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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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Mike Hughes 10/25/2008 12:41 PM
Topic:
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Rainer
201,427
Frank & Jodi Orlando
Frank & Jodi Orlando Get Us A Home Realty Atlanta Homes Sale - Cumming, GA

Good post and another reason quick books can be invaluable. You can compare a year or a quarter to the previus to see how they compare and the inevitable expense, gross, & net. Can be ugly at times but the numbers don't lie and you have to take a look....

Oct 24, 2008 05:10 PM #83
Rainer
91,329
Laura Watts
Positive Properties, LLC - Laurinburg, NC

Mike-You must have accounting in your blood. Good post and gets you to thinking.

Oct 24, 2008 06:54 PM #84
Ambassador
897,732
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Realtor - Ann Arbor Real Estate

Mike, this is great. Start from you goal, figure out what you need to do to make it and work your plan. We don't always hit our goals but this is a good start.

Oct 24, 2008 08:49 PM #85
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

JL - perhaps more people would be interested in math in school if they were taught where it applies to real life. I had an eight grade teacher who really turned me around by teaching compound interest.

Trunda - but some politicians don't seem to understand that, or care

Frank, or is it Judy? or both? - if you can't build your own spreadsheet Quickbooks or other similar products work for you.

Laura - I didn't finish my business degree because I needed to more semesters of accounting, and after the screaming tedium of the previous accounting semester......

Missy - if you know what your goal is and what it takes to reach it you can plan your strategies

Oct 25, 2008 08:59 AM #86
Rainer
70,887
Susan McQuaide
Keller Williams - Simpsonville, SC

Mike - KW is great - they have RE training and great business models as well.

Oct 25, 2008 09:03 AM #87
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

Susan - they do provide a great starting point

Anonymous - granted, future referrals are estimates. Office charges are known and go into cost of doing business expense.

Oct 25, 2008 11:39 AM #88
Rainer
77,557
David Slavin
RE/MAX Grand - Katy, TX
CDPE, ABR, SRES RE/MAX Grand

You've really put some thought into this.  I try not to think about it since i'd probably need to get a part time job.

Oct 25, 2008 01:17 PM #89
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

David - if you know what you have to do to make what you want, you won't have time for a part time job.

Oct 25, 2008 06:11 PM #90
Rainmaker
353,208
Norma J. Elkins
Elite Realty Group - Morristown, TN
Realtor - Elkins Home Selling Team

Great info - thanks for sharing - This is very good!

Oct 25, 2008 07:40 PM #91
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

Norma - you are welcome

Oct 25, 2008 10:25 PM #92
Rainmaker
119,559
Gary McNinch
Better Properties Real Estate - Renton, WA
Broker, Renton WA Real Estate

Mike - Nice to see someone else sharing this.  I have used a KW Business Plan Excel Spreadsheet Tool that Dave Therrien made several years ago.  It follows the MREA models.  It has individual and team categories.  Starts with $$$ goals, break it down to # of transactions (buyer and seller side), average transaction, average commission, then takes it to number of appointments, then conversion rate (for buyer and seller appointments) to number of contacts and number of leads needed to reach the goal.  It has a strong expense component built in.  

The KW Business Planning Clinic is a must in my mind.

List and Sell (and know your numbers from start to finish)   Gary @ RentonHomeFinder

 

Oct 26, 2008 11:22 PM #93
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

Gary - darn, I didn't know the spreadsheet tool was available and developed my own. I agree, the business planning clinic does help

Oct 27, 2008 06:59 AM #94
Rainer
50,511
LS Rogers Realty
LS Rogers Realty - Richardson, TX

AMEN to that MIKE! I think politicians are aware of what it takes to do business. Licensing requirements and operating expenses are similiar across the board. That leaves me to believe it's just an intentional recipe to earn more to make ends meet.

Oct 28, 2008 07:43 PM #95
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

Trunda - most politicians have never run a business. But they certainly know how to make running a business difficult.

Oct 28, 2008 10:18 PM #96
Rainmaker
83,101
Winter Baserva
Seasons Realty Group of Solid Source Realty, Inc. - Atlanta, GA
Realtor -Homes For Sale, Atlanta, GA

Wow...this is impressive...Looks like i need to do some number crunching myself. Would you fancy sharing your blank spreadsheet for the community?

Oct 30, 2008 09:57 AM #97
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

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

Oct 30, 2008 10:30 AM #98
Rainer
11,187
Imma Carletto
Houlihan Lawrence - White Plains, NY

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

Dec 02, 2008 10:51 PM #99
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

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

Dec 03, 2008 07:31 AM #100
Rainer
59,862
Sonja Adams
Samson Proprties - Purcellville, VA

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!

Dec 03, 2008 08:14 AM #101
Rainmaker
563,876
Mike Saunders
Lanier Partners - Athens, GA

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

Dec 04, 2008 06:06 AM #102
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