Every new business owner needs to know the fundamentals. Forbes.com is breaking down those building blocks by answering eight core questions related to a given industry. Taken together, the information will give budding entrepreneurs a head start on making those first critical steps.
How much will I need to shell out in start-up costs and ongoing expenses?
Before you get started, first decide how to pay your agents. There are two models, known as “desk-fee” and “commission-split.” Some firms use a hybrid of the two.
In the desk-fee model, made famous by giant RE/MAX International, agents pay a flat monthly fee to the brokerage firm (which in turn covers operating expenses like rent, computers and office supplies) and keep 100% of the sales commission–typically 6% of the price of the home, split between the buying and selling brokers. They also take on the volatility in the housing market.
With this model, start with your target profit margin and work backward. Factor in operating costs such as rent, utilities, insurance, marketing, office supplies and listing fees, and out pops the fee agents should pay.
In the commission-split model, still used by most brokerages, agents split the commission with the broker. Typically, the split
starts at 50%; as agents prove their worth, they can capture up to 80%. Like the desk-fee model, broker owners still cover administrative costs, but agents pay to market their own properties.
While revenues can fluctuate dramatically with this model, administrative costs generally eat up between 10% and 30% of the top line. (Larger offices, with 30 agents or more, gain economies of scale.) Rent and property taxes can run as high as 35%; equipment and supplies, up to 20%; marketing and advertising, up to 20%. Listing fees, insurance and other niggling items will chew up a few more percentage points. While the most profitable brokerages can clock pretax margins in the 20% range, anything above 5% is considered respectable.
No matter which model you choose, you will need an office. Jack O’Connor, owner of Englewood, Colo.-based Prestige Real Estate Group, estimates that brokerage owners should allot 75 square feet to 100 square feet per agent.
Depending on your client base, you may want to offer some perks: O’Connor, who targets luxury vacation-home buyers, spends $2,000 a month on gourmet coffee for clients. He also suggests setting aside enough cash to cover at least six months of operating costs while sales ramp up.