“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?”

Two days ago I started addressing the question above with a list of pros and cons.  The biggest advantage (which I addressed on Day 1) was saving money.  It was a long explanation because it's a complex subject.

Well today we're going to do the same thing.  We're going to start the list of disadvantages but focus on the most important one...

TOP 7 REASONS FOR NOT GETTING A REAL ESTATE LICENSE:

1) EXPENSE. If you haven't already done so, go back and read the Number One Benefit for why a real estate investor would want to have a real estate brokers or salesperson license.

Although the upside might be not paying someone a real estate commission, the downside is that by being your own broker (or agent) you have business expenses above and beyond just getting licensed.

Let’s start with the expenses the state (of Missouri) requires by law.

First, to be your own broker you must establish a place of business and register it with the state of Missouri.  Your place of business needs to have signage to identify it and be open at regularly stated intervals (what exactly that means I’ll refer to the Missouri Real Estate Commission).

Although this absolutely doesn’t rule out having an office out of your home, you do need to investigate if local zoning laws will be a problem.

If a home office isn't practical, being your own broker means paying rent (or investing in a building as an office). As an agent (salesperson) you might have this space provided by your broker.  Some brokerage will charge you rent, others will just take enough commission from your sale to cover their expense.

Either way, you need to ask yourself as a rehabber will you save enough money on commissions as a licensed real estate agent or broker to cover these expense?

Also, as a broker-owner how will you hold your office hours? Will this keep you from other work (i.e. the rehabbing)? If you decide to take on an employee to manage your office hours for you, what expenses are associated with that?

FYI, if you do hire someone and want them to answer the phone and talk about real estate for you (like give out the price of a property for sale), realize they MUST be licensed in order to do that.  You see, if a property is listed for sale with a licensed person (even if they're the owner) then only another licensed person can answer sales questions on their behalf.

However if you're selling your own properties as an unlicensed person (FSBO) you CAN hire another unlicensed person to handle sales related tasks on your behalf.  In fact, most sales reps for large home builders typically won't be licensed.

For the record, many of the expenses above ONLY exist if you decide to hold your own license as a broker. If you want to just be an agent working for a broker, a lot of these are the broker’s problems.

That brings us to the next expense- start up costs.

This should include consulting with a good small business tax accountant and talking to one or multiple attorneys to address questions relating to start up- like how to structure your business for tax reasons, hiring (if applicable) as well as establishing a relationship with a real estate attorney should you have problems with a transaction.

You may also wish to investigate liability insurance and errors and omissions insurance (called E&O).  As an agent working for someone else, many brokers will require you to carry E&O.  Depending on the policy this can range from $250-500/year.  Although not currently required in Missouri at the time of writing, some states may require E&O as well.

You might also want to do some independent research on start up expenses.  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.

Moving on...

The next expense you need to think about is if you want to be a member of any professional association (say, The Local Association of REALTORS which gives you access to the MLS).

If so, there are membership dues, classes, MLS fees, etc.  A good rule of thumb is to plan on roughly $1,000 per person/per year.  However with that you get access to standardized forms (like sales contracts) and a lot of other resources you would otherwise have to pay for.

As a broker, if you want to sell real estate for others and have agents work under you, you might also want to consider buying a franchise (which is such a complex discussion I won't even touch it here).

Then you have marketing, advertising and other things that relate to selling or managing your properties vs. hiring an agent to do them for you.

How will 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 yearly fees to be there.

At the same time, brochures and flyers cost money to print. Even if you make them yourself, that cheap little ink printer you have at home can cost $.50-1.50 PER PAGE if you are printing color pictures.  And if you buy a color laser printer or copier to get a lower cost per page expect to spend at least $1,000 for it.

For actual printing costs, I usually print 50 flyers at a time for brochure boxes.  On some houses that can last months, other homes 50 flyers can be gone in two days.

Then don’t forget the most basic form of advertising- lawn signs. They can cost $25-150 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- like furniture for your new office, a phone line(s), a fax to receive contracts on, lockboxes so other agents can access keys (the electronic kind agents use cost $150/each I believe).

As a salesperson you can often find a broker who can provide a lot of these things for you, but there is still a cost associated with it.

With all this in mind, if your only goal is to sell/manage your own properties you should probably ask yourself (and your accountant 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.

If you’re already borrowing money to rehab, knowing your lender's limits is important 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). Do you really want to tie up your own money in this side venture?  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- it’s a different market today).

However the start up expenses might be worth it if you are rehabbing in volume.  Selling 50 properties a year is very different than selling 5 because the commissions you save pays for the startup costs a lot quicker.

You should also realize that what makes sense for you today may change down the road as you get larger.  Many investors who start off small will FSBO or hire an agent early on then add these services later as they grow.  That's how my wife Kimberly, who used to rehab, started out in real estate.

If you decide to start out as “just” a salesperson you should also realize that the expenses you pay your broker can vary significantly depending on the broker.  For example, if you don’t perceive value in having a broker that’s a part of a large franchise, then why pay a broker that offers franchise services?

Soooo, if you still need more reasons than just the expenses, I’ll address the rest of the list tomorrow.