Starting your own real estate brokerage is a big accomplishment in your career. But if you don’t accurately predict your expenses, your dream of owning your own business could quickly turn into a nightmare.
I’ve been in the real estate business for 27 years and have a lot of experience with start-up brokerages. I’ve found that one of the most important things to do when starting a new business is to accurately estimate your expenses. That’s why I wrote this article to outline the right way to estimate expenses for your new brokerage.
Real Estate Brokerage Expense Categories
This article covers the various real estate brokerage expenses you may incur when starting a new business, as well as estimated annual costs and the ideal percentage of overall revenue for each category.
After reviewing each of the expense categories for your brokerage, you can move on to estimating revenues and completing your real estate brokerage budget.
** Although profit is not technically an expense, we have included a 20% profit margin in our calculations, on the assumption that you are running a profitable brokerage business by keeping expenses and revenue in line with our recommendations. We will discuss this further later on.
If you need some help with your brokerage’s budget and finances, Xendoo may be a good option for you. Their experienced real estate accountants can help streamline your accounting at an affordable cost. They offer bookkeeping and accounting, tax preparation, and financial statement preparation services.
Real Estate Agent vs. Real Estate Broker
There is a common misconception that real estate agents and brokers are one and the same, when in reality there are some key differences between the two. Though they may share some similarities, real estate agents and brokers each have their own unique roles and responsibilities.
Real estate agents are professionals who facilitate transactions between buyers and sellers. They help consumers buy and sell their properties and are paid a commission for their services. Some of their duties include:
- Passing offers between buyers and sellers
- Working with other agents
- Helping clients deal with paperwork
- Informing clients of buying and selling requirements, such as home inspections and closing dates
To become a real estate agent, you must take classes and pass an exam. You will also need to find a broker who is willing to sponsor you.
Real estate brokers are professionals who further their education to get specialized licenses which allow them to start their own firms and work independently. If they choose, they can also bring real estate agents and associates to work under them. Their duties and responsibilities are the same as agents.
There are generally three different broker tiers. But their functions may differ:
- Associate Brokers: Work with other brokers and do not supervise others.
- Managing Brokers: Manage daily office functions while hiring, training, and managing staff.
- Principal Brokers: Overseeing agents to ensure they are in compliance with state regulations.
The real estate agents get paid by collecting commissions on the deals they execute. They also receive a share of the commissions from the sales of their agents.
Fees
The agent only gets paid when the home is sold and will work hard for you.
2 The fees that real estate agents charge are negotiable, with the average being 5%-6% of the home’s value. In most cases, the seller is responsible for this fee, not the buyer.
The sales commission is usually split between the sales or listing agent and the buyer’s agent, netting each half. So that $5,000 is split into $2,500 for the seller’s agent and $2,500 for the buyer’s agent. But that full commission isn’t divided just between the listing agent and the buyer’s agent. The listing broker and buyer’s agent’s broker also take a share of the commission.
If you are thinking about hiring an agent, it is a good idea to look into their past to see how successful they have been. If they have a lot of experience and have been successful in the past, it may be worth it to pay them more, which usually means paying them the full commission. If you can’t find an agent with a lot of experience, try to negotiate the commission.
Consequently, most buyers use the services of an agent or broker when searching for a home A majority of homes are sold with the help of a real estate agent or broker, with For Sale By Owner (FSBO) transactions taking up an estimated 7% of the market.2 Consequently, most buyers use the services of an agent or broker when searching for a home.
Agent Tips for Buyers
If you’re buying a home and plan on using an agent, there are several steps to follow to ensure you’re making good decisions:
-
- Shop around for the agent with the best reputation. Paying a premium for someone who can get you the best deal can save you thousands of dollars or more.
- As noted above, commissions aren’t set in stone. So make sure you negotiate them. The only exception to this rule is if you’re working with a top-tier agent, which would make full commission justifiable because that agent will save you money in the end. After all, it makes sense if you’re going to pay more to your broker if they’ll save you on the price or get you top dollar for your home.
- Don’t reveal to the agent what you’re willing to pay for a home while offering a much lower amount to the seller. The agent might use this information to their advantage if they’re more concerned with their commission.
- Use the website for the National Association of Exclusive Buyer Agents. This site will help you find buyer agents who have no ties to seller agents. This is also a good way to find a buyer agent who works on a fee structure as opposed to commissions.
- Be wary of inspector lists provided by buyer agents. The buyer’s agent and inspectors on that list might have a mutual interest that doesn’t benefit you. This means it’s possible that the inspector won’t disclose the real damages to the home because the buyer’s agent wants the commission when you buy the home and the inspector wants repeat business from the buyer agent.
Agent Tips for Sellers
If you don’t want to use an agent to sell your home, you need to be careful about pricing. An independent appraiser will cost around $200 and will help you determine the right price for your home.
How much money could you save by not using an agent when selling your home? Let’s say you sell a $200,000 home. If you were to use an agent, you would pay a 6% commission, which would be $12,000. However, if you use an independent appraiser and spend $200 on advertising, you would only spend $400 total. This means you would save $11,600 by not using an agent.
If you are thinking about selling your home without using a real estate agent, you should be aware that it can be challenging. It will take up more of your time, and you will need to be knowledgeable about real estate procedures and contracts. Furthermore, if your property is unusual or if the market trend is down, it could take a while to sell your home.
Who Pays Real Estate Agent Fees?
The party responsible for paying real estate agent fees is typically the seller. These fees, which are also referred to as commissions, are often split equally between the seller’s and buyer’s agent.
How Much Are Real Estate Agent Fees?
The average real estate agent commission is between 5% and 6%.1 Keep in mind that these fees are negotiable. If you’re using a top-tier broker or agent, it may be worth it to pay the full commission.
Who Pays Real Estate Agent Fees at Closing?
The charges that come with closing a transaction are called closing costs. These can include fees for loan underwriting and origination, taxes, title filing, and insurance premiums, as well as real estate commissions. They might be paid by the buyer, the seller, or divided between both parties.
Outsourced Transaction Coordination, File Review & Other Expenses
Estimated cost: $18,000-$24,000/year Ideal percentage of revenue: 3%-5%
Some ways to keep your employee costs low are by outsourcing certain tasks and by automating others. For example, you can outsource tasks like transaction management and brokerage file review, or you can automate things like customer outreach or lead follow-up.
Different transaction coordinator companies charge different prices for their services, but they typically fall between $150 and $300 per file. If you’re tight on money, you might want to consider paying a detail-oriented, experienced agent in your brokerage to do it on the side for less money.
You may want to consider hiring someone to do things like photography, marketing, or sign installation and storage while you are working on other things.
Software Expenses
Estimated cost: $13,000-$36,000/year Ideal percentage of revenue: 3%-6%
The traditional model of a real estate brokerage with four or five employees is no longer necessary. Today, many of the services that brokerages provide can be managed using software. This allows you to operate your brokerage with as few as one employee.
This article covers the software choices available for brokerages and how to estimate the expenses.
For now, here is a quick breakdown of rough estimates for software pricing in common categories you will likely need:
Office & Office-related Expenses
The estimated cost of the virtual reality system is $0, and the ideal percentage of revenue from the system is 20%-30%.
expenses. Still on the fence about the benefits of a brick-and-mortar versus a virtual office? See my previous article Are Brick & Mortar Real Estate Offices a Waste of Money? If you’re not operating your real estate brokerage virtually, your office is probably taking up a lot of your expenses. Unsure about the benefits of a brick-and-mortar office versus a virtual office? Check out my previous article Are Brick & Mortar Real Estate Offices a Waste of Money?
There are a lot of things you need to think about when picking an office, so it can be tough to choose the right one. Some of the factors are easy to see, but others can only be discovered after you’ve already agreed to the lease. If you’re still trying to decide on a place, read my article on “How to Select the Right Office for Your Real Estate Brokerage” to learn more.
You can divide the costs of having a real estate office in a physical location into four categories: base rent, CAM, utilities, and maintenance. This will help you when it comes to budgeting and expenses.
Base Rent
Estimated cost: $36,000-$66,000/year
The amount your brokerage pays each month for the use of the space is the base rent. In a city like Boulder, Colorado, typical office space can range from $25 to $50+ per square foot. To calculate your base rent on a commercial lease space, you need to multiply the total square footage of the portion of the building you are leasing by the cost per square foot.
If you were to rent an office space that is 3,000 square feet, it would cost you $66,000 a year in annual base rent.
(3,000 sq ft X $22/sq ft = $66,000)
To calculate your monthly base rent, divide the annual base rent by 12.
($66,000/12 = $5,500 monthly base rent)
Common Area Maintenance
Estimated cost: $15,000-$30,000/year
CAM fees are expenses related to the property that are passed through to the tenant. These expenses include the costs of the space you occupy as well as the costs of the common areas of the property, such as parking lots or other shared spaces.
The expenses commonly associated with CAM charges includes costs for cleaning, repairs, building maintenance, utilities, internet, insurance, security, parking lot maintenance, snow removal, landscaping, trash, and taxes.
CAM fees, which are fees charged by landlords for the upkeep of common areas in buildings, can add a significant amount of money to your lease. You may even be charged for these fees retroactively if the landlord underestimated the cost. Therefore, it is important to understand your potential liability and make sure you can afford the fees before signing a lease.
Utilities
Estimated cost: $3000-$13,000/year
You will need to budget for utilities such as gas, electricity, water, and sewer if they are not included in your lease or CAM. If you plan to use communication utilities such as phone and internet, you should budget for them as well since they can add up quickly.
Maintenance
Estimated cost: $1,500-$3,000/year
If everything goes according to plan with your brokerage, you will have a lot of wear and tear from busy agents using your office. To keep things in order, you will want to budget for common maintenance. This can include services like cleaning, trash removal, recycling, and paper shredding.
If you’re renting a standalone building, or if building maintenance isn’t covered in your lease or CAM, you’ll need to budget for additional building maintenance. This will help ensure that your agents and their clients are not discouraged by a poorly maintained office.
Cleaning
Estimated cost: $4,800/year
It’s understandable if you or your staff don’t want to spend time cleaning the office every week – after all, it’s not the most exciting task. However, if you don’t outsource this chore to a professional cleaning service, your employees may start to see it as a punishment. Not only that, but the cost of hiring a cleaning service will quickly be offset by the benefits of having a happier team.
Buyer & Seller Lead Advertising Costs
Estimated cost: $20,000-$100,000/year
Estimated return: $40,000-$400,000
Percentage of revenue: Excluded from operational budget
While it’s not required to provide buyer and seller leads to operate a brokerage, many brokerages today offer some brokerage referred leads or lead programs.
The cost of platforms like Real Geeks, which are used by many tech-savvy brokerages, ranges from $500 to over $2,500 a month. These platforms generate leads and help manage customer relationships. The advertising spend necessary to generate a consistent return starts at $1,000 a month, and can quickly exceed $10,000 a month.
If you want a less hands-on approach, you can buy leads for your agents from services such as Zillow or BoldLeads.
If you want your agents to make the most of the leads you purchase for them, you might want to hire a Leads Manager. This person can manage the system, track leads, and hold agents accountable, which could increase your ROI from paid leads by 300% or 400%.
Separate Profit & Loss Statement
When determining whether or not your lead program is profitable, create a separate P&L that includes the revenue from referral fees along with the expenses of running the program. Your agents should pay a referral fee at the close of any transaction that came from the lead program. Doing this will give you a clear picture of whether or not the program is actually profitable.
Associations, Professional & Insurance Expenses
Estimated cost: $12,000-$18,000/year Ideal percentage of revenue: 2%-4%
Some real estate brokerage expenses are necessary but not as exciting as renting a flashy office. Examples of necessary expenses include insurance, banking, and legal costs.
Additionally, you may overlook expenses like membership dues, licensing fees, and tax preparation because they only occur once a year. However, these costs can be significant, so you should include them in your budget.
The Bottom Line
One of the biggest financial decisions that most people will make in their lifetime is whether to buy or sell a home. It is crucial to understand how real estate agents on either side of the transaction get paid, so that you can decide if it is in your best interest to hire an agent or go at it alone.
Now you can estimate your expenses and move on to the better part, estimating your real estate brokerage revenues and finalizing your real estate budget.
Here is a quick overview of the costs associated with licensing, insurance, bookkeeping and other professional expenses. You may prefer to manage your own books, and there are plenty of online tools and resources to help you with this.
QuickBooks Accounting Software for Small Business is available to use with a monthly subscription plan. This software makes it easy for you to manage your brokerage budget from anywhere you have an internet connection and can save you expenses on bookkeeper fees. The QuickBooks accounting products also help you to track your business expenses, revenue, and profitability, so you can easily handle these tasks on your own.
