If you’re considering starting your own real estate brokerage, you may be wondering if it’s a profitable business model. It’s important to consider the risks associated with this undertaking.
Read on to learn about the pros and cons of real estate brokerage, plus, get tips to ensure the success of your business.
Key Takeaways
Owning a real estate brokerage can be a profitable business model that allows you to earn more, be independent, and have creative freedom in your business practices.
There are several risks involved with owning a real estate brokerage, including economic, market, and legal considerations. These risks can present your brokerage with financial difficulties that can be difficult to overcome.
Before starting a real estate brokerage, researching and planning your business strategies and operations is always important. Creating a business plan, obtaining all necessary licenses, and obtaining financing are the best places to start.
Is Owning a Real Estate Brokerage a Profitable Business Model?
Owning a real estate brokerage can be an extremely profitable business if executed correctly. As the owner of a brokerage, you receive a higher salary and a higher percentage of profits from each deal.
The sources of profit as a real estate broker are the connections you make with buyers, sellers, franchises, and the hard work of your agents.
As a broker, you can increase potential profit by seeking out more deals yourself and getting paid full commission, or by sponsoring real estate agents who are closing deals and splitting their commission.
With these streams of income, owning a a brokerage has the potential to be a very profitable business model. However, it also comes with its fair share of risks.
These risks include downward market shifts, economic crises and client lawsuits. You must always be prepared to deal with these situations and have enough funds to avoid going bankrupt.
What is the Profit Margin For Real Estate Agents?
Owning a brokerage means spending money to make money. Maintaining a favorable conversion rate and profit margin is crucial. The average profit margin is 5-6% of the sale price.
For a $500,000 property, this would be a $25,000-$30,000 commission.
However, this commission is typically split evenly between the buyer’s agent and the listing agent. If only one of the agents is from your brokerage, then you’ll receive less of the commission. If both agents are from your brokerage, then you as the broker will receive a larger portion of the commission.
To maintain profits and stay afloat, your brokerage needs a sufficient profit margin from commissions to cover agent fees and operations, even during dry spells.
For example, a brokerage with a rate per agent of $10,000 per year will have to bring in around $12,000 per agent annually to maintain an ideal profit margin while providing their agents with sufficient payouts and commission splits.
The most common commission split is 60% for the agent and 40% for the broker, but there could also be 50/50, 70/30, or 80/20 splits.
In another example, if the brokerage wants to employ more agents and keep a lower split but create more deals, the rate per agent would increase along with the earnings to maintain a similar profit margin.
Pros of Starting a Real Estate Brokerage
There are some key benefits to owning a real estate brokerage. They include:
Increased Income
When you own a brokerage, your salary can increase from working as an agent or partner. However, how much more you can earn depends on the success of your brokerage.
As a broker, you can set up appropriate commission splits for your agents, if you have any, and negotiate initial fees and property prices.
Although you own the brokerage, your income and revenue depend on your and your agents’ success.
Industrial Real Estate Specialist, David Cox, notes:
“Your income will be directly related to how much work you put in, the types of properties and clients you choose to work with, and the reputation that you develop in your community through the building of positive professional and personal relationships.”
Independence
As the owner, you can decide when and where you work. You can also create quotas and deadlines for your team to keep the business operating smoothly and turning a profit. This sense of control and independence is one of the greatest benefits of owning a brokerage.
Freedom
When you own a brokerage, you will find the deals and negotiate with sellers and buyers. You will ultimately be in charge of what properties you broker and are free to explore and experiment without restrictions.
However, as an agent or partner, your ideas may be limited, and you can only explore some possibilities you may have hoped for.
Cons of Starting a Real Estate Brokerage
Before starting your own brokerage, it’s important to consider the downsides:
External Risks
To enjoy the benefits of more income and creative freedom, your brokerage has to succeed. In the way of success and profit lies a minefield of economic, market, and legal risks that can affect your brokerage.
The current economy suffers from high inflation and interest rates, making maintaining a favorable profit margin harder.
The real estate market has ups and downs that will either make or break your profit stream. One unsatisfied buyer can even take you to court and cost you expensive legal fees.
These risks create high costs and difficulties for your brokerage and are worth considering.
Large Responsibility and Investment
The other downside of owning a real estate brokerage is the huge responsibility placed on your shoulders. You are in charge of finding the sellers and buyers, negotiating prices and fees, hiring agents, managing them, obtaining your broker’s license if you haven’t already, and so on.
Dealing with this responsibility may require you to work double or triple overtime with little wiggle room. It will take tremendous work, money, time, and effort to succeed as a broker.
Things To Do Before Start a Real Estate Brokerage
Before starting a real estate brokerage, there are some important steps you must take to prepare yourself for the challenges ahead.
Experience & Licensing
The first step for anybody looking to start a real estate brokerage is to obtain your broker’s license, which can take years. The requirements for obtaining the licenses vary by state, so you can research your state’s specific criteria and go from there. You can also hire a licensed broker for your team.
After obtaining your license, you should gather as much experience as possible in the real estate industry. Spending time working for another broker or franchise is recommended because knowledge is power; the more you have, the more successful you will be when you start your own brokerage.
Market Research
Before starting your brokerage, you should do plenty of market research to find out if your location is a profitable place to start a brokerage. This research will help you decide what type of real estate will be most profitable in your area.
There are several types of properties to specialize in, such as commercial, residential or industrial.
You can also partner with franchises or find buyers and sellers in an area with an open space to fill. Find your niche and concentrate all your efforts on this specialty with your brokerage.
Financing
The next step, and arguably the most important, is to acquire financing to start your brokerage. The amount you will need depends greatly on where and what you will broker, but it typically ranges from $10,000 to $200,000.
Researching to find the best deals on loans you can use to finance your brokerage before getting started is crucial.
Setting up financing requires a lot of paperwork. A great way to organize all this paperwork in one place is through digital software, like Trustworthy, a system where you can store and manage your important financial documents and share them securely with collaborators.
Business Plan
The next step is to create a detailed business plan outlining your brokerage's operations, goals and financing. The business plan should include an executive summary, financial planning, commission details, and recruiting and training processes.
Legal Consideration
When you create your business, it’s important to cover all of your bases and select the type of business that benefits you the most. A limited liability corporation (LLC) is a popular choice for most people, but consider all options before making your decision.
Ensure all liability and revenue information is documented, signed, and agreed upon by all partners and employees. If you run into trouble later on, you will be glad you took all the necessary precautions.
Tips to Make a Real Estate Brokerage Profitable
Now that you have successfully started your brokerage, here comes the stressful part: making a profit.
Here are four tips to help you create a profitable brokerage:
Tip #1: Develop A Lead Generation System
Lead generation is one of the most important investments for any start-up brokerage. Leads are how you will keep your agents going and bring you the most profit potential.
As a new brokerage, you may want to invest in lead generation technologies and systems to keep your agents occupied and provide them with as many leads as they can handle.
Tip #2: Keep Agents Productive and Retention High
The key to a successful brokerage is closing deals; you can’t close deals without the hard work of talented agents. It’s crucial to keep your agents productive and offer a high enough split to motivate and retain them.
Providing leads, offering a higher-than-market split, and great communication are all ways to attract and maintain talented agents to your brokerage.
Tip #3: Embrace Technology and Innovation
Investing in technology and software is another great way to appeal to agents and increase productivity and potential profit. Customer Relationship Management and lead generation tools will make you and your agents’ work easier and increase the quality of your operations overall.
Tip #4: Partner With A Franchise
Another tip to consider is partnering your brokerage with an existing franchise. You can save on your initial investment and enjoy the franchise's benefits.
A franchise will already have an established brand and funding in place for technology that can support your brokerage when you're just starting.
Frequently Asked Questions (FAQs)
How are commissions paid in real estate?
Commissions are a percentage taken from a property’s selling price paid to agents. Sellers are typically responsible for paying the commission. A typical commission rate is 5-6%.
How does a brokerage make money?
A brokerage makes money by charging a commission for sales they brokered between a buyer and seller. There are also several fees that a broker can charge a buyer and seller that will net them a profit from every transaction.
What is the most profitable real estate company?
Equity Residential, China Overseas Land & Investment Limited, CBRE Group Inc., AvalonBay Communities, Inc., Goodman Group, and Alexandria Real Estate Equities, Inc. are some of the most profitable real estate companies.
What is a brokerage business model?
A brokerage business model consists of three parties: a home buyer, a seller and a broker. The broker brings the buyer and the seller together to facilitate the purchase of a good or service and charges a fee for their work.
Is a brokerage the same as a real estate agency?
A brokerage differs from a real estate agency because of who they represent. A broker is responsible for facilitating the transaction between a buyer and a seller, so the broker represents the buyer or seller who hired them. Both can employ real estate agents but represent different parties.
