Section 3 The Numbers
The terms “Revenue” and “Income” are frequently confused. This is further complicated by the fact that the industry itself refers to “Gross Commission Income” (GCI) when they actually are referring to Revenue. In layman’s terms Income is Revenue less Expenses, or alternatively Revenue is Gross Earnings before Expense and Taxes.
Expenses are frequently the primary reason agents fail or leave the industry. Expenses often continue to rise and when not controlled effectively will spiral out of control and become the death knell for a potentially successful real estate agent or business.
Basically there are two types of expenses you need to monitor: fixed and variable. In real estate fixed equates to your overhead costs, and variable is your transactional costs.
3.3.1. The Tricky Profit Killer: Overhead
Overhead is defined as those expenses you would incur just to exist in the real estate industry. Examples would include desk fees, licenses, E&O insurance, signs, automobile, lockboxes, MLS access, etc. Overhead is frequently referred to as the “silent killer” in real estate, as many agents do not include these costs when calculating their budget or weighing a concession request.
A good real estate business plan would include into the overhead figure any advertising for personal marketing such as newsletters, farm mailings, general advertising, client meetings, websites etc. The reason that personal marketing is included in overhead is that because as a general rule, regardless of how many transactions you close, an agent still needs to do something to keep their name in front of their sphere of influence, past clients and other potential customers.
Another overhead expense also frequently neglected is the cost associated with terminated transactions. Every listing may not sell for whatever reason, irrespective of the time or costs you may have invested. Terminated transactions therefore represent a cost of doing business and should be incorporated as an overhead.
3.3.2. Every Deal Costs Something: Transaction Expenses
Transaction expenses are more complicated to calculate and track as they are by definition variable. Transaction expenses, or direct expenses, are those expenses an agent incurs when closing a transaction. Think about a typical listing:
- Do you send out “Just Listed” Cards and “Just Sold” Cards?
- Do you place newspaper ads?
- Do you create virtual tours?
- Do you have any direct MLS fees such as listing fees or refresh fees?
- Do you provide buyers a closing or move-in gift?
- Have you ever needed to buy a refrigerator just to get the deal to close?
Do you pay your assistant a bonus per closed listing?
The Davis Yoder Realty Group
“Unless you have a business plan allocating time, costs and budgets it is very difficult to achieve your goals.” Bob Yoder
The list is endless and can sometimes account for nearly half the money you will spend on a transaction. We strongly suggest you take a quiet hour and brainstorm, list and then price out all the expenses you incur. This exercise is in itself an eye-opening experience for most agents.
3.4. Understanding the Numbers
After determining your revenue and expenses you can now begin to process the numbers by applying a variety of interesting calculations and formulas that can result in on endless list of answers, ratios, percentages and limit costs.
- What are my costs per transaction?
- Am I more profitable with buyers or sellers?
- Do I need an assistant?
- How many additional transactions must I close to afford an assistant?
- Which of my marketing activities is the most cost effective?
How does my profit per transaction compare to top agents/other agents?“Unless you have a business plan allocating time, costs and budgets it is very difficult to achieve your goals.”
3.5. The Tools Available
Although there is a good selection of Business Planning books, workbooks and coaching programs in the real estate industry that deal with this important topic, strangely enough there is a very limited number of electronic real estate business planning solutions available to agents. As with most of our research reports we seek out the best options available for agents and in this chapter we have decided to include:
- Microsoft Excel
- Create A Plan
In examining the different products we considered aspects such as how easy it is for an agent to install, setup, understand, and operate a business plan, the cost of time invested, and in the final analysis the usefulness of the output and results.
RE/MAX Associates of Dallas
“Our life today is a testimonial to business and financial planning. We have just celebrated our second anniversary of living in our dream home in Playa del Carmen on the Caribbean coast of Mexico!” Missy Vanderbilt3.5.1. Microsoft Excel
Excel, in and of itself is not a business planning tool but is often the first tool agents decide to use to structure a business plan. An “Expert Level” user will be able to create various columns, sections and formulas that could calculate various key numbers. In most cases the Transaction expenses will have to be hand calculated on a separate worksheet and then pulled in. Using a feature called “Iteration” Excel can also make a certain number of calculations before the system frequently stops. This medium is however not ideal for real estate business plans as the large number of variables in real estate transactions, such as Sliding Commission Scales, Transactional Expenses, etc. make it extreme hard and complex. If you are not an “Expert Level” Excel user you may have to have someone to do the programming for you – budget for a few hours. You already have Excel if you purchased the “Microsoft Office Suite”, otherwise you will need to purchase this separately ($200). Total costs for this option would range between $200 – $500 for a non-industry specific solution in which the plan will only be as good as the extent of the formulas and business logic programming you undertake.
Included within QuickBooks is a budgeting tool. QuickBooks Premier Edition has a business plan writing feature based on the results from their budgeting tool. The budgeting tool is relatively basic but will at least auto-populate all the accounts. The user is required to insert dollar values for each month. The most advanced feature is the ability to increase a row by a percentage amount. QuickBooks does not calculate information such as required number of transactions, overhead per transaction or even direct transaction expenses and as this was not originally designed for real estate there is obviously no section to track sources of business or activities required to meet your goal.
The final result from the budget produced by QuickBooks was very limiting. There is a comparison of plan vs. actual which was easy to read, but focused entirely on the monetary aspects of the business. Since the number of transactions is not entered, any calculation about transaction costs must be calculated separately. Also expenses associated directly with transactions had to be manually manipulated each time revenue budget numbers were changed. For example if you determined that you needed an extra $10,000 in income the user will need to manually adjust for the expenses associated with that income. Try Quick Books Pro.
CreateAPlan is the only real estate specific business planning software we could find. Although it has not influenced our inclusion of this product in this whitepaper, nor our comments about the product, it should be noted that both authors are associated with RealtyU®, the parent company of CreateAPlan, Inc.
CreateAPlan is a web-based application specifically designed to create business plans for real estate agents and brokers. Not only is the plan electronic the application itself is accessed via the Internet using a User ID and Password. There is a Wizard that walks users through the initial data entry process step-by-step and even provides the ability to add new fields. In addition to the audio Help, written Help is available on each page. It takes approximately 30 minutes to go through the Wizard, which covers Commission Structure, Our Goals, Transaction Expenses, Personal Marketing Expenses and Overhead. Once completed the user has a well constructed real estate specific business plan providing the number of required transaction needed to close, a five-year projection on revenue and expenses, and a calculation of the overhead per transaction.
In addition to the Plan Summary is a Business Development section that enables the user to plan where their transactions will come from and designs a high level To-Do list for what must be accomplished in order to meet the user’s income goal. The Business Development section has an Activity Tracker and Log that we found most helpful. The Activity Log emails a Worksheet each week that is customized from the Business Development section. With the worksheet we could log the activities and appointments we had during the week. What was produced was information about what Activities generated the most Appointments and Transactions.
Weekly e-mail reminders keep agents on track for the entire year at no additional expense.
CreateAPlan has an Expenses and Income log that is a great substitute for those in the industry that still use a “shoebox” as their preferred accounting method. The Expense and Transaction logs were easy to use and required no setup or accounting knowledge. The expense log could be viewed and printed by Date Range, Quarter, or Entire Year and is broken into three categories, Business Overhead, Personal Marketing and Other.
Entering data into the Transaction Log is simple and to the point. The log is divided between Listings and Buyers and requires basic information about each transaction. Beyond the usual items such as Average Days-on-Market and Totals of Commission and Volume this log produces some very useful information; Average List vs. Sale Price, Average Transaction Expenses, Number of Terminated Transactions, and a calculation called Net-Effective
Commission Rate which is a number reflecting what you really charged a listing after discounts and concessions.
A very beneficial feature of CreateAPlan is the ability to use the application throughout the year and make adjustments to the original plan. An Adjustment flow through each part of the business plan, adjust your activities and refocuses our attention on the required activities needed to meet the re-stated income goal. Plan vs. Actual reports enables agents to view where they stand compared to goals at any point in time.
The total annual cost for CreateAPlan is $119, and provides the most comprehensive, real-estate-specific and easy-to-use business planning tool. The weekly tracking capability makes this product incredibly unique and by far the best buy available.
RE/MAX Metro. St. Petersburg, Florida
“Your business plan must be in writing, be measurable, and have accountability. If you don’t know where you’re going, you certainly won’t get there.”
Sharon Simms Business Planning Conclusion
Business planning is often the last thing real estate professionals want to do.
Yes, it can be daunting, complicated and sometime a painful process. However, there is little value attached to your dreams if they only stay in your head.
For a real estate business plan to be successful, daily actions need to echo the written word, which in turn need to echo the dream or vision underpinning the plan.
Now that we have provided you the beginning of a roadmap to create your plan, remember to share it with your team…whether you’re a one-person operation, a midsize company or a mega-company, your real estate business plan requires complete buy-in, ongoing dedication, constant focus and persistent follow through.
Last, but not least, you must hold yourself, your team or your company accountable. Break each target into smaller, more measurable pieces and monitor the results regularly. A plan that can’t be measured or isn’t measured almost always fails. Create small steps and measurable wins–celebrate them with the team and recharge for your next goal.
Decide beforehand what measure of loss is acceptable and what isn’t. If you find in the future that goals are unrealistic, adjust them, but keep this practice infrequent and logical.
Remember, the best rewards are always difficult to accomplish, yet ultimately achievable.