Economic & Lead Generation Models: A Practical Guide

1. The Economic Model: Understanding Performance, Investment, and Outcomes

The economic model in real estate is a fundamental framework for understanding the relationship between your efforts, resources, and financial results. It’s expressed as:

Performance + Investment = Outcomes

Let’s break down each component:

1.1. Performance: Applying Skills and Resources

Performance reflects how effectively you utilize your abilities, skills, and available resources to generate revenue. Key elements of performance include:

Skill Level: Your expertise in negotiation, marketing, market analysis, and client service.
Behavior: Your consistent, disciplined work habits, including lead follow-up, prospecting, and appointment setting.
Ability: Your capacity to learn, adapt, and overcome challenges in the real estate market.
Resources: Your network, technological tools, and support systems.

1.2. Investment: Time, Money, and Effort

Investment encompasses the time, money, and effort you dedicate to lead generation and conversion. This can be further divided into:

Time: The hours spent on prospecting, nurturing leads, and working with clients.
Cost of Sales: Expenses directly related to closing transactions, such as marketing costs, commissions paid to other agents, and transaction fees.
Operating Expenses: Costs associated with running your business, including office rent, technology subscriptions, and administrative support.
Leads: Dollars invested to generate leads, whether online, offline, or through third-party providers.
Appointments: Effort and cost to set appointments with potential clients.
Talent: Costs related to hiring assistants or team members.
Systems: Investment in CRM or automation platforms to streamline processes.
Tools: Money invested into services, hardware, or software to boost productivity.

1.3. Outcomes: Gross Commission Income (GCI) and Net Income

Outcomes are the tangible results of your performance and investment, primarily measured by:

Gross Commission Income (GCI): The total revenue generated from your real estate transactions before deducting any expenses.
Net Income: The profit remaining after deducting all operating expenses and cost of sales from GCI. This is your take-home pay.

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

A helpful guideline to manage your finances effectively is the 30/30/40 rule:

Operating Expenses: 30% of your GCI should be allocated to running your business (marketing, office, technology).
Cost of Sales: 30% of your GCI should cover transaction-related expenses (commissions splits, marketing costs for specific properties).
Net Income: 40% of your GCI should be your profit.

Formula:

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

This model emphasizes that focusing on increasing GCI will proportionally increase all three components, especially your net income.

Example:

GCI: \$2,500,000
Operating Expenses: \$750,000
Cost of Sales: \$750,000
Net Income: \$1,000,000

3. Cash Flow: Managing Revenue and Expenses

Understanding cash flow is crucial for maintaining financial stability. It involves tracking income and expenses to ensure you have sufficient funds to cover your business operations and personal needs.

Cash Flow Calculation:

Total GCI = GCI from Listings + GCI from Buyers

Followed by deducting your expenses:

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

Example:

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

4. Three Drivers of the Economic Model: Conversion Rates

The economic model is propelled by three key drivers:

Leads to Appointments: Generating leads and converting them into buyer or seller appointments.
Appointments to Signed Agreements: Converting appointments into signed service agreements (listing agreements or buyer representation agreements).
Agreements to Closed Transactions: Successfully guiding clients through the transaction process to a closed deal.

Each driver relies on a conversion rate, which is the percentage of leads, appointments, or agreements that successfully convert to the next stage.

Example Conversion Rates:

Leads to Buyer Appointments: 70%
Leads to Seller Appointments: 75%
Buyer Appointments to Buyer Agreements: 70%
Seller Appointments to Listing Agreements: 70%
Buyer Agreements to Homes Sold: 70%
Listing Agreements to Homes Sold: 70%

5. The MREA Economic Model: A Framework for Growth

The MREA (Millionaire Real Estate Agent) Economic Model provides a detailed roadmap for achieving specific income goals by working backward from your desired net income.

The MREA model involves the following steps:

Determine Your Net Income Goal: Decide how much money you want to earn annually.
Calculate Total GCI: Divide your Net Income goal by 40% (0.4) to determine the necessary GCI.

Total GCI = Net Income / 0.4
3. Calculate Operating Expenses and Cost of Sales: Multiply your Total GCI by 30% (0.3) to determine the budget for each category.

Operating Expenses = Total GCI * 0.3 Cost of Sales = Total GCI * 0.3
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 needed to be sold.

Total Units Sold = Total GCI / Average Commission Amount
6. Calculate the Appointments Needed for Sell Side and Buy Side:
- Determine percentage of units sold for buyers and sellers.
- Calculate Total Buyers Listings Sold and Total Sellers Listings Sold.
- Calculate Total Buyers Listings Needed and Total Seller Listings Needed based on conversion rates.
- Calculate Total Buyer Appointments Needed and Total Seller Appointments Needed based on appointment conversion rates.

6. Avoiding Economic Model Traps

To effectively leverage the Economic Model, avoid these common pitfalls:

Failing to Understand the Power: Not recognizing its value as both a diagnostic tool and a planning instrument.
Not Using it for Decision-Making: Neglecting to apply the insights gained from the model to guide strategic choices.
Lack of Holistic View: Not assessing your business in its entirety.
Ignoring Conversion Rates: Not tracking and improving your key conversion rates.
No Goal Adherence: Failing to hold yourself accountable to your goals.
Insufficient Lead Generation Understanding: Not comprehending the amount of lead generation required to secure the necessary appointments.
Not Connecting to Other Models: Not using the Economic Model as the basis for other MREA models.

7. Leveraging Technology

Utilize technology to streamline and enhance your economic model. Real estate-specific tools can assist with goal setting and progress tracking.

Command goal setting can be helpful to track progress, and opportunities is often used to get commissions paid.

8. Business Plan: Economic Model (Actual and Pro Forma)

Create two versions of your Economic Model:

Actual: Reflects your current performance and financial metrics based on historical data.
Pro Forma: A projected model outlining your goals and strategies for future performance.

Steps to complete your Economic Model:

Write your Net Income goal.
Divide Net Income by 40% (.4) to calculate total GCI.
Multiply GCI by 30% (.3) for both Operating Expenses and Cost of Sale.
Write in your Average Commission Amount.
Divide total GCI by your Average Commission Amount to calculate the number of units to be sold.
Calculate the rest of the formulas.
Calculate how many appointments to go on monthly and weekly.

9. The 4-1-1 Action Goal Worksheet

The 4-1-1 worksheet is a tool for breaking down your annual goals into monthly and weekly action steps. It ensures that your daily activities align with your overarching objectives.

4: Four weeks in a month.
1: One month.
1: One year.

Elements of a 4-1-1:

Annual Goals: Net Income, Total Units Sold, # Listing Appointments, # Buyer Appointments.
Monthly Goals: # Listing Appointments, # Buyer Appointments.
Weekly Goals: Listing Appointments, Buyer Appointments (broken down for each week of the month).

10. Lead Generation Model: Prospecting and Marketing

Effective lead generation is the lifeblood of a successful real estate business. It involves a combination of prospecting and marketing strategies.

Lead Generation: The process of capturing contact information from individuals who have expressed interest in your services.
Lead: A person who has shown interest in real estate services and whom you can contact, but they are typically anonymous at first.
Contact: A person you’ve met and added to your database with permission for two-way communication.

10.1. Prospecting vs. Marketing

Feature	Prospecting	Marketing
Nature	Proactive	Passive
Response	Immediate	Delayed
Interaction	Direct, personal	Indirect, impersonal
Value Exchange	Exchange value for information	Offer value
Time/Money	Time-intensive	Money-intensive

10.2. Lead Generation Activities

Category	Activities
Prospecting	Phone or Face to Face, Listings without Agency, FSBOs, Expired Listings, Circle Prospecting, Community Outreach, Key Relationships, Teaching and Speaking Opportunities, Meals, Door-to-Door Canvassing, Networking Events, Booths and Kiosks, Walk-ins
Both	Text Correspondence, SMS, Messenger, Email
Marketing	Farming, Events, Networking, Purchased
Advertising	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)

10.3. The Rule of 4: Top Lead Sources

Focus on your top four lead sources to maximize efficiency and results. Track the percentage of your leads generated by each source.

Example:

Sphere of Influence: 45%
Online Leads: 20%
Referrals: 12%
Open Houses: 9%

10.4. Database Management

Your database is the central repository for all your leads and contacts.

Database: A container that holds all the contact information for the leads you’ve generated.

Track the following metrics:

Total number of names in your database.
Number of names you communicate with regularly.

10.5. Communication Strategies

Implement consistent communication strategies to stay top-of-mind with your database.

Keys to Success:

Frequency: Consistent, regular communication.
Consistency: Maintain a steady communication schedule throughout the year.
Gain Permission: Obtain opt-in consent for two-way interactions.
Pair Value: Offer relevant and valuable content based on individual needs and interests.

10.6. MREA Touch Campaigns

Campaign	Frequency	Description	Target Audience
19 to Connect	4 Quarterly phone calls, 12 Monthly emails, 2 Direct mail pieces, 1 Annual event	Designed to establish initial contact and build rapport with new leads.	Leads
1 to Cement	1 High-value touch (e.g., personalized gift)	Aims to solidify the relationship after an initial connection.	Contacts
36 to Convert	4 Telephone calls, 26 Bi-weekly emails, 2 Events, 4 Direct mail pieces	Focuses on nurturing existing relationships and converting contacts into clients through consistent value-added communication.	Contacts

11. Legal Considerations: TCPA and Do Not Call (DNC)

Be aware of and comply with the Telephone Consumer Protection Act (TCPA) and Do Not Call (DNC) regulations. Failure to comply can result in substantial fines.

Consult an attorney for guidance on TCPA and DNC laws.
Subscribe to the DNC Registry and check numbers before calling.
Honor all DNC requests promptly.

By mastering these economic and lead generation models, you’ll be well-equipped to achieve financial success in real estate.