Conversation from a YouTube video explaining how a real estate firm adopted a CFO mindset: they analyzed operating expenses (staff, office, marketing), estimated team capacity (number of deals), calculated required gross commission income (GCI) per deal (about $12k gross at the time), and back-calculated target sale prices (roughly $400k given ~3% commission) to guide marketing and lead generation. The approach treats each property like a 'widget' with cost and price targets to ensure the business covers expenses and achieves profitability.
So the first thing that we had to do is we had to kind of take a little different mindset and we had to start looking at ourselves a little differently. Rather than just a traditional real estate company where you're going to do every deal that comes your way, anything that comes across your desk, your brother in law wants you to sell his 10k lot in the middle of nowhere kind of thing. And it then forced us to start doing the math and looking at our budget and our expenses and all of the pieces of the puzzle that, that really in a manufacturing world you would know it cost us this much money for staffing, materials and all these things. So therefore we have to sell all these widgets at a certain price in order to either break even or make a profit. We started doing that in our world and knowing that we had a certain amount of expenses to cover, then we started figuring out, okay, well on every deal, if we're going to do X number of deals, we think on every deal we need to make some certain amount of money. And then from there it allowed us to back into a price point that we knew, okay, we need to start selling properties on average, at least at this, in order to make sure we're covering, we're covering our expenses every time. And so that was the first step is we definitely needed to make sure we understood the math of everything and the budget and economics of, of our model.
Okay, so let's just go deeper on this and since you kind of opened it up here and then we'll get into the other, other two steps. So let's, let's talk about what did the process look like. So you're opening up your books, you're thinking about economic model, you're looking at where you're spending money now. Like what's the actual tactical process that we need to follow to do this?
Yeah, it's actually simpler than you think. You know, we, back in the day when I was running golf courses, I had to manage, I had to create and manage these budget, right as far as carts and food and beverage and buying and selling clothing and how many rounds, all that kind of stuff. Well, I started looking at our real estate budget, our model the same way, started understanding, you know, what it costs for staff, what it costs for office and expenses and everything on the expense side of the budget and then figuring out what we're kind of targeting as far as cost of goods, like basically how much money we need to make sure that we pay the agents each time. And we did a bunch of research and actually talked to you a little bit, and a bunch of other folks that we knew had kind of walked that road a little bit. So we understood all the math of all of that. And then we figured out, based on the number of team members we had and the bandwidth that everybody seemed to have over the years, how many deals we thought we could do. And so that number divided by the other number gave us average money we needed to make on each one. Like, we figured out we needed to make around 12 grand or so every time we sold a property. And this was 18 months ago. And this is.
This is gross margin after you pay your agents.
This was gross before.
Okay.
So then we were splitting out from there.
Got it.
We needed to generate that much GCI on each deal around 12, 12, 5. Somewhere in that range back then to make it work. And so then once you start figuring out price points from there, backing into that number based on 3% commission here in Texas, that kind of. We figured out what price we needed to sell at each time, you know, which turned out to be about that time was like, three. Now it's four. Something was around four, 400 grand, that kind of thing. And so that pushed us to start saying, okay, well, then we definitely need to make sure we're marketing to that and that we're talking to those kinds of people and that our website is generating those kind of leads and that kind of stuff. So figuring out those numbers was crucial to get the conversation started.
