A Sound Economic Model Begins with a Solid Grasp On Your Numbers: Becoming the CFO of Your Business

Welcome back to Real Estate Team Builders podcast. Super excited today. I am Lars Hedinburg, the founder of Real Estate B School and I'm your host for the podcast. We are, we stand for something a little different in the real estate industry. The industry and team builders, traditional teams in particular tend to be driven by top line and egos. And I still being it that you want to scale your real estate team profitably, but without the grind and the enduring unhealthy levels of success, you have to focus on sound business principles. And that brings me to the conversation we just had with Michael Wigan. He was the CEO or he is the CEO of Culhane Premier Properties. And there you have to go back one episode. If you missed that episode, it was awesome. It blew my mind how they increase their price point 60% in 18 months, essentially selling less homes and making more money and having a business that is filled with elegance and ease and not the blood and guts that we see in most traditional real estate teams. So I want to spend time here on our follow up episode. That's the cadence here in Real Estate Team Builders. I, I want to interview someone doing the thing right, building and running a successful real estate team, one that I know the margins, I know it's built on the right economic economic model. And then I want to have a dialogue and go a little bit deeper on something maybe that we didn't have time to cover. So what I want to cover today is when Michael was talking, he clearly had a grasp of the numbers in his business. So how do you become the CFO of your business? Traditional real estate teams, the team leader, typically it's built on the wrong economic model and I'm going to cover what that means. They're doing splits with their agents that are not based on value. I'm going to go over what that looks like and as a result of it, they're having to stay in production and do a bunch of deals and their head is down and stressed and focused on production. And they have these responsibilities around leadership and managing others and, you know, being the coo, the chief operating officer, being the CEO, being this chief Brand officer, cbo, chief Marketing officer, cmo. And what we're going to talk about today is how do you become the CFO of your business? A cfo, it's not, it's a little different than an accountant. So when I talk about being the CFO of the business, it's how do you use numbers, organize numbers in a way where they're useful to make business decisions? Right. So Michael Talked about the first step in going from, you know, average price point 400 or so to 700 in 18 months was the math. And strategically, what numbers do you need to look at, look at in your business to understand the math in your business? And he did a really good job of going through the math as it related to doing, making that shift in price point. The things that we didn't have time to cover specifically. I want to dive a little bit deeper when we talk about economic model. And then we touched on value based commission splits. So that's what the conversation is going to be on today. Before I get into those two things specifically is that you need to have a place that you go in your business that keeps track of the numbers of your business. So in real estate B school, we have a tracking tool that gives you every metric that you could possibly need about your business. Every lead source, every agent on your team, their product, their productivity, if they're setting, meeting, signing appointments, the amount of money you're putting into a lead source and how much you're getting out and anything you could think of. Right. So we've got a tool like that in place. You don't have a tool like that in place. That, that's where the conversation needs to begin. You need to get that baseline tool in place. If we can help you with that, go to realestate bschool.com, book in to schedule a call and we can have a conversation about where you are in your business specifically. All right. So economic model and value based commission splits fit into economic model. Most real estate team leaders, traditional real estate team leaders, they, they're a little bit afraid of numbers. This is not their, their strong suit. And so I want to break down the economic model, the economic model that we subscribe to when we teach in real estate B school. And I have made every mistake you can possibly make. I've run a team that served over 5,000 families and I've made all the mistakes. One mistake I didn't make is economic model. I began with the end in mind when it came to what I wanted my business to look like. From a profit and loss statement. The future profitability of my company was written years ahead of when I got there. So when we were a $3 million business, I had predetermined how I wanted the economic model to look. So I didn't end up with a $3 million company that without my production had no profitability. That's the traditional model. I decided that a third roughly of the 3 million because that's exactly what I decided. I decided I was going to build a $3 million business, and the third of it was going to go to pay for inside sales, outside sales, showing agents, we call that cost of sales. And then a third of it was going to go to pay for overhead. And overhead is three parts. And this is all worth writing down and going back and pausing and writing this down. Three parts is your overhead, what you pay people, administrators, your staff, not your salespeople. That's. That's in. In cost of sales. So what you pay your staff, what you pay for lead gen or marketing. Right. If you're buying leads or if you're spending money on radio or your client events, your database, marketing, that sort of thing. And then the third is pretty much everything else, and we call that overhead. So your operating expenses is the bigger category. And roughly a third of gross commission, top line should be spent on those three buckets. And I may have misspoke there. The broad category is operating expenses, and it's people. It is marketing or lead gen. And then all other overhead and overhead is like rent and phone systems and. And that sort of thing. And so. And that's roughly a third. So if you're building a business, let's say your vision is to build a $1.5 million real estate business where you're out of production. That's the target economic model that we want to put you on is roughly again, with you out of production, you're not selling any homes. You're working probably 30 hours a week, 40 hours a week. In the example I'm going to give you, which may be way different than where you're at right now, and you have less stress and life is just good. So top line is a million and a half. You're spending about $500,000 on the, you know, let's call it five or six agents, maybe one inside salesperson and five outside agents that are servicing that business. So there may be, you know, 100,000 to $125,000 and average comp per person, some less. Some. Some more. Then you're spending about $500,000. And let's break that into three buckets. You're spending about $500,000, 500 boom, boom, boom, divided by three, you're spending roughly $167,000 on administrators. So that's probably three administrators. If you have an average $10,000 price point or average commission check of $10,000, 1.5 million is about 150 transactions. And a rough rule of thumb is that you need one administrator for about every 50 transactions and in different roles. Right. You can have a listing coordinator, a closing coordinator and a marketing coordinator, for example. So those three salaries will total about 167,000. And then on lead gen you take the 167, you divide it by 12, about $14,000 a month on lead gen in that example, which is $167,000 a year. And then all your other overhead is about the same. So again that's about almost $14,000 a month rent, any technology, any team events, that sort of thing. Everything that's not people and that's not legion and marketing. Everything else is sort of general overhead. And that's the economic model. So we referenced it a few times in the episode we were talking about increasing price point. You know, you understanding your numbers is critical to be able to make any strategic decision as it related to to the conversation that we were having with with Mike Michael Wigan. Okay, so that's the one part of it is that there's roughly five numbers we need to know. It's your top line gci, how much are you spending on your salespeople? What's left over is your gross margin and then what you're spending on lead gen, what you're spending on people and what you're spending on. So six, maybe six numbers and what you're spending on overhead and everything that's left over is your net profit. So in the example where it's 1.5 top line, you're spending 500,000 on your Salesforce, 500,000 on your operating expenses and you're taking home 500,000 to coach and mentor at that point. And so it's a different job profile than a typical agent or traditional real estate team leader is probably doing about 50% of the production on their own in that example. And so as you fast forward that example to 2.1, it's 7000-007000-00700,000. When you advance that to 2.4 it's 800,000 take home or profit and the math becomes pretty 2.7 is 900 and then 3 million. That's when you have a seven figure income and you're running a business that's completely leveraged and all is good in the world. The other thing I want to cover here is the conversation. It was mentioned once or twice value based commission splits. How do you build a business where you are giving less of a split than most of certainly brokerages, but most real estate teams and we call them value based commission Splits because you need to be in a position where you provide so much value to your agents that the split, the percentage is irrelevant. Their take home is the thing that's meaningful. So they've, you've got, you're spending money on lead gen and you're spending money on overhead and you're spending money on people. All of those are their systems in place to provide all the value to the front stage to salespeople so they can spend more time in the activities of sales people to make more money per unit of time they put into their business. And we touched on that a little bit as well. And so value based commission splits, it needs to blend out at about a third. So on the listing side generally there's massive leverage on the listing side where that needs to be at about 25% or so payout to agents. And on the buyer side it needs to be about 45%. So a 50, 50 business buyer and listing, you'll be right in the middle. You'd be about 35% payout. And we, we actually recommend a little bit higher, a 60, 40 listing, a listings focused business. So it'll be, it'll actually come out at about 31, 32% and depending on how you pay your, your broker, maybe a little bit more than that. But generally you want to be between about 30 to 35% that you're paying to your broker and your salesforce. And that's where things need to end up. And you can have different splits for different lead sources. And it's an important part of what we teach at real estate B school. But you have to have an awareness about it. You don't just offer a split based on what other people are doing. You decide and predetermined. You begin with the end in mind, where you want to end up. And so that initial decision you make on your cost of sales. Let's take the example of the 1.5 million real estate team where the wrong decision was made. It's 50, 50 and up. So you're, you end up paying out about if you're going to exit production, you end up paying out more than 50% of the 1.5. It's 750. And let's say you're still spending 500,000 in that example on operating expenses. There's only 250,000 of profit left. And that's why most team leaders will be in production because they need to make up for what they've lost because they set it up the wrong way. They did not begin with the End in mind. All right. I am out of breath, so I know I've talked a lot and I've thrown a lot of high level concepts at you. I would say if you, you know, you need to engage in a conversation like this with someone that has been there ahead of you, that's literally all that we can offer you at real estate B school is to have a conversation about your business and what your current economic model looks like and what your splits look like. And we are experts in helping you navigate the transition if you built this thing the wrong way. So don't stick your head in the sand. Don't have any shame around any of this. You right? We don't teach this as an industry, we just don't teach it as an industry. So go to real estate bschool.com. there should be a button on there. Book a call or apply now. Book in for a business growth strategy session. It's literally just a coaching conversation about where you are in your business and where you want to go in your business and what the gap looks like. How do we go from where you are today to where you want to be in a few years? And if there's a conversation about real estate B school, that's great. But there's not an obligation at all to jump on a coaching call with us. So much love, much respect. Become the cfo. Your business, this, that's where the money is made in business is designing the right economic model and as it relates to real estate, implementing value based commission splits. We'll talk soon. Be good.