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The First Steps to Becoming a Real Estate AgentAn Insight to the Initial Costs of a Career in Real Estate
By Henry D. "Hank" Myers
iUniverse, Inc.Copyright © 2008 Henry D. Myers
All right reserved.
Chapter OneThe Fallacy
"I get my license, join a brokerage, get to set my own work schedule, make sales quickly and easily, and receive large commission checks without breaking a sweat."
Let's carefully look at that concept; otherwise, we may very well end up derailed before we even get the engine started.
Sure, you can purchase the home study courses or take the minimal number of required courses at the local junior college for a few hundred bucks. If you are lucky and pass the licensing exam on the first try, congratulations—you're an excellent student. However, very little of what you learn in order to pass the test is useful in the day-to-day work as an agent.
I earned a Bachelor of Science degree by working my way through college, and I had begun work on my master's degree before winning the "military lottery" in 1969. For those who remember, that lottery was not necessarily one you wanted to win.
I knew how to study and was not your average idiot, yet it took five attempts before I passed the 250-question, three-hour exam to become licensed. Having grown up on farms in the Midwest, I already knew how many square feet there are in an acre of land, and I knew how to tell in which direction the sun rises and sets, and where north and south are. But believe me when I tell you, understanding the thinking process of those who design the California real estate licensing exam really does force you to think beyond your normal framework of logic.
After you have spent your first "few hundred bucks" and at least six weeks of time for your education, you may pass the exam on the first shot. Know that rarely can you take the licensing exam the day after you qualify to do so. You must schedule the exam and usually travel a good distance to one of the exam sites. Waiting for an exam date may cost you another couple of months.
Now, with new license in hand, you must decide, "With which broker do I wish to work?"
Most brokers start new licensees on a brokerage split of 50 percent. Let's take a typical bread-and-butter transaction in most of the well-populated cities in California as an example. Most three-bedroom, one-or two-bath, 1,000-to 1,500-square-foot ranch-style homes built any date from 1950 through 1980 will sell for $500,000.
Be aware that the price may vary slightly depending on whether it is a buyer's market or a seller's market and what decade you read this example. "Prices are subject to change without notice." Where have we heard that disclaimer—and how often?
If you are lucky, you may obtain a listing and negotiate a commission of 6 percent of the sales price; or, if you represent buyers, the home they want to buy will be listed with a 6 percent commission.
Understand that commissions are not set by law. They are negotiated between the agent and seller. Commissions may range from 1 percent to 10 percent depending on the circumstances, property, and negotiating skills of both the agent and the seller.
Typically, your broker will receive half of a commission and another broker will receive the other half. It is not the norm for an agent to list a property and also find the buyer for that listing. So, with a 6 percent commission on a $500,000 property, your broker (usually) will receive $15,000 as the gross commission.
Most brokers must take 6 percent of the gross commission right off the top to pay for the Corporate Franchise Fee. Brokerages are often "independently owned" but may be affiliated or franchised with one of the "Big Five" nationwide brokerage firms. This top 6 percent of the gross commission goes toward paying for that affiliation.
So now the $15,000 has just been reduced to $14,100, from which the broker gives you your 50 percent split, and you receive $7,050.
With your paycheck in hand, you feel "Saturday-night rich." You should go to the mall and "shop 'til you drop," right?
You must remember your Rich Uncle. You need to plan to pay taxes on your windfall. To be safe, you probably should figure the IRS will get 25 percent of your gross earnings. You will have to pay an estimated tax each quarter of the year, and your gross earnings will ultimately determine what your tax bracket will be. But for the sake of our example, your net windfall becomes $5,287.50.
Another "Uncle" you will need to plan to contribute to is your local municipality. Once you are discovered as a person who is conducting business and making money in the town or city where you ply your trade, you will have to pay for a license to do so.
This may be a flat fee or it may be based on your gross earnings for the year, and it is usually due at the end of the local municipality's fiscal year. This may cost you anywhere from $50 to $500 on average. If you routinely sell real estate in more than one municipality, you may have to have a license in each of those communities, not just in the one where your public business office is located.
Depending on the marketplace and your skill as an agent, you may not close your second transaction for several months. A safe rule of thumb is to budget at least six months in advance for all of your living expenses. Living can become very uncomfortable if you are down to your last $100 and you don't have anything in escrow.
Keep in mind that if you are not in escrow, you are not employed. You only have a license to sell real estate. Oh, yeah—your state issued license has also cost you a couple of hundred dollars.
Once you pass the exam, do you think the state just gives you the license?
Are we approaching the truth about the instant fortune to be made as a real estate agent? Read on Mc Duff.
Chapter TwoHidden Costs
Oh! Did I forget to mention that before you get to the end of the first sale, you will need to cover a few up-front costs before you can even start to work with most brokerages?
Before you can actively and freely work with most brokerages, you will need to join your local Multiple Listing Service (MLS). The MLS is the organization through which all cooperating brokers may share their listings in return for a shared (usually equally) commission earned on each listing. The MLS is the tool you need to give your listings maximum local exposure to all other agents who are also members. The MLS greatly increases your chances that another agent will bring a buyer to your listings. Unless there is an extremely compelling reason, all sellers should insist on their property being listed in the local MLS. The widest exposure and best chance for obtaining the highest price for their property is gained when it is listed in the MLS.
National data bases access local MLSs to create their websites and are viewed from anywhere in the world via the Internet. Remember: it is a very small percentage of listings that are sold by the listing agent himself or herself.
Joining the local MLS will cost you perhaps $1,000. There are annual expenses of another couple of hundred dollars, either annually or biannually, to continue being a member of your MLS.
You will also want or need to belong to your Local Association of Realtors®. This will also cost you a couple of hundred dollars annually. Your local membership may or may not include some of the cost of belonging to the National Association of Realtors® and any State Association of Realtors® where you live.
To access listed properties, key safes are usually installed on your and other agent's listings. You will need a key safe for each of your listings. You will also need a key card to access all the key safes on listings you want to see that belong to other agents. A key card will cost a couple of hundred dollars, and each key safe will cost another hundred or so. You will probably want six key safes for your potential listings. The electronic key card is usually leased from the company that makes the card. Renewal of the lease—yes, I said lease—will cost another couple of hundred dollars each year.
Now we get to signs for use on your listings. Typical 18" by 24" plasticized corrugated cardboard signs run about $25 each. These are the least expensive descent size signs to purchase. Signs with your picture on them will cost more, but basic signs with just your name and phone numbers are the cheapest way to get started.
If you are lucky, your broker will be so happy to have you join his or her firm that he will spring for the first five or six generic company signs and hardware (posts) to help you get into business. You will, however, be required to pay for your replacements as you need them. Strong winds and graffiti artists can easily destroy a half-dozen signs within a normal three-to six-month listing period.
You will also need at least four Open House signs to direct traffic to your open house events. These will cost you from $25 to $30 each. If you breach local ordinances with the placement of these signs, they may be confiscated by local authorities during your open house event. They may also be stolen by vandals just for fun. Flags are also great collectables for vandals and children. Flags will cost you about $15 each.
Any riders for your signs will cost extra, and you will have to spring for those on your own. But these cost only about $10 to $15 per rider, and you probably won't need more than a half-dozen to get started.
Many brokers will also give you your first 500 or maybe 1,000 business cards, which will cost you, on average, $65 per 1,000 to replace. You can easily use 1,000 business cards per month if you are diligent in "farming" and passing out cards to the public in order to become a household name. You will also drop a card every time you preview a property during broker caravan (see below) and when showing properties to customers.
Errors and omissions insurance will be required on each transaction. This may be available to you for about $200 per transaction, or your broker may require you to pay it in advance each year with his or her policy, or the corporate policy if applicable. Annual fees for E&O are typically $1,500 to $2,000 per agent if paid up front.
Oh, you didn't expect these costs?
Don't forget the additional insurance for your vehicle. You will be carrying people in your car for business purposes, and you will need to cover them in case you have an accident. If you ever have an accident with clients/customers in your vehicle, you will be glad you have the additional coverage. In addition, your broker will require that his company is also named on your policy. Allow another $500 each year for this cost.
You may have to run your own ads for your open houses, and you may need additional advertising to placate some of your more demanding sellers. You may also want or need to advertise in any number of "glossy" magazines for additional exposure, especially for some of your more discriminating listings. These ads aren't cheap. A "glossy" can cost up to $800 or more per month for a single listing.
Are we making money yet?
If you have a listing that is receiving fewer than multiple offers once it hits the MLS, you may have to sit open house on it every Sunday, or at least every other Sunday, to make it available to potential buyers until it is sold. Most sellers will expect open houses on Sunday afternoons.
Get used to this idea. You may actually have to work a little bit.
During the down cycle of the real estate market, you may have a listing for as long as a year before it is sold. When you hold open house, you may wish to serve some small refreshments to maintain the appearance of graciousness and hospitality. There is a cost for refreshments. You will pay for this, not your broker.
Not getting any cooperation or showings from your fellow agents?
Broker open caravan, or broker's tour, is usually held once each week through most MLSs and is designed for all agents to preview new listings that have come on the market during the week. Broker caravan refers to agents or groups of agents who may carpool to view properties that are listed on broker's tour. Broker's tour includes listings that may have previously been available for agents to see by appointment only.
Typically, you can sponsor a broker open on the same property at least once each month. If there are a large number of houses on the broker's tour each week, be prepared to offer refreshments and even free gifts for a drawing as enticement to attract agents to your listing.
The gift for a drawing can be a $25 or $50 gift card from any store or gas station. Lotto tickets are also popular enticements. Real estate agents are prone to playing the odds. If you need an example of the odds, consider the chances of obtaining a listing, opening a transaction, and then successfully closing it.
To illustrate these odds, let's take the current descending market in the city where I work, which has approximately 200,000 residents. During the month of July, 2007 there were approximately 1,200 active listings in our MLS. There were approximately 3,500 active agents who consummated approximately only five purchase agreements each day.
Using these raw numbers, only an average of 34 percent of the agents had a listing. Keep in mind that by averaging, the true story is lost. Those who have a listing, typically have more than one.
At the above rate of sales per day with two agents being involved in each sale, it would take 120 days for each agent in our MLS to complete one sale. The fact is that not every agent had a listing or a buyer for one of the 1,200 listings.
In the unreal occurrence that each agent would be involved in only one transaction until the entire inventory is depleted (without any listings being added) during the 120 days, it is easy to see how great the odds are that each agent would successfully complete a sale during that time frame.
When an offer is accepted, there are more than 100 items to be disclosed on each property sold in California during the transaction. Any one disclosure may result in the buyer rejecting the property and there is usually a loan that must receive final approval before the sale can be completed. Plus, all items of concern that are discovered by any inspection performed by the buyer must be addressed and negotiated to the satisfaction of both the buyer and seller before the transaction can proceed to it's successful completion.
This is precisely what I mean by realty agents being prone to playing the odds. Perhaps I should restate this by saying "Real estate agents are an extremely optimistic group of people."
Agents burn a lot of gas each week while previewing properties and showing potential buyers properties they (agents) have seen on broker open caravan/tours. Most agents appreciate the odds of winning a $50 gas card or winning the lotto (so they can retire) just for seeing a property on the weekly broker's tour.
You need to do the math!
If your new career appears to be the proverbial "money pit," it is all money well spent, but it does run up the tab for being a real estate agent. You may try to beat the system by cutting corners on these costs, but you will reap only what you sow.
Investing in just the basics outlined here will save you time in the end, and you will come to understand acutely the meaning of the phrase "Time is money."
You will eventually learn to waste neither.
Chapter ThreeThe Internet—Your Indispensable Home Tool Chest
Don't underestimate the power of the Internet in real estate today. The media say that in the mid-1990s less than 5 percent of the public used the Internet to search for property and an agent to help them buy or sell a property. Today over 80 percent of all real estate searches by buyers and sellers are initiated on the Internet.
You will need a home office with Internet capability in order to "be on top" of your business as an agent. If you get a call from a potential client (seller) or customer (buyer) at 9:00 p.m. on either your cell phone or residential phone, you will probably need to have the MLS database at your command when you talk to them. Therefore, you will want at least the basic office equipment at your fingertips, because when a client/customer calls, she will be listening very carefully to see if you are the agent with whom she truly wishes to work. Being Internet and computer savvy is the initial litmus test.
Excerpted from The First Steps to Becoming a Real Estate Agent by Henry D. "Hank" Myers Copyright © 2008 by Henry D. Myers. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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