The MREA Economic & Lead Generation Models

Performance, Investment, and Outcomes: The Foundation of the Economic Model

The MREA Economic Model revolves around the interplay of three core elements: Performance, Investment, and Outcomes. This model provides a framework for understanding how specific actions and resource allocations translate into financial results in real estate.

• Performance: Refers to the effectiveness with which an agent applies their skills, behavior, abilities, and available resources to generate revenue. It’s the how of real estate practice.
• Investment: Encompasses the resources – time, money, and effort – dedicated to lead generation and lead conversion activities. Investment represents the input required to drive results.
• Outcomes: Are the tangible results of performance and investment, primarily measured as Gross Commission Income (GCI) and Net Income (Profit). Outcomes are the what – the financial reward for strategic effort.

Mathematically, this relationship can be expressed as:

• Performance + Investment = Outcomes

Understanding the Components

1. Performance:

   • Skills: Technical proficiency in negotiation, marketing, property valuation, and legal compliance.
   • Behavior: Consistent work ethic, proactive communication, and client-centric service.
   • Ability: Natural aptitude and learned expertise in navigating the real estate market.
   • Resources: Access to tools, systems, and support staff that enhance productivity.

2. Investment:

   • Time: Hours dedicated to lead generation activities (e.g., prospecting, networking).
   • Leads: Number of potential clients identified through various channels.
   • Appointments: Face-to-face or virtual meetings with potential clients to discuss their real estate needs.
   • Talent: The people that work for you and the degree to which their skills, and experience add to your investments.
   • Systems: CRM, marketing automation, transaction management.
   • Tools: Technology, comparative market analysis (CMA) software.
   • Cost of Sale: Expenses directly related to closing a transaction (commissions splits, marketing costs per listing).
   • Operating Expenses: Overhead costs of running the business (rent, salaries, marketing, technology).

3. Outcomes:

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

Real-World Application:

Scenario: A real estate agent spends 20 hours a week on lead generation, attends networking events, and invests in targeted social media advertising. The agent effectively uses negotiation skills and market knowledge during client interactions, resulting in signed agreements and closed transactions.

Analysis: The agent’s investment of time and money, combined with strong performance, will lead to a higher GCI and net income. In contrast, an agent with the same investment but lacking essential skills or consistent behavior will likely experience lower outcomes.

30/30/40: The Economic Model Ratio

The Economic Model highlights the importance of understanding the relationship between total GCI, operating expenses, cost of sales, and net income. A common target is the 30/30/40 ratio:

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

Formula:

Total GCI (100%) = Operating Expenses (30%) + Cost of Sales (30%) + Net Income (40%)

Practical Application

Example: An agent generates $1.25 million in GCI from listing sales and $1.25 million GCI from buyer sales, totaling $2.5 million in GCI.
* Operating Expenses: $2,500,000 * 0.30 = $750,000
* Cost of Sales: $2,500,000 * 0.30 = $750,000
* Net Income: $2,500,000 * 0.40 = $1,000,000

This example underscores the importance of managing expenses and maximizing GCI to achieve a desired net income.

Understanding Cash Flow

Cash flow is critical for sustaining and growing a real estate business. Agents should focus on managing cash flow by closely monitoring income and expenses. A strong cash flow allows agents to reinvest in their business, weather market fluctuations, and achieve financial stability.

Key Components

1. GCI from Listings: Revenue generated from closed listing transactions.
2. GCI from Buyers: Revenue generated from closed buyer transactions.
3. Cost of Sales: Expenses associated with each transaction, such as commission splits.
4. Operating Expenses: Day-to-day costs of running the business.
5. Net Income: Profit after deducting all expenses.

Three Drivers of the Economic Model

The Economic Model is propelled by three primary drivers that convert leads into income:

1. Leads to Appointments: Generating leads and converting them into buyer or seller appointments.
2. Appointments to Signed Agreements: Converting appointments into signed client service agreements.
3. Agreements to Closed Transactions: Facilitating successful transactions by effectively serving clients.

Conversion Rates

Conversion rates are the linchpin for transforming leads into revenue. These rates measure the effectiveness of each stage in the sales process. The Economic Model analyzes these rates to identify areas for improvement.

Key Conversion Rates:

• Lead-to-Appointment Rate: Percentage of leads that convert into scheduled appointments.
• Appointment-to-Agreement Rate: Percentage of appointments that result in signed client agreements.
• Agreement-to-Closed Transaction Rate: Percentage of signed agreements that result in closed transactions.

Formulas:

• Lead-to-Appointment Rate = (Number of Appointments / Number of Leads) * 100
• Appointment-to-Agreement Rate = (Number of Signed Agreements / Number of Appointments) * 100
• Agreement-to-Closed Transaction Rate = (Number of Closed Transactions / Number of Signed Agreements) * 100

Example:

• Generated 100 leads.
• Scheduled 15 appointments.
• Signed 5 agreements.
• Closed 3 transactions.

Conversion Rates:

• Lead-to-Appointment Rate = (15 / 100) * 100 = 15%
• Appointment-to-Agreement Rate = (5 / 15) * 100 = 33.33%
• Agreement-to-Closed Transaction Rate = (3 / 5) * 100 = 60%

The MREA Economic Model: Net Income as the Starting Point

The MREA Economic Model prioritizes starting with the desired net income and working backward to determine the activities and investments required to achieve that goal.

1. Determine Desired Net Income: Set a realistic financial goal based on personal needs and market opportunities.

2. Calculate Total GCI: Use the 40% net income target to determine the necessary GCI.

   Formula:
   Total GCI = Net Income / 0.40
   3. Calculate Operating Expenses and Cost of Sales: Allocate 30% of the total GCI to each category.

   Formulas:
   Operating Expenses = Total GCI * 0.30 Cost of Sales = Total GCI * 0.30
   4. Determine Average Commission Amount: Calculate the average commission earned per transaction based on market data and past performance.
   5. Calculate Total Units Sold: Divide the total GCI by the average commission amount to determine the number of transactions needed.

   Formula:
   Total Units Sold = Total GCI / Average Commission Amount
   6. Allocate Transactions by Side: Determine the percentage split between buyer and seller transactions based on market conditions and business focus.
   7. Calculate Required Leads and Appointments: Work backward from the total units sold, using conversion rates, to determine the number of leads and appointments needed.

   Formulas:
   Total Leads Needed = Total Appointments Needed / Lead-to-Appointment Rate Total Appointments Needed = Total Units Sold / Appointment-to-Agreement Rate

Avoid Economic Model Traps

• Not understanding the power of the Economic Model, failing to use it both as a diagnostic tool and a strategic planning device.
• Not using the Economic Model as a guide to decision-making.
• Not looking at your business as a whole.
• Not knowing or improving your conversion rates.
• Not holding yourself to your goals.
• Not knowing how much lead generation is required to secure the appointments needed.
• Not using the Economic Model to create the other MREA models.

The Lead Generation Model: Prospecting-Based, Marketing-Enhanced

The Lead Generation Model emphasizes a balanced approach, combining proactive prospecting with strategic marketing efforts.

• Lead Generation: The process of capturing contact information from individuals who have expressed interest in real estate services.
• Lead: An individual who has shown interest but with whom you have not yet established direct communication.

Prospecting vs. Marketing

• Prospecting: Involves direct, proactive outreach to potential clients, such as cold calling, door-knocking, and networking. It yields immediate responses and is time-intensive.
• Marketing: Employs passive strategies to attract leads, such as advertising, content marketing, and social media. It is money-intensive and provides a delayed response.

Formula for ROI

Return on Investment (ROI) is a critical metric for evaluating the effectiveness of lead generation activities. The formula is:

ROI = (Net Profit / Cost of Investment) * 100

Example: An agent invests $1,000 in a marketing campaign and generates $5,000 in net profit.

ROI Calculation:

ROI = ($5,000 / $1,000) * 100 = 500%

Lead Generation Activities: A Multifaceted Approach

A comprehensive lead generation strategy encompasses various activities across prospecting, marketing, and hybrid approaches.

Prospecting Activities

1. Phone or Face-to-Face: Direct outreach to potential clients.
2. FSBOs (For Sale by Owners): Targeting homeowners selling without an agent.
3. Expired Listings: Contacting homeowners whose listings have expired.
4. Circle Prospecting: Targeting specific neighborhoods or apartment complexes.
5. Community Outreach: Engaging in charitable and volunteer work.
6. Key Relationships: Building relationships with corporations, builders, and investors.
7. Teaching and Speaking Opportunities: Presenting real estate-related topics to groups.
8. Meals: Networking over meals with potential clients and referral partners.
9. Door-to-Door Canvassing: Distributing marketing materials and engaging with residents.
10. Networking Events: Attending industry events and meetups.
11. Booths and Kiosks: Setting up promotional displays at public locations.
12. Walk-ins: Engaging with individuals who visit your office or booth.

Marketing Activities

1. Farming: Targeting specific geographic or demographic areas with consistent marketing efforts.
2. Events: Hosting open houses, seminars, and client appreciation events.
3. Networking: Engaging with your sphere of influence, past clients, and allied resources.
4. Purchased Leads: Buying leads from referral networks or advertising platforms.
5. Advertising: Using pay-per-click ads, search engine optimization (SEO), and social media.
6. Broadcast/Content Creation: Producing radio segments, TV shows, and blogs.
7. Direct Mail (Non-Farm): Sending postcards and market updates.
8. Promotional Items/Swag: Distributing branded merchandise.
9. Public Relations/Press: Issuing news releases and advice columns.
10. Sponsorship: Supporting local events and organizations.

Hybrid Activities

1. Listings without Agency: Communicating with homeowners before they hire an agent.
2. Text Correspondence: Using SMS and messaging apps for lead generation.
3. Email Marketing: Sending targeted email campaigns to prospects.

Lead Sources - The Rule of 4

Focus on identifying and nurturing your top four lead sources. According to the Rule of 4, most agents derive a significant portion of their business from a small number of lead sources.

The Database: Your Central Hub

The database is the central repository for all contact information collected through lead generation activities. Effective database management is crucial for nurturing leads and converting them into clients.

Key Steps in Database Management

1. Collect Contact Information: Gather names, phone numbers, email addresses, and relevant details.
2. Segment Leads and Contacts: Categorize contacts based on their interests, demographics, and engagement levels.
3. Implement Communication Plans: Develop automated email campaigns, newsletters, and follow-up sequences.
4. Track Interactions: Record all communication with leads and contacts to personalize future interactions.
5. Clean and Update Regularly: Remove inactive contacts and update information to maintain accuracy.

Communicate with Everyone in Your Database

Keys to Success

1. Frequency
2. Consistency
3. Gain Permission
4. Pair Value

MREA Touch Campaigns

1. Saturate 19 to Connect
   For Leads - use the 19 to Connect Touch Campaign
   • 4 Touches Quarterly phone call
   • 12 Touches Monthly e-mail, newsletter, market report, video
   • 2 Touches Promotional direct mail, such as a magnet, calendar, printed market report, etc.
   • 1 Touch Annual event, party, movie screening, get-together
2. Saturate 1 to Cement
   A high value touch that solidifies the relationship you have just established and opens the door for future interactions.
3. Saturate 36 to Convert
   For Contacts - use the 1 to Cement and 36 to Convert Touch Campaigns
   • 4 Touches Telephone calls
   • 26 Touches Bi-weekly email offering some type of information of value to the consumer
   • 2 Touches Events, get togethers, parties
   • 4 Touches Promotional direct mail, such as a magnet, calendar, market report, etc.

Do Not Call / Telephone Consumer Protection Act

Adhere to the Telephone Consumer Protection Act (TCPA) and Do Not Call (DNC) regulations to avoid legal penalties.

Key Compliance Measures:

• Subscribe to the DNC Registry.
• Check numbers against the DNC Registry before making calls.
• Honor all Do Not Call requests.
• Obtain prior express written consent before using autodialers or prerecorded messages.

Database Size: The Foundation of Your Business

The size and quality of your database directly impact your ability to generate appointments and close transactions. Nurturing a large, engaged database is essential for sustainable growth.

Example:

Assumptions:

1. You have 500 contacts in your database, receiving 36 touches a year.
2. 6% of your database will buy or sell each year.
3. You convert 50% of that 6%.
4. 4% of your database gives you a referral, and you convert 50% of them.

Calculations:

1. Appointments from Database = 500 * 0.06 * 0.5 = 15 appointments
2. Appointments from Referrals = 500 * 0.04 * 0.5 = 10 appointments

Total Appointments = 15 + 10 = 25 appointments