If you want to learn how to start a real estate brokerage in 2020, you could do worse than learn from Jeff. Jeff (not his real name) was a Brooklyn kid who managed to grow a literal mom-and-pop brokerage in Williamsburg to a small empire he sold to NRT for a reported mid-eight figures.
Now you might be thinking that Jeff was lucky. That he started at the low end of the market and rode one of the largest upswings in New York City real estate history all the way to F#$&* You money. You’d be right, of course, but you’d also be missing the point.
To paraphrase a wise man I once knew, you can only fish with the rod you’ve got. You can’t create the market, but you can learn how to start a real estate business that will easily enable you to 10x your gross commission income (GCI) by 2020. Here’s how to get started.
1. Before You Even Think About Starting a Brokerage, Find Your Why
Before you even think about starting a real estate brokerage, you need to understand that 80-hour weeks will become your new normal, and chances are better than even that you’re going to fail. If you do, you might find yourself back where you started with an extra $50,000 in debt.
In order to make your real estate business thrive instead of just survive, you’re going to have to work even harder than that. Just showing up won’t cut it. You’re going to have to bring your A game every single day.
Why Do You Even Want Your Own Real Estate Business?
If you’re going to bring your A game and function at your best every single day, you’re going to need motivation. I hate to say it, but unless you’re Lex Luthor, money won’t be enough. After all, you’re living comfortably now, right? Do you really think you’ll be able to wake up ready to go every single morning if all you’re after is money?
✋ Money Is Not Enough to Fuel Your Daily Grind
If you really want to succeed, you’re going to have to dig a little deeper than money as a source of motivation. You might even ask yourself, why do you want money in the first place? While that may seem obvious at first, it gets murkier the more you think about it. Why do you want to be rich?
Maybe you really crave independence, or want to prove something to yourself or a loved one. Maybe you have a family that you desperately want to provide for. Whatever your reason, you better know what it is before you get started. Unless, of course, you want to wake up in a cold sweat nine months from now and realize you want to work in nonprofit, write books, teach kids, or a million other less painful journeys and don’t really care about money at all.
“He who has a why can suffer any how” — Friedrich Nietzsche
Study after study has shown that in order to be successful at a difficult task, your goals need to be concrete rather than wishful thinking. So if you want to have the motivation to get you well out of your comfort zone every day, you need to figure out what you want in as much detail as possible. Once you have your target, you’ll be surprised at how much energy you have to actually get there.
2. Figure Out If You & Your Partners Are Qualified to Start a Brokerage
Before you start doing anything else, you need to take the time to figure out if you and the partners you plan to work with are qualified to run a real estate business. Here’s a quick checklist to make sure everyone on your team is ready to hit the ground running.
Do You Have a Broker’s License or Can You Hire a Broker of Record?
While this one might seem obvious, you’d be surprised at how many people who have zero real estate experience want to set up shop in hot markets. Legally, of course, you’re going to need at least one person on your team to have their broker’s license so they can be the broker of record—aka the person legally responsible for all the transactions any agent in your brokerage completes.
In some states, like New York, you can also hire a broker of record to take on that responsibility for you. While this might seem like an ideal solution in theory, in practice it can be a bit of a nightmare. Many brokers for hire want to just sign their name for a fee and basically never show up at the office. This is incredibly risky. You may as well ask your department of state to fine you.
Do You Have Enough Savings to Live for at Least a Year With No Income?
This is an important one. Even if you have the perfect plan and the money in the bank to make it work, you can never really predict success in your first year. The market might shift, the economy might tank, or your partners might abandon you. That means you need to mitigate the risk of going bankrupt by having enough savings to last you for at least a year without income.
Do You Trust Your Partners?
Whenever money is involved, even the best of friendships can become strained. So before you start planning your brokerage with other people, ask yourself if you really trust them. Are they professional? Do they have enough money in the bank to not make rash decisions because they need quick cash? There is no shortcut to vetting your partners, so make sure you get to know them well before you even think about planning your brokerage.
Can You or Your Partners Get Financing?
If you’re new to business ownership, you might be surprised to learn that even billionaires use loans to finance new businesses. There’s a simple formula to understand why: OPM > YM. That is, using other people’s money is better than using YOUR money. This is a concept popularized by Robert Kiyosaki, and it’s popular for a reason. It works.
Depending on the type of brokerage you want to start and where you want to start it, you could be looking at $10,000 to $150,000 in capital to get started. For example, to start a virtual brokerage, you just need to incorporate your business, get errors and omissions (E&O) insurance, voice-over-internet-protocol (VOIP) software and phones, some basic lead generation and transaction management software, a good customer relationship management (CRM) tool (or even better, an all-in-one platform that can scale with your growth), and start recruiting agents. That means $10,000 might be enough to bootstrap your business.
If you want to start a brick-and-mortar real estate business, well, all bets are off. If you’re in a big city, you might be looking at renting spaces for $2,500 to $7,500 per month for a small office in a good location. You’ll also need to secure a long-term lease and pay for furniture, computers, Wi-Fi, and other utilities. Instead of that $10,000 bootstrap budget, you might need to budget $10,000 per month.
So look into potential sources of finance you and your team can acquire quickly and cheaply. Small Business Administration (SBA) loans are a popular choice as they take money from your 401(k) to start your business. You can also look at traditional business loans or personal loans from family or friends.
3. Start Building Your Dream Brokerage (on Paper)
Once you’ve spent enough time honing in on your why, it’s time to start working on the how by outlining the steps you need to take to reach your goal. In this stage of starting a real estate brokerage, you will actually start building your brokerage on paper. It’s also the perfect time to run through the potential problems that may arise before you write that first rent check.
What Kind of Brokerage Would Make You Happy?
Before you run any numbers, spend a few hours trying to figure out what kind of brokerage would make you happy to run five years from now. Is it a large brokerage? A small boutique brokerage that focuses on luxury properties? Or would you rather work with investors and focus on property management and fix and flip? What kinds of people do you want to work with? What office culture would make you excited to come into work every morning?
It’s important to not worry about money here, so just try to focus on what you want and flesh it out on paper in as much detail as you can. Next, we’ll take your dream brokerage and see how it stacks up against your local market.
Is There Room for Your Dream Brokerage in Your City?
By now you should know what will motivate you, have vetted partners, and have some ideas about what kind of brokerage will make you happy. The next step in starting a real estate business is to figure out if your dream brokerage fits into your local market.
This stage can be extremely time-consuming in large cities, or might take an afternoon of work in a smaller town you know well. In order to find out whether or not your dream brokerage makes sense for your area, look at the current successful brokerages, see what they’re doing right—and more importantly, what they’re doing wrong that you could do better.
Here are some things you should look for:
Are the listings in your local area split relatively evenly between brokerages or is there one dominant brokerage that seems to get all the good listings?
Try to find as many examples of your competitors’ branding that you can across multiple platforms like print, social media, online, and events. What are they doing right? What can your new brokerage do better?
Do the successful brokerages in your area have dated brands that don’t line up with the demographics of the area? What kind of brand is doing well in similar cities that’s missing in your city?
4. Brokerage Models
Are there any high-split brokerages? What about virtual brokerages? iBuyers?
This one can be tricky, but what kind of office culture do the successful brokerages have? Are they formal and stuffy? Too laid back?
Do local brokerages make agents suffer with antiquated CRMs or transaction management software? What about agent profiles and listing pages? Do they look like they’re from 1995? Most agents want shiny new technology, so this might be something you can offer.
7. Training & Mentoring
Does your competition just take new agents and throw them to the wolves? If not, what kind of training and mentorship do they provide? How can you, as a small boutique broker/owner, improve on their training and mentoring?
Putting It All Together
Next, see how your dream brokerage works in your local market. Does it fill a need for potential clients? How about for agents? If you want a successful real estate brokerage, you’re going to have to appeal to both.
Now we’ll start modifying your dream brokerage into something that can work in your local area and figure out what you need to make it profitable.
4. Start Building Your Brand
Once you think you’ve narrowed your idea down to a brokerage that works in your local area, you need to start building your brand. While your brokerage’s brand can and will evolve over time, having a well-thought-out brand ready to go will help with your business plan, and just might help you get a loan. Banks want to lend money to businesses with a chance of succeeding, and a strong brand is a key part of that success.
Considering that there are entire college degrees built around branding, we can’t really do the topic justice here. So, for brevity’s sake, we’ll run you through the basics, then link out to articles that will help you nail down the specifics when you’re ready to rock.
Here are the core components of any strong brand, roughly in order of importance:
- Your brokerage’s name: The keystone of every great brand: What you name your business is one of the most important decisions you’ll make. That said, it doesn’t have to be rocket science. If you want to learn more about coming up with a name that will help your brokerage thrive, check out our in-depth guide to naming a real estate business here.
- Your brokerage’s logo: After your name, your brokerage’s logo is the second-most important element of your brand. After all, your logo is a visual representation of everything your brand stands for. You owe it to yourself to create a professional logo. To learn more, check out our guide to great real estate logos here.
- Your brokerage’s slogan: A memorable slogan, also known as a tagline (“Think Different”), can also help get more leads and close more deals. If you want to learn more about writing great slogans, check out our in-depth guide to real estate slogans here.
Start Claiming Your Online Real Estate
Once you’ve settled on a good brand, the next step is to make sure you can actually use it online. Now go try to claim a domain name and social media accounts with your name. If you’re using your last name in your brand, this part will be easy. If you’re using relatively common words in your brand, finding available domain names and social media accounts might be an expensive challenge.
Pro tip: While you’re grabbing the domain name for your business, you might as well see if you can get multiple domains for lead generation sites and landing pages. You also might as well set up hosting while you’re at it.
At Bluehost, you can kill two birds with one stone and get your domain and $3.95 per-month hosting in less than five minutes.
5. Draft a Business Plan for Your Brokerage
Once you’ve created a brand that you can work with, the next step will be to create a business plan for your real estate business. While this task might seem daunting, it’s one of the most important documents you’ll ever write for your business, so take it seriously.
Here’s a quick rundown of what to include in your business plan.
An Executive Summary
An executive summary on a business plan is where you briefly outline your path to success. How do you plan to fund your brokerage? How will you recruit agents? What will you pay them? Why does your local area need a new brokerage?
A Financial Plan
Next, you’re going to need to break out the calculator and make sure your numbers really do add up. Here are a few ideas to think about including in your financial plan so that anyone can see a clear path to profitability for your business:
Your Commission Model
What do you plan to pay your agents? A high split might get more experienced bodies through the door, but you’ll have to close a large number of deals per month in order to breakeven.
If you pay something close to the market rate of 50%, you might have a harder time attracting talented experienced agents, but will get plenty of trainable agents who only have to close a few deals to get you to breaking even.
Most brokerages tend to go with something right in the middle. High splits and low or no desk fees for experienced agents, and standard splits or even commission shares for newer agents with no experience.
Brick & Mortar vs Virtual & Coworking
Do you plan to rent out local office space or build a virtual brokerage? If you want to go virtual, then you can cross off rent as an expense and possibly offer better splits and get more talented agents.
On the other hand, renting a nice local office goes a long way toward establishing trust with your potential clients.
Franchise vs Hanging Your Shingle
You also need to choose if you’re going to piggyback on a large national franchise like Keller Williams or go it alone. Both have advantages, but franchises can cost a lot of money upfront and might only get you a well-known name. If you created a great brand, this is not that great a trade-off.
Lead Generation Plans
To keep your agents happy, how do you plan to get them lots of leads to work? Again, there are a ton of options here, but Zillow and BoldLeads keep coming back as the best lead sources for new brokerages. Zillow has amazing brokerage features and offers sophisticated ways to generate buy and seller leads. BoldLeads, on the other hand, just sells you the leads. That said, BoldLeads does offer buyer and seller leads, so make sure to kick the tires of any lead generation software before buying.
If you have limited cash on hand, spending it on lead generation might be your best bet for the first year or two. While technology is great, nothing is more attractive for agents then leads.
Here’s James McGrath, co-founder of Manhattan brokerage Yoreevo, on the importance of offering your agents leads:
“For all the talk of technology (e.g., Compass), I don’t see anything on the horizon that agents will care about. The reality is agents spend very little of their time actually working with clients, so making that part of the job more efficient isn’t the point. By generating leads, we make sure our agents are spending more of their time with clients—that’s a difference maker.”
Still not convinced? Check out our interview with Kendrick Realty founder Luke Monroe on why he spends a whopping $155,000 per month on leads for his agents.
Believe it or not, even in crowded cities like New York, recruiting new agents and getting them to stay with you can almost feel like a full-time job. How much money, time, and effort do you plan on investing in recruiting new agents? How and where do you plan to recruit?
As an aside, many new broker/owners are afraid to start a brokerage because they don’t think they can woo top talent away from the big players.
While this is a concern you need to plan ahead to mitigate, don’t worry too much about it. You can still build a highly profitable brokerage with a mix of agents.
Here’s Sheryl Simon, Principal of Benoit Mizner Simon & Co, on recruiting new agents:
“There are always good brokers who don’t want to be lost inside a large brokerage. Seek them out and make sure that you have a solid and attractive business model to get them excited about joining your company.
“You should have a mix of top producers, young and hungry associates, mid-career agents, a good location, and a support team, including an administrative staff and potentially graphic designers, web builders, and so forth.”
What kind of technology can you offer your new agents without breaking the bank? In most cases, the more high-end the software you offer agents, the more agents you’ll attract. As an added bonus, many agents will be far more effective using advanced CRMs, like Propertybase, that can automate outreach and follow-up.
Voice-over-internet-protocol (VoIP) is another way to both attract agents and let them work smarter instead of harder. VoIP companies like Grasshopper offer multiple lines for cell phones as well as scalable, advanced VoIP phone systems for brick-and-mortar offices.
Here’s Eric Stegemann, CEO of website and tech provider Tribus, on the importance of providing technology that can scale along with your brokerage:
“Identify technology that can grow with the brokerage, not something you’ll need to change every one to two years. This likely means a bigger investment upfront, but it will be worth it to not have a ‘who moved my cheese’ issue down the road with agents.”
While technology like a great CRM is crucial these days, don’t sweat it if you don’t have a ton of money to spend on the latest and greatest technology. The odds of you competing with franchises that spend millions on in-house tech are slim anyway. Instead, focus on the value you can offer. Here’s 25-year real estate veteran and Close contributor Sean Moudry to explain:
“If you can’t compete with other brokerages on technology, win with hands-on service.”
A Management Structure
One of the most neglected elements of running a successful real estate brokerage is management. Most new broker/owners end up micromanaging their new agents or worse, taking a laissez-faire approach, which can end up in litigation.
As you might imagine, supervision can be more of a problem for virtual offices, especially those where managing brokers also work their own deals.
Here’s attorney and real estate broker James S. Tupitza on the importance of quality control for small, tech-focused brokerages:
“There is an exponential increase in the risk brokers assume as the sales teams move away from the traditional office. Supervision must keep up with all the changes in the way salespersons operate.
“As an aside, I already have one policy limit ($1M) settlement this year against a broker for negligent supervision of a salesperson. I expect a second policy limit settlement in the next few months in another case.”
So before you start signing leases and writing Indeed ads, figure out exactly how you plan to manage your agents. How will you ensure compliance without being an overbearing tyrant? For most people, the answer will lie in building an organizational chart that spells out each partner’s responsibility and sticking to it.
Technology, especially in transaction management, can also make compliance much, much easier to handle.
In the budgeting section of your business plan, you’re going to take all of your hopes and dreams for your brokerage and (hopefully) make the numbers work.
Of course, your budget won’t be an exact representation of your monthly expenses, but it’s a good starting point to estimate how many agents you’ll need and how many deals they’ll need to close to break even, or better yet, make a profit.
Let’s go through a quick hypothetical budget so you can get an idea of the types of quarterly expenses and revenue estimates you might need to include.
- Office space: $6,000
- Utilities: $750
- Recruitment: $900
- E&O insurance: $190 x 10 agents = $1,900
- Lead generation: $4,500
- Marketing expenses: $3,000
- Loan repayment: $3,000
Total Expenses: $20,050
Target Quarterly Revenue
Median listing price: $500,000
Gross commission income per deal: $15,000
Agent split: -$7,500
Total revenue per deal closed: $7,500
x 7 agents closing one deal per quarter: $52,000
Quarterly expenses: -$17,500
Total Quarterly Revenue: $35,500
Keep in mind this is a highly simplified budget and does not factor in slow seasons or agent turnover and training.
If you want to take a deep dive into creating a business plan for your real estate business, check out our in-depth guide here.
Whatever you do, try to look at your revenue projections as soberly and honestly as possible. Being confident in your abilities is great, but the realities of the market have ended many would-be brokerages before they even really got off the ground. Don’t make that mistake.
Close contributor and 25-year real estate veteran Sean Moudry started and ran a successful brokerage and learned this the hard way. A healthy dose of skepticism and maybe even a little pessimism can help you avoid failure. Here’s Sean:
“Be sure your business model is profitable. The business revenue plan is more important than a great idea.”
6. Secure Financing & Office Space
Now that you’ve come up with a bulletproof business plan, it’s time to secure your financing and start looking for office space.
With the budget you came up with earlier, figure out how much money you’ll need to keep the business afloat for at least two to six months with no revenue. Keep in mind that this is in addition to having a similar personal financial cushion. This is just to keep your lights on should things suddenly turn pear-shaped.
Where to Get Financing for Your Real Estate Business
Luckily, there are a lot of ways to finance your real estate business. You can get an SBA loan that allows you to use money from your 401(k) to start a business, get a traditional bank loan, use your own cash or a relative’s, or more than likely some combination of all three.
Cover Your Bases Legally
If you have partners, you also need to make sure you have all agreed upon share of revenues and are all jointly and severally liable for any and all expenses or potential losses. A limited liability company (LLC) is probably your best bet here, but make sure to consult with a lawyer to see what might work best for your unique circumstances.
How to Find & Lease Office Space for Your New Brokerage
Finding a physical home for your new brokerage is one of the trickiest parts of getting started. In most cities worth working in, good office space is a hot commodity, and therefore very expensive. Good retail space is even more expensive. Here are a few tips to help you find a space that works.
Since commercial leases are long and your growth doesn’t come with guarantees, don’t lease a giant space right off the bat. Instead, consider coworking spaces, or subleasing space in larger offices that already have things like dedicated phone lines, conference rooms, and T1 connections.
Pay Attention to Aesthetics
While the whole plucky garage-based startup thing might score you some points with the Gary Vee crowd on Instagram, your customers won’t see it that way. Instead, they’re going to think twice about your professionalism. So make sure whatever space you rent is well-furnished and pleasant.
Choose a Location That Works for Your Agents & Your Customers
If your agents have to commute 20 miles to your office every day, then chances are they aren’t going to stick around. Likewise if they have to drive half an hour to each showing. So choose a location that is convenient for your agents and ideally offers some foot traffic to draw in customers.
7. Start Recruiting New Agents
Yes, you’ve done a lot of work to get to this point, but don’t pat yourself on the back just yet. Now you need to start what will become one of the most time-consuming and often frustrating parts of running a brokerage. Recruiting—and more importantly—keeping talented agents who will actually close deals.
As a rule, buyer’s agents will be a whole lot easier to recruit than listing agents, but just keep in mind that you’re probably going to have to feed your new buyer’s agents leads. Most new buyer’s agents have limited marketing resources and few connections, but will be hungry enough to close deals for you. So try and get a decent mix of buyer’s agents and listing agents if you can. Recruiting listing agents won’t be easy, but investing the time, effort, and money into recruiting them will be worth it.
How to Recruit Talented Agents Without Resorting to Begging
Well, we hate to say it, but one of the best ways to get great agents on your team is to steal them. That’s right. Being mindful of non-compete clauses in previous contracts, get ready to start wooing talent away from dull, old competitors. After all, you’re the cool new kid on the block and their curiosity will never be higher than right now.
The hard part, of course, is getting talented people in the door without losing your shirt offering high splits, signing bonuses, or other perks. That said, if you can make the math work, then go for it. Paying a top-producing listing agent a $10,000 bonus to come on at a 70% split could end up paying your quarterly expenses with one big deal. As with anything business-related, just make sure the numbers work before committing.
Recruiting agents is not easy. Even market-dominating brokerages like Compass have to woo top-producing agents from other firms with perks like signing bonuses, marketing budgets, or even splits that mean they will see little profit from these agents. The business that a top producer can bring to your brokerage means other agents will take notice and recruiting will become that much easier.
Make Sure the Agents You Recruit Are a Good Cultural Fit
Since agents seem to switch brokerages as often as they change their socks these days, retaining agents once you’ve managed to recruit them will be an ongoing battle. Remember, they left their previous broker to come work for you! This is why screening for a good cultural fit is crucial to hiring agents who will stay for the long haul. Here’s Sean again:
“Know your tribe. Agents will want to join you, be sure they value what you offer.”
By cultural fit, we don’t mean that you like the same kinds of TV shows or root for the same baseball team. While that can help keep agents around too, in this case cultural fit refers more to your corporate culture and values you worked out in the first step of this guide. For example, does your new recruit share your philosophy of customer service? Are they willing to let a deal slip away to do the right thing?
Over to You
Have great advice for starting a real estate brokerage in 2020 and a burning desire to share with 100,000 other agents? Let us know in the comments!