We all spend money.  Like death and taxes, it’s simply an indistinguishable part of life.  The question we often take for granted, though, is “Why?”  Before you give what may be the obvious answer (because things cost money!), consider that – depending on how you spent your money – that question could be answered in a variety of ways.

From a professional financial standpoint, as it pertains uniquely to business, we can separate how we spend our money into two basic purposes:

• To Maintain Your Business and Real Estate Career
• To Grow Your Business and Real Estate Career

Learning how to better understand and manage the money you spend can make a tremendous impact on the health of your real estate career.  For instance, in order to make your money work the best for you, the following is always a strong two-part question to posit: 1) How consistently are you making a profit, and 2) How does that profit provide for all of the aspects of your life?

Those two answers will reveal much about your individual spending habits – namely where and how you spend money, and also how your expenses affect the larger span of your real estate career.

Where and how do you spend the money that your business generates?  Basic accounting or business acumen tells us that there are two types of expenses: fixed and variable.  From a real estate perspective, this translates into 1) transaction expenses and 2) overhead expenses – which include 3) personal marketing exercises.  Each of these three expenses covers both growth and maintenance business elements.

To discover where and how you spend money, start with your business plan.  Briefly list the expenses you incur each time you take a listing or work with a buyer.  With a listing these might include:

Expense Description:                                       Expense Type:
Just Listed Cards                                              Growth
Just Sold Cards                                                 Growth
Virtual Tours                                                        Maintenance
Meals and Entertainment                                 Maintenance
Advertising                                                           Growth
Closing Gift                                                          Maintenance
Flyers and Brochures                                        Maintenance

Each and every expense that you incur can be labeled in this fashion, and subsequently measured for effectiveness.  After listing your expenses and indexing them with the proper purpose, the next step is to measure your results for any expense whose sole purpose is to grow your business.  For example, if you distribute “Just Listed” cards with the intent of generating more listings in your market, how many cards must you send to secure one appointment?  Remember that unless you specifically track and measure the rate and type of responses you receive from your marketing endeavors, you will never be able to accurately grasp the overall effectiveness of your chief marketing activities.

Now perform the same analysis and evaluation for your personal marketing efforts.

One major difference between the example shared above and the following list is that your personal marketing efforts are ongoing, and therefore not directly effected by your current number of listings or buyers.  Personal marketing should always be directed toward growing your business.  Within this category, consider the various types of personal marketing you perform.  For example, you might want to categorize these activities as direct (face-to-face) and indirect (i.e. snail mail, email, etc.).

Examples of Personal Marketing:                   Type of Expense and Contact:
      Farm Mailing                                                    Growth – Indirect
      Client Party                                                       Growth – Direct
      Personal Notes                                               Growth – Indirect
      Sphere Mailings                                              Growth – Indirect
      Personal Meetings                                         Growth – Direct
      General Advertising                                        Growth – Indirect

As you work through your personal marketing campaign, weigh your cost-effectiveness ratio.  How effective are each of your personal marketing attempts?  To answer that question, you must again possess the capability to measure your results.  How many pieces of mail must you send, how many ads must you place, and how many client parties must you conduct to obtain one closed transaction?

The key calculation now is to discover the cost of obtaining that client, and then juxtapose that figure to the revenue produced from the transaction you completed in such a manner.  As time passes you will begin to realize which activities produce the best results for you.  Once you become comfortable with the activities that maximize your skill set, focus your attention on those tasks.

For a truly eye-opening epiphany, at a later point in time, re-examine your marketing dollars with your new focus in comparison to the effectiveness of your expenditures before you begin to closely measure your results.  If that doesn’t convince you of the bottom line value of such an important exercise, you’re probably in the wrong business.

The long-term effects of your daily expenses on the health of your real estate career can be best viewed through the dual lenses of liquidity and longevity.  Liquidity is a measure of your ability to create enough free cash-flow to simultaneously pay your regular business expenses in addition to paying yourself a livable wage.  If your expenses are too high, and you must incur debt to pay your bills over a long period or on a regular basis, then it’s only a matter of time before you exhaust your initial capital and find yourself paging through the classifieds for a new job. 

That credit card bill – plus any interest expected on a minimum payment – can be a cruel taskmaster at times, but keeping a handle on your expenses is not an impossible task.  It’s simply a part of treating your business like a business.  Most hard-working real estate agents are capable of generating enough revenue from their trade to survive.  It’s not the lack of revenue that causes so many to exit the industry prematurely, but the fact that these same agents cannot control their expenses.

Let us switch gears for a time to discuss longevity – the true key to success in real estate sales.  Consider the following scenario:

• Customers Buy and Sell a Home About Every Five Years…
• The Average Home Sales Price is Approximately $200,000…
• The Average Commission is Roughly 3 Percent

Lets’ say you sell a home to a couple during their mid-30’s.  At 40 they list, sell, and buy a new home, and at 45 they repeat the process.  During that 10-year period of time five transactions occurred at roughly $200,000 a piece.  On a $200,000 sale you make $6,000, which, over that same period, translates into a total of $30,000.

Here is the critical question: do you get all $30,000 year one?  Of course not!  You earn this money in smaller amounts over the decade.  In other words, you make $3,000 each year.  What’s the point?  To win this real estate industry, you must survive, which means that you must outlast your competition!

Regardless of your high-powered brochure, your exceptional standard of customer service, or your incredible attention to every detail of the transaction, if you do not remain in real estate with your customers from the beginning of their home buying and selling season through it’s end, you will not be able to amass the momentum you need not just to survive, but to thrive.  Referral and repeat business is the crux of the real estate industry, so realize and execute the key elements and activities that are required to grow and maintain you business.

If you plan on making real estate a career rather than just a hobby, you owe it to yourself and your future to fully understand your expenses; especially how the money you spend affects your business.  It’s simple, and worth every penny: track your growth and maintenance expenses, determine your most cost-effective activities, and focus primarily on those activities that work best for you.

We all spend money, but you don’t have to spend it like there’s no tomorrow – you don’t even have to spend money you don’t have.  If you manage your expenses wisely (and neither immortality nor a relocation to Nevada are in the works), you can still make it to the top of your game.