October 20, 2020

The Economics of Real Estate Brokerage

(Image source: Pixabay.com)

Special to California Business Journal.

The real estate industry is one of the most lucrative and sought after fields for passive income by job seekers. The industry has grown and matured through the ages, surviving every economic setback—from the unprecedented price surge in the Roaring Twenties and the Dot-com Bubble to the Great Depression and now the COVID-19 Recession.

But what are the economics of a real estate brokerage in the modern world? Can a real estate agent make a living by working the conventional 40-hours a week? And most importantly, is it worth it? In this article, we’ll explore the economics of real estate brokerage from the costs vs. income perspective.

The Costs Associated with Running a Real Estate Brokerage

Just like any other business, owning a brokerage will require some startup costs.

Startup costs derive from website design, office equipment, furnishing, legal costs, stationery, marketing, and lease expenses. Typically, lease space averages $1.0 to $1.5 per square foot, and this could add up to $2,500 per month depending on your preferred office space.

Running a brokerage will also require operational expenses. Here’s a breakdown of the various running expenses you’ll incur.

Operational Expenses—Technology

Operational expenses include anything that keeps your office running. This includes things like paper, printer, and the cost of running and maintaining technology equipment.

Speaking of technology, you’ll need a real estate leads management software to manage your transactions, streamline workflows, facilitate follow-ups, and stay organized. In house CRMs usually cost $50 – $250 per user so the total monthly costs will depend on the size of your team.

Marketing/Advertising Expenses

The scope of marketing is broad and encompasses anything from flyers to yard signs to business cards. Each yard sign costs around $60 but varies depending on size and material. It’s recommended that you start your career with at least two open house signs and a few yard signs.

In addition to flyers and yard signs, agents must find the time and money needed to market their personal brand to grow their business.

Other Expenses

Other expenses realtors incur include transportation, career development, and professional fees. Transportation expenses related to vehicle expenses.

You’ll also spend around $100 – $500 per year on your license and subsequent subscription renewal fees. In terms of career development, nearly 50% of agents spend over $500 a year on training and continuing education.

The Rewards: How Much Do Real Estate Agents Earn?

According to the U.S Bureau of Labor Statistics, the median annual earnings for real estate brokers and sales agents in 2019 was $50,730. This is equivalent to a 9 am -5 pm job that pays $24.39 per hour.

So how do real estate brokers get paid? Brokers earn money in two ways:

–One hundred percent of the commission from their own deals

–A percentage of the commission earned by the agents they sponsor.

Typically, the fee a seller pays a broker is 6% but that can vary. Agents usually get a percentage of the commission received by the brokerage from the sale and this could be anywhere from 30-80%.

For example, assuming an agent places a listing of a $200,000 house at a 6% commission, and the house sells at the asking price, the commission would be $12,000 (0.06 x 200,000).

If the contract stipulates a 60/40 split, then the agent would receive $7,200 (0.6 x 12,000) and the broker would keep $4,800. The earnings can be lower if there are more parties. But if the broker lists the property and then finds a buyer, he/she will keep the full $12,000 commission.

What are your thoughts on the nature of the brokerage business and it’s earning potential? Share with us in the comment section below.

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