(This is Part 1 of a three-part series. See Part 2: 8 ways to keep real estate biz afloat and Part 3: Real estate survival of the fittest.)
Some economists are predicting a real estate recession. The boom in California appears to be ending, and many other places are in the midst of a major downturn. Does this harbinger a buyer’s market where there are too many listings and too few buyers? If so, a buyer’s market is an agent’s worst nightmare. If a real estate recession is on the way, the question is, “Will you be a survivor or a casualty?”
If you think competition is tough during a seller’s market when there are too few listings, wait until you experience a true “buyer’s market.” Contrary to what most people believe, buyers rather than sellers drive sales. Without buyers, your listing inventory burns marketing dollars. Desperate sellers expect more and more services in a futile attempt to sell. When sellers receive an offer, it’s usually so low they often refuse to accept it. When inventory increases, prices decrease. Sellers know the market is difficult; however, few believe their own properties have declined in value.
To cope with this dramatic change in the market, you must first prepare your business for a recession. This involves three steps:
1. Identification of current “profit centers” as well as “loss centers”
2. Strategic plan to maximize profit and reduce loss
3. Creating and implementing a business plan that allows you to change focus quickly when market conditions shift
Identify Current Profit and Loss Centers
A “profit center” is any revenue source where income received is greater than expenses incurred to earn it. Unfortunately, agents normally focus on “revenue,” rather than how much they keep after expenses (profits). Almost no one bothers to break down how much income and expense is associated with each aspect of his/her business (i.e. “profit center.”) To determine your personal profit centers, make a list of all closed listing and all closed buyer transactions and follow the steps below.
1. Calculate gross revenue (income before expenses)
Using the “profit center” approach, each listing and each buyer is treated as a separate profit center. Your “gross revenue” is the commission you earned prior to deducting any costs you incurred during the sale process.
2. Calculate gross profit
To calculate “gross profit,” subtract all expenses related to closing the sale including advertising, web promotion, open house supplies, and vehicle expenses. This includes driving to and from properties for showings, offer presentations, inspections, etc. Do this for each closed sale.
3. Rank order your profit centers in each category
Starting with the transaction where you earned the most income, rank each one of your “profit centers.” Once you have finished, which list was more profitable, listings or buyers?
4. Determine your personal “profitability patterns”
Which listings were the most profitable? For example, a $150,000 listing that sells in two days may actually be more “profitable” than a $500,000 listing you have to market for 10 months. As you evaluate your two lists, do you notice any patterns? Are you selling more properties in a given location? Are you more effective in certain price ranges or geographical locations? (i.e. first-time buyers vs. estate properties). Note both your strengths and your weaknesses.
5. Calculate “net losses”
To calculate your “net losses,” identify each listing that did not sell well as each buyer who did not buy from you. Add all expenses incurred.
6. Rank order “net losses”
Identify the listings and the buyers who cost your business the most money (i.e. they did not close.) Carefully evaluate what went wrong in each case. Did you knowingly take an overpriced listing? Did you work with a buyer for months when you really should have fired them? Were you unable to negotiate price reductions when necessary?
7. Identify the source
For each profitable seller and buyer, as well as for each “loss,” list how you generated the lead. Is there a pattern? Are your referrals more profitable or is calling on expired listings? Is open house making money for you or is it really a loss? Did the 100 hours of floor time you sat through this year really generate enough sales to make it worth your while?
8. Build on your strengths
If most of your listing business comes from a single geographical area, focus on obtaining more listings in that area. If you have trouble obtaining price reductions and consistently have listings expire, avoid taking overpriced listings in the first place. The key to increasing your profits is to expand the areas that make you money, and to be ruthless about eliminating areas where you experience loss.
Actively tracking your profits and losses is only the first step in surviving a buyers’ market. See next Friday’s column, “8 ways to keep real estate biz afloat.”
Bernice Ross is an owner of Realestatecoach.com and can be reached at bernice@realestatecoach.com.
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