They say real estate is a numbers game, and knowing how to crunch them can see you come out on top. Mark McLeod explains the ‘compounding effect’ and how understanding it can help your business.
I want to go into some detail and dispel any myths about the great compounding effect of a real estate business.
I have been asked on numerous occasions to explain further, and I will start with this: if the only thing you get out of a sale is the money, you are a fool.
There is a saying about the compounding effect.
Those that understand it, earn it and those that don’t, pay it.
That could never be truer than in the real estate world.
Let’s start with some basic thoughts.
If you have a clean database (clean is a name, phone number, property or properties they own and permission to communicate) and you have 1000 clean contacts, then it is extremely valuable.
The average database in Australia will turn over at about five per cent, meaning that for every 1000 contacts, 50 of those vendors will come to the market in any given year.
I will work on a conversion of 50 per cent. However, I do work with databases that have much higher conversions.
That means you will list roughly 25 homes per year from that database.
I will make assumptions on the sales ratios and for the article and certainly in this market, say I sell everything.
With an average commission of $15,000, that equates to $375,000 in core listings, without taking into account outside opportunities.
The 25 listings generate 20 inquiries over the course of the campaign, which is ultraconservative in most markets.
Data tells us that somewhere between 30 and 60 per cent of all inbound enquiry will come from people who own a property surrounding the listing.
So in the first year, we should add 250 people to the database.
In the second year, we should add 310, and in the third year, we should add 390, and so on.
Each year my business is compounding on itself and logic should tell you that on the same conversions, my income should increase from $375,000 in the first year to $900,000 by the fifth year – not taking into account opportunities that will exist outside the data.
So why doesn’t this occur for many agents?
There are two reasons.
Firstly, you need to invest time, effort and money into nurturing the data (the top line on the table above).
Secondly, as Warren Buffett says, not many people want to get wealthy slowly.
The focus on the now and the development of the business, in many cases, is too powerful.
Real estate is one of those industries where the compounding effect is alive and well and fully understanding this will lead to a productive business, you just have to invest, be patient and care about your data.