Friday, November 04, 2005

Real Estate Careers Cost More Than You Think

The real estate sales industry has seen an amazing amount of growth over the last several years as it has morphed into a multiple services industry, rather than simply a sales services business.

Any time an industry experiences amazing growth, you'll find a lot of people move to it to get into the flow of money. The mortgage industry underwent this type of amazing growth in the 1990s and into the 2000s when interest rates dropped into the 5's and 6's from the low teens in the 1980s.

When you can drop your interest rate from 12 to 6 percent, everyone is going to get in line to refinance, which is what happened ferociously during the last 15 years. Mortgage companies hired like crazy. Top loan officers even left their current companies and launched their own companies. Fortunes were made. When everyone refinanced, guess what -- some of those fortunes went stale. The need for more loan officers dissipated and online transactions removed the need for as many mortgage professionals.

The same happened to the real estate industry through the 1980s. The membership rose to nearly 1 million nationwide. Then the early 90's hit, the recession and the drop off began -- down to about 600,000 Realtors in 1995 -- then it turned yet again. Now, 10 years later, the National Association of Realtors has the highest number of members it's ever had.

Real estate is the industry today (even in the face of leveling markets across the country).

So what does it take to really carry on a successful real estate business? It depends. Getting started is the easiest item to calculate. In the Washington, D.C. area, it's about the same for most agents to get into the business. Recruiters here include a sheet with the projected costs of getting started. Albeit, a couple of thousand dollars, it doesn't all have to be paid right up front. Thus if you're wanting to stay in business and hold on to your day job, you can stagger when you pay out the start up costs.

The investment of conducting business, however, depends on your level of commitment to the endeavor. Those who try their hand at a part-time career end up paying out a couple thousand dollars per year, hoping to net enough to pay their expenses and have some profit at the end of the year.

For top producers, it reaches into the tens of thousands of dollars per year just in office and marketing expenses, not including staff and a buyer agent team. Other expenses include insurance coverage in your state, the local and state association charges, and what you determine you're going to spend on business setup.

Below are a few of the charges you can expect if you want to start your career. While the pricing may differ a tad from state to state and jurisdiction to jurisdiction, the categories will generally remain the same. What I've done is provided a range of costs for several items below.

Start Up

School & test: $330
Each state requires a license and you must attend a certified school to attain this. The charges will differ per school.

Business cards: $25
These are for basic cards. Color with your photo may cost more. If you don't order these, you're not really serious.

Training: $100 - $200
Some companies offer in-house training for free, others for a small fee, still others rely on the local association to provide training for your. There's usually a small fee for this service to cover materials.

Trade Association, lockbox services: $400 - $1,000
This also differs according to your local association charges. Your association services will reflect the cost of membership.

Errors & Omissions insurance: $500 - $700
This is a policy you'll pay for every year you're in business. It's a policy to protect you from making, well, errors and omissions in your business when dealing with the public. Be careful about the deductible and ask to read the fine print. Some have no deductible (and cost a bit more each year) while other policies are cheaper up front, but leave the agent responsible for the first $5,000 or $10,000 in damages.

MLS application fees and charges: $400
There are set up charges, then either a monthly or quarterly fee to help maintain this co-op program.

Miscellaneous business set up expenses: $500 - $1,000
This is determined by your own personal plan. Do you need new clothes, PDA, calendar, computer, office supplies, etc.? If you're counting on the office to supply some of these items, be ready to talk to your manager first. Some offices supplies this for agents, others don't.

Total: $2,255 - $3,655

Once you're up and going, then you have regularly scheduled expenses you'll have to pay. When you're running your own business, keep in mind that what the company used to pay for in an employer-employee situation, you now must cover month in and month out as an independent contractor (self-employed).

Ongoing (annual expense):

Monthly mailings: $2,400
This is referred to as "farming" and quite frankly, not all agents carry this out. It's amazing to me how many agents are just waiting for business to ring in on the phone. If you want to build a business, you have to let people know you're in business. The above cost is minimal. Top producers mail to tens of thousands of prospects each year and invest even more.

Networking memberships & events (chamber, network groups, etc.): $500
Again, this is the cost of letting other business people know you're in business. Most of the cost above is for the networking events -- breakfasts, mixers, trade shows, etc.

Cell phone (2,500 minutes, minimum): $1,800 - $2,400
The front-line weapon of today's real estate agent. You're going to need the best plan you can afford.

Website: $500 - $1,000
Some companies offer some sort of web presence (a page, etc.) and it can be free. For a bona fide website, include the above as a minimal expense.

Errors & Omissions insurance: $500 - $700
The policy is usually negotiated through your company. You may be able to get a policy discount through your trade association.

Trade Association memberships: $400 - $1000
For the trade association near you, visit and click the link at the bottom of the page.

Office expenses: $3,000
This will be a personal choice, depending on your use of technology and mailings, etc. However, you still need to feed paper into the printer, use paper clips, ink pens, etc., along with various other marketing materials, such as open house brochures, property packets, etc.

Car expenses: $4800
This could be reflected in either a lease, payment or upkeep (tires aren't cheap); and you will be living in this vehicle with your clients.

Gas: $3,000 (based on $3 per gallon; 1,000 gallons)

Total: $16,900 - $18,800

This is a base line of expenses that you'll need to maintain just to be in a full time business. Your expenses will fluctuate according to how much you want to market yourself. Thus, if you want to make $50,000 in this industry, you'll actually need to make about $20,000 more than that to just cover your business investment each year. The industry suggestion is 15 to 25 percent of your income should be used to market you and your business.

One final note, the above numbers don't include your tax expenses and any services you may hire out (assistants, clerical work, etc.). Also, for the self-employed, you must pay for both sides of the Social Security tax, which doubles your rate from 7.5 to 15 percent right off the top. (In an employee environment, the employer pays half of this tax.)

Published: October 7, 2005

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