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Real Estate Agents and The Pareto Principle

When joining with real estate agents to become mutual success partners it becomes apparent that it is a numbers game. I liken the process to a frog kissing contest, you need to kiss a lot of frogs before you find your princess and/or prince. You can avoid chapped lips from kissing too many frogs that never poof into something worthwhile if you apply the Pareto Principle to your efforts.

The Pareto Principle also known as the 80/20 rule, the ‘law of the vital few’ as well as ‘the principle of factor sparsity’ states that, for many events, roughly 80% of the effects come from 20% of the causes. It is a very common rule of thumb in business that 80% of your sales come from 20% of your clients. This principle certainly holds true in the real estate world.

A recent stat that I saw attributed to the National Association of Realtors was that 22% of the real estate agents do 90% of the business, now I’m not too sure about this stat because I really do not believe anything coming from NAR but in my town the 80/20 rule is very accurate. There are just over 10,000 real estate agents in what makes up the St. Louis area, of those it seems that about 20 percent of these agents close at least 6 transactions a year.

I have no idea where I picked up this next factoid but I always say that the average real estate agent has the ability to refer 6 transactions annually to a loan officer, the average real estate agent is NOT the 80 percenters! The lower end real estate agents are to be avoided at all costs, it is the upper 20 percent that is mine and should be your target.

I divide the 20 percent into two catagories, the upper 5% and the remaining 15 percent of the top producer. The upper 5% I refer to as Elephants and in another post I will discuss how to go Elephant Hunting, these heavy hitters are completely different than the majority not only in their production but how to attract them to you.

So why concentrate on the remaining 15 percenters? It is a simple numbers game, we have 10,000 real estate agents in my town, throw away the bottom 80% and you have 2,000 real estate agents who produce great to decent numbers. We are going to take and place to the side the top 5% of producing agents or 500 elephants, you are now left with 1500 frogs that need to be kissed.

If the average agent in this group can send you 6 transactions annually, which is extremely low but I use this number to build my business plan, then how many agents do you need to recruit to become your success partner? Say you want to close 100 mortgages via your real estate partners, that would translate into 16 real estate agent partners or in my case about 1% of the total frogs I am willing to kiss should be in my pond.

This is great news, only 1 percent of the total base of top real estate agents in your area can be sending you enough business to make a very comfortable living in our industry. Real estate agents can and do still control buyers, they have an influence within the transactions that can not be ignored. Best, is that every one of these top real estate agents recognizes that they need a solid lender partner in their business if they are to continue to be successful, it may as well be you.

Eventually, once you have built a reliable base of partners you will determine that these real estate agents will be able to refer directly and indirectly many more than 6 transactions per year to you, which means you will not need a large number of agents. Personally, I like having a large stable of good agents, the more I have the more I get. But, it is also reassuring that I have a small representative sampling of available producing real estate agents. Knowing that there is a large pool of frogs to replace a prince/princess that has reverted back to a frog allows me to work among my partners without fear. No fear is the key to your success in partnering with a real estate agent for mutual succss.

My advice is that you partner with with real estate agents who share your views, that you have commonalities with, that are willing to work your programs and systems, and who recognize your value. Remember you are looking to partner with a small number of available top producers, you must be selective in who you partner with. Find them, ask for the appointment and then interview them just as if they were a job applicant, because that is exactly what they are. You are looking to partner with a professional who will work with you and for you, does this not sound like a partner.

The mistake most loan officers make is that they want and go kiss all the frogs and think they will all turn into their needed prince/princess, huge mistake. This is your business; only partner with those that fit your business.

June 10, 2009 by · Leave a Comment

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  1. Brian Brady says:

    “The mistake most loan officers make is that they want and go kiss all the frogs and think they will all turn into their needed prince/princess, huge mistake”

    …HUGE mistake. We are not all things to all people. It’s reasonable to suggest to a “some time” agent that you can’t meet their expected level of service because of other commitments. It’s crucial to you that you do so.

    Bob, how have you handled the inevitable dismissal of a poorly matched agent?

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