The Economic Model: Performance, Investment, and Outcomes

1. Introduction to the Economic Model

The Economic Model is a fundamental framework that connects your actions, resources, and financial results in real estate. It provides a clear understanding of how your Performance and Investment directly influence your Outcomes, specifically Gross Commission Income (GCI) and Net Income. Understanding and leveraging this model is crucial for maximizing profitability and achieving your financial goals.

• Performance: How effectively you utilize your skills, behaviors, abilities, and available resources to generate revenue.
• Investment: The time and money you allocate to lead generation, lead conversion, and operational expenses.
• Outcomes: The tangible results of your performance and investment, measured by Gross Commission Income (GCI) and Net Income.

Core Equation:

Performance + Investment = Outcomes

1.1. Performance Factors

• Skill Level: Mastery of real estate principles, negotiation tactics, market analysis, and sales techniques.
• Behavior: Consistent implementation of effective strategies, proactive communication, and ethical practices.
• Ability: Aptitude for building relationships, problem-solving, and adapting to changing market conditions.
• Resources: Access to tools, technology, training, and support systems.

1.2. Investment Components

• Leads: Spending time and resources to generate and nurture potential clients.
• Appointments: Securing and effectively conducting meetings with prospective buyers and sellers.
• Talent: Investing in your own skills as well as the potential contribution of team members.
• Systems: Establishing efficient processes for lead management, client communication, and transaction coordination.
• Tools: Utilizing technology, software, and marketing materials to enhance productivity and reach.
• Time: Allocating sufficient hours to prospecting, client service, and professional development.
• Cost of Sale: Direct expenses associated with closing transactions.
• Operating Expenses: Overheads to keep business running.

1.3. Outcome Metrics

• Gross Commission Income (GCI): The total revenue generated from real estate transactions before expenses.
• Net Income: The profit remaining after deducting all operating expenses and cost of sales from GCI.

2. Elements of the Economic Model: The 30/30/40 Rule

A simplified yet effective framework for visualizing the relationship between GCI, expenses, and net income.

Breakdown:

• Total GCI (100%)
  • Operating Expenses (30%): Costs to operate the business.
  • Cost of Sales (30%): Costs directly related to sales transactions.
  • = Net Income (40%): The ultimate profit.

Mathematical Representation:

• Net Income = GCI - Operating Expenses - Cost of Sales
• Assuming 30/30/40 split:
  • Net Income = 0.4 * GCI
  • Operating Expenses = 0.3 * GCI
  • Cost of Sales = 0.3 * GCI

Example:

• If you aim for a Net Income of $1,000,000, then:
  • Total GCI: $1,000,000 / 0.4 = $2,500,000
  • Operating Expenses: $2,500,000 * 0.3 = $750,000
  • Cost of Sales: $2,500,000 * 0.3 = $750,000

3. Cash Flow Dynamics

Understanding how GCI translates into cash flow is crucial for managing finances and sustaining your business.

Cash Flow Equation:

Net Income + Operating Expenses + Cost of Sales = Total GCI

Example:

• GCI from Listings: $1,250,000
• GCI from Buyers: $1,250,000
• Total GCI: $2,500,000
• Listings Cost of Sales: $125,000
• Buyers Cost of Sales: $625,000
• Total Cost of Sales: $750,000
• Operating Expenses: $750,000
• Net Income: $1,000,000

4. Three Key Drivers of the Economic Model

Success in real estate hinges on mastering three interconnected conversion processes:

1. Leads to Appointments: Generating a consistent flow of leads and converting them into scheduled appointments with potential clients.
2. Appointments to Signed Agreements: Effectively presenting your value proposition during appointments to secure signed service agreements with buyers and sellers.
3. Agreements to Closed Transactions: Providing exceptional service and guiding clients through the transaction process to reach a successful closing.

5. Conversion Rates: The Engine of Growth

Conversion rates measure your effectiveness at each stage of the sales process. Tracking and improving these rates is vital for optimizing performance.

Example Conversion Chain:

• Leads Generated -> Buyer Appointments (70%)
• Buyer Appointments -> Buyer Agreements (70%)
• Buyer Agreements -> Homes Sold (70%)

5.1. Calculating Conversion Rates

• Conversion Rate = (Number of Successful Conversions / Total Number of Attempts) * 100%

5.2. Importance of High Conversion Rates

• Increased Efficiency: Higher conversion rates mean you generate more business with fewer resources.
• Improved Profitability: Greater efficiency translates directly into higher net income.
• Competitive Advantage: Superior conversion skills set you apart in a crowded market.

Example Scenario:

• Generating 100 leads resulting in 70 appointments, those appointments result in 49 signed agreements, those agreements lead to 34.3 homes sold.
  • 100 Leads -> 70 Appointments -> 49 Agreements -> 34 Homes Sold

6. The MREA Economic Model

A specialized model based on “The Millionaire Real Estate Agent” (MREA) book, emphasizing net income and scaling.

6.1. Begin with the End in Mind: Net Income Focus

• Start by defining your desired net income.
• Work backward to determine the necessary GCI, transactions, and activities.

6.2. Reverse Engineering Your Goals

1. Define Net Income Goal: The starting point for all calculations.
2. Calculate Total GCI: GCI = Net Income / 0.4 (assuming 40% net income target)
3. Determine Operating Expenses and Cost of Sales: Expenses/COS = GCI * 0.3 (assuming 30% allocation each)
4. Calculate Average Commission Amount: Review past sales to determine the average commission per transaction.
5. Calculate Total Units Sold: Total Units = GCI / Average Commission
6. Determine Sell-Side vs. Buy-Side Split: Estimate the percentage of transactions from listings vs. buyers.
7. Calculate Total Seller Listings Sold and Total Buyer Listings Sold: Split total units based on the percentages determined in step 6.
8. Apply Conversion Rates: Calculate the number of listings needed and buyer appointments required.

7. Avoiding Economic Model Traps

Common pitfalls to avoid when implementing and using the Economic Model:

1. Not understanding the power of the Economic Model: Using it passively instead of actively planning and monitoring performance.
2. Not using the Economic Model as a guide to decision-making: Failing to use it to make informed choices about resource allocation and strategy.
3. Not looking at your business as a whole: Focusing on individual transactions rather than the overall financial picture.
4. Not knowing or improving your conversion rates: Ignoring the key performance indicators that drive business growth.
5. Not holding yourself to your goals: Setting unrealistic targets or failing to track progress and adjust strategies accordingly.
6. Not knowing how much lead generation is required to secure the appointments needed: Lack of understanding of lead generation metrics.
7. Not using the Economic Model to create other models: Neglecting to integrate it with budgeting, lead generation, and organizational models.

8. Leverage Technology

• Command Goal Setting: Utilize Command features to set goals based on the Economic Model and track progress.
• Opportunities Applet: Leverage the Opportunities applet to manage transactions and track commissions.

9. My Business Plan - Economic Model (Actual)

This section walks you through calculating the actual economic model based on recent performance.

Steps:

1. Net Income (40%): [Enter Value]
2. Operating Expenses (30%): [Enter Value]
3. Cost of Sale (30%): [Enter Value]
4. Total GCI: Calculate GCI using the formula GCI = Net Income / 0.4
5. Average Commission Amount: [Enter Value]
6. Total Units Sold: Calculate Total Units Sold using the formula Total Units = GCI / Average Commission Amount

Sell Side:

• % Buyers/Sellers: [Enter Value]
• Sellers Listings Sold: Calculate Seller Listings Sold.
• % Sold Conversion Rate: [Enter Value]
• Total Seller Listings Needed:
• % Appointment Conversion Rate: [Enter Value]
• Total Seller Appointments Needed:

Buy Side:

• % Buyers/Listings: [Enter Value]
• Buyers Listings Sold: Calculate Buyers Listings Sold.
• % Sold Conversion Rate: [Enter Value]
• Total Buyers Listings Needed:
• % Appointment Conversion Rate: [Enter Value]
• Total Buyer Appointments Needed:

10. My Business Plan - Economic Model (Pro Forma)

Creating a pro forma economic model based on future projections

Steps:

1. Net Income (40%): [Enter Value]
2. Operating Expenses (30%): [Enter Value]
3. Cost of Sale (30%): [Enter Value]
4. Total GCI: Calculate GCI using the formula GCI = Net Income / 0.4
5. Average Commission Amount: [Enter Value]
6. Total Units Sold: Calculate Total Units Sold using the formula Total Units = GCI / Average Commission Amount

Sell Side:

• % Buyers/Sellers: [Enter Value]
• Sellers Listings Sold: Calculate Seller Listings Sold.
• % Sold Conversion Rate: [Enter Value]
• Total Seller Listings Needed:
• % Appointment Conversion Rate: [Enter Value]
• Total Seller Appointments Needed:

Buy Side:

• % Buyers/Listings: [Enter Value]
• Buyers Listings Sold: Calculate Buyers Listings Sold.
• % Sold Conversion Rate: [Enter Value]
• Total Buyers Listings Needed:
• % Appointment Conversion Rate: [Enter Value]
• Total Buyer Appointments Needed:

11. Build Your 4-1-1

A practical tool for breaking down annual goals into monthly and weekly action steps. The 4-1-1 represents:
* 4 - weeks in a month
* 1 - month
* 1 - year

Elements:
* Annual Goals: Set annual targets for net income, units sold, and appointments.
* Monthly Goals: Break down annual goals into monthly benchmarks.
* Weekly Goals: Define weekly activities to stay on track.

12. Ahas and Action Steps

Reflection:
* What valuable insights did you gain?
* What specific actions will you implement?

SECTION 4: THE LEAD GENERATION MODEL

1. Prospecting-Based, Marketing-Enhanced

Real estate success hinges on a blended approach, prioritizing prospecting and leveraging marketing.

1.1. Prospecting

• Definition: Proactive outreach to identify and engage potential clients.
• Characteristics:
  • Passive
  • Delayed Response

1.2. Marketing

• Definition: Creating awareness and attracting leads through various channels.
• Characteristics:
  • Money Intensive
  • Immediate Response

2. Lead Generation Activities

2.1. Prospecting

1. Phone or Face to Face:
   • Listings without Agency
   • FSBOs (For Sale by Owners)
   • Expired Listings
2. Circle Prospecting:
   • Neighborhoods
   • Apartment Complexes
   • Recently Sold listings
   • Recently Listed Properties
3. Community Outreach:
   • Charity
   • Volunteer Work
4. Key Relationships:
   • Corporations
   • Builders
   • Banks
   • Third-Party, Data Companies
   • Investors
5. Teaching and Speaking Opportunities:
6. Meals
7. Door-to-Door Canvassing
8. Networking Events
9. Booths and Kiosks
10. Walk-ins

2.2. Both

1. Text Correspondence:
   • SMS
   • Messenger
2. Email:

2.3. Marketing

1. Farming:
   • Geographic
   • Demographic
2. Events:
   • Open Houses
   • Seminars
   • Contests
   • Client Appreciation Events
3. Networking:
   • Sphere
   • Past Clients
   • Allied Resources
   • Agents
4. Purchased:
   • Referral Networks
   • Advertising Networks
   • Clientele
5. Advertising:
   • Pay per Click
   • SEO
   • Radio
   • TV
   • Newspapers
   • Personal Vehicles
   • Bus Stop Benches
   • Social Media
   • Portals
   • Magazines
   • Billboards
   • Yellow Pages
   • Grocery Carts
   • Moving Vans
6. Broadcast/Content Creation:
   • Radio Segments
   • TV Shows
   • Live Social Media
   • Blogs
7. Direct Mail (Non-Farm):
   • Postcard Campaigns
   • Special Events Cards
   • Just Sold/Just Listing Cards
   • Quarterly Market Updates
8. Promotional Items/Swag
9. Public Relations/Press:
   • News Releases
   • Advice Columns
10. Sponsorship:

3. Database

A centralized repository for lead contact information.

3.1. Database Size

• Number of names in your database today
• Number of names you communicate with regularly

4. Communicate with Everyone in Your Database

• Frequency - quantity keeps you top of mind
• Consistency - spread touches throughout the year
• Gain Permission - ask for opt-in
• Pair Value - leverage the information you gain about your contacts

4.1. MREA Touch Campaigns

• Saturate - 19 to Connect
• Saturate - 1 to Cement
• Saturate - 36 to Convert

5. Database Size

5.1. Example with the Following Assumptions

1. You have 500 Contacts in your database receiving 36 touches a year.
2. 6% of people in your database will buy or sell each year.
3. You convert 50% of that pool of 6%.
   • 500 × .06 × .5 = 15 appointments each year
4. You ask for, and 4% of your database give you, a referral and you convert 50% of them.
   • 500 × .04 × .5 = 10 appointments each year