Start a real estate brokerage by following these 9 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your real estate brokerage. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
STEP 1: Plan your Business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How long it will take you to break even?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a real estate brokerage?
There are licensing fees, which are different from state to state. You will need to have an office and an ongoing marketing campaign. You will need to have insurance to be bonded and for “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)
Being realistic, you will need up to 12 months to begin closing your first deals and earn your commission, so you will need to finance the operations, which are running at a loss for the first year. This means you will need to finance about $46,750 for the first year, not counting any money you will pay for employees or need for yourself. Most brokerages are financed by investors, family, or with their own 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?
One of the best things about the real estate market is almost everyone is a potential customer. The evolving nature of the industry requires extended interaction with clients in order to secure listings and buyers. An ideal seller will be motivated to sell quickly, though the process to secure the listing will likely involve constant interaction for several months.
An ideal buyer, on the other hand, will be one who is either ready to purchase in cash or has received financing from a financial institution. Ideal buyers will also have an idea of what type of property they'd like to buy while also being flexible.
An oft-overlooked quality in sellers and buyers is agreeableness. Most real estate agents and brokers will tell you that a lucrative opportunity with an ornery client is not worth the time. A brokerage may find itself working for 6 months without ever completing a transaction because of a picky client.
How does a real estate brokerage make money?
Real estate agencies make money by earning a commission (or a part of a commission) from participating in the conclusion of the sale of a property. In the sale of a property, they may represent the buyer, the seller, both (with consent from both parties), or by acting as a transaction coordinator—who helps with the paperwork without representing either party. Typically, a broker will receive a percentage of the agent's commission, as agreed upon in the agent's contract. This may take the form of a 50/50 split, 60/40 split, 90/10 split, or whatever else the broker and agent agree to.
How much can you charge customers?
In the sale of single-family homes, the typical sales commission is 5% to 6% of the sales price. For the sale of much more expensive commercial properties, the average commission is 1% to 2% of the sales price.
This commission is shared in equal amounts by the brokerages of the listing agent and the selling agent. It is possible for the listing and selling agent to be the same person. The real estate broker that the agent works for typically gets 10% to 50% of the commission depending on how much financial support they give to the agent, such as a monthly draw against future commissions.
How much profit can a real estate brokerage make?
Real estate brokers, who are well-established and successful, typically make more than $100,000 per year after paying for the expenses of their operations.
Investopedia describes how the real estate commissions are paid. The most successful real estate brokers in a major market area can easily make over $1 million per year. The one thing to remember is that it is just as easy to sell a home that sells for $1 million, if it is fairly priced, as it is to sell a home for $100,000. The paperwork and the selling process are very similar in both cases. However, the commission for selling a $1 million home versus the commission for selling a $100,000 home is quite different.
How can you make your business more profitable?
One thing to consider is adding property management services to your real estate brokerage business. This is an excellent source of additional income and helps attract more clients for real estate sales.
What will you name your business?
Choosing the right name is very important. Read our detailed guide on how to name your business. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.
After registering a domain name, consider setting up a professional email account (@yourcompany.com). Google's G Suite offers a business email service that comes with other useful tools, including word processing, spreadsheets, and more. Try it for free
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC prevents you from being personally liable if your real estate brokerage is sued. There are many business structures to choose from including: Corporations, LLC's, and DBA's.
Form Your LLC
Read our Guide to Form Your Own LLC
Check out the Top Business Formation Services from our friends at StartupSavant.
You should also consider using a registered agent service to help protect your privacy and stay compliant.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Find the right bank for you, read our review of the Top 5 Banks for Your Small Business
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
Regulations on real estate brokers vary by state. Real estate brokers must be licensed. To become licensed, brokers need to have been a real estate agent for a certain amount of time, complete required pre-license education (number of required hours vary by state), and pass a real estate license exam.
Real estate agents must work under the supervision of real estate brokers.
All real estate brokers are real estate agents but not all agents are real estate brokers. Real estate brokers are required to undergo additional coursework and experience in order to obtain a broker’s license.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
STEP 7: Get Business Insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
How to promote & market a real estate brokerage
Creating positive word-of-mouth referrals is critical. You will gain this by making your clients happy. If someone lists a property for sale with your firm and the sale happens quickly for a fair price, then you will gain a good reputation.
Moreover, if you find a “dream” home for a family that is one that they can afford in the area they prefer to live in, you will increase your positive reputation.
There is still value in traditional advertising as well, like mailers, newspaper ads and more, but the industry has shifted heavily in favor of Internet marketing. Well-polished websites, informative videos, and an active social media feed all help brokerages appeal to the younger demographic.
How to keep customers coming back
Making the process easier for the client will go a long way to attracting new clients and keeping your relationship with existing and former clients strong. 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's also important not to forget clients once the deal is closed. Clients are made into repeat clients when the brokerage follows up periodically to ensure clients are happy with the transactions. Following up like this will help you find out when your former client may need to buy or sell again, and you'll be at the top of their mind.
STEP 9: Establish your Web Presence
A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Start A Real Estate Brokerage In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
If you find yourself driving through the neighborhoods, looking at the various properties, and thinking about how much they might sell for, then real estate might be the perfect business for you. You will spend a lot of time canvassing certain areas of town to get familiar with what is offered for sale and then more time in your car driving potential buyers around to take a look at these properties.
Local ordinances require you to be a real estate agent for a certain amount of time before you can get your broker's license and start your own brokerage, complete a certain number of deals per year, complete a certain number of hours of continuing education, and pass the real estate broker's exam. If you've worked as an agent and enjoy the experience, you might enjoy opening a real estate brokerage.
What happens during a typical day at a real estate brokerage?
While daily duties differ greatly for real estate brokerages, the general duties of the supervising broker (and/or owner of the brokerage) can be summed up as follows. Supervising brokers advertise the brokerage and oversee the operations of agents. This includes helping with paperwork, giving advice, and stepping in where necessary to help with transactions.
Brokers also frequently perform many of the same duties as agents. A broker may choose to represent a client as a listing agent or a buyer's agent. As a listing agent, your duties include marketing properties, holding open houses, and vetting buyers. A buyer's agent, on the other hand, helps clients by finding suitable properties, creating and presenting offer agreements, among other things.
What are some skills and experiences that will help you build a successful real estate brokerage?
Because of the licensing requirements, all real estate brokers that establish their own companies have worked as real estate agents for others first. There are also course requirements for each state that need to be finished successfully and exams that must be passed in order to be qualified for a license. Real estate agents have to work under the supervision of a licensed real estate broker. Being personable and gregarious is very helpful in getting listings of properties for sale and helping buyers find a property that they want to purchase. Exceptional organizational skills are also necessary. Meticulous records need to be kept in this industry. A customer relationship manager, like Copper, is a great way to keep track of interactions with customers and clients.
What is the growth potential for a real estate brokerage?
Expansion of this business is based on serving additional geographical areas. A common practice is to set up a brokerage in one community and then expand to serve other areas based on the initial successful operation.
An example is Century 21 that started in 1971 with a single location and then expanded globally to now have over 6,800 independently-owned franchise operations in about 78 countries, with over 100,000 sales professionals.
Should you consider joining a franchise?
If you'd rather buy into an existing system, you can join a franchise. Companies like Re/Max and Keller Williams carry brand recognition that may help brokers in the marketing process. In addition, real estate franchises usually help market your business and offer valuble training along with proprietary business models. If you would rather not start from scratch and you have significant income, a franchise may be the right fit for you.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a real estate brokerage?
It helps tremendously if you are already a community leader with a vast array of personal contacts that you are able to call upon in your local area. Being able to network and be trusted in your local community goes a long way in establishing your reputation. A real estate sale or purchase is a fairly rare occurrence in any individual’s life, so you will need to have an extensive network of contacts in order to continuously generate new business.
If you've been a prolific real estate agent, and often find yourself helping other agents, you'll likely be a good fit for starting a brokerage.
Give some thought as to whether you want to operate in a brick-and-mortar location, purely online with cloud services, or a combination of the two. Much of the market is moving toward internet-based real estate transactions, but there is still value in meeting face-to-face in an office.
Lastly, don't underestimate the importance of a business plan, especially if you'll have investors. A strong business plan could be the difference between a successful brokerage and a huge waste of time and money.
How and when to build a team
As a real estate broker, you will want to add as many effective real estate agents to your business as your administrative staff can handle. The more agents you have, the more likely it will be that you will earn commissions. Most real estate agents work on a commission-only basis, and the real estate broker that they work for gets to keep part of the commission for supervising the transactions and giving the agent an office and support.
The support given by a real estate broker to their agents includes such things as answering the phones, participating in a multiple-listing service (MLS), and advertising the business. Most real estate brokers start out with at least a few agents working with them. A very active office in a major metropolitan area might have many agents involved in the business.