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 Should a Real Estate Investor Hold Their Own Real Estate License?
By: Darin "Sid" Cameron, CRS
Sat, Aug 5th, 2006 1:43 am

I moderate a local real estate investors discussion forum at the Invest in St Louis Website. Last week there was a new member who posed the following question:

“I am brand new to this industry. I am going to be rehabbing homes and doing a little bit of property management. I am really confused about whether or not to become a licensed broker. I have passed my real estate sales person state test, but I will be owning my own property when I go to sell it. Any advice - pro-broker license or against broker license?”

Here's my answer in case you are pondering the same question.

Please note that items relating to licensing laws are specific to Missouri and may be different in your state.

Dear New Rehabber-

First off, you need to know the difference between a real estate salesperson (which I frequently refer to as an agent) and a real estate broker.

A real estate broker has the ability to own their own company (i.e. a brokerage) and hold and sell real estate listings.  Only a real estate broker can be paid commission.

A real estate salesperson is someone that works for a broker- they can not run their own business and they technically don't list properties for sale (they do it on behalf of their broker).  A salesperson can only be paid for real estate work by their broker.

But someone with a broker's license that doesn't want to own their own company can work as a Broker-Salesperson for another broker.  A broker's license is also required to manage an office for a large brokerage.

In a nut shell, the broker's license just gives you options that you don't have as a salesperson.  For the sake of answering your question, I'm going to assume that the reason you're asking is because you're trying to decide if you should own your own brokerage or just work for a broker.

And to answer that question, my belief is there are legitimate reasons for and against depending on what YOUR SPECIFIC personal goals are and what you want to accomplish. So, instead of giving you my opinion let me give you both sides of the argument so you can make up your own mind.

TOP 5 REASONS FOR GETTING A REAL ESTATE LICENSE:

1) SAVE MONEY. Most real estate investors will list saving money on sales commission as their number one reason to get licensed.  Heck, most will list it as the ONLY reason.  Because this is such a hot point, I want to spend some extra time addressing it.

But the short answer to your question is that the difference between being an agent (who works for a broker) and being the actual broker who does everything means one less person to pay (although there may be training or franchise benefits you get by working for a broker that are expensive or hard to duplicate on your own).

Now the long answer...

If saving money is your top reason for getting licensed, you should probably first considered that as the property owner you can legally sell the properties yourself WITHOUT a real estate license.  Doing a "For Sale By Owner" or FSBO saves you the time and money of getting licensed completely (agent or broker) and may accomplish the same goal for you.

I would also suggest you take the time to fully understand what you're saving by being your own agent or broker.  To do that, you need to know what you'd be paying if you hired an agent instead, so here's an explanation of how commission works:

The commission paid by a home seller is always negotiable and can be either a percentage of the sales price or a flat fee.  That's important to point out because a lot of new real estate investors think it's always a set percentage.

You also need to realize that brokers frequently offer some of the commission to other area brokers (called cooperating brokers) which gives the home seller the benefit of thousands of local agents trying to sell your home(s) instead of just one.  This percentage can be what ever you want it to be, but a general rule of thumb is 2-3% of the total sales price or 40-50% of the total commission.  Homes on the upper or lower end of the market frequently vary from that.

This is very important to understand because it means the money you save on commission by being your own agent or broker may not be 100% of the total commission a typical broker charges; it's probably closer to 50% or less.

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.

So as a simple example, let’s say you talked to an agent who offered to list your rehabbed property for sale at a 6% commission with a 50/50 split paid out to a cooperating broker.

As your own broker, if you decided to match that 3% to entice cooperating brokers to show and sell your home and then spend 1% on marketing, you end up with a 2% savings for your efforts over what you would have paid that other agent.

On a $200,000 home, that's a $4,000 savings you get by taking on the work of the broker.  Depending on how much work that is and how much you enjoy doing it, that may be a significant savings for you.

But as an agent working for a broker it will be a little bit different because you will ultimately end up paying the broker something.

For example, you might have to charge yourself (as the seller) the full 6% commission on the sale, then the broker will pay you (as the agent) a percentage (called a split) of the 3% of the commission that your broker kept.

Every brokerage will have different compensation plans for their agents, but it's not uncommon for new agents to have a 50/50 split although a lot of brokers will assume some and perhaps all of the marketing and advertising costs for their share of the money.

So let's go back to our example of a $200,000 home at 6% total commission split 50/50 with a cooperating broker.  Your broker will end up with $6,000 from the sale.  If your split is 50/50 and the broker is assuming 50% of the marketing expenses, you will save $2,000 by being your own agent working for a broker.

However realize that you're probably seeing that $2,000 savings as income so you probably need to plan for income taxes.

Also realize that these simple examples don't factor in overhead business expenses associated with being an agent or broker that you would not otherwise have occurred or other franchise or broker fees you'll pay as an agent.  I will discuss these expenses in greater detail in the AGAINST getting licensed category.

This also assumes that as your own agent or broker you're getting the same contract price and/or selling your home in the same time frame as you would if you hired a broker (which may or may not be the case).

So how's that for the long answer?  I'll publish the rest of the Top 5 Reasons for a Real Estate Investor to Get Their Own License tomorrow.

[ Next Article: << Should a Real Estate Investor Hold Their Own Real Estate License? (Part 2) ]
[ Previous Article: >> Real Estate Blogging... WHY? (Part 6) ]


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Darin "Sid" Cameron spent 15 years working in tech sales which in 1998 relocated him to St. Louis. In 2004 he took over web development tasks for Kimberly's real estate team and later became the full-time Marketing and Operations Director. In 2011, he launched two brokerages, The Realty Store, Inc. and Realty Referral Partners, Inc. Sid holds a real estate broker's license in Missouri, CRS certification and was the first CyberStar in the St. Louis area.
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