The Economic Model: Performance, Investment & Outcomes

This chapter delves into the economic model as it applies to real estate, dissecting the critical components of performance, investment, and outcomes. We’ll explore how these elements interact to drive success in your real estate business, providing you with the tools to understand, analyze, and optimize your financial strategies.

1. Understanding the Economic Model

The economic model provides a framework for understanding the relationship between your activities and your financial results. It’s based on the fundamental equation:

Performance + Investment = Outcomes

Let’s break down each component:

• Performance: Represents how effectively you leverage your skills, behaviors, abilities, and available resources to generate revenue. High performance is about maximizing efficiency and effectiveness in every task.
• Investment: Encompasses both the time and money you allocate to lead generation, conversion activities, and operational overhead. Strategic investment is crucial for fueling growth.
• Outcomes: These are the tangible results of your performance and investments, primarily measured by Gross Commission Income (GCI) and Net Income (Profit).

1.1. Elements of Performance

Performance is multifaceted and encompasses the following:

• Skill Level: Your expertise in negotiation, marketing, market analysis, and client communication.
• Behavior: Your consistency, discipline, and positive attitude in executing your business plan.
• Ability: Your innate talents and learned capabilities that contribute to your success.
• Resources: The tools, technologies, and support systems you utilize to enhance your productivity.

1.2. Elements of Investment

Investment includes:

• Time: The hours dedicated to lead generation, client meetings, administrative tasks, and professional development. Time is a finite resource, so its allocation is a critical decision.
• Cost of Sale: The direct expenses associated with closing a transaction, such as commissions, marketing costs for a specific property, and staging expenses.
• Operating Expenses: The ongoing costs of running your business, including office rent, software subscriptions, marketing campaigns, and administrative support.
• Leads: Investment in acquiring potential clients through various channels.
• Appointments: Time and resources spent securing meetings with potential clients.
• Talent: Investment in training, coaching, and building a skilled team.
• Systems: Implementation and maintenance of efficient operational processes.
• Tools: Software, hardware, and other resources used to streamline operations.

1.3. Elements of Outcomes

The primary outcomes are:

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

2. The 30/30/40 Rule: A Financial Guideline

A simplified economic model is represented by the 30/30/40 rule:

• Operating Expenses: 30% of GCI
• Cost of Sales: 30% of GCI
• Net Income: 40% of GCI

This rule of thumb suggests that for every dollar of GCI, 30 cents are allocated to operating the business, 30 cents are spent on direct costs of sales, and 40 cents represent profit. This is a benchmark; your actual percentages may vary.

2.1. Mathematical Representation of the Economic Model

Let:

• GCI = Gross Commission Income
• OE = Operating Expenses
• COS = Cost of Sales
• NI = Net Income

Then, the model can be expressed as:

• NI = 0.4 * GCI
• OE = 0.3 * GCI
• COS = 0.3 * GCI
• GCI = NI + OE + COS

2.2. Cash Flow Illustration

Let’s consider an example:

• GCI from Listings: \$1,250,000
• GCI from Buyers: \$1,250,000

• Total GCI: \$2,500,000

• Listing COS: \$125,000

• Buyer COS: \$625,000

• Total COS: \$750,000

• Operating Expenses: \$750,000

• Net Income: \$1,000,000

In this scenario, the agent achieved a \$1,000,000 net income by managing \$750,000 in operating expenses and \$750,000 in cost of sales, generated from a \$2.5 million GCI.

3. Three Drivers of the Economic Model

The economic model is primarily driven by three key factors:

1. Leads to Appointments: Generating leads and successfully converting them into buyer and seller appointments.
2. Appointments to Signed Agreements: Effectively utilizing appointments to secure client commitment through signed service agreements.
3. Agreements to Closed Transactions: Providing excellent service to clients, guiding them through the transaction process, and ultimately closing deals.

3.1. Conversion Rates and Their Impact

Conversion rates are a critical performance indicator. They measure the effectiveness of each stage in the sales process. Examples include:

• Lead-to-Appointment Conversion Rate: Percentage of leads that convert into scheduled appointments.
• Appointment-to-Agreement Conversion Rate: Percentage of appointments that result in signed agreements.
• Agreement-to-Closed Transaction Conversion Rate: Percentage of signed agreements that lead to successful closings.

Example Conversion Rates:

• Leads Generated to Seller Appointments: 75%
• Leads Generated to Buyer Appointments: 70%
• Seller Appointments to Seller Agreements: 70%
• Buyer Appointments to Buyer Agreements: 70%
• Listings Taken to Homes Sold: 70%
• Buyer Agreements to Homes Sold: 70%

Improving conversion rates at any stage can significantly boost your overall GCI.

4. Implementing the MREA Economic Model

The MREA (Millionaire Real Estate Agent) economic model emphasizes starting with the desired end result – your target net income – and working backward to determine the necessary activities.

Steps to Implement:

1. Define Net Income Goal: Determine your desired net income for the year.
2. Calculate Total GCI: Divide your net income goal by 0.4 (40%) to calculate the total GCI required.
3. Calculate Operating Expenses and Cost of Sale: Multiply your GCI by 0.3 (30%) for both operating expenses and cost of sale.
4. Determine Average Commission Amount: Calculate your average commission per transaction.
5. Calculate Total Units Sold: Divide total GCI by your average commission amount to determine the number of units (transactions) needed.
6. Calculate Required Leads, Appointments, and Agreements: Work backward using your conversion rates to determine the required number of leads, appointments, and signed agreements needed to achieve your sales target.
7. Divide and Conquer: Break down your annual goals into monthly and weekly targets to maintain focus and momentum.

4.1. Mathematical Representation of the MREA Model

To formalize, let’s define:

• NI_goal = Desired Net Income
• AvgComm = Average Commission per Unit

Then:

• GCI = NI_goal / 0.4
• UnitsSold = GCI / AvgComm

If you know the Agreement-to-Closed Transaction Conversion Rate (ConvRate_ATC), then:

• AgreementsNeeded = UnitsSold / ConvRate_ATC

And if you know the Appointment-to-Agreement Conversion Rate (ConvRate_ApA), then:

• AppointmentsNeeded = AgreementsNeeded / ConvRate_ApA

And if you know the Lead-to-Appointment Conversion Rate (ConvRate_LdA), then:

• LeadsNeeded = AppointmentsNeeded / ConvRate_LdA

4.2. Example MREA Economic Model

Let’s say an agent has a target net income of \$200,000 and an average commission of \$10,000.

1. NI_goal = \$200,000
2. GCI = \$200,000 / 0.4 = \$500,000
3. OE = \$500,000 * 0.3 = \$150,000
4. COS = \$500,000 * 0.3 = \$150,000
5. AvgComm = \$10,000
6. UnitsSold = \$500,000 / \$10,000 = 50 Units

Assuming ConvRate_ATC = 70%, ConvRate_ApA = 60% and ConvRate_LdA = 10%:

• AgreementsNeeded = 50 / 0.7 = 71.43 ≈ 72 Agreements
• AppointmentsNeeded = 72 / 0.6 = 120 Appointments
• LeadsNeeded = 120 / 0.1 = 1200 Leads

Therefore, the agent needs to generate 1200 leads, set 120 appointments, obtain 72 signed agreements, and close 50 transactions to achieve a net income of \$200,000.

5. Avoiding Economic Model Traps

Several common pitfalls can hinder the effective use of the economic model:

1. Lack of Understanding: Failing to grasp the power of the model and its application for both performance tracking and planning.
2. Ignoring the Model in Decision-Making: Not using the model as a guide for prioritizing investments and activities.
3. Siloed Business View: Not assessing the business holistically and understanding the interdependencies between different aspects.
4. Neglecting Conversion Rates: Failing to track, analyze, and improve conversion rates at each stage of the sales process.
5. Lack of Goal Accountability: Not holding yourself accountable for achieving the goals defined by the model.
6. Insufficient Lead Generation: Not generating enough leads to meet the required appointment targets.
7. Disconnecting Models: Not integrating the economic model with other business models, such as lead generation or organizational models.

6. Leverage Technology

Technology tools can greatly enhance the efficiency and effectiveness of implementing the economic model. Customer Relationship Management (CRM) systems, such as real estate-specific platforms, are invaluable for tracking leads, managing contacts, and monitoring conversion rates.

6.1. CRM Systems for Data-Driven Decisions

A CRM enables you to:

• Track lead sources and conversion rates.
• Manage client communications and interactions.
• Analyze sales data to identify trends and opportunities.
• Automate marketing and follow-up tasks.

7. Prospecting-Based, Marketing Enhanced

The most effective lead generation strategy balances proactive prospecting with strategic marketing efforts.

• Prospecting: Involves direct, proactive activities such as phone calls, door-knocking, and networking events. Prospecting provides immediate feedback and allows for personalized interactions.
• Marketing: Encompasses passive, long-term strategies like online advertising, social media marketing, and direct mail campaigns. Marketing builds brand awareness and generates leads over time.

The ideal approach is to enhance prospecting efforts with targeted marketing campaigns that support your direct outreach and build a strong online presence.

8. Lead Generation Activities: A Comprehensive Overview

Effective lead generation encompasses a variety of activities across prospecting, marketing, and hybrid approaches.

8.1. Prospecting Activities

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

8.2. Marketing Activities

• Farming:
  • Geographic (Specific Neighborhoods)
  • Demographic (Targeting Specific Groups)
• Events:
  • Open Houses
  • Seminars
  • Contests
  • Client Appreciation Events
• Networking:
  • Sphere of Influence
  • Past Clients
  • Allied Resources
  • Agents
• Purchased Leads:
  • Referral Networks
  • Advertising Networks
  • Clientele

8.3. Both Prospecting and Marketing Activities

• Text Correspondence: SMS, Messenger
• Email
• Advertising: Pay-per-Click, SEO, Radio, TV, Newspapers, Personal Vehicles, Bus Stop Benches, Social Media, Portals, Magazines, Billboards, Yellow Pages, Grocery Carts, Moving Vans
• Broadcast/Content Creation: Radio Segments, TV Shows, Live Social Media, Blogs
• Direct Mail (Non-Farm): Postcard Campaigns, Special Events Cards, Just Sold/Just Listed Cards, Quarterly Market Updates
• Promotional Items/Swag
• Public Relations/Press: News Releases, Advice Columns
• Sponsorship

9. Database Management: The Core of Your Business

Your database is the foundation of your real estate business. It’s a repository of contact information for leads, prospects, and past clients. Effective database management is essential for nurturing relationships and generating repeat business.

9.1. Key Elements of Effective Database Management

• Centralized System: Utilize a CRM system to store and manage all contact information in one place.
• Segmentation: Group leads and contacts based on demographics, interests, and transaction history.
• Regular Communication: Implement a consistent communication plan to stay top-of-mind with your database.
• Personalization: Tailor your messages to resonate with specific segments of your database.
• Data Hygiene: Regularly update and cleanse your database to ensure accuracy and completeness.

9.2. Communicating with Your Database: Strategies and Best Practices

Consistency is crucial for maintaining relationships with your database. The MREA model suggests several touch campaigns:

9.2.1. For Leads: “19 to Connect” Touch Campaign

Focuses on initiating and establishing relationships.

• 4 Touches Quarterly Phone Calls
• 12 Touches Monthly E-mails, Newsletter, Market Report, Video
• 2 Touches Promotional Direct Mail
• 1 Touch Annual Event

9.2.2. For Contacts: “1 to Cement” Touch Campaign

Solidifies established relationships.

• 1 High Value Touch

9.2.3. For Contacts: “36 to Convert” Touch Campaign

Nurtures existing relationships and drives conversions.

• 4 Touches Telephone Calls
• 26 Touches Bi-weekly E-mails offering valuable information
• 2 Touches Events
• 4 Touches Promotional Direct Mail

9.3. Legal Considerations: Do Not Call (DNC) Compliance

Adherence to the Telephone Consumer Protection Act (TCPA) and Do Not Call (DNC) regulations is paramount. Violations can result in significant fines and legal repercussions.

• TCPA: Regulates calls and texts to cell phones and landlines, auto-dialed calls, prerecorded calls, and faxes. Requires prior express written consent for certain communications.
• DNC Registry: A national database of phone numbers that individuals have registered to avoid telemarketing calls.
• Best Practices: Subscribe to the DNC Registry, check numbers before calling, and honor all DNC requests.

Conclusion

The economic model provides a powerful framework for understanding the financial drivers of your real estate business. By focusing on performance, strategic investment, and data-driven decision-making, you can optimize your operations, increase your profitability, and achieve your financial goals. Remember to continuously monitor your performance metrics, adapt your strategies based on market conditions, and leverage technology to enhance your efficiency and effectiveness.