Economic Model: Performance, Investment, and Outcomes

This chapter dissects the Economic Model, a cornerstone of success in real estate, exploring how performance, investment, and outcomes interrelate to drive profitability. We’ll delve into the underlying theories, practical applications, and methodologies for effectively managing your real estate business through the lens of this model.

1. Understanding the Core Components: Performance, Investment, Outcomes

The Economic Model is built upon three foundational elements:

• Performance: Represents the effectiveness with which you execute tasks and leverage resources to generate revenue. It’s the application of your skills, behavior, abilities, and available resources.

• Investment: Encompasses the resources (time and money) allocated to lead generation, nurturing, and conversion. It is the input required to fuel the engine of your business.

• Outcomes: The quantifiable results of your performance and investment, primarily measured as Gross Commission Income (GCI) and Net Income (Profit). These are the prizes of your effort.

The Fundamental Equation:

Performance + Investment = Outcomes

1.1 Deconstructing Performance

Performance is a multifaceted concept determined by the following:

• Skill Level: Proficiency in core real estate tasks like valuation, negotiation, and marketing. Enhanced skill leads to increased efficiency and higher conversion rates.
• Behavior: Consistent, proactive activities such as lead follow-up, networking, and providing exceptional client service. Positive behavior fosters trust and repeat business.
• Ability: Innate talents and learned capabilities that contribute to success. These include communication skills, problem-solving abilities, and market knowledge.
• Resources: The tools, technologies, and support systems available to facilitate your work. Effective utilization of resources amplifies your productivity.

1.2 Strategizing Investment

Investment is strategically allocating resources (time and capital) across several key areas:

• Leads: Efforts dedicated to generating new leads through prospecting and marketing activities.
• Appointments: Time spent securing and conducting buyer and seller appointments.
• Talent: Investment in training, coaching, and potentially hiring support staff to enhance overall capabilities.
• Systems: Implementing and optimizing processes and workflows to improve efficiency.
• Tools: Acquiring and mastering relevant technology and software to streamline operations.
• Cost of Sale: Expenses directly tied to closing deals (e.g., marketing materials for a listing, staging costs)
• Operating Expenses: Fixed costs such as rent, insurance, and administrative expenses.

1.3 Defining Outcomes

Outcomes are the definitive measures of your business’s financial health and success:

• Gross Commission Income (GCI): The total commission earned from all closed transactions.
• Net Income (Profit): The revenue remaining after deducting all operating expenses and cost of sales from the GCI. This is the true measure of profitability.

2. The 30/30/40 Rule and Cash Flow Dynamics

This model emphasizes focusing on GCI and Net Income, and outlines how these elements interrelate.

• Total GCI (100%)

  • Operating Expenses (30%)
  • Cost of Sales (30%)
  • Net Income (40%)

  A healthy business, ideally, should see a 40% Net Income margin, while keeping Operating Expenses and Cost of Sales at 30% of the Total GCI, respectively.

  Cash Flow Example

  • GCI From Listings: $1,250,000
  • GCI From Buyers: $1,250,000

  • Total GCI: $2,500,000

    • Listings COS: $125,000
    • Buyers COS: $625,000
    • Total COS: $750,000

    • Operating Expenses: $750,000

    • Net Income: $1,000,000

3. Three Core Drivers of the Economic Model

Success hinges on three primary drivers:

1. Leads to Appointments: Generating a sufficient volume of quality leads and successfully converting them into buyer and seller appointments.
2. Appointments to Signed Agreements: Effectively presenting your value proposition during appointments to secure signed service agreements with clients.
3. Agreements to Closed Transactions: Providing exceptional service and skillfully navigating the transaction process to facilitate successful closings.

4. Conversion Rates: The Key to Unlocking Efficiency

Conversion rates measure the efficiency of each stage of the process. Optimizing these rates is crucial for maximizing profitability.

Example Conversion Pipeline:

• Leads Generated
  • Seller Appointments (75%)
    • Seller Agreements (70%)
      • Listings Taken (70%)
        • Homes Sold
• Leads Generated
  • Buyer Appointments (70%)
    • Buyer Agreements
      • Homes Sold

Calculating Conversion Rates:

Conversion Rate = (Number of Desired Outcomes) / (Number of Attempts)

Improving Conversion Rates:

• Lead Qualification: Implementing systems to filter and prioritize leads based on their likelihood of conversion.
• Sales Training: Investing in training programs to enhance your closing skills and techniques.
• Client Relationship Management (CRM): Utilizing CRM systems to track interactions and personalize communication.

5. The MREA Economic Model: Goal Setting with the End in Mind

The Millionaire Real Estate Agent (MREA) Economic Model advocates starting with your desired net income and working backward to determine the necessary activities and conversion rates.

Step-by-Step Implementation:

1. Define Your Net Income Goal: Determine your desired annual net income.

2. Calculate Total GCI: Divide your Net Income by your target Net Income percentage (e.g., 40%).

   Total GCI = Net Income / 0.4
   

3. Determine Operating Expenses and Cost of Sales: Multiply GCI by your target percentages.

   Operating Expenses = Total GCI * 0.3
   
   Cost of Sales = Total GCI * 0.3
   

4. Determine Average Commission Amount: Find your average Commission per unit sold.

5. Calculate Total Units Sold: Divide total GCI by your Average Commission Amount.

   Total Units Sold = Total GCI / Average Commission Amount
   

6. Analyze Split Between Sell Side and Buy Side: Split your total units to be sold between listing and buyer sides.

7. Factor in Conversion Rates: Account for seller and buyer conversion rates.
8. Calculate total Seller Appointments Needed: Units sold divided by % Sold Conversion Rate divided by % Appointment Conversion Rate.
9. Calculate total Buyer Appointments Needed: Units sold divided by % Sold Conversion Rate divided by % Appointment Conversion Rate.

This structured approach ensures that all business activities are aligned with achieving your financial goals.

6. Avoiding Common Economic Model Traps

• Underestimating the Model’s Power: Not leveraging the Economic Model for both performance assessment and strategic planning.
• Failing to Use the Model for Decision-Making: Ignoring the model’s insights when making critical business decisions.
• Lack of Holistic View: Focusing on isolated metrics without considering the interconnectedness of the entire business.
• Neglecting Conversion Rate Improvement: Failing to track, analyze, and optimize conversion rates at each stage of the pipeline.
• Not Holding Yourself Accountable: Setting goals but failing to consistently track progress and make necessary adjustments.
• Insufficient Lead Generation Analysis: Not understanding the lead generation volume required to secure the necessary appointments.
• Model Isolation: Not integrating the Economic Model with other planning models (e.g., Budget Model, Organizational Model).

7. Leverage Technology

Features to help with the Economic Model in Command:

• Track goals in Command
• Use Command and Opportunities fully with all data fields completed to get proper tracking.

8. Lead Generation Activities

• Prospecting vs. Marketing

  • Prospecting: Proactive approach with immediate response. Activities include phone calls, community outreach, key relationships, teaching, meals, etc.
  • Marketing: Passive approach with delayed response. Activities include advertising, events, purchased referrals, etc.

  • Lead Sources - The Rule of 4

  • Focus on top lead sources to maximize leads and listings

9. The Importance of a Database

• A database is a container that holds all the contact information for the leads you’ve generated.

10. Communicating with your Database

• Keys to Success:
  • Frequency
  • Consistency
  • Gain Permission
  • Pair Value
• MREA Touch Campaigns
  • Saturate 19 to Connect - for Leads
    • 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
  • Saturate 1 to Cement and 36 to Convert - for Contacts
    • 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.

Conclusion

The Economic Model provides a scientific framework for understanding and managing the performance, investment, and outcomes in your real estate business. By embracing its principles, diligently tracking key metrics, and continuously optimizing your processes, you can achieve sustainable growth and maximize profitability.