It’s a bad idea. Here’s why. It comes down to “cost per lead”. I’ll show you. Let’s take a typical market where the average sale price is $206,500 and the average commission side is 2.6%. That means that the average Gross Commission Income (GCI) is $5,369. According to real estate “experts” an agent should budget 20% of GCI for marketing. I’ve even heard numbers as high as 25%! (Incidentally, the rest of the entire business world budgets less than 10% of revenue for marketing, but what do they know?)
I personally think you should be able to operate on 6-7% and if you spend 10% you should be able to produce more sales leads than you can personally handle, allowing you room to grow. So if we use 10% that means that our budget per closed deal is $537 (10% of GCI). Now, it takes an average of 24 leads to close one deal. That’s a national average. That means your budget per lead should be no more than $22.37. Stay with me. The budget is $22.37 per lead. Now what is your cost of each farming lead?
I know what you’re thinking… “How do I know?!” But you can know. Let’s say you want to make $100,000 this year in real estate. You want to work 50 weeks of 40 hours per week. Do the math. Your time is actually worth $50 per hour.
Now let’s look at farming. There are basically two methods of farming: walking neighborhoods, or direct mail. Let’s look at each. As someone who has done about every dumb idea in real estate, I happen to have personal experience using both methods.
First walking neighborhoods. Generally this involves handing out cards, refrigerator magnets, or fliers, or all of the above. It also involves kissing babies and petting dogs. What it doesn’t involve to any large degree, is generating business. I can’t tell you how many times some other agent’s sign appeared in a yard just days after I visited the house! Now let’s say that you farm 500 homes and want to touch them every month. That’s what the “experts” recommend. Given roughly 20 work days a month that means you are walking 25 homes every day. That means canvassing two blocks of houses every day.
If you are really good, you can cover a block in an hour. Two hours a day is $100 in time cost, not counting cards, magnets, calendars, or other material. Remember, your budget of $22.37? Do the math. If you don’t get 4.5 leads for every two hours you invest, you are over budget. Now if your experience is anything like mine, you won’t get anywhere near that. In fact, long term there are never more than about 5% of the population buying or selling at any time. If you talked to all 25 people and they all liked you, only one is a potential lead.
Direct mail is even worse. Spend a half day doing the monthly mailing and add a cash cost of 50 cents per piece, including postage and you have $250 in cash, and $200 in time cost. Take the $450 and divide it by $22.37 and that means you need to produce a minimum of 20 leads from each mailing. Don’t forget, there are only 25 potential leads in your entire mailing group (5% of the population). When is the last time any marketing idea you tried produced those kinds of results?! It’s impossible! Can’t happen.
Sorry, farming’s just a bad idea, plain and simple. Pigs will fly before farming is a good investment. I challenge anyone in any market to show me hard numbers where the total cost (time and cash) justified the results. Don’t feel bad, as dumb as it is, I’ve done it too. But that’s my quick answer.