Agents Only Blog

There are people who will say yes and there are people who will say no. My belief is there are legitimate reasons for both depending on what your personal goals are and what you want to accomplish. So, instead of giving you my opinion let me give you reasons for and against both so you can make up your own mind.

REASONS FOR GETTING A BROKER LICENSE:
1) SAVE MONEY. Most people will list saving commission as the number one reason to get a license although this can be accomplished as an unlicensed For Sale By Owner as well. I would estimate this to save you 2-3% of the sales price of the property (less any marketing and business expenses that you occur which an agent/broker would otherwise have paid for). This can be higher or lower, which probably needs explaining.

Here is an oversimplified explanation of how commission works: When a seller and a broker set the commission structure on a home (which in this case would both be you), they generally set aside a percentage of the commission to be paid to any other broker that brings you a buyer. If you join the local realtor association (which I will discuss below) they require this to be specified in writing at the time the house is listed so there will be no disputes. This percentage can be what ever you want it to be, but a general rule of thumb is 2.5% to 3% (or 40-50% of the total commission).

At the same time, a good rule of thumb would be to estimate marketing costs at 1% although the needs of every property are different, however. So as a simple example, let’s say you would normally pay out 6% commission. As your own broker you could expect to pay out 3% to the buyer’s broker and then spend 1% on marketing (that's a 2% savings). On a $200,000 home, that is $4,000.

The wildcard here, however, would be business expenses associated with being a broker that you would not otherwise have occurred, I will discuss them in the AGAINST category below (See Expenses #1). This also assumes that you are getting the same contract price and/or selling your home in the same time frame as a different broker (which may or may not be the case).

2) THE MLS. The other popular answer for getting licensed would be to get your own properties in the MLS (Multiple Listings Association). The MLS is the database most agents search to find their buyer’s homes to look at. It also drives popular websites like www.realtor.com and most home searches on agent’s websites. As a result, it is usually perceived as being a very valuable place to have your home listed. To be in the MLS, you not only need to be licensed by the state, but you need to join the St Louis Association of Realtors and follow their additional rules and guidelines to listing and selling properties. There are also fees associated with being a member and having this access.

3) MAKE MONEY. A good reason to be your own broker would be if you wanted to sell or manage someone else’s property. If you want to be paid by others (for either sales or property management) you must have a state license (although you could do it as an agent working under a broker).

The questions to ask yourself are:
- What is your business plan, personal/professional goals, or objectives?
- Do you want to build an empire with dozens of people working for you or do you want to be left alone?
- Forgetting about financials for a second, if you could only do one or the other, which would you really love to do- rehab or sell/manage? Which would motivate you the most to get out of bed at 5am and/or work all night?

If you love the rehab work (i.e. getting dirty) but hate dealing with people, you probably won’t like managing or selling real estate. If you hate getting dirty and are only rehabbing because you think there is money in it, you might prefer to focus on sales/management and ultimately become a full time broker/property manager and get out of rehabbing (or keep it on the side). So, if you really want to build a business in sales/management beyond your own rehabs, get licensed.

4) CONTROL. As your own broker you can control your own destiny on how the property is marketing for sale (within legal guidelines of course). Although this often costs more than using an established company, as your own broker you determine where and when a property gets advertised.

5) CRAPPY SERVICE. Working with agents can sometimes just flat out suck. I’ll make no apologies for my industry. My wife became an agent not because she wanted to, but because her brother’s construction company had so many awful experiences with agents that they decided it was less painful to be their own brokerage (she then went out on her own in 2004). I’ve met more than one builder/rehabber who has felt the same way.

REASONS AGAINST HOLDING A BROKERS LICENSE:
1) EXPENSE. Go back to #1 on Reasons For. Being your own broker has expenses associated with it (above and beyond just being an agent or being unlicensed). Let’s start with the expenses the state (of Missouri) requires by law.

First, before you can be your own broker, you must have established a regular place of doing business with conspicuous signage noting that it is your place of business and what your established office hours are (and you must have regular established office hours even if it’s just noon to two on a Saturday). Although it doesn’t completely rule out having an office out of your home, the requirements are specific enough that it makes it difficult. A lot of towns and subdivisions WILL prohibit you from having a home business with signage and established business hours- so know your zoning laws and consult a good attorney first. If this is the case, this means paying rent (or investing in a building as an office). If you only plan to sell your own properties, will you save enough money on commission to cover this expense?

Also, how will you hold regularly established office hours? If it is just you setting in the office every week for a couple of hours, does this keep you from other work (i.e. the rehabbing)? If you decide to take on an employee to manage the office hours, what expenses are associated with that? If you want the employee to answer the phone and talk about real estate for you, realize they MUST be licensed to talk about real estate (because they work for a licensed broker).

(For the record, these expenses ONLY exist if you decide to be a licensed broker. If you want to be a sales agent working for an established broker, most of these are the broker’s problems not yours. If you decide to sell your own properties without a license (i.e. For Sale By Owner) you can bypass these laws- including licensing an employee. However it does mean getting rid of the sales person license you already have).

The state also requires you to have errors and omission insurance.

Another expense to think about is start up costs. This should include consulting with a good small business tax accountant, talking to a lender and talking to one or multiple attorneys (one about starting up a small business- specifically real estate related because you will need help working with the state to file paperwork and/or incorporating- and one about dealing with real estate law should you have problems with a transaction. These may be different people). HOWEVER I HIGHLY ENCOURAGE YOU TO SEEK OUT COMPETITENT LEGAL ADVICE PRIOR TO STARTING YOU OWN BROKERAGE. Heck, that should be your first step.

As you may guess, this advice doesn’t come for free. A quick Google search produced start up costs estimating $10,000-$250,000 (Obviously if it’s just you selling your own properties it should be on the lower end…). The National Association of REALTORS (NAR) has a nice webpage I just found that discusses opening up a brokerage. Another resource to look at is www.realtytimes.com.

The next expense is if you want to be a member of any professional association (say, The Local Assoc. of REALTORS which gives you access to the MLS). If so, there are membership dues, classes, MLS fees, etc. Believe me, they add up but in return you also get standardized forms to use as contracts and a lot of other resources you would otherwise have to pay for. If you want to sell real estate for others, you might also want a franchise (which is another expense I won't even touch here).

The next expense would be marketing and advertising. These expense have less to do with licensing and more to do with selling your own properties vs hiring it out. How do you find renters for your rental properties? How are you going to advertise your properties for sale? Small ads in major newspapers can cost hundreds of dollars. The free homes for sale magazines you find in the grocery stores generally cost $400-500/mo. Pre-built websites can cost $50/mo and custom websites can cost thousands, and if you want featured homes on large websites (realtor.com, homes.com, etc) you will pay to get it.

At the same time, brochures and flyers cost money to print. Even if you make them yourself, that cheap little ink jet printer can cost $.50-1.50 PER PAGE if you are printing color pictures (and, I usually print 50 flyers at a time for brochure boxes). Then don’t forget the most basic form of advertising- lawn signs. They can cost $25-100 each and routinely get vandalized and stolen. I personally had two brochure boxes (at $15 each) stolen in the past couple of weeks. If you want large signs (like a 4 foot by 8 foot builder’s sign or a banner) they can cost over $200 each (and are still prone to vandalism, weather damage, etc).

Then there is a long list of other things you will probably need to start up a brokerage. Office equipment- furniture for your new office, a phone line(s), a fax to receive contracts on (because contracts need to be date/time stamped they are generally sent via fax), lockboxes for keys (the electronic kind agents use cost $150/each I believe), yada, yada, yada…

With all this in mind, if your only goal is to sell/manage your own properties ask yourself (and your accountant, lender, and legal team) what you think your needs will really be for the first few years and if they justify the expenses of being your own brokerage. Knowing your lender's limits is important here because most lenders will cap the amount of money they want to lend a new rehabber (which handcuffs you on how many properties you can actually do in a year). I would also expect lenders to tighten up on rehabbers as the market slows down (so don't expect to get today what another rehabber got three years ago- its a different market today).

The start up expenses might be worth it if you are rehabbing and selling 50 properties a year, but is it worth it if you only sell 10? If not, look for options that allow you to do this as an agent under another broker or as an unlicensed person. There are a lot of little (non-franchised) companies out there that will allow you to do your own thing for a small fee. Then again, it might be something you want to forget about entirely for the first couple of years until you've built up your inventory of rental properties and grown the rehab business into a real business.

Soooo, do you still need more reasons than just the expenses???

2) FOCUS. Go back to #3 on the Reasons For. If (by chance) you have a full time job and are starting out rehabbing on the side, this is just one more process to know and manage. Unfortunately, because we’re talking about state regulated businesses, mistakes aren’t as forgivable as a bad grout job. Even if you have the luxury of being a full-time rehabber, it can still be a distraction that keeps your rehab projects from reaching their full potential. Truthfully there is a lot more to selling a home besides showing it (managing advertising resources, writing and managing contracts and all the things that have to be done in order to close, dealing with problem agents, dealing with problem buyers, keeping everything legal, dealing with the state, etc). There’s also a lot more to managing a property than collecting rent (background checks, legally handling security deposits, dealing with 24 hour emergencies, keeping government agencies happy, etc).

For example, if a rental property’s furnace dies on a frosty 10 degree below zero Tuesday in January, are you able to drop everything else and get a new furnace installed that very day? If not, realize that the government agencies that regulate housing don’t care that you are a one person show with a full-time job and no free time until Saturday. If a tenant complains to the appropriate government agency that there’s been no heat for four days, you will have problems (in some municipalities, think arrest warrants). So, if all you really want to do is go get your hands dirty rehabbing houses, focus on what you enjoy doing and find a professional(s) you trust to do the rest regardless of what those things are.

(On this subject, there's an old saying in real estate, "If you spend your time doing the $5/hr tasks, all you will make is $5/hr." When my wife was a rehabber, she also ran a property management company because they had rental units as well. In particular, she had a 12 unit building in the city that she could never keep/get fully rented. One of the biggest problems she had as a property manager was that the building wasn't located anywhere near her office, other rental properties, or the homes they were rehabbing- so any visit to the building killed an hour of her day (or more) driving to and from the building. As you can imagine, showing the property 5-6 times a week to renters was a real drag on her schedule. Eventually, she broke down and hired another property management company to deal with getting renters and collecting rent while she continued to deal with maintenance and upkeep issues. The property was filled within a couple of months and finally became profitable.)

3) LEGALITY. Being a licensed agent/broker means following a whole lot of rules and regulations that are not required should you decide to sell/manage your properties on your own (as an unlicensed person) or by hiring someone else. Although I encourage you to conduct business in an honest and ethical way regardless of how you decide to do business, I can tell you from experience that an open house doesn’t go by where someone doesn’t ask me a question I can’t legally answer as an agent. I know a whole lot of rehabbers and builders who are unlicensed for this very reason (including some who have previously had licenses). Along this topic, remember as a licensed broker you are responsible for reporting and dealing with the State Real Estate Commission and the Local Assoc of REALTORS (should you decide to join) which both have the right to audit your business should complaints be registered with them. The same holds true with any franchise you might decide to do business with as well. Discuss what being a brokerage really means from a legal standpoint with a good attorney to know more.

4) MAINTAINING DISTANCE. When you are selling or managing your own property (regardless of how you decide to do it), the clients (renters, buyers or buyer’s agents) all have access to you and expect you to make decisions immediately. The buck stops with you and they know it. One of the real advantages of outsourcing these services is that the client’s point of contact becomes someone else who’s, “just doing their job”- allowing you to maintain your distance from an emotional buyer, or a disgruntled tenant (basically a good cop/bad cop routine).

I know of two different situations within the past year where rehabbers were working directly with the buyers of preconstruction rehabs (in other words, a contract was written before the houses were completed). In both cases, the buyers started off innocently asking if simple (and cheap) things to be changed as the properties were being completed. Both rehabbers gladly obliged because they wanted happy customers. However, once the precedence was set that they “could get anything they wanted” the buyers became nightmares- demanding thousands of dollars in upgrades that weren’t apart of the contracts- and even hiring lawyers to determine if they could sue to get them. When this happens, buy a bottle of Tums and kiss your profits goodbye. A *good* agent (emphasis on good) manages this process from you to keep you insulated. If you are 100% new to real estate, it would probably amaze you on how rational, sane, and very likable people can become completely emotional and dangerously raving lunatics when everything in a real estate contract isn’t going there way.

The same is true with property management. Tenants are prone to reacting differently when a property manager “who’s just doing his/her job” is collecting rent or tells them they can’t have something over when it’s the owner. Think about it. Who does the tenant think, “is getting rich off of their rent?” The owner.

5) FLEXIBILITY. As a licensed agent/broker, every property you sell that you own must be designated as an Agent/Broker Owned (even if you hire a different broker to sell it for you). There are a lot of rules and regulations on how you may market the property (i.e. you can’t just stick a FSBO sign in the yard because the state would view that as “hiding” the fact you are a brokerage and you must make full disclosure). But as an unlicensed person if you think you can still sell the properties on your own, you are free to try your properties as a For Sale By Owner. And that gives you flexibility. If you want to experiment to see how good you would be at sales, try it on one of your properties. If you want to experiment with management, find one rental unit to manage for six months as a test that is close to home. If it doesn’t work out or you really screw things up, then hire an agent/manager for future deals (and an attorney to fix the screw up). Odds are in favor if something goes wrong, you will have a much better idea of what you want in an agent/property manager in the future! Yes, screw ups cost money, but unfortunately the best learning experiences are usually the bad ones…

Now, if you determine using someone else for sale/management is the way to go, here is some advice...

If you think all you need is to get your property in the MLS and it will sell itself (see #2 in Reasons For) or want into the MLS but want to manage your own marketing (see #4 in Reasons For), you should know that there are discount brokers who will give you MLS access for $500-1000 per transaction (and let me add, I’m not one of them so don’t ask). They can be found all over the internet or in phonebooks. It’s honestly a cheaper way to find out how valuable (or unvaluable) the MLS really is prior to starting your own brokerage to do the very same thing. Sign a 30-60 day agreement, and if it doesn’t work you can change your direction (sell it yourself or use a full-service agent).

If you determine you really want a full service solution that gives you marketing, contract management, etc, then just build the commission expense into your construction budget and go interview agents until you find one you are comfortable with. Ask them questions like, “exactly where and how do you advertise your properties (and not just themselves),” or “how do you handle contracts (is there one agent doing everything, or is there a team of specialists),” and, “what kind of feedback or contact from you should I expect to get while the property is being listed? (i.e. do they have a process for giving you updates on showings, etc).”

Remember, you get what you pay for, so the person who’s the cheapest (or only trying to sell themself with a lower commission) is probably that way for a reason. If you’re getting nothing but being stuck in the MLS, why pay anything more than what the cheapest discount brokerage can provide? In other words, if you decide you need full service marketing and are willing to pay for full service marketing, don’t settle for anyone that is expecting to give you anything less. The same is true for property management.

More important, if an agent does a crappy job, DON’T USE THEM AGAIN. It amazes me the number of rehabbers/builders who stick with agents who screw them over or give them lousy service. You are a repeat customer you deserve to get better service.

The final note on flexibility is that as an unlicensed person you can treat every property differently- selling some yourself and using agents (and even different agents) for others (although the best agents probably won’t want to work with you long term if you are only giving them the dogs). The same is true for property managers. Who says one company should have all your business unless they have proven themselves? Also, don’t sign long term agreements that aren’t industry norms and make sure there are no cancellation penalties should you fall out of love with your agent/broker/property manager. If you have questions regarding a contract that isn’t being fully explained to you, seek legal consultation from an attorney prior to signing anything.

6) ASSISTANCE AND ADVICE. The very purpose of using an agent is to get someone who knows a whole lot more about the subject in question than you do in order to help you achieve your goals quicker and easier (and realize goals CAN be different- be it selling a house quickly vs. selling a house for the maximum you can get regardless of how long it takes or keeping a property 100% occupied vs. taking the time to get quality renters who pay rent on time, etc).

In case you haven't realized it yet, two weeks of real estate class doesn't make you or anyone else an expert in real estate. Think about it, did you actually even see or discuss how to fill out a real estate contract in that class? Probably not, because they are too busy teaching you the terminology.

It amazes me the number of people who hire an agent/broker that they know has no knowledge about real estate (or the kind of real estate they are buying/selling) for reasons that aren’t business related (it’s a cousin or some lady from church). There are also a surprising number of people that hire an agent to represent them but then treat them as an adversary (heaven forbid the agent trying to help you set rent should know what your monthly expenses are).

In your case, assuming you are new to rehabbing, new to landlording, AND new to real estate sales/property management, don’t you think it would be a good thing to seek out someone who can give you advice to help you keep from making costly mistakes??? It’s no different than hiring the accountant, attorney, and banker I suggested prior to starting a business. Learning how to become a broker by processing your very first sale without any one to assist you is dangerous. Learning how to do it when it's your first sale AND your own investment property that you've probably refinanced your personal house to rehab and are working nights on to fix the screw ups you made because you're still learning to rehab is just crazy. Even if your long term goal is to be your own brokerage, you might find value in going through the process (as a seller and/or an agent working under an established broker who can assist you in the process) a few times prior to becoming your own broker.

7) LIABILITY. Almost forgot this one. Here's an interesting (and potentially scary) statistic. Over 50% of all lawsuits filed in the U.S. are real estate related. As I eluded to above, very nice people can become very irrational when it comes to their homes. As a broker/owner of a brokerage you are responsible for your own actions and anyone that is working under you. Take that for what it is worth.

Hope this helps someone!