You Know How Much Money You Want to Make. But, Do You Know How Much Commission it Will Take to Make It.?

By
Real Estate Agent with Lanier Partners

How much money do you want to make next year? $50,000.00? $75,000.00? $100,000.00? $1,000,000.00?

Let me rephrase that question. How much after tax profit do you want next year? Do you have any idea how much gross commission it will take to make that amount of money? Do you know how many sides it will take to make that gross commission? And do you know how many listing/buying appointments it will take to get that number of sides?

I do!

One thing I understand is that the commission I make and the profit that I have at the end of the year are not one and the same. My wife and I have put together a very modest profit plan for next year, $50,000.00 after all taxes dollars in the pocket. It might sound low, but based upon what we want to do, it will be more than enough.

However, what will it take me to put $50,000.00 in my pocket after paying Uncle, the Gov, self employment, etc.? That's easy. I will only need to make $142,099.72 in gross commissions next year. Not to bad at all.

You may ask how did I get to that figure almost 3 times the amount of my pocket change. I have an answer for that also. Take a look at the figures below.

Net Income After Taxes  $  50,000.00
Net Income Before Taxes  $  79,007.45
Cost of Sales    $  35,809.13
Operating Expenses    $  24,441.15
Gross Commissions    $142,099.73

 As you can see, I need to clear over $79,000.00 gross profit in order to net $50,000.00. But I have to make $63,000.00 just to cover what it is going to cost me to make that commission. You may think that those figures might be high, but, when you look at it, they really aren't. Cost of sales includes all my listing costs, commission splits, referral splits, etc. Operating expenses include everything I need to spend just to stay in business including office fees, auto, insurance, advertising, education, etc. I might be able to trim that a little but I am being conservative. These figures are based upon some historical percentages based upon 1000's of agents inputs. I have a cap on my splits and a decent split rate. Agents with no cap and/or a 50/50 split will have an even higher cost of sale. $100,000 commission has a $50,000.00 cost of sale in commissions alone.

Knowing that I have to make $142,099.73 I know how many sides I will need to close, based upon average selling prices and estimated commissions locally. And from knowing my conversion to closing rate I know how many buyers/listings I need to have. Knowing that data, and knowing my conversion rate from appointments to listings I know ho many appointments I will need each month and week.

The figures below show what it will take for me to make $50,000.00 profit using conservative conversion rates and an average sales price of $175,000.00. They also assume a conservative average commission rate of 2.75% to reflect the variety in commissions that I will be making based upon the transactions.

 Sellers            Buyers 
 $      71,049.86   Gross Revenue From    $      71,049.86
2.750%    Commissions   2.750%
 $  2,583,631.42   Sold Volume    $  2,583,631.42
 $    175,000.00   Average Sales Price    $    175,000.00
15   Sides   15
50%   Conversion Rate   50%
30   Listings Taken   30
50%   Conversion Rate   50%
60   Listing Appointments   60
5   Monthly Appointments   5

The great thing is that I have all this in spreadsheet form with the only variables being my desired profit, conversion rates, average sale price and average commissions. Just changing any one of those 4 entries will let me see that affects upon my entire income plan. And now, knowing how many appointments I need per month, I can plan my lead generation and marketing strategies and tactics for next year.

Do you know what you need to do next year?

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  1. Mike Hughes 10/25/2008 12:41 PM
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Rainmaker
563,876
Mike Saunders
Lanier Partners

Winter -I am working on a generic version of it where people can just enter their own state specific data.

October 30, 2008 10:30 AM
Rainer
11,187
Imma Carletto
Houlihan Lawrence

This is great! Really puts it in perspective and helps with planning. Thanks so much for taking the time to calcuate this.  Imma Carletto, Prudential Rand, White Plains NY - www.immacarletto.prudentialrand.com

December 02, 2008 10:51 PM
Rainmaker
563,876
Mike Saunders
Lanier Partners

Imma - thanks for the comments, I am still working the generic spreadsheet

December 03, 2008 07:31 AM
Rainer
59,562
Sonja Adams
Samson Proprties

Well....now you have a great piece of your 2009 business plan done...you have to know your budget and your goals to succeed!  Thats awesome!

December 03, 2008 08:14 AM
Rainmaker
563,876
Mike Saunders
Lanier Partners

Sonia - almost have the rest of it done also, thanks for commenting

December 04, 2008 06:06 AM
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