(This is Part 1 in a four-part series. See Part 2, Part 3 and Part 4.)
The “B” word (bubble) continues to raise its ugly head. While some markets are cooling, others are booming. Do you have the skill set required to prosper in both up and down markets?
Interest rates are increasing across the board. This translates into a decline in affordability as well as fewer buyers in the higher price ranges. If your market is slowing down, you are experiencing longer market times, fewer buyers, and unrealistic sellers. If your market is increasing, you may be experiencing more competition from discounters, For Sale by Owners (FSBOs), and stiffer listing competition from traditional brokerages. Surviving market shifts while maintaining or increasing your production takes planning, solid skills, and innovative marketing strategies.
Shifting Market Survival Strategy No.1: The Three-Level Business Plan
The National Association of Realtors is predicting that its membership will grow slightly from 1.2 million to 1.3 million in 2006. Slowing markets on both coasts will eventually contribute to an exit of agents from the business. Downturns result in fewer agents and fewer companies. Regardless of whether the market is moving up or down, however, a major reason people exit the real estate business is because they lack a business plan. In fact, 90 percent of all small businesses lack a business plan. It’s not surprising that the rate of business failures is also 90 percent. In the past, your competition was the agent down the street who probably didn’t have a plan either. You only had to compete for business locally. Today, however, your competition is from well-funded giants who operate from a business plan, have multimillion-dollar funding, and understand the dynamics of successfully marketing on the Web. Your competition is not local; it’s international.
To survive in a shifting market, the first step is to create a business plan that takes into account shifting market conditions. The place to begin is with last year’s income. How much were your expenses for each listing that you sold and for each buyer that you represented? If you are not tracking expenses for each lead that you generate and for each transaction that you close, now is an excellent time to start. If you did not track this data in 2005, then divide the expenses on your Schedule C or corporate tax return by the number of transactions you closed. This gives a rough estimate of the expenses incurred per transaction. A more accurate approach would include the costs that you incurred marketing properties that did not sell, transactions that did not close, and buyers who did not purchase.
The next step is to make a plan with three different levels. The first level assumes that there is no shift in the market and that you will have the same income and expenses you had in 2005. The second level assumes a 25 percent drop in the number of transactions and requires a 25 percent cut in expenses. The third level assumes a 25 percent increase in transactions and requires a 25 percent increase in marketing dollars. To survive and prosper, your marketing dollars and fixed expenses must shift as the market shifts. Failure to shift your budget and your plans based upon changing market conditions is a primary reason agents end up leaving the business. Increasing your budget by 25 percent is easy. Cutting expenses by 25 percent, however, is extremely difficult. You won’t be able to do it successfully and maintain your business unless you have a plan locked in place before the downturn hits.
An important component of this process is to evaluate individual profit centers. You must track which profit centers are yielding a return as well as the costs of generating that return. For example, if you hold open houses, how many hours of open house time does it take you to generate one closed transaction? How much did you spend in terms of your billable hours (i.e. the amount you would earn if you divided your gross commission income by 2,000 hours–50 weeks, 40 hours per week)? How much did you spend in hard costs including advertising, Web site maintenance, car expenses, and other related expenses? Understanding these numbers is critical, especially if you are experiencing a downturn. Tracking these numbers allows you to dump advertising or activities that are not yielding an adequate return on investment (ROI). It also allows you to spot the most lucrative places to invest your advertising dollar when conditions slow. In a market downturn, for instance, the first part of the market to feel the pinch is the top of the market. In contrast, the first-time-buyer market may remain strong for months after the luxury market has crashed. The only way you will be able to know, however, is to track your personal return on investment.
Tracking can be a difficult chore, but it is well worth it. Currently, the best software tool for tracking each of your profit centers is from www.Createaplan.com. The Council of Residential Specialists (CRS) approves it and it comes with a money-back guarantee.
What else does it take to survive market shifts? See next week’s article.
Bernice Ross, co-owner of Realestatecoach.com, has written a new book, “Waging War on Real Estate’s Discounters,” available online. She can be reached at bernice@realestatecoach.com.
