Yesterday we showed how on a $200,000 home sale with 6% commission being paid by the seller, a fairly good experienced agent could expect to get paid just under $2,000 in commission after broker/franchise splits, reoccurring marketing expenses and taxes.  But that's not all you need to know.

The Real Estate Catch-22

The interesting thing to note is how an established agent can earn significantly more money off of the same sale than a new agent.

If a veteran (extremely successful) agent is getting a 90% commission split and has virtually no marketing cost (because they rely on repeat clients and referrals), then they can easily take home $3,500 from that same example.

Compare that to a rookie who is only getting a 40% commission split- they are left with just under $1,200 on the same sale.  And that’s assuming they don’t have to spend more than 30% on marketing which they probably do.  With most rookies they may be lucky if they clear $500 after expenses.

As you may have guessed, this is the problem with being a new real estate agent. Not only do new agents have fewer prospects for clients, but they have to work harder and spend more money on marketing to get them. Yet at the same time, newer agents can easily earn 50% less commission on the same sale so they have less to spend on the marketing they need more of!

But Wait Ron Popeil, There’s More!

Before you rush out to spend that $2,000 (or $500) in commission, I should note that I’ve only mentioned MARKETING expenses. There are other reoccurring and fixed expenses to know about as well that go above and beyond marketing.

Most brokers (and some states) require agents to carry “Errors and Omissions Insurance” to protect you in a lawsuit from an unhappy client. This is a per agent fee even if you are on a team and the contracts are all run under one agent (or you don’t actually sell anything). Costs will vary depending on company and policy, but expect to pay $300-500 a year for this.

Many brokerages also have various fees they charge their agents (I personally refer to them as “bullsh**” fees). My broker charges their agents a “technology fee” of $25 per month per agent to pay for the "technology" (and I use that term loosely) in our office.  Other brokerages can charge hundreds per month or even per transaction (so I’m not complaining too loudly about that $25).

You also have membership fees into any professional organization you join- the most common of which would be your local Association of Realtors which your broker might require you to join (so you can get access to the MLS).

Expect to spend just under $1,000 per year to be a member of a board and MLS. Because many brokers require it, as a new agent just plan on having $1,000 ready to give to your local Association/MLS as soon as you get your license.

The state will also require you to take continuing education every two years (pricing can vary depending on where you take your classes, but expect to spend $250 or so every other year).

After that, you will probably have to buy your own computer (and software), cell phone (and service), digital camera (to take photos of homes with), office supplies, lockboxes (for keys) and (of course) a car to haul around clients.

I would also recommend talking to your auto insurance agent to make sure you have enough liability coverage should a client be injured in your car.

If you work from home (even part-time), you will probably want to buy for your home office a fax machine (everything in real estate is faxed), color laser printer (for printing flyers), office furniture, high-speed internet and a business phone line.

As your business grows you might want to consider a toll-free (800) number for relocation clients to call, professional binding equipment for quality looking proposals, sales management software, etc.

If you grow to the point you need an assistant, you might need to buy him or her a computer and software as well.  Staff assistants can be paid in commission if they are licensed.  If not, they will need to be salaried, hourly or paid per project.

Want to start your own brokerage so you can stop paying a broker?

Visit realtor.org for the things you will need to do that. If it's just you working out of your own house, you can keep expenses reasonably low.  But if you want office space to recruit agents a general rule of thumb, based on my research, is to have $50,000 ready to invest (more if you want a franchise).

The final thing to consider would be personal expenses that might be covered by your traditional employer (outside of real estate) that an agent doesn’t get because they are an independent contractor. The largest of these would be health insurance. We pay approximately $400 per person per month for our plan (and the coverage isn’t that good). We do not have dental or vision.

(Editor’s Note: Much of this stuff is tax deductible, so consult your accountant first.)

Bottom Line Statistics

Yesterday we discussed the real estate "Catch 22" where new agents not only have to spend more to generate leads over experienced agents but they generally get paid a lot less when those leads turn into sales.  Well in real estate class I was presented with the following statistic- 7% of all real estate agents sell 82% of all real estate in the U.S. which shows you just much of an advantage the top agents really have over everyone else.

So as a new agent, what can you really expect to earn?

According to Department of Labor statistics, in 2004 (which was one of the best real estate years ever) the median gross income (before expenses and taxes) for a all real estate agents was $35,670/year.

Now subtract from that $5,350 for federal income tax (15%) and $5,350 for self-employment tax (15%) and another $8,000-10,000 for marketing expenses (since 30% is a good estimate) if you want to see what the median take home pay was! (and I haven't even factored in state or local taxes!)

But even more sobering, The Department of Labor also says the bottom 10% (where the vast majority of the new agents are) had a median income of $17,600.  Subtract taxes and that doesn't leave you a whole lot of money for personal marketing and advertising.

As a reult, it's probably not surprising to learn that some statistics show roughly 80% of new agents quit the industry within five years.

Tomorrow, the summary!