When you hear the dollar amount of commissions and see real estate agents post about working from tropical islands, it can seem like a no-brainer to get your license and join up. STOP – and consider some realities before you take that leap.
For the past five years, I’ve been the backbone of the business end of real estate – first for a small team owned by a long-time salesman and then as the business manager for large, multi-location brokerages and now supporting over 825+ franchised brokerages through the corporate team. And here’s what I’ve learned are the top myths folks still believe about becoming a real estate agent:
- Get your license and sell a home the next day.
- You can set your own hours.
- Net $1M in your first year.
- The commission split is the most important number.
- Training is free from the brokerage.
- Everything is a contract!
1. Get your license and sell a home the next day.
How long it takes to “get started” varies, and lot of it depends on YOU. The rest of the timing is up to the government on the front end.
One of two sequences are going to affect your ability to take a buyers agency or listing right away after passing your exam:
- In some states, you have to received your license from the state real estate commission before you can affiliate with a brokerage, and you must be affiliated with a brokerage *before* taking an agency – legally.
- In the other states, you have to affiliate with a brokerage *before* you can apply for your license.
Either way, you must have BOTH license in hand AND brokerage affiliation *before* you can sign a buyer or take a listing. The wait time for this can be 2 days to 2 months, largely depending on the real estate commission’s process.
Pro Tip: ask the brokerages you are interviewing with how long it takes for you to have both to be able to have business on the books.
The other side of this is that signing the buyer and taking the listing are just the beginning. For listings, expect a 45-60 day process from list to close – that’s 45-60 days before you get paid. For buyers, expect 30 days of showings and offers before you finally get one accepted, and then 45-60 days to close.
Assuming you’ve gone into real estate full time (quit your day job and work on real estate 8-10 hours a day), that’s 2-3 months of your personal savings you are spending. Did you save that much yet?
Pro Tip: save at least 6 months of your personal expense needs before quitting your day job. This will get you through those first 2-3 months before your first closing and commission income check.
2. You can set your own hours.
Yep, you sure can. And If you know anything about how many hours business owners put in a week, then you know this means 60-80-hour weeks to get your new business off the ground.
You see, when you become a real estate agent, you become a busiess owner, which means that in addition to writing offers, overseeing inspections, and collecting commission checks, you are also responsible for
- creating marketing and advertising – you are a graphic designer, a copy writer, and digital and social media presence
- keeping the books – you are a bookkeeper, budgeter, and – if you hire an assistant – a payroll payer
- human resources – as your business grows, you may hire an assistant, a showing assistant, another agent to help you – you are an interviewer, employee/contractor paperwork, tax paperwork, trainer, manager, performance reviewer, and firer.
- and more.
Are you ready to take on these roles and more as your busines grows? Where will you find the hours to perform the non-sales parts of running your business? Or whom will you pay to do these for you? Does the brokerage you are talking to offer support and training for YOU to become this business owner?
Pro Tip: you will spend either time or money – choose wisely – real estate is expensive either way.
With either choice, here are some expectations you need to keep in mind:
- A real estate agent is a business owner, not just a sales person. You have to also order supplies, become a marketing expert, enter your business receipts into an accounting program, file business taxes at the end of the year. That’s a lot to learn in addition to the sales and legal ins and outs of real estate.
- A full-time job is an 8-hour-a-day job, so if you are dual career, that means you are giving at least 16 hours a day to work.
- When you do real estate only 2 hours an evening after your day job, you are quadrupling the time it will take you to simply replace your current income with real estate. So if a brokerage tells you that you can net $100K in one year, expect it to take your 4 years to achieve that working only 25% of the day.
The fact is that business owners get to choose their own hours only when the’ve put in the work and hours to be able to hire others to run their business for them.
3. Net $1Million in your first year
Yes, it’s possible. Nope, it’s not probable.
The key factors in achieving this particular expectation *in your first year* are almost completely out of your control because it’s a function of the local average sales price. Let’s do a little math here:
The average newly licensed full time realtor will close 8-10 deals in their first 12 months.
ProTip: The Millionaire Real Estate Agent (book) digs into this formula and the KW Business Planning Clinic drills down to how many people you need to talk to each day to achieve whatever your Net goal is.
“Net” means the amount you keep in your bank account after splits to the brokerage and all business expenses are paid.
The basic formula for Net is 30-30-40 where 40% is the net you are looking for:
- Commission Income (100%) = $2,500,000
- COS (30%) = $750,000
- Business Expenses (30%) = $750,000
- Net (40%) = $1,000,000 (before taxes)
So at 8-12 deals in an average first year in real estate, the average sales price you need to be handling to net $1M a year is around $7Million per contract.
So is this your local average sales price, your experience level, or your luxury designation? Who in your brokerage closed 8-12 deals at $7Million each – that’s wh you need to become your mentor.
4. The commission split is the most important number.
When you are interviewing brokerages – and, yes, YOU are interviewing THEM because they need your money to operate – you’re likely to hear variations on these five costs:
- Commission Split
- Royalty or franchise fee
- Transaction Fee
The Commission Split is where folks tend to focus, and everyone wants to hear 100%. Well, here’s the fact: the brokerage has to make it’s money somewhere to provide you with whatever perks they are promising you to get you to sign up. The commission split is where that happens. Here’s what you might expect based on how much real estate business you’ve done in the last 12 months:
- Newly licensed agents should expect a split from 50/50 to 70/30 to account for the extra attention from the broker or coach to ensure all actions are legally compliant.
- Agents with a history of capping in the last 12 months should expect a split of 80/20.
- Agents with a history of achieving $10M+ in sales annually in the local market for at least 2-3 years running may expect a split of 90/10 or 95/5 depending on their production levels. This is the group with the most split negotiating power.
Pro Tip: the commission split determines how quickly you will reach your cap, not how much you’ll be paying the brokerage, so you really want to check out the next paragraph.
The Cap is the real key to how much you are (or aren’t) paying to the brokerage. Here’s how a cap works: based on the month you started, that’s your cap “anniversary” and the beginning of your 12-month period for your cap. The brokerage sets a fixed amount of the cap, let’s say $15,000. Using the split percentage, you will pay only $15,000 of your commission in that 12-month period to the brokerage; once you’ve paid that $15K, you’ll switch to a 100% commission until you hit that anniversary month.
Another way to think of this is that you are worth $15,000 to the brokerage. And in a brokerage with a great culture, every agent, no matter how much business they do, is worth the same – no one is worth more/less than anyone else. Look for this kind of equity in your brokerage because if they are offering you a sweet deal off the spec sheet, then chances are down the road, they’ll automatically update you to the standard cap regular terms so that they can offer someone more valuable to them a sweet deal too.
The Royalty is a cost unique to franchised brokerages like Keller Williams, Berkshire Hathaway, and others. It’s generally 5-10% of your commission, depending on the brokerage. But here’s the kicker and what you want to be really specific in asking about: is the royalty capped or is it assessed on every transaction until the end of time. The answer that best benefits your way to achieving that $1M net is a capped royalty.
The Dues and the Transaction Fees are opposite sides of the same coin. You’ll pay one or both, regardless of the brokerage you choose, so, again, ask lots of questions so that you can accurately compare what you’ll owe monthly, per transaction, or both combined. Here are some common items that fall into these categories:
- E&O insurance fees
- Lead fees
- Broker fees
- MLS fees
- In-house Transaction Coordinator fees
- Training fees
- Coaching fees
- Desk/Office rental space
- Copies and Faxes
5. Training is free from the brokerage.
Pro Tip: you know what they say about free stuff, right? You get what you pay for.
That’s largely true when training is left up to “more experienced” agents to share what works for them – with no compensation. That’s called mentoring, not training.
What you are looking for in training is
- a consistent program with clear objectives,
- instructions, examples, and practice towards achieving those objectives,
- instructors who are trained to be instructors and held accountable for ensuring associates achieve the practice objectives in “class” so they can achieve them in real life, and
- a clear habit of scheduling core training progrms on a regular basis (ask for the last three months of the training caledar).
In an ideal world, you’re looking for a brokerage that offers more training opportunities than you could possibly attend in one month and still run your business, training like this for all levels of development, not just for brand new agents and not necessarily just for free:
- free training and paid coaching options for new associates – there’s a lot of financial benefit to joining a coaching program that takes a little higher split and offers services you’d otherwise be figuring out on your own like marketing and closing coordination
- ongoing coaching – look at options where the coaching fee is at least in part based on what you close rather than a flat rate – that way you know that their compensation is based on how well they help you get more/enhanced business
And be sure to engage in specialized training that might involve travel, including the national convention(s) of the brokerage you join. These are important opportunities to meet and mastermind and learn from the highest achievers in real estate towards improving your business. And they are amazing events for enhancing your referral network, another great way to grow your business.
6. Everything is a contract.
As you are looking for your first brokerage, you are probably taking or just finishing your pre-licensing classes which throw a lot of legal stuff at you – the stuff that needs to make it into a contract or an addendum to a contract for sale to close.
Pro Tip: everything is a contract, and it’s your job to protect your business interests by insisting on having it in writing.
And it’s important that you also know that every part of your affiliation with a brokerage is a contract as well. Start with the brokerage policies & guidelines and your affiliation contract; these are where you should expect standard terms to be clearly defined.
Here are some things you’ll want to make sure you have in writing with signatures for your own protection:
- ICA – independent contractor agreement – you are a 1099 contractor of the brokerage, not an employee – make sure you research what that means
- All fees you are charged both/either as monthly dues or per transaction fees
- Referrals – make sure you have all client referrals you receive and that you send to other agents – even in your own brokerage – in writing and acknowledged by the brokerage that will be handling the commission
- Special terms – if you negotiated anything different from the standard affiliation terms, get that in writing – reduced cap, higher split, brokerage-paid services, etc., and especially how long each change is effective. If there’s going to be an end date, you want to know that up front.
Everything is a contract, and it’s your job to protect your business interests by insisting on having it in writing.
I currently work for Keller Williams Realty International – the corporate headquarters – and have been affiliated with KW for five years through five different brokerages (called market centers within KW) on the East Coast. I have only worked with the Keller Williams real estate franchise to date and have assisted a number of agents – both newly licensed and with decades of experience – work through the data presented by different brokerages in order to figure out the apples to apples comparison. KW usually but does not always come out on top when weighed against their needs and goals.