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 GCI by 2020. Here’s how to get started.
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 9 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.
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 Your 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 E&O insurance, VOIP software & phones, get some basic lead generation and transaction management software and a good CRM, 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 $2500 – $7500 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, WiFi, 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. SBA loans are a popular choice as they take money from your 401k to start your business. You can also look at traditional business loans, or personal loans from family or friends.
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 and 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 and 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 and 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.
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 and 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.
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 break even.
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 up front 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
How do you plan on keeping your agents happy by getting 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 that 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, etc.”
What kind of technology can you offer your new agents without breaking the bank? In most cases, the more high-end 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 followup.
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 and scalable advanced VOIP phone systems for brick and mortar offices.
Here’s Eric Stegemann, CEO of website/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 1-2 years. This likely means a bigger investment up front, but it will be worth it to not have a who moved my cheese issue down the road with agents.”
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 ones 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 sales person. 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: $6000
E&O insurance: $190 x 10 agents= $1900
Lead Generation: $4500
Marketing Expenses: $3000
Loan Repayment: $3000
Total Expenses: $17,500
Target Quarterly Revenue
Median listing price: $500,000
Gross commission income per deal: $15,000
Agent split: -$7500
Total revenue per deal closed: $7500
x 7 agents closing one deal per quarter: $52,000
Quarterly Expenses: -$17,500
Total profit: $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.
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-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 401k 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. An 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.
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.
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.
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!