Ranch Marketing: It’s Time Ranch Brokers Understood ROI

Understanding ranch marketing ROI for ranch brokers

What? Brokers do not look at returns on their ranch marketing dollars spent? You just fronted $14,000 on the ranch listing you just took on. How soon will you get that money back? What is the ROI on that ranch marketing investment? This article is probably going to be a “duh?” article that we all read …one where it states the obvious on a subject we already knew but what the article does is formulate the thought and process into an actionable list for ranch brokers.

I’ve found that the ROI calculation for ranch brokers is simple, but where you get tripped up is costs. Allocating costs to a listing isn’t always clear and straight forward. What is cost of goods sold (COGS), operating costs, marketing costs, etc. I’ll hold off on allocating costs discussion until the end of the article to maintain the simplicity of our example below.

Let’s begin with high level ranch marketing budget. The best way to develop a marketing budget is to treat that budget as if it’s an investment, i.e. something that delivers an expected return. Your listings represent the portfolio of investments.

Review last years ranch marketing spend and calculate the ratio of cost to revenue to give you a benchmark starting point in the new year. So if your firm did $500,000 in fees and spent $100,000 in marketing (yes you need to include fees from outside vendors) then your marketing cost ratio is 20%.

Now, there is a catch. If your brokerage let’s say carries 10 ranch listings on average your ranch marketing cost ratio is likely higher than if your brokerage carries 30 ranch listings on average. The ranch brokerage with more average listings count gets an economies of scale in most cases because resource costs are spread over more listings and higher total revenue. An example of this is print advertising where larger ranch brokerages put more listings on their full-page ad. A smaller brokerage may only be able to put 4 listings in an ad whereas another brokerage may have 10 listings in the ad.

Another example would be somewhat fixed service costs such as SEO or social media. Whether you have 10 listings or 30 listings those services may not increase with more listings.

I see marketing cost ratios vary from 10% to 25% depending on the total revenue of your brokerage and other variables. The important data point here is get your benchmark ranch marketing cost ratio from last year and use to measure against going forward. This is a measurable key performance indicator (KPI) for any brokerage.

Now that you have your ranch marketing cost ratio, let’s get into an example listing and ROI. I like round numbers so let’s start off with a property for sale at $1,000,000. It has 400 acres with a nice cabin to add some liveability. That’d make it $4,000 per acre.

Easy commission calculation is $1,000,000 x 3% = $30,000. So if your marketing cost ratio was 20% last year then your planned ranch marketing spend could be up to $7,500. This listing marketing budget doesn’t mean allocating all of it to paid ads such as print, social, video, etc. You have to leave plenty of room in there for services.

NOTE: I don’t like to plan commission percentages on “double ending” deals. The best practice would be to budget a marketing spend around representing one side or the other on a transaction.

The next number we need is “average days on market”. Take each listing that sold last year (or last several years) and individually calculate days on market from listing creation date to closing date. Sum the days on market for all these sold listings and divide by total number of sold listings in your data set.

I personally prefer to look at months so take your average days on market number and divide by 30. You probably won’t get a whole number so just keep it to 1 decimal place.

Let’s presume that your brokerage average months on market is 10 months. This means that your $7,500 investment will likely come back to you in 10 months. If all goes well the brokerage commission will be $30,000. This would be net return on investment of $22,500 or 75% Return on Investment (ROI) or 360% annualized yield.

Now take this a step further …your brokerage has 30 listings and each listing has $7,500 in marketing costs tied up in them. That totals $225,000. So presumably you’d have about a quarter of a million dollars tied up at any given time in marketing of ranches. If you’re running this as a line of credit with a bank then there is a carrying cost associated with these allocated funds.

Key Takeaways:

  1. Benchmark your marketing cost ratio. Work from there moving forward. Possibly work to lower it with more efficient ranch marketing spends that can achieve better or same results in sales as in past.
  2. Benchmark your average months on market. All brokers want to sell listings fast but in many cases the velocity at which a listing sells is largely due to a number of factors …months supply of similar listings in that area, popularity of an area, proximity to major metro areas, income production, land amenities, and much more.

By benchmarking your ranch real estate brokerage you’ll be able to target new listings that fit your formula for marketing cost ratio and average months on market. Any time you can make a more informed quantitative decision, the more likely you’ll realize the anticipated ROI.

Quick notes on allocation of costs to listings …

I’ve found it hit or miss that a brokerage will assign direct costs to specific listings. Here are some simple practices to start allocating costs to listings accurately and some suggested practices.

  • When you purchase a print ad and receive an invoice from the publication, enter the invoice into your financials then itemize the total to each “product” aka listing. By itemize, if the total print ad cost $3,000 and included 6 listings then each listing would get charged $500 when itemizing the invoice.
  • You’ll also have direct costs from outside vendors that can get directly charged to the listing such as professional photographer/videographer, surveyor, GIS mapping services, soil samples, etc. When you have these direct service costs, assign the invoice to a specific listing.

Ranch marketing expenses that appear to be operational expenses:

  • SEO services
  • PR services
  • Social media services
  • Brochure design services
  • Website hosting
  • Online classifieds subscriptions (i.e. Lands of America)

These ongoing marketing expenses can be consistent or fluctuate depending on how you operate your brokerage. My suggestion is take your monthly average spend on services used monthly and divide by average # of listings you carry at any given time. So if your monthly services average $5,000 per month and you carry 20 listings on average then each listing costs you $250 per month it isn’t sold. Then if your average months on market is 10 months that equates to $2,500 per listing of services carrying costs for the year.

Remember the $7,500 marketing budget from earlier? Well, there goes $2,500 of that budget in marketing services carrying costs. Now you have $5,000 left in the budget.

Bank fees and interest. There is always interest cost if running your brokerage on a line of credit (LOC). That interest is certainly entered into the financials each month during reconciliation. Again, you can chose to average it out based on months on market to arrive at a month finance fee to charge to each active listing that has money tied up in the LOC.

If your brokerage has an in-house bookkeeper, controller, or CFO then you should make absolutely sure your business begins measuring these number every month, quarter, and year. If you use outside financial services, then make a point to set down with your bookkeeper or accountant and get a game plan together to begin tracking these numbers and measuring against your brokerage benchmarks. This is how efficient business are run!

Get started benchmarking ranch marketing cost ratios and listing average months on market. Take a deeper look at how best to allocate costs to individual listings and establish cost averages where fees are spread over all listings.

To learn more about ranch broker marketing, visit http://www.realstack.com/digital-marketing

Ranch Real Estate Market Metrics

Ground breaking metrics for every ranch real estate brokerage to operate by

I’m going to introduce some new concepts to the ranch real estate market. These concepts are standard in many financial and commodity markets but I’ve applied them to our market for farms, ranches, and land.

Now you may be saying we are not in a “commodities” market, and I 100% agree. The challenge I see in the ranch real estate market is there is little quantitative metrics that provide any value to the seller, buyer, or the market in general. With my metrics you’ll be able to have meaningful conversations around prices with buyers and sellers and ultimately sell more ranch real estate listings faster and be able to win more ranch listings with prospective sellers.

I’m going to be introducing 3 concepts or calculations that any ranch broker should begin using on their portfolio of listings.

  1. Price per Acre to Market (PPATM)
  2. Price per Acre Rank (PPAR)
  3. Total Price Rank (TPR)

So now I hear you saying …”there are no two ranches alike. They are all unique and impossible to compare.” Rightfully so. Then why when negotiations come down to making a deal is it always price per acre? Because it matters what a buyer will pay, what a seller is willing to take, and what a lender is willing to lend on ranch real estate.

The next objection I hear is “sale price is really what matters. The asking price really doesn’t help us compare our listings to the market.” Then why price it at all? The asking price is roughly where the sellers market is at during any given period of time. The price sellers are willing to entertain in exchange for their property. So …asking price does matter.

One final point to make as to my logic for introducing these concepts is often times the buyer and or seller are high net worth individuals. They’ve spent their career handling millions of dollars of operating capital, reviewing financials, looking at large ROI opportunities, understanding yield, and more. We as an industry do not build the case with real metrics and data to support our claims. Brokers usually rely on their reputation and good looks to convince the buyer or seller that their claims or advice are accurate.

This has to change!

We need to substantially improve our service level to clients with real-time data and analytics to best inform them of buying or selling decisions.

Ranch Real Estate: Price per Acre to Market (PPATM)

PPATM is the percentage of a listing price per acre to the average price per acre for similar listings in that market.

See example 1-1 below. First you’ll need to know that the Average Per Acre price is 100% of market, meaning that is the going rate for per acre asking price. In this case, it is $5,073.

Comparing your listing or other listings to this market average as a percentage creates a meaningful data point for your clients. The tighter the acreage group the more valuable the data point but by comparing the per acre price vs total price, statistically it enables us to look at a wider range of acreage to compare.

Ranch Real Estate

What I’ve learn while pouring over listings and their numbers, listings that have a PPATM greater than 110% of market are very difficult to sell and have a high months on market total. In broker speak, this usually translates into an “over-improved” property. The house is massive, too many buildings on the land, the livestock or equine facilities are extravagant, its use is very specialized such as hunter jumper equestrian facilities, or other.

Regardless, for both the buyer or seller this gives a quantitative number to compare listings in all different ways and scenarios.

If meeting your brokerage goals is important, you need to be inside of 105% of market at most. You simply don’t realize how many prospective buyers pass over your listing before they ever ask for a showing simply because they know the seller has an inaccurate view of the market asking prices.

As the broker, you’re goal is get your marketing investment back as soon as possible and balancing that with representing your seller with best possible sale price. For the efficient broker, targeting your average months on market for your brokerage is important. We’ve found that to maintain this KPI for your brokerage, the listings need to be 95% of the market or lower.

For brokers and prospective sellers, this number creates a lot of value when supporting your suggested asking price for their property or gives you the analysis to evaluate salability and if you’d consider taking on this listing.

Ranch Real Estate: Price per Acre Rank (PPAR)

Simple as it sounds: a numerical ranking of listings in the dataset from highest price per acre to lowest price per acre. If price per acre of a listing within the group of comparable listings is the highest then it will rank #1 in PPAR.

Why is this metric important? When your listing is setting at the top of the market in price per acre, then you either A) need to have property amenities to really back it up, or B) lower your price per acre if you expect to get an ROI on marketing dollars spent.

Don’t get me wrong, it feels great to set a record for price per acre within a county, but if you are focused on selling listings, turning your listing inventory, getting an ROI on marketing spend, then you need to be in the middle of the price per acre rank. Again, buyers are either mentally or in a spreadsheet tracking price per acre. Even if they are not ranking them as REALSTACK does, they are mentally processing this price per acre against their comparable properties.

From the brokers perspective, it is another metric to evaluate your price in the market at any given time. If there are 5 comparable listings, then you want to rank 3rd or better when possible. This helps you get leads, showings, and transactions. When taking on listings you evaluate that the ranch real estate property will fit in this metric to help contribute to your ROI and lowering your months on market averages.

It is important with PPAR to have tighter bunch in acreage per listing. In most counties as the acreage goes up the price per acre declines. In example 1-1 above we have an outlier with 1922 acres. We had to include this property because it was one of our ranch brokerage client listings and within Bosque County, Texas there were no other ranch listings within +/- 1,000 acres of it.

Ranch Real Estate: Total Price Rank (TPR)

Another simple comparison but deep value: a numerical ranking of listings in the dataset from highest overall price to lowest overall price.

Why is this important? In studying the data of ranch listings, I found gaps in acreage within certain counties. Not surprising, but statistically this has meaning. Let me explain.

If a county has a heavy set of inventory between 200 and 500 acres but no listings between 501 and 2000, then the Total Price Rank becomes significant because total price of a large acreage ranch can present a challenge in certain areas of the United States.

Let’s take Bosque County, Texas as in example 1-1 above. It is a popular county for high income earners to get a weekend retreat who are based out of Dallas-Ft. Worth. They can afford and are most interested in property +/- of 100 acres. Ranch real estate they can afford, enjoy, and maintain. When you jump out there with a 1,900 acre place your total price for that market can present a challenge to what the demand for that county will bear.

The months supply for acreage in this range will be high and the absorption rate will be low therefore stretching out your marketing investment before you’ll realize an ROI. Remember your goals for your brokerage on ROI and average months on market? Well it is statistically likely that this listing will not meet those brokerage goals and objectives.

There are a lot of things in the ranch market you can’t control such as oil prices, overall demand, stock market, and more, but you can control Price per Acre to Market, Price per Acre Rank, and Total Price Rank.

Conclusion

In business, cash flow is king! If you take on fast moving ranch real estate listings and price accurately, then your return on capital will be most efficient. Efficient capital equates to more dollars returned to your brokerage faster! Return on capital will be another article for ranch brokers.

Price per acre to market, price per acre rank, and total price rank are key factors in managing for the most efficient use of your marketing capital that gets tied up in every ranch real estate listing. Start measuring and re-evaluate your current portfolio of ranch real estate listings to watch your cash flow and gross margins begin to sore.

Visit http://www.realstack.com