niche market

How to find a highly-profitable niche market

Do you have a niche market focus?

Or are you chasing deals all over town?

One of the key components of an effective business strategy is knowing what types of clients you’ll serve, where you’ll serve them and how to leverage your strengths and resources.

In this article, you will discover how to find a profitable niche market that will support your business for years to come.

You’ll learn the different types of niche markets, how to find a niche that aligns with your overall business strategy and how to identify and analyze the most promising opportunities.

And if you’re still stuck in the mindset that narrowing your focus will limit your income potential, consider this; In my own career, I focused on two niche markets – new construction and high-end resales – all within a few miles of my home.

Those two niches generated over $15 million in income in 12 years.

Convinced? Good, let’s get started. . .

Types of niche markets

There are three categories of niche markets you can use to build your business; geographic, demographic and specialty.

Geographic
Geographic niche markets are generally those that are defined by boundaries, such as

  • ZIP codes
  • School districts
  • Neighborhoods
  • Communities
  • Waterfront property
  • Mountain property
  • Specific buildings

Demographic
As you know, people’s housing needs change according to their age, income and the size of their household, creating numerous niche market opportunities.

Demographic profiles of buyers and sellers can reflect age, income, net worth, marital status, presence of children in the home, ethnicity and much more.

Some of the demographic-based niche market opportunities include;

  • Young, professional singles
  • Young married couples – perhaps buying their first home
  • Growing families
  • High-income professionals
  • Hispanic or Asian homeowners
  • Empty-nesters
  • Elderly homeowners

Specialty
A specialty niche reflects a particular type of client or housing type, such as;

  • Investors who buy and hold properties
  • Investors who buy, fix and flip properties
  • Homebuilders – either of single or multi-family homes
  • Veterans
  • Home buyers
  • Relocation
  • Equestrian properties
  • Farm, ranch or sporting properties
  • Low-maintenance living
  • Historic properties
  • Condominiums
  • Town homes
  • Apartments or co-ops

There’s also a fair amount of overlap between the various types.

For example, there is an area near my home that features numerous developments of luxury, low-maintenance, cluster homes and town homes, priced from $400,000 to over $1 million. These homes are owned, primarily, by professional married couples without children, empty nesters and retirees.

That housing type, location and demographic profile creates a nice primary or secondary niche market opportunity for an agent to pursue.

And because there’s still land available for future projects, an agent could leverage their knowledge of the housing type and market to work with developers of new, similar housing, creating another niche opportunity.

You’ll probably find that the niche market, or markets, you select to focus your efforts on will include some elements of geographic, demographic and specialty niches.

Selecting your niche market

Your business strategy and goals should define your niche market focus.

Let’s suppose you want to earn $150,000 per year before taxes, work as an independent agent (with no team) and have a balanced life.

Those goals are certainly attainable, so long as you choose your niche market carefully.

If your average sales price is $200,000, however, and your split with your broker is 70%, you’d have to complete about 35 transactions per year to reach your income target, not including sales to cover your business expenses.

That’s averaging just under 3 sales per month.

Depending on many other factors, such as the number of listings or buyer clients you have to maintain to close 3 sales per month, those numbers may be inconsistent with your overall strategy of working independently and having a balanced life.

On the other hand, suppose your average sales price is $400,000. You’d need to close about 17 transactions to achieve your income goal, or less than 1.5 closed transactions per month.

That also aligns with your overall strategy of working independently and having time off to enjoy with your family and friends.

In selecting a niche market, there are several things you need to consider, including;

Income and Production

How much do you want to earn – and how does that translate into your required number of closed transactions for each year?

Average sales price

As we saw in the example above, the average sales price of your closed transactions can have a huge impact on your required production levels.

Previous sales activity

If you are an established agent, consider your track record.

Do you have a history of closing sales at the average sales price you want to pursue? If so, you can leverage your prior sales experience to gain new listings at, or above, your average price.

Does your track record include closed transactions in the niche you are considering? If you have an existing track record and name recognition in a given area, it could be easier to build market share than if you started in a niche with no prior experience.

Required size of niche

There’s a lot of misinformation floating around the real estate industry regarding the appropriate size for a niche market.

Ask a group of agents and you’re likely to hear 500, 1,000, 2,000 or more.

The truth is, it depends.

To find the optimum size of a niche market, you must know your own unique production requirements for closed transactions, the turnover rate for housing in the niche and your estimated market share.

Your ability to capture market share will depend on your overall value proposition, how aggressively you market your services and the number, and strength, of the competing agents.

Location of niche

The location of your chosen niche to your home or office is also important.

To be effective, you should be active in the market, not just from the standpoint of being a real estate agent, but also as an active participant in the community.

If your chosen niche is convenient to your home or office, it is much easier to become involved in local community organizations and events where you can expand your contacts and build awareness.

It’s also much easier to stay on top of opportunities when you are in the market on a daily, or at a minimum, a weekly basis.

Your fit

When selecting a niche market, you need to be totally honest with yourself about your skill set, resources, personality and more.

If you are not an analytical person, working with investors may not be a good fit for you.

Investors are going to require that you provide detailed numbers to justify the investment potential of the opportunities you present to them.

I have to admit, I am not the most empathetic person. As such, I enjoyed working with homebuilders because there was very little drama involved. It was a business transaction.

A more empathetic person would have run circles around me – especially working with buyers!

If your goal is to work with ultra high-end homes, you’ll likely struggle if you don’t socialize with the demographic profile of those homeowners.

You must also consider your budget to market your services, and the listings, within your chosen niche.

If you have a limited budget, targeting a high-end niche market wouldn’t make sense. Your marketing pieces would need to be higher-end to reflect your target audience and your costs would go up compared to serving a more moderately priced niche.

Nor would it make sense to choose a niche that required you to market to a large number of people versus a smaller niche.

I hear of agents who used postcard campaigns for lead generation, mailing to thousands of homes only to run out of money before their campaign gained traction. Mailing to a smaller market would have been more appropriate given their limited funds.

Your company’s fit

Last, you should consider your company’s fit within the niche market you wish to pursue.

If your strategy is to serve a high-end market by assembling a team to provide “white glove” service, yet your broker isn’t supportive of teams, the company’s policies don’t align with your strategy.

The same situation applies if the brokerage you are affiliated with doesn’t have strong brand recognition within your chosen niche.

There are times when changing brokers, or firms, may be only way to implement your strategy.

All of these factors must be balanced against one another to determine which niche market aligns best with your overall strategy and enables you to achieve your production and income goals.

Identifying your niche market

Geographic niche search

To begin a geographic search, first identify the following;

  • The level of geography you would like to consider, such as ZIP codes, school districts or communities
  • The price range you are considering – if your average sale is $400,000, you may want to search for homes in a range of $300,000 to $500,000 or possibly even a wider range.
  • The housing type you are considering, whether single family, condominium or town house.

Search your MLS using these criteria for sales activity over the past 3 to 5 years.

The reason I recommend searching over the past few years is that it will enable you to see if the area is trending upwards or downwards with regards to sales activity.

Identify the areas with the greatest activity first.

In the image below, we see that one particular area has considerable more sales (155) than any surrounding area. This is where we would want to focus our attention.

niche market

As we zoom in on the area, we can then see exactly where those sales have occurred.

You are then able to identify the neighborhoods with the greatest activity and delineate them as a potential niche market for your business.

niche market

Your next step is to determine how many homes are located within the area you have identified.

I recommend creating a list on paper or a spreadsheet and including the name of every street in the selected area.

Then, using your tax record database, calculate the number of homes on each street as shown below, adding them together to get the total number of homes in the niche market.

In a moment, we’ll discuss how to use this information to analyze your niche market.

niche market

Demographic niche search

If you have chosen to work with a certain demographic profile of buyer or seller, finding the greatest concentration of your target audience can be a little more challenging.

Fortunately, there are tools such as Social Explorer, as shown in the image below, and Simply Map.

These online mapping tools enable you to search various levels of geography for hundreds of demographic variables.

The smallest level of geography you can search, and get the full range of census demographic information, is a block group. A block group represents, on average, 700 households, so it provides you with the ability to drill down to specific neighborhoods.

Here’s how it works;

Let’s say you want to work with couples, between the ages of 25 and 35, with young children.

You include those variables in your search, specifying the block group level of data.

The mapping tool will create a thematic map displaying the results.

A thematic map uses a variety of colors, or shades of a single color, to represent the areas based on the population of your chosen demographic profile.

In the example below, the areas that are a very dark orange, almost brown, represent the areas of the greatest value for the search term – in this case, population density. The areas that are shaded in the lightest orange would represent areas that have the lowest numbers of your desired target audience.

If this map reflected the population of married couples age 25 to 35 with young children, these brown areas would represent the prime areas to start your search. You could also add new layers to your map, such as the best public or private schools to see where your target audience is concentrated relative to specific school districts.

niche market

Specialty niche search
Searching for a specialty niche market can be a challenge.

Oftentimes you will have to use a combination of geographic searches, such as the location of condominiums within a specific price range, new homes and the land for redevelopment into new homes – whether single lots or developments.

Your search may also include using demographic search tools such as the mapping tools described above.

This could be the case if your goal was to serve the real estate needs of veterans and you want to identify the areas with the greatest concentration of veterans by age range.

Other specialty niches will requires reviewing zoning maps to identify historic districts or land zoned for agricultural use for ranches, farms or equestrian properties.

niche market

Analyzing your niche market

Once you have identified an area that you are interested in, you need to quantify the potential for sales to support your business.

The key metrics we will use are;

Turnover rate

The turnover rate identifies what percentage of the homes in the niche market sell every year. A good turnover rate to shoot for is 8%.

But, as with everything, that depends on lots of factors, including your average sales price and the level of competition.

If your average sales price is very high, over $2 million let’s say, you can get away with a lower turnover rate.

If there’s little competition within the niche, you can get away with a lower turnover rate.

But if your average sales price is low, perhaps $200,000, you will need a higher turnover rate, or a larger niche market, or both, to meet your income goals.

To calculate the turnover rate, use this simple formula;

niche market

Market shifts

The next market indicator you should evaluate is whether the market is shifting. Are sales increasing within the niche year-to-year or are they decreasing?

What is driving the change? Ask around and do your homework to uncover the cause for the changes.

You do not want to attempt to build your business in an area that is declining.

Competition

The amount, and strength, of the competition you face in your chosen niche will influence your ability to capture market share.

Rarely does any one agent control 100% of a market.

You can use your MLS to search for sold homes and sort the results by the listing agent. Look for those agents who repeatedly sell homes in the niche market.

Add all of the sales from these “dominant” agents to determine their total market share.

If they control 30% of the market, do not focus on them. Instead, focus your efforts on capturing some portion of the 70% that is being served by agents who may sell one or two homes per year in the niche.

Conversely, if the dominant agents control 70% of the market, and you need 20% market share to achieve your production and income goals, you may find that you will have to present a very compelling case for homeowners to choose you over these established agents.

Required niche market size

As we discussed earlier in this article, your optimum niche market size is unique to your business.

What works for another agent may not, and probably won’t, work for your business.

Calculating the optimum size for your niche market requires knowing the following;

  • Your total required sales for the coming year
  • The percentage of sales you want from seller listings
  • The percentage of seller listings you expect to close from your niche market
  • Your estimated market share – based on the strength of the competition
  • The annual turnover rate within your niche

The free cheat sheet provides the formula for calculating your required niche market size.

Conclusion

Having a niche market focus enables you to become an expert or authority in an area with the proven potential to support your long-term business and income goals.

It does not mean you are limited to only working with clients in your chosen niche.

It simply provides an area where you can focus your limited resources, time and money, with the best possible results.

By following the steps outlined in this article, you can identify a niche market that aligns with your overall business strategy.

In future articles, we’ll explore how to identify what homeowners in your chosen niche desire most from a real estate agent, how to stand out from the competition and how to generate consistent leads from your new niche market.