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When billionaire Warren Buffet buys a company, do you think he bases his decision on a coin toss, his investment instincts, or an analysis of the company's business models and financials? If you know anything about his unprecedented investment success, the answer is obvious: Buffet focuses on the numbers and won't commit a dime until a company's performance matches his strict investment criteria. As it says in Buffetology, Buffet "commits capital to investment only when it makes sense from a business perspective." How does he know the deal makes sense? Because Buffet's mastered the science of knowing where a company's money comes from. And, if as a real estate agent, you think your money comes from commissions, read on.

The first step in analyzing a company's financials is to take a hard look at its economic model. In other words, Buffet first investigates where the company's money comes from (the activities that lead to gross revenue), where it goes (expenses), and what's left over at the end of the year (net income). In short, Buffet follows the money. He does this because he understands that a business without a sound economic model probably isn't a sound investment no matter how undervalued it may be. Buffet's careful analysis of economic models is one reason he's an amazingly successful business person and one of the wealthiest people in the world.

Now, some of you reading this column may wonder what all of this has to do with real estate sales? It has everything to do with it, especially if you want to make the transition from being a sales person to being a business person. If you do, then learn a lesson from Buffet: Understand the underlying economics of your business and focus on the key activities that have the greatest impact on your profitability.

All the top-producing agents that we interviewed for The Millionaire Real Estate Agent (McGraw-Hill 2004) successfully made the transition from a self-employed sales person to being a business owner by mastering their economic model, which is one of the four foundational models outlined in the book. Think of your economic model as a formula that describes the way your business works. It is your equation for success and describes the relationship between a series of activities and the specific outcomes they produce.

In real estate sales, the specific outcome most agents focus on is their net income. After all, at the end of the day, you are solely responsible for paying yourself. So, let's quickly outline the basic economic model of a real estate sales professional and then show you how to put it to use to target a net income for your business.

If you look at Figure 1, The Basic Economic Model of The Millionaire Real Estate Agent you can see that everything starts with seller and buyer listing appointments. If you don't have buyers and sellers, well, it's unlikely you'll have sales, right? So the model begins with the number of appointments you successfully convert to buyer and seller listings taken. Next, you take into account that only a certain percentage of these will actually close and multiply that number times your average sales price and commission to get your revenue numbers.

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