A real estate brokerage is a business that employs real estate agents and associate brokers and conducts real estate transactions. Transactions are usually facilitated by the brokerage. In order to open a brokerage, you must become a licensed real estate broker.
This text provides a simple guide to starting a real estate brokerage. The steps provided will help ensure that your new business is well planned, registered correctly, and compliant with the law.
STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. You need to know what you’re doing and where you’re going, or you’ll never make it. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
We have done a lot of research for you, so you’re lucky.
What are the costs involved in opening a real estate brokerage?
In order to become a real estate agent, you will need to pay licensing fees, which vary depending on the state. You will also need to have your own office and an ongoing marketing campaign. In addition, you will need to be insured in order to be bonded and to have “errors and omissions” coverage in contractual dealings.
Typical startup costs are:
- Real Estate Broker’s License – $1,500
- Office lease deposit – $2,000
- First month’s rent – $2,000
- Utilities, Telephone, Internet – $250 per month
- Office signage – $2,000
- Marketing expenses – $2,000 per month
- Employee expenses – (depends on the number of agents)
It will take up to a year to start closing deals and earning commission, so you will need money to finance the business, which will be operating at a loss during the first year. This means you will need to come up with $46,750 for the first year, not including any money you will need to pay employees or for yourself. Most brokerages are financed by investors, family, or the owner’s personal capital.
What are the ongoing expenses for a real estate brokerage?
The monthly expenses for a small office with five real estate agents and one administrative support staff are:
- Staff expenses – $5,000 per month plus commission shares on sales
- Rent – $2,000 per month
- Marketing – $2,000 per month
- Utilities – $250 per month
- Insurance – $200 per month
Total: $9,450 per month
Who is the target market?
Almost everyone is a potential customer in the real estate market, which is great. However, this also means that agents have to constantly interact with clients for extended periods of time in order to secure listings and buyers. Whereas in the past agents could just get a listing and then wait for the calls to come in, now they have to constantly be in touch with their clients to keep the listing.
The best type of buyer is someone who is either able to buy the property outright with cash or has already been approved for financing from a bank. It’s also helpful if they have a general idea of what kind of property they want, but are willing to be flexible.
An important quality that is often overlooked in sellers and buyers is agreeableness. Most real estate agents and brokers will tell you that a lucrative opportunity with a difficult client is not worth the time. A brokerage may find itself working for 6 months without ever completing a transaction because of a demanding client.
How does a real estate brokerage make money?
Real estate agencies profit by collecting a commission (or a portion of a commission) from involvement in the sale of a property. This may include representing the buyer, the seller, or both (with permission from both parties), or by serving as a transaction coordinator–who helps with the paperwork without representing either party. More often than not, a broker will receive a percentage of the agent’s commission, as specified in the agent’s contract. This percentage can take the form of a 50/50 split, 60/40 split, 90/10 split, or any other arrangement that the broker and agent agree to.
How much can you charge customers?
The average sales commission for single-family homes is 5% to 6% of the sales price. For the sale of more expensive commercial properties, the average commission is 1% to 2% of the sales price.
The listing agent and selling agent both receive an equal portion of the commission. If the listing agent and selling agent are the same person, they will still receive the commission as if they were two separate people. The broker that the agent works for usually receives 10-50% of the commission, depending on how much financial support they give the agent, such as a monthly draw against future commissions.
How much profit can a real estate brokerage make?
Real estate brokers who are established and successful typically make more than $100,000 per year, after paying for their operational expenses.
According to Investopedia, real estate commissions are paid differently depending on the price of the home being sold. For example, a successful broker in a major market area can make over $1 million per year from selling a home that is priced at $1 million. In contrast, the commission for selling a home that is priced at $100,000 would be much less. This is because the amount of paperwork and the selling process is generally the same regardless of the price of the home.
How can you make your business more profitable?
If you’re thinking about expanding your real estate brokerage business, one option is to add property management services. This can be a great way to generate additional income and attract more clients for real estate sales.
What will you name your business?
. It’s important to carefully consider what name you choose for your business. If you need help coming up with a name, our “How to Name a Business” guide can assist you, or try using our Real Estate Brokerage Name Generator for some creative ideas.
If you are the only owner of your business, you may want to do business under a different name than your own. Learn more about this by reading our guide on doing business as another name.
When registering a business name, we recommend researching your business name by checking:
- Your state’s business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It’s important to get your domain name before someone else does.
If you want to be a real estate broker or hire one to oversee operations for you, you or the broker must have been licensed as a real estate agent for a certain amount of time (as determined by your state), along with some other state-specific requirements.
STEP 2: Form a legal entity
There are four main types of business structures: sole proprietorship, partnership, limited liability company (LLC), and corporation.
If you establish a legal business entity such as an LLC or corporation, you will not be held personally liable if your real estate brokerage is sued.
Limited Liability Companies can be formed by anyone willing to pay the minimal state LLC costs. However, for a small additional fee, it may be worth it to hire one of the best LLC Services.
STEP 3: Register for taxes
You will need to register for state and federal taxes before you can open for business.
To register for taxes, you will need to apply for an EIN. It’s free and easy to do!
You can get your EIN for free through the IRS website, by fax, or by mail. If you’re interested in learning more about EINs and how they can help your LLC, read our article, What is an EIN?.
You can find out how to get an EIN by reading our guide or by searching for your existing EIN.
Small Business Taxes
The business structure you choose will affect how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
The amount of state taxes you have to pay for your business depends on the state you’re in. Our state sales tax guides have more information on state sales tax and franchise taxes.
STEP 4: Open a business bank account & credit card
If you want to protect your personal assets, you need to have dedicated business banking and credit accounts.
If you mix your personal and business accounts, your personal assets could be at risk if your business gets sued. This is called “piercing your corporate veil.”
You can improve your business’s credit rating by taking out credit in the business’s name and using it responsibly. This will help you get better interest rates and credit limits.
Open a business bank account
Besides being a requirement when applying for business loans, opening a business bank account:
- Separates your personal assets from your company’s assets, which is necessary for personal asset protection.
- Makes accounting and tax filing easier.
You should read our Best Banks for Small Business review to find the best national bank or credit union.
Open net 30 accounts
Net 30 accounts help businesses establish credit and improve cash flow. Businesses that use net 30 terms purchase goods and then pay the full amount owed within 30 days.
Vendors that offer credit on net 30 terms report to the major business credit bureaus, which helps businesses build their credit so they can qualify for credit cards and other lines of credit.
If you’re interested in learning more about building business credit, we recommend reading our guide on the best net 30 vendors. This will help you get started on the right foot and establish yourself as a reliable borrower.
Get a business credit card
Getting a business credit card helps you:
- Separate personal and business expenses by putting your business’ expenses all in one place.
- Build your company’s credit history, which can be useful to raise money later on.
Applying for a business credit card from Divvy is a quick and easy way to build your business credit.
STEP 5: Set up business accounting
It is critical to understanding the financial performance of your business to keep accurate and detailed records of your various expenses and sources of income. This will also simplify your annual tax filing.
By keeping track of your business expenses, you can save time and money come tax season. Our LLC Expenses Cheat Sheet makes it easy to stay on top of your finances and quickly find and categorize your expenses. Our LLC Expenses Cheat Sheet can help you save time and money by keeping track of your business expenses. You can use it to quickly find and categorize your expenses, so you’re ready come tax season.
STEP 6: Obtain necessary permits and licenses
If you don’t get the right permits and licenses, you could be fined a lot of money or your business could be closed.
State & Local Business Licensing Requirements
Each state has different regulations for real estate brokers. In order to become one, they must obtain a license. The requirements for this vary by state, but usually include having worked as an agent for a certain period of time, completing certain pre-license education hours, and passing an exam.
Real estate agents are not allowed to work without the supervision of a real estate broker.
Not all real estate agents are brokers. In order to obtain a broker’s license, real estate brokers are required to undergo additional coursework and experience.
If you are a small business owner, it is important to learn about how sales tax will affect your business. Our article, Sales Tax for Small Businesses, will provide you with the information you need to know.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
STEP 7: Get business insurance
Your business needs insurance to protect it financially in the event of a covered loss.
If you run a small business, you’ll want to look into getting General Liability Insurance. This is the most common type of insurance coverage that small businesses need, so it’s a good place to start.
If your business will have employees, it’s likely that your state will require you to carry Workers’ Compensation Coverage.
STEP 8: Define your brand
Your brand is what makes your company unique and how the public views your business. A strong brand will help your business be more visible than your competitors.
If you aren’t feeling confident about designing your small business logo, then check out our
Design Guides for Beginners, we’ll give you helpful tips and advice for creating the best unique logo for your business.
How to promote & market a real estate brokerage
It’s really important to get people talking about you in a positive way. You can do this by making your clients happy. For example, if someone uses your company to list a property for sale and the sale goes through quickly and smoothly, people will start to think of your company favorably.
If you can help a family find a home that they can afford and that meets their other preferences, you will improve your reputation.
While traditional advertising methods like mailers and newspaper ads are still effective, the industry has increasingly shifted towards Internet marketing. This includes having a well-polished website, informative videos, and an active social media presence, which all appeal to the younger demographic.
How to keep customers coming back
Making the process easier for the client will make the client want to come back and also tell their friends about how great their experience was. Clients want a brokerage that will work hard for them and go the extra mile. Whether that’s a gift basket sent to a family after the purchase of a new home or maintaining flexible hours for showings with a buyer, that extra step will help to set you apart from the competition.
It is important not to forget about your clients even after you have closed the deal. You can turn them into repeat clients by following up with them periodically to check if they are satisfied with the transaction. This will also help you find out when they may need to buy or sell again in the future, and you will be the first person they think of.
From nagging start-up requirements to territorial limitations, franchise brokerages can have their downside as well that are commonly overlooked by the excitable entrepreneur. That is why in this article, we outline the top 4 reasons you should NOT buy a real estate franchise brokerage:
- Inflexible Rules and Vision
- Start-Up Qualifications
- Upfront Investment
- Franchise Territories
1) Inflexible Rules and Vision
First, franchisors have a lot of rules that franchisees have to follow. This might limit how you want to run your business. For example, you might not be able to use certain methods that you think would be successful. Second, a franchisor’s business model might not be the best for your location. Finally, following the rules set by the franchisor can be expensive.
If you’re an entrepreneur who likes to be creative and have a lot of your own ideas in your business plan, it may cause conflicts with your franchised brokerage, which requires you to run your business their way, instead of your own.
2) Start-up Qualifications
You have decided to buy a real estate franchise after considering the pros and cons. You are excited to start building your own real estate brokerage business, but you should know that it is not a simple process. Franchises are never simple to own.
Before purchasing a franchise, real estate entrepreneurs should make sure they are actually eligible to be a franchisee candidate for that franchise. Overlooking this step can lead to big mistakes.
Most real estate franchises have high qualifications and requirements that a prospect must meet in order to be considered as a candidate to open an office. These usually range from a certain amount of previous experience and achievements in real estate, either as an agent or a manager, to your overall net worth or liquid assets that you have on hand to ensure that you can operate your business effectively.
3) Upfront Investment
The most common reason people cite for not opening a real estate franchise brokerage is that it is too expensive.
This is the start-up investment you will need to make.
As mentioned before in the article, real estate franchises have certain standards that you must abide by, which usually come with hefty fees. To pay for these fees, you will either need to pay out of pocket or get a business loan.
4) Franchise Territories
The last reason you should not purchase a real estate franchise is that successful franchisees can become frustrated with the franchisor.
Franchises have territories to prevent two franchisees from competing in the same area. For example, you may have never seen two McDonalds locations next to each other.
