The Three Levers of Profitability


Why are we in the business of selling houses? To make money. We are independent contractors and this is our business. Understanding the fundamentals of how profit happens is critical to making our businesses as successful as possible. 


The great news is that at the highest level, there are only three different factors that impact the profit – and profitability – of your business. Let’s identify them now: 


1. Top Line Revenue: Gross Commission Income (GCI)


First and foremost, let’s discuss top-line revenue. In the residential real estate world, we often refer to this as Gross Commission Income, or GCI for short. The principle here is straightforward: the more houses you sell, the more GCI you generate. And if everything else remains constant, a higher GCI directly translates to increased profitability. Simply put, boosting sales isn’t just about numbers; it’s about maximizing the topline number. Your profit will always – always! – be limited to the topline number of your Income Statement. It’s the very foundation of your business’s profit. Never underestimate the power of selling just one more property.


2. Cost of Sale: Get the Best Value


The term ‘cost of sale’, or ‘cost of goods sold’ is one of the most frequently misunderstood terms for Realtors getting their arms around the fundamentals of profitability. 


Here’s how we define ‘cost of sale’: The cost of sale refers to expenses you incur directly when a transaction happens. Imagine you have earned a referral from another agent in another city and you close the deal. You will pay them a referral fee upon closure, but only when it closes. That’s a cost of sale. It’s a one-time, transaction-linked expense. 


Here’s the cost of sale that most real estate agents don’t really think about: their brokerage compensation plan. What you pay your brokerage on a per-transaction basis can significantly impact your overall cost of sale. Is it a traditional split plan? Is it a cap model? Maybe a per-transaction fee? Each of these models includes varying sizes of your cost of sale. A traditional split on every sale will generally be the highest cost of sale (less money goes to you) and a fee-based model will generally be the lowest cost of sale (more money to you). 


That being said, let’s underscore a very important point: Cost of Sale with your broker is a measurement of value. So instead of setting the goal of minimizing your cost of sale to maximize your immediate or short-term profitability, ask this question instead: ‘Am I getting the best *value* for my cost of sale?’ ‘Am I getting constant value for the split I’m paying that is moving me forward in my business?’ Or, ‘What value am I missing from my broker by only paying a per-transaction fee that would otherwise move me forward in my business?’ 


Get the highest return on your cost of sale to maximize the profitability and profit of your business! 


3. Operating Expenses: Where profitability goes to die


Lastly, let’s shine a spotlight on operating expenses, sometimes known as fixed expenses. These are the costs you incur regardless of your sales activity. Think of your monthly cell phone bill, subscriptions (MLS, newsletters, coaching, etc.), tech fees, or perhaps salaries for any assistants on your team. While individually they might seem small and static, you’d be surprised how they can adversely impact profitability when they all add up. The challenge here is twofold: be conscious of these expenses and optimize where possible. Every saved penny translates directly to your profit. And the flip side of that coin: remember, don’t be penny-wise and pound-foolish. 


The formula for profit is simple:


GCI minus Cost of Sale minus Operating Expenses = Profit


When you assess profitability, you’re essentially looking at net income as a percentage of your total GCI. So, to bolster your profitability:


– Boost your sales and GCI (while maintaining expenses).

– Be vigilant about your cost of sale and ensure you are getting the best value

– Keep a close eye on operating expenses.


One final thought on profitability: Top agents and teams as a best practice are visiting the Income Statement (or ‘P&L’) no less frequently than every month. You are an independent contractor in this business to make money. Cultivate the same habit as the top agents and check your Income Statement at least each month.