocated 10 percent to leverage and 10 percent to lead generation in my operating account. (Leverage refers to systems, tools and people; lead generation is technology, marketing, CRM, print campaigns, etc.)
40% cost of sales + 10% leverage + 10% lead generation = 40% profit margin
In addition to driving profitability, this allowed me to attract talent. Split conversations are really profit conversations when your team members have the same economic opportunity that you have as the business owner. Agents on a team have the same potential net profit margin as the actual business does. Your profit margins are identical.
2. Live by your budget model
Your budget model is your business planning tool. There should be a targeted percentage on every line item. If you do not have a budget model, you do not have a business.
3. Pay for people before you pay-per-click
If you attract true talent, they will generate far more revenue than any paid lead. You can use that revenue to pay-per-click, but the revenue must come first. The right talent will generate revenue that grows your business, which you can then reinvest in them. Pay-per-people before you pay-per-click.
4. Scrutinize spending versus investing
When we invest, we expect a return. Think about it this way: When you invest in stocks, you expect to earn a return on your investment. The same should apply to your business.
When we simply spend, we are not necessarily expecting a return. We fall into the trap of “buying production.” Hold every dollar on your profit and loss statement accountable to a return.
There are some things that you might feel are a necessary “spend,” such as new signs or a display ad in a local magazine. That doesn’t mean you should neglect tracking the ROI. If you aren’t seeing a 3X return on your investment, it’s likely a “spend” that should be reduced and reallocated more strategically.
5. Either grow, or pull back
Review your profit-and-loss statement at least monthly. The key is to grow. If the growth is not there, it’s time to pull back.
Stay true to your targets. Hire and invest according to your budget model. Sometimes, you may need to pull back and reduce expenses based on your budget model. That’s OK. That’s part of running a successful business.
In March, the global pandemic was spreading, communities were sheltering in place, and the economic outlook felt uncertain. Working with the mega agent teams in our network, the first action we took was to reduce expenses by 20 percent. Although this was a proactive move, it provided us with security and confidence until we saw evidence that our production was not only stable but growing.
Now, we are able to reinvest those savings in our businesses. These decisions were all driven by staying within the targeted percentages and profit margins in our budgets.
6. Consider your preferred future
We often celebrate sales volume and closed units. What is the value of those numbers if your business is not profitable?
Profitability will be your competitive weapon. Profit leads to bigger business opportunities, more experiences with your loved ones, the opportunity to better serve your community and an eventual exit strategy. Focusing on profitability will set you on your path to your preferred future.