Becoming a Real Estate Broker; To Be Or Not To Be

Nuggets For The Noggin

Real Estate Broker; To Be Or Not To Be!

That Is The Question; Isn't it?

By Jim "Gymbeaux" Brown, April 24, 2014

In my over 33 years in the real estate business I have lost track of the number of times I have been asked about a real estate agent becoming a license real estate broker.  In all those years my answer has not changed.

My response is based on Louisiana Real Estate Law so if you are from another state please check your state's licensing laws as they may quite possible be different.

In Louisiana the first fact that needs to be considered is the cost of maintaining a Sales Person license versus the cost of maintaining a Broker's license.  The Broker's license is more costly plus there is an additional cost to obtain the Broker's license.

Now comes the hardest question.  It has been my experience that agents "think" that obtaining a Broker's license is the next logical thing to do once they obtain their sales license; it is not.  I once thought that and I obtained my Broker's license right after I completed the required two years as being a licensed sales person.  At the time I had no desire to be a Designated Broker for a real estate company or to own my own real estate company so the urgency to obtain my Broker's license was simply not there but I did it anyway.  I did not actually use my Broker's license as a Designated Broker for almost 15 years.  So I paid the additional costs involved even though I did not use the license as a Designated Broker but instead an Associate Broker working as a sales person and even a manager (where a broker's license was not actually required) within a real estate company.

Therefore the most difficult question that a license agent must ask and answer is why do they want to obtain their broker's license?  Is it to be become a Designated Broker within an existing real estate company or is it to open their own real estate company?

I have found that most agents, certainly not all agents, who obtain their Broker's license for the purpose of opening their own real estate company immediately suffer a reduction in income upon opening the business.  Why?  There are so many reasons why this occurs, such as:

1. They now have operating expenses for the actual company whereas before they had operating expenses ONLY for their own individual real estate business (listings and sales).  They now have rent, utilities, additional permitting fees, insurance, additional equipment to properly outfit the new office/company, paper products, higher board and MLS fees and in Louisiana I had to maintain two licenses, one as the Designated Broker in the name of the company and one for my own real estate individual business.  That meant double fees all around.  As the owner of the company you also have to develop a company logo, purchase stationary, envelopes, create non-standard use forms, etc.  All this costs money to begin and then even more money to maintain.  Where does this money typically come from?  From the Broker/Agents individual listings and sales.
2. IF your intent is to be the ONLY agent within your new company you must formulate an operating budget that identifies all of the Company expenses and all of the your own personal real estate sales expenses.  Agents who create a one-person real estate business oftentimes think that they are going to be able to not only maintain their current level of business but also increase it and that just does not happen on any regular basis.  Most individual listings and sales tend to taper off and then level off at a much lower rate than when they were with a much larger company.  There is a reason for this and that is sellers are not stupid and they know there is a greater chance of selling their home when they list with a company that has a lot more than just one agent promoting the sale of their property - it really is that simple.  More importantly I can assure you that the competition is using the fact that you represent a company of only one agent against you when it comes to listing a home.
3. IF your intent is to grow your newly opened company that means recruiting and a lot more than you might first imagine.  There is a cost in recruiting; not much, but a cost nonetheless.  The cost is incurred by the requirement of adding more desks, more phones, more equipment, more space, higher rents, higher utilities and a great more of your personal time in managing the new office with more people being added; hopefully.  When your time is taken away from your listing and sales business you necessarily experience a reduction in income that must be used as personal income and income required to operate your new business.  It is extremely difficult to be a top producer in a real estate company while also being the owner, the Designated Broker and if you have not thought about it, the recruiter, the bookkeeper, the compliance person and the trainer all of which will require your time.
4. The next question is whether you will be an independent company or purchase a franchise.  If you elect the franchise route, you have a franchise fee to consider and they range all over the place and I would budget at least $15,000 for a franchise fee (probably more now).  Some fees are good for a specific period of time like 5 years and then are renewed.  Some franchises require a transaction fee on each transaction.  You need to research the various franchise opportunities available to you in your area.  Most franchise companies will NOT permit a new franchise office in an area where there is already an existing franchise office in place.  In fact if it were me, I would not want to even consider a franchise who would permit a second competing office in a given area because if they will do that to the existing franchise owner they will also do it to me should the opportunity present itself.  If you decide on the franchise path, you will oftentimes be required to spend time and money in attending franchise ownership training, equipment and software.  Again this money comes from you and/or your company but either way, it is YOUR money you are going to spend.
5. If you decide on becoming an independent broker AND intend to recruit, what will you have to offer recruits to entice them to join your company.  It has to be more than your personality.  In fact your personality and previous production could work against you because recruits worth their while understand that they will be in competition with you for listings and sales and that is never a good position to be in either for you or for agents within your office.  Your agents must feel they have your complete 100% support and not fear you taking their customers away from them at the first sign of difficulties.  They must also believe that they will have an equal chance at receiving referral business that come into the company and that you the owner/broker/agent do not take them all; that is a very hard thing to prove and typically causes discontent within the office/company when agents believe the owner/broker/agent is taking all the referrals coming into the company.
6. Employees:  Whoa, who said anything about employees?  You must at some time consider hiring someone to maintain your books and maybe even working your front desk.  This is an additional cost that must be paid for by YOUR income even though you may think it is coming from the company.
7. IF your decision to get your Broker's license is because you have the opportunity to become the Designated Broker for an existing company, the big question should be whether you can continue to list and sell property.  If the answer is YES you will undoubtedly run into problems with the agents within your company who think you may be taking incoming referrals for your own business rather than dispensing them to agents within the office/company.  If the answer is YES you run the risk of not being available for the agents and owner in your company as your listing and sales business will or should routinely take you out of the office making you unavailable when needed by others; that is never a good situation.  If the answer is NO, then you need to (1) assure yourself that your income provided by the owner of the company is sufficient for your needs and more importantly (2) know what has to happen for your income to be increased.  You also need to know what expenses will be paid for by the company such as your license renewal fees, insurance, board dues and MLS dues.  Whatever you do, get all these things IN WRITING from the owner(s)!

Before you decide to obtain your Broker's license these are just some of the thoughts that came to mind as I wrote this Nugget.  There will be more as time goes by.  As you can see, the decision to become a broker should not be taken lightly.  There is much to consider. I would highly recommend you consider a Ben Franklin close where your draw a large letter "T".  On one side you put all the positive things to consider and on the other the negative things to consider.  When you see them all located in one place it oftentimes makes the decision much easier to make.

So let's assume you decide to get your Broker's license.  The next step would be to create a Business Plan and that plan should address a very precise operating budget.  Define how much it will cost you to operate the business and then where the operating funds will come from.  It should also define where you see your business in 1 month, 6 months, a year, 5 years out and 10 years out.  That will help you to decide if your decision makes sense.  If someone would not lend you money to open up your business based on your plan, what would make you think it would be a successful business? 

But wait, there is one more HUGE thing to consider IF you intend to open your own company.  Is it needed in the area?  What will make your company that much different than other companies already in operation?  What will be your company's points of difference from everyone else and can you get the public to buy into those differences?  You need to conduct "Gorilla Warfare" in your area to determine whether there is enough business to support another real estate company in your area.  Then will there be enough agents not satisfied with their current companies to take a chance on you and your company to join your company.  THAT IS A HUGE ITEM TO CONSIDER!  Remember the 80/20 Rule.  In your area, of ALL the existing agents in your area, only 20% would be considered as top producing agents.  Then what percentage of THOSE agents can you reasonable expect to recruit; if any.  Remember agents typically have a downturn in their production when they change companies.  Then of the remaining 80% the 80/20 rule applies again.  Of the remaining 80% only 20% of those agents are producing any kind of sales.  The remaining agents are basically non-productive.  This represents your resources for growing your company.  If you are going to rely on recruiting brand new agents you had better have a very good training program designed to help new agents become productive.  A VERY GOOD ONE!

There you have it in a nutshell.  The ultimate decision is yours to make but please, for your own sake, make it an informed decision.  Get help in formulating all you need to know to make an informed and practical business decision.  Most agents realize that their best path to make the most money is stay an agent within another company and focus on that goal.  Just because an agent is successful in listing and sales does not automatically translate into being a good owner/manager - it takes a different mindset for each of those tasks.  Are you best at listing and sales or at managing people?