The categories of free in real estate are legendary: free property showings, free open houses, free broker opens with “free” lunches, and the list goes on and on.
Step 1: Eliminate free services
While we may have trained consumers to expect free services, not all trust in them. In fact, when I polled more than two hundred consumers in my 1998 “Frugal HomeOwner® Survey” many stated that they would pay for services we currently offer for free if they could obtain them from an “unbiased party without the pressures of being expected to list or sell something to obtain the information they needed”.
It boils down to the fact that “free” in any industry is an oxymoron. Each and every activity/service carries its own degree of overhead for running the enterprise including insurance, marketing, employees, etc. In fact, one of the most abused services is the amount of supposed “free” services squandered by real estate salespeople. Until each one of us determines what an hour of our time is worth and be willing to write a check for every hour spent (for most of us it’s between $75 and $200+ per hour), we will misguidedly attempt to compete with “free”. As seen in previous recessions, many real estate people are forced to leave the business not solely due to a lack of sales, but from the sheer cost and mismanagement of “free” services.
Step 2: Determine your break-even per transaction side
Before you can prudently add profit centers and/or trim costs, you need to identify your break-even point for transaction sides in your listing/selling business.
Here’s the formula:
- Divide your gross annual expenses by the number of transaction sides you’ve closed over the past year (i.e. a listing is one side, a sale a second). For example, say you had $47,200 in gross expenses and did a total of forty transaction sides. $47,200 divided by 40 = $1,180 break even per transaction side. In other words, until you exceeded $1,180 in revenue per transaction, there was no profit. And to make it worse, it’s not just bottom-line profit that’s lost---you’ve been paid nothing for your time! This is one of the most overlooked aspects of traditional real estate sales---not penciling in a satisfactory line item to reimburse the most precious commodity we have and are hard-pressed to replace---our time and expertise. The good news with new business approaches like fee-for-services is that your personal time plus profit is factored into every activity as a line item, not an afterthought. It’s a great indication that new business approaches could generate stronger bottom-line profit.
Step 3: Determine what percent of your gross income is attributable to expenses vs. your time/profit
Another gauge of where you are financially is to compare what percent of your gross income is attributable to expenses versus reimbursing your time and profit. Let’s say that your annual gross income is $100,000 and your annual expenses are $47,500. When we divide the expenses by the gross income, we find that they’re 47.5% (rounded to 48%) of your gross income ($47,500 divided by $100,000.) In other words, less than half of what you generate goes to pay expenses---that’s pretty good in an industry where expenses often eerily encompass as much as seventy to eighty percent of gross.
Step 4: Determine your rate per hour
While we admit that our industry has never been stellar in placing proper “time value” on the personal services we render, here’s the way we typically (erroneously) calculate what we’re worth per hour. We take the gross amount we make and divide it by the total number of hours we worked during the year---and it turns out to be a negative number! How can that be? Simple. We’re working too many hours doing things that 1) don’t properly compensate us; 2) should be done by someone working at a lower pay scale; and/or that 3) shouldn’t be handled/accomplished by us (or someone else working for us) at all.
Using a type of zero-based budget approach, the following formula is much more likely to result helping you “get real” about what one hour of your time is worth:
First: Divide what you want to make by the number of hours in a year that you want to work: For example, if you want to make $100,000 per year by working no more than forty-hours per week for fifty weeks (2000 hours) that would equal $50 per hour ($100,000 divided by 2000 = $50/hour). We’ll call this your net hourly fee.
Second: Multiply the net hourly fee by either two or three. Use “two times” if your expenses were 50% or less (as calculated in the third step we covered previously). Use “three times” the net hourly fee if your expenses exceeded 50% of your gross. Since the expenses in the third step were 48%, your gross hourly fee is $150 per hour ($50 x 3 = $150).
If you’re wondering what the rationale is behind multiplying the net hourly by two or three, in a nutshell it’s to compensate not only for the cost of doing business (your overhead) but for down-time, vacation time, and miscellaneous real-world situations when you can’t be productive. Much in the same way a wholesale product is marked up two or more times cost to bring profit in a retail arena, your net hourly becomes your gross hourly to cover costs plus profit for your services. You’re safe using two times your net hourly if your expenses are low; but need to kick it up to three times the net hourly to cover higher expenses.
Published: December 26, 2002
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Julie Garton-Good, DREI
“The Frugal HomeOwner™”
 As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability.
She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women. |
