Reading Time: 35 minutes

Opening a real estate brokerage firm requires a substantial investment of time and capital.  The broker should develop a realistic business plan, project start-up costs and estimate operating costs for at least six months.  Part of the business plan requires that the broker decide whether to remain independent or buy a franchise.

Tax considerations require a decision concerning the accounting system and whether salespersons will be employees or independent contractors.  The plan also must establish the salespersons’ compensation.  Other issues that must be addressed include how many employees and salespersons to engage and whether a sales manager is necessary.  The broker should develop a policy and procedures manual to guide all firm members’ activities.

DEVELOPING A REALISTIC BUSINESS PLAN

Brokers who start their own firms often have only general ideas of their organizations’ goals.  This can affect a firm’s success significantly.  The broker who prepares a business plan carefully has already reduced the likelihood of two principal causes of business failure: lack of capital and poor planning.  A study of firms that have established their positions in the marketplace usually indicates that these firms have strong foundations in business planning.  The results show, not only in market share and profitability, but also in customer satisfaction and their reputation for ethical behavior.

A written business plan provides direction for an organization, as well as the steps involved in accomplishing its goals.  By reviewing the plan continually, each member of the organization understands his or her role in its success and is more likely to work as a team member to achieve the stated goals.

This chapter provides much of the information a broker needs to prepare his or her firm’s business plan.  The plan must cover capital requirements for start-up and for budgeting and controlling operating expenses.  The broker must decide whether remaining independent will accomplish his or her goals better than joining a franchise.  Also, the broker must recruit, train and retain qualified salespersons and employees.  These tasks all should be included in the organization’s business plan.

CAPITAL AND START-UP COSTS

The typical candidate for the state broker’s examination takes the exam to enhance his or her education and qualifications and will become a broker-salesperson in his or her present firm.  Some candidates who have the required experience in another state prefer to start in Mississippi as a broker.  Some of those who open their own offices start small, perhaps even working from their homes.  This chapter is for the broker who intends to open a firm or to become an officer or a partner in an existing firm.  It is this broker who must develop a business plan.

Preparation of a business plan includes budgeting for start-up costs and expense reserves in the early months of operation.  This process helps the broker understand how much money will be needed to open his or her business.  Running out of money just before a company becomes profitable is not uncommon and usually results from a failure to plan.  Even if the new firm is small with no salesperson or employees, start-up costs and expense reserves may be substantial.

INITIAL START-UP COSTS

Some initial start-up costs include the following:

Attorney and account fees.  An attorney must prepare all documents for incorporation or the partnership agreement, if appropriate.  The accountant also helps set up the company’s bookkeeping system.

Office setup and occupancy.  The cash needed for office set-up depends primarily on whether the broker intends to purchase or lease office space.  Purchasing an office building usually takes a substantial cash down payment and closing costs, as well as any money necessary to remodel the space.  Usually, the building is too large for a new brokerage firm, so the broker leases space to others until needed.  The broker should consider the long-term economic benefits of purchasing a building.  Rent payments tend to increase steadily, but a fixed-rate mortgage may provide real estate savings in the future.  The other important consideration is the building’s appreciation over time, which renting does not provide.

Most brokers initially rent their office space.  Landlords generally require the first month’s rent and a security deposit in advance, but this is much less money than a broker needs to purchase a building.  Another advantage of renting is the flexibility it provides a broker who must move to larger quarters as the company grows.

Office equipment and furniture.  The business plan helps the broker decide what to buy and how to pay for it.  Attractive office space and quality furnishings help attract good salespersons.  The broker on a tight budget often can find good-quality used furniture at excellent prices.  Neither should the broker overlook the need to buy file cabinets, work tables and accessories such as pictures and lamps when setting the budget.  Necessary office equipment includes the telephone system, a computer, software, a printer, a copy machine and a fax machine.

Signs and lock boxes.  The broker may pay for signs and lock boxes (key safes attached to doorknobs or other fixtures on homes for sale) for the firm’s listings, although many now require salespersons to buy or lease their own.  Lock box prices increase as the security technology is enhanced.  If the broker provides the boxes, the start-up budget should cover at least three months of operation, even though, because of the expense, the boxes may be purchased as needed.  Signs usually are sold with quantity discounts, often in lots of 25, 50 or 100 signs.  Buying fewer than 25 signs usually is not cost effective.  Often national sign companies offer lower prices, but the broker must consider shipping costs when comparing prices with local companies.

National Association of REALTORS (NAR), Board of REALTORS®, and Multiple Listing Service® (MLS) fees.  The broker should include these fees in the budget.  Competing in the residential market without easy access to the listings other brokers share through the MLS is difficult.  Also, the Code of Ethics and professional standards required of REALTORS® is an important advantage of NAR membership.  Finally, the education opportunities available through the local, state and national associations of REALTORS® provide another strong incentive to become a member.

Office supplies.  The broker must budget for pens, paper, file folders, tape, scissors, staples and numerous other office supplies.

Promotional materials.  The broker must order letterhead paper, envelopes, business cards, listing and sales forms, promotional brochures and other materials.  Commercially printed forms and promotional materials may be more attractive, but also are more expensive.  Many brokers prefer to buy inexpensive, attractive, preprinted paper stock and personalize it with their laser or inkjet printers.

Advertising, direct mail and a grand opening.  Although these are effective ways to announce a firm’s opening, initial promotions can be very expensive, and the broker must choose them carefully.

ESTIMATING INCOME AND EXPENSES

Factors To Consider When Projecting Income 

When projecting income and expenses for a new firm, the broker tries to consider all the variable that will affect the estimate.  Therefore, the broker must consider the scope of the firm’s operations, market conditions and the number and productivity of salespersons.

Scope of company operations.  The business plan should describe what types of services the firm will offer.  Many brokers intend to specialize in commercial properties, acreage tracts, property management or residential sales.  Commission percentages often differ for each service, so the mix of revenue sources may affect income projections.

Market conditions.  The business plan should describe which market area the firm will service.  In urban areas, a new firm generally works in a smaller geographic area with many residents.  In rural areas, marketing in adjacent counties is common for small brokerage firms.  The need for branch offices increases costs.

The broker also must evaluate the general market conditions in the area.  If sales are strong, the broker may consider an aggressive growth strategy, but if the market is weak, the broker may decide that a more conservative approach to expenditures is warranted.  Salespersons should attend training sessions on how to price listings so that the broker does not pay to advertise listings that have little chance of selling.

Number and projected productivity of sales associates.  Properly estimating the number of salespersons and their production level directly affects the overall financial estimate.  New brokers may overestimate the number of salespersons who will agree to join their firms, then underestimate the time it will take the new staff to become productive.  Conservative estimates help to prevent unpleasant surprises.

Income sources.  The firm draws income from commissions, property management fees and referral fees, that the broker should show separately in the firm’s budget and in its financial statements.  Commissions income is revenue from listings sold or sales made.  Other brokers pay referral fees for business sent to them.  Residential property management fees can stabilize a firm’s revenues because they continue in good times and bad.

Factors To Consider When Projecting Operating Expenses  When project expenses, the broker must consider variable such as office size, the scope of company operations, marketing methods, market conditions and compensation programs.

Size of the broker’s office.  If the broker will not recruit salespersons, operating expenses are much easier to estimate and control.  The task becomes more challenging if the broker projects that she or he will recruit ten or more associates.

Scope of operations.  If the broker intends to service a wide geographic area, additional advertising may be necessary.  Branch offices needed to service a large market area may increase expenses significantly.  Also, brokers specializing in acreage or commercial properties may need to advertise in out-of-town newspapers, which is often expensive.  And if the firm offers property management with investment and residential sales, the broker must calculate for additional staff and equipment.

Marketing methods.  Institutional advertising describes the firm, its personnel and its services.  Some brokers believe that this type of advertising is the most effective way to get listings.  Other brokers find that they get the most business form advertising specific properties for sale in newspapers or homes magazines.  Still others market properties in out-of-town newspapers.  Of course, property signs remain one of the most important sources of calls.

Market conditions.  The broker must consider economic conditions in the market area before making projections.  A buyer’s market has more listings than can be expected to sell in a reasonable time.  Therefore, brokers need more listings, priced right, to achieve the same level of sales, so advertising, sign and lock box costs are higher.  In a seller’s market, listings sell quickly, and many sellers market their own properties.  This requires more institutional advertising to attract listings.

Agent/employee compensation.  A broker who wishes to recruit salespersons quickly might offer higher commission rates or provide extra services, such as personal assistants for a few hours per week.  The broker must consider these factors when estimating expenses.

FIXED EXPENSES

Fixed expenses normally do not vary with increases or decreases in income.  They include occupancy costs, salaries and other payroll costs, equipment rental and maintenance, furniture rental, business liability insurance and property insurance.

Occupancy costs.  Occupancy costs include rent or mortgage payments, utilities, janitorial service, building maintenance and trash removal.  While a mortgage payment is not strictly an operating expense, it must be reflected in cash flow projects.  Some occupancy expenses may vary somewhat depending on the number of persons in the firm, but they are considered fixed because most are based on contracts.

Many office buildings include utilities in the rent.  More often, the broker pays for utilities separately.  Air-conditioning consumes the most energy.  The cost varies depending on power company rates, the building’s insulation, and how the office is situated.  If it is on the top floor or faces the west, it will cost more to cool.  An interior office normally is insulated by other heated and cooled space and should experience lower rates.

Payroll costs.  Here, the broker estimates his or her own salary, as well as salaries for sales managers, secretaries and clerical personnel.  The broker should include employer’s contributions for payroll taxes, medical insurance and any other benefit plan.

Equipment costs and maintenance.  The broker should include in the estimates the rental costs of any equipment, such as computers, typewriters, copy machines, telephones, fax machines and postage meters.

Furniture rental.  Some offices rent furniture instead of buying to conserve cash flow in the early years.  The broker must weigh the short-term cash savings against the higher long-term costs.

Liability insurance.  Several types of insurance protect the broker against claims, including coverage for accidents to the public, worker’s compensation for employees and errors and omissions insurance for problems in real estate dealings.  Insurance is expensive, but absolutely necessary for every broker.

Property insurance.  A fire, a windstorm or another disaster could destroy the company’s furniture, equipment and office improvements.  The company would suffer further losses for business interruption and the move to a new site.  Unless the broker insures the premises, the losses may result in business failure.

VARIABLE EXPENSES

Expenses that go up or down depending on the level of business are called variable expenses.  They include commissions, advertising, MLS® listing fees, telephone services, office supplies and printing.

Commissions.  Many brokers subtract their commissions expense directly from gross commissions income to reach a subtotal called the company dollar—that is, the amount remaining for the company to pay other expenses and for the broker to make a profit.  Commissions expense is tied directly to income because salespersons normally are compensated only when they generate income.

The percentage of the gross commission paid to salespersons usually varies with the production generated.  When projecting this expense, the broker should base the estimate on the expected mix of salesperson commission rates.

Advertising.  The primary types of brokerage advertising are specific and institutional.  Traditionally, brokerage firms have spent most of their promotional dollars on advertising listings.  An ad for a duplex is specific (product) advertising.  It is a necessary, effective way to help sellers who have entrusted the broker with the sale of their property, but it is only one aspect of advertising.

Institutional advertising is designed to make the public aware of the firm, and its services, management and staff (“Jones Realty—22 years of service to the Gulf Coast area,” for example).  Because advertising represents a substantial percentage of a firm’s expenses, the business plan should be quite detailed on how the funds are allocated.  A strong marketing plan is well coordinated and consistent.  The public should see the same image whether it is on TV, in the newspaper or in a homes magazine.

MLS listing fees.  Ordinarily, a firm pays listing fees to the Board of REALTORS® or to the company that operates the firm’s computer service.  The fees could be charged one time only, monthly or quarterly.  A fee commonly is charged for participation, access to the service, each listing placed in the service and office and home computers.

Telephone.  Telephone service can be a significant part of the firm’s total expenses.  The broker pays for each phone line into the office, for the switching equipment and for the phones themselves.  Long-distance calls add up quickly.  Many brokers agree to pay for calls to present contracts and service listings, and require salespersons to pay for the prospecting calls.  Other firms provide long-distance calls to a certain dollar amount, with all calls exceeding that amount charged to the salespersons.  Finally, “Yellow Page” advertising increases the phone expense.

Office supplies.  The broker must purchase the initial inventory of supplies to be used in the everyday operation of the company.  Necessary items include staples, paper clips, file folders, paper, pens, markers, coffee and light bulbs.  Because of the number of items available, the broker should plan carefully to prevent overspending.

Printing.  Letterhead, envelopes, brochures and forms are expensive.  The company’s business plan dictates whether the broker orders from a commercial printer or buys blank stock and prints the necessary stationery and brochures in-house.  The broker also might include the design of the company’s logo and advertising theme in this expense category (or he or she can include it in the advertising category.)

FRANCHISE VS. INDEPENDENT FIRM

The new broker must decide whether his or her firm will be independent or whether buying a franchise offer more advantages.

Advantages of Purchasing a Franchise

Franchising has been a very successful part of American business.  Real estate franchises offer brokers many advantages, such as:

  • Built-in referral networks, providing the names of new prospects moving into an area and offering income from other brokers for referrals they receive;
  • Formal training programs for salespersons with tested curriculums and trained instructors;
  • National advertising, providing immediate name recognition and giving brokers market impact the moment they open their doors;
  • Advertising assistance that includes professionally designed logos, signs and brochures. (Also many franchises participate in regional cooperative advertising, so many brokers can advertise their listings together to show a strong market presence); and
  • Management training programs that help brokers become more effective in planning and operating their firms.

When evaluating the benefits of joining a franchise, the broker should remember that many brokers who purchased real estate franchises that later went out of business lost thousands of dollars.  “Penny wise and pound foolish” is a well-known expression that, in this context, means don’t buy a cheap, unproven franchise; go with a proven winner.

Advantages of Remaining an Independent Broker

While recognizing the benefits in buying a franchise, many brokers remain independent because of lower start-up and monthly fees, more operating independence and the ability to establish a local personality, among other advantages.

  • Franchises are very expensive to buy, and many larger franchises require that brokers have substantial liquid assets and net worth. Many brokers prefer to remain independent for this reason.
  • Independence means lower overhead. Most franchise companies charge a fee that ranges from 4 percent to 8 percent or more of a firm’s gross commissions income.  Usually, the franchise company takes this fee off the top, before salespersons receive commissions, so salespersons often make less on each transaction.  (Franchise brokers would argue that they have more transactions, thus more income.)
  • Increased operational freedom is a benefit of remaining independent. When a broker associates with a franchise company, the company places many restrictions on the broker’s operations.  Some brokers want to use their own creativity and advertising ideas and do not want to be tied to a regional advertising program.
  • Local personality is easier to achieve as an independent than as a franchise. While it is true that the franchised real estate office is locally owned, the appearance is that it is part of a national firm.  Some brokers believe that customers want to do business with strictly local companies.

Whether the broker chooses to affiliate with a franchise or remain independent, it is the firm that provides the most ethical and effective service to its customers that prospers.

TAX CONSIDERATIONS

Bookkeeping System (Cash vs. Accrual Method)

Whether the broker uses the cash or accrual method of accounting depends on the firm’s size, its structure and how it uses it financial statements.

Most small-business taxpayers use cash basis accounting primarily because it is simple.  Income is taxable in the year received; expenses are deducted in the year paid.  Usually, a firm’s balance sheet shows no accounts receivable or accounts payable.  Holding checks to deposit after the year end is considered constructive receipt of the funds, and the broker must pay taxes in the year he or she receives the checks.  Neither does the IRS allow the broker to pay some expenses (rent and insurance) in advance to reduce tax liability.  S corporations may only use the cash basis system.

Accrual basis accounting attempts to match a firm’s revenues and expenses.  Income is recognized when all parties have accepted a contract.  Expenses are booked for the period they benefited.  Income is reduced for the period in which the contract falls through, if that happens.

IRS Treatment Concerning Employees vs.

Independent Contractors

The broker who opens a new real estate office should file Form SS-4 with the IRS to request an Employer Identification Number (EIN), that he or she will use on all tax returns and reports filed with the IRS.  The broker also must apply for an account number with the Mississippi Department of Labor and Employment Security.

The nature of the independent contractor relationship.  Most real estate brokerage firms treat their salespersons as independent contractors.  If a broker meets all requirements, this results in substantial savings, primarily from the employer’s share of Social Security taxes, worker’s compensation insurance, unemployment taxes and other                      fringe benefits.  The three major requirements a salesperson must meet to qualify for independent contractor status follow:

  1. The salesperson must hold a real estate license.
  2. The salesperson’s gross income must be based on production rather than on the number of hours worked.
  3. The salesperson must work based on a written contract that states, among other things, that the salesperson is not considered an employee for federal tax purposes. The IRS denies independent contractor status if an audit reveals that the broker directs how the salespersons should do their job, requires salespersons to take a floor duty time or makes attendance at company meetings mandatory.

Financial control is another problem area for brokers.  If a broker reimburses a salesperson for business expenses, such as automobile expenses, business cards, insurance plans or licensing or board dues, the IRS may determine that the salesperson is an employee.  The broker then would be liable for Social Security, Medicare and income taxes.  These rules also apply to salespersons who employ personal assistants.

Reporting requirements for employees and independent contractors.  A broker’s basic responsibilities regarding taxes and reporting for employees and independent contractors include:

  • recording the employees’ names and Social Security numbers exactly as shown on their Social Security cards (or a penalty may be assessed);
  • asking the employees to complete Form W-4, “Employee’s Withholding Allowance Certificate” (If an employee does not do so, the broker may withhold tax as if the employee is single, with no withholding allowances. This form remains in effect until the employee submits a new one.  An employee may claim fewer withholding allowances than he or she is entitled to claim);
  • withholding federal income tax based on Form W-4;
  • withholding the employees’ shares of Social Security and Medicare taxes;
  • depositing the taxes withheld along with the employer’s share of Social Security and Medicare taxes (The deposit due date depends on the amount withheld, and penalties can be substantial for late deposits);
  • depositing federal unemployment tax each quarter if the undeposited amount exceeds $100;
  • filing Form 941 within 30 days after the end of each calendar quarter showing the compensation paid and taxes due;
  • filing the Unemployment Compensation Employer’s Quarterly Report within 30 days after the end of each calendar quarter;
  • by January 31, giving each employee Form W-2 and each independent contractor Form 1099-Misc. and filing with the IRS the annual federal unemployment tax return; and
  • by February 28, filing Forms W-2 and W-3 with the Social Security Administration and filing Forms 1099 and 1096 with the IRS.

STAFF AND SALES PERSONNEL

Great organizations have one common denominator: well-qualified personnel who are enthusiastic and motivated to work as a team.  Putting the right people in the right positions is one of the most important tasks the broker faces.  The positions the broker must fill include support staff and sales personnel.

SUPPORT STAFF

The broker must select carefully the necessary staff to support the sales personnel, including the following:

Receptionist/secretary.  Customers and prospective salespersons form their first impressions of the company when the receptionist greets them.  Therefore, the receptionist should be neat, personable, articulate and helpful.  A small firm may combine this position with that of secretary, bookkeeper and personal assistant.  The secretary’s duties should be well-defined regarding how much assistance he or she will provide to the sales staff for typing, general mailings, preparation of brochures, and so on.

Bookkeeper.  In a larger firm, or in an office with many property management units, the broker may need a bookkeeper to make daily postings and keep all company records up to date.  Legally, the broker is responsible for escrow and property management accounts whether the broker or the bookkeeper does the daily postings.  Blaming the bookkeeper for an error does not excuse the broker from the disciplinary action if a shortage or an overage occurs in an account.

Support staff.  Other employees of the firm include sales managers, personal assistants and transaction coordinators.  Sales managers usually are employed when a firm has ten or more salespersons.  The sales manager may be compensated by salary, commission override or some combination of the two.

Some brokers hire personal assistants to help salespersons measure homes, put up signs, complete market reports and prepare brochures.  Assistance might be offered on a rotating basis, with a salesperson paying an hourly fee for the help.

Transaction coordinators handle the administrative tasks involved with closings, including ordering title insurance, surveys, pest inspections and so on.  Many firms charge the buyer or seller a fee for this service in addition to the brokerage commission.

REAL ESTATE SALES PERSONNEL

One of the broker’s most challenging tasks is recruiting good salespersons.  Characteristics of good salespersons include honesty, empathy for consumers, self-esteem, motivation to succeed and desire to provide excellent service.  The good salesperson continues to pursue professional knowledge in marketing, financing, construction, the economy and the law.  Brokers complete mightily to get the best salespersons.  Salespersons usually associate with brokerage firms whose salespersons share the same quality standards.

If a broker has only enough office space for five sales associates, it is important that each salesperson produce at least the minimum $20,000 annually.  When a salesperson does not produce at least the desk costs (total expenses divided by number of salespersons), he or she should be counseled.  The broker may have to search for a replacement if the salesperson does not become more productive.

Very often, brokers are contacted by licensees who have full-time jobs, but who wish to work part time in real estate, at least until the income justifies working full time.  Brokers may be tempted to employ these salespersons; however, the decision usually results in problems for the broker.  Some reasons part-time salespersons fail follow:

  • Part-time salespersons often are not available for sales meetings or training sessions; they usually work after office hours. This lends to salespersons who are not familiar with the office listings, new financing terms or license law changes.
  • Part-time salespersons rarely make enough in commissions to justify becoming full-time salespersons.
  • Buyers and sellers who place their confidence in salespersons often are dissatisfied if they are not told that the salespersons who work only part time.

Of course, in special situations part-time salespersons can be very productive.  Therefore, the broker should consider what skills and contacts a person brings to the position.

Hiring a sales manager.  When the office sales staff grows to more than ten associates, it may be time for the broker to consider hiring a sales manager.  The manager’s job is to recruit, train, and help the sales force.  Many managers also are expected to be the office administrators.  Managers sometimes are compensated with straight salaries, salaries plus bonuses or salaries plus commission overrides (part of the commissions the company collects), depending on the gross commission income.  Some are paid by commission override only.

New salespersons often are paid lower commission splits until their production increases.  This helps compensate the company for the additional training and assistance it provides.  The broker might structure an override as a percentage of the company dollar on each transaction.  An additional override/bonus may be available to the sales manager for each salesperson recruited.

For example, assume that owner Bob pays manager Fred a 7 percent override on company dollar.  New salesperson Sally, who gets a 50 percent split, makes gross commissions of $5,000.  The company dollar is $25,500, so Fred makes $175 ($2,500 x .07).  Experienced salesperson Judy, who gets a 70 percent split, makes gross commissions of $5,000.  The company dollar is $1,500, so Fred makes $105.  That works for Fred because Judy takes very little of his time, while he spends much more time with Sally.

Unlicensed personal assistants and clerical assistants.  One of the most important trends in Mississippi real estate practice has been the increased use of personal assistants.  The real estate licensee who plans and delegates effectively can multiply his or her efforts many times over by employing        

MINIMUM MONTHLY TRANSACTION FORMULA

Calculation of Number of Monthly Transactions Required

Last year, Howard’s brokerage office had 50 sales.  The amount remaining after he paid commissions to salespersons was $67,500.  Howard’s current monthly expenses (including his salary) are $6,000, and he wants to make a minimum of $1,000 profit in addition to that.  Assuming no change in the company dollar percentage, how many transactions must Howard have per month to pay all expenses, including his salary, and also give him a $1,000 per month profit on his investment?

A licensee who employs an unlicensed personal assistant must be certain that the assistant does not go beyond what is allowed by law.  The broker is legally and financially responsible for the actions of personal assistants and should establish policies to ensure that no violations of the license law occur.

Unlicensed personal assistants, because they receive salaries and may not be paid commissions, are under the licensee’s or employer’s control.  They may not be classified as independent contractors.

Many salespersons prefer to use licensed personal assistants because they can do much more with respect to listings, sales and personal contacts.  Although salespersons may use licensed personal assistants, only brokers can pay them commissions.  The brokers hold their licenses, and MREC holds the brokers responsible for their actions.  A broker must make clear to salespersons that personal assistants ultimately are under the broker’s legal control.  The broker also may be legally and financially responsible for the actions of salespersons’ employees.

The salesperson may be financially liable for the actions of their assistants.  An accident on the job may make a licensee or employer liable to an assistant.  And if the employee injures another person while running errands for the licensee, the licensee may be held liable to the injured party.

Occupational (business) licenses.  Most municipalities in Mississippi require that brokers maintain occupational (business) licenses.  Failure to register and pay for such licenses may result in substantial penalties.

RECRUITMENT AND SELECTION

The broker must determine how many salespersons are needed to meet company goals and must calculate the most efficient and economic methods to recruit them.

Set recruiting goals.  One of the most basic questions a broker must ask and answer is, “How many salespersons do I want on my staff?”  Some brokers want as many as possible and will sacrifice quality standards in favor of numbers.  Other brokers are satisfied to have small sales staffs made up of highly trained, specially selected professionals.  Whichever approach the broker takes, he or she must be certain that the number of salespersons is manageable.

Sources for new salespersons.  Because the transition from new licensee to seasoned professional takes awhile, and a natural attrition of experienced salespersons occurs over time, brokers must prospect for good salespersons continually.  They can use many sources to find the right personnel to staff their offices.

Advertising for new salespersons.  Advertising can be very effective if the ad is designed and worded properly.  A broker should target the ad to the widest possible group, and the advertising must not discriminate.  An ad with wording similar to, “We have an opening on our professional staff for a salesperson” probably is more effective than “We need lots of salespersons.”  Brokers should consider running advertising in different sections of the newspaper to reach different interest groups.  The business section, sports pages, comics or TV pages often are more effective than classified advertising.

Career nights.  Well-organized and well-presented career nights can be effective recruiting tools.  Advertising and direct mail usually are the best ways to communicate a program to the public.  The broker should select a central location, require reservations, plan refreshments and compile handout literature.  The broker should encourage attendees to arrange appointments for one-on-one career counseling sessions and should send all attendees a letter of thanks.

Other real estate firms.  Recruiting experienced producers from other firms reduces the lengthy period required to bring new sales agents into production.  Brokers find it easier if a prospective salesperson makes the first contact.  This is more likely to happen if a broker operates a successful, respected firm that is home to other top producers.  Many brokers refrain from making the first contact because of the ill will it breeds with brokers who lose their top producers.

Personal contacts.  Sometimes the broker’s own contacts are the best sources of salespersons.  A pleasant waitress, an office supply salesperson and acquaintances from a parents’ meeting at school are all candidates.  Even if a person decides not to follow up on the broker’s invitation to join the firm, the contact may generate years of good will and additional real estate business.

Personal referrals from salespersons.  Referrals from salesperson in the firm often are more effective than broker contacts.  Many brokers offer a bonus or a commission override to salespersons to keep them focused on the need to staff the office with the best people.  A broker should consult with the firm’s lawyer to be sure no conflicts exist with the independent contractor status.

APPLICATION PROCESS

The broker must carefully evaluate prospective employees and independent contractors with respect to their ability to do their jobs.  The evaluation process includes filling out an application form, verifying license status, checking references and interviewing the applicant.  Brokers must follow the requirements of the equal employment opportunity laws and the Americans with Disabilities Act (ADA).

Equal employment opportunity laws.  Discriminating in employment is illegal based on race, color, religion, sex, age, national origin, marital and family status or disability.  The broker must be certain that application forms doe not contain questions that violate the law, and the broker must avoid asking such questions when conducting interviews.  Examples of violations are questions about marriage plans, plans for having children, origin of a name, date of birth, feelings about working for someone younger or older and availability to work Sundays.

ADA requirements regarding hiring personnel.  Millions of Americans have disabilities of some type, and many have experienced discrimination in access to housing, commerce and employment.  The ADA legislation adopted in 1990 allows those citizens to participate in activities most people take for granted.  While the law does not require preferential treatment for disabled persons, it does prohibit discrimination in all employment practices, such as hiring, firing, compensation and training.

Under the law, an employer must make accommodations to allow disabled persons to do their jobs provided the accommodations do not impose an undue hardship on the business.  Such accommodations include providing large-print materials, arranging furniture to widen aisles and raising desks to provide clearance for employees in wheelchairs.  The employer also must establish application procedures related only to a person’s ability to perform according to the job description.

Under the ADA, an employer may not do the following:

  • fire, or refuse to hire, persons associated with a disabled person, or a person who works as a volunteer in community service activities for disabled persons;
  • ask in person or on the application whether an applicant has a disability; however, employers may ask whether the applicant can do the job as described; or
  • require a medical exam before extending an offer of employment, and then only if it is customary for all new employees to take medical exams. Drug testing is not considered a medical examination.

Application forms.  The application is part of the employee’s or salesperson’s permanent records.  The application may not contain questions that violate the equal opportunity employment laws.  It may request only basic personal information, such as full name, address, telephone number, former employers, education, real estate license number, license status and work experience related to the position.  If the broker uses an application form for one applicant, he or she must use it for every applicant.  Using the form selectively as a screening mechanism may lead to charges of discrimination.

Interview procedures.  Many brokers prefer a two-interview process.  The preliminary interview, usually brief, allows both the broker and the applicant to decide whether they want to continue the process.  The broker may ask several open-ended questions to get the prospective salesperson talking about themselves, their likes and dislikes and why they feel they would be good in the position.

When the broker believes that a person has the qualifications to be a good employee or salesperson, a second, more thorough, interview is scheduled.  This gives the broker time to verify the applicant’s license status and check the references.

Verifying license status.  At this point, the broker contacts the Mississippi Real Estate Commission concerning the applicant’s license status and any prior disciplinary actions against the licensee.  Some, if not all, of this information may be available at the MREC web site on the Internet.

Checking references.  As part of the application process, the broker should request references from the applicant, from persons who know the applicant well and can testify as to personal character.  The broker then should check with persons named, as well as former employers.  Because of the amount of litigation in our society, obtaining complete information about the applicant from previous employers is sometimes difficult.  They may provide no more than an answer to the question “Would you rehire?”  If the applicant currently works for another firm, the broker must be careful not to violate any promises of confidentiality by calling the other broker.

Every person applying for a job takes a very personal risk.  The broker must be sensitive to this vulnerability.  A thank you letter and phone call to each unsuccessful applicant, while they may not carry the news the applicant wanted, are common courtesy.  Failing to do so may leave the applicant with feelings of ill will toward the broker and the firm.

EMPLOYMENT AGREEMENTS

Tax considerations.  The independent contractor agreement must specify that the salesperson will be treated as an independent contractor for federal income tax purposes and that the salesperson will be responsible for paying all taxes.

Non-compete clauses.  Some employment and independent contractor agreements contain clauses that prohibit employees or salespersons from competing with the broker or working for any firm that competes with the broker after leaving the firm.  The broker may believe that an employee or a salesperson will use or reveal to the competition certain trade secrets he or she learned while working for the broker.

The broker should consider the difficulty in recruiting salespersons when they must agree to a non-compete clause.  The inclusion of such a clause in a contract also may endanger the contract’s independent contractor provisions.

Usually, the courts will not enforce broadly drawn noncompete covenants.  A broker would have to show that a covenant is necessary to protect the business and the employer’s good will and that the covenant does not impose an undue hardship on an employee.  The broker should consult with an attorney about suggested wording of such covenants and their enforceability.

Hours and working conditions.  The independent contractor agreement must not prescribe required working hours or establish vacation schedules.  Independent contractors are accountable to the broker for the results of their work, not the hours or methods they use to achieve the results.  Obviously, the broker has the duty to include in the agreement a provision that salespersons will abide by the law and established codes of ethics.

Written acceptance of company policies.  The employment agreement should include a statement that the independent contractor has read the firm’s policies and procedures manual and agrees to abide by those provisions.

COMPENSATION OF LICENSEES

A wide range of compensation plans is available to salespersons.  The broker must establish a plan that not only makes economic sense to the firm, but appears fair to salespersons.  The competition for top producers has resulted in higher compensation programs for salespersons and lower profit margins for brokers.  Plans include straight salary, fixed percentage commission split, commission split plus bonus, graduated commission based on production and 100 percent commission with a management fee.

Straight salary.  Some large commercial firms offer their producers straight salaries (plus bonuses, in many cases) to even out the peaks and valleys of having just a few large sales per year.  Because the expense is fixed, a market slowdown or a nonproductive salesperson results in loses to a company.  It also takes away the benefits of independent contractor status to the broker.  Very few general real estate brokerage firms compensate by salary.

Fixed percentage commission split.  The fixed commission plan stays at the same level throughout the year, whatever the salesperson’s production.  Obviously, the plan’s weakness is that it overcompensates the poor producers and undercompensates the superstars.  The natural result of such a program is loss of good producers, which explains why few firms use it today.

Commission with bonus.  The compensation plan is midway between a fixed commission plan and a graduated commission plan.  The bonus often is paid at year end or even in successive quarters after year end.  When compared with a graduated commission plan, this program has advantages for both the broker and the salesperson.  The broker receives higher cash flows up front because part of the commission is paid later as bonuses.  The salesperson gets lower commissions to start, but receives the bonus later, which may help smooth the income flows.  The broker should consult with an attorney to ensure that the bonus does not invalidate independent contractor status.

Graduated commission.  In a graduated commission program, the salesperson is compensated at a low rate until he or she achieves a certain level of production.  Subsequent commissions occur at a higher rate, which continues to rise as production increases to present limits.  This plan provides strong incentives to top producers and reduces the need for brokers to negotiate a different commission rate with each salesperson.

Obviously, this type of sliding scale offers many ways to compensate salespersons.  Many firms pay salespersons based on gross commissions or on an office’s share of the gross commissions.

One point of dissatisfaction exists among top producers.  It is the policy of many brokers to reset the commission rate to its lowest level at the beginning of each year.  If a salesperson worked his or her way up to a 70 percent rate last year and must start again at 50 percent this year, it may be perceived as the opportune time to leave the firm.  Some offices use moving averages of production so that salespersons do not drop back to the lowest rate at the beginning of each year.

100 percent commission.  Many independent brokers and several national franchise companies offer to pay from 95 percent to 100 percent of the gross commissions a company collects if the salespersons pay management or rental fees.  A typical plan takes the desk costs plus the broker’’ profit and divides by the number of salespersons in the firm.  The result is the management fee, which salespersons must pay at the beginning of the period regardless of whether they have produced a sale.  Salespersons are expected to pay all expenses, including those often paid by the brokers in split commission firms (signs, lock boxes, advertising, postage, etc.)

COMMISSION REDUCTIONS

Items like required fees and payments, franchise fees, signage fees and other costs reduce the commission percentage a salesperson receives (see Figure 3.6 for an example.)

Required fees and payments.  Required fees and payments include the following:

  • management or rental payments in 100 percent plan officers; and
  • errors and omissions insurance fees.

Franchise fees.  Most franchise companies charge a percentage of the gross commission for each closing, which is taken off the top before the salesperson’s split is calculated.

Sign fees.  Many offices contract with sign companies to place real estate signs on and remove them from listed property.  The service is charged to each salesperson, either when the property is listed or when it is sold.  Many salespersons must buy their own signs.

FIGURE 3.6                                                  SAMPLE OF OFFICE CHARGES TO A SALESPERSON

I N V O I C E

Your Real Estate Office, Inc.

1764 W. Banana Street

Gulfport, MS 39501

INVOICE NO: 0451

DATE: April 3, 2002

To:                                             Carolyn Bayer, GRI, CRS

                                                    500 N. Appleyard Drive

                                                    Long Beach, MS 33475

QUANTITY DESCRIPTION UNIT PRICE AMOUNT
12 24 X 30 Yard signs (including shipping) $ 32.94 $ 395.28
7 MLS listings added to system 7.49 52.43
1 Monthly MLS computer access fee 12.84 12.84
2 MLS books 12.56 25.12
Advertising – (see attached bill) 268.40 268.40
TOTAL $ 754.07

Please make certain your check is received in the office by April 10, 2002.

If you have any questions concerning this invoice, check with Savannah Cooley.

We appreciate the way you make Your Real Estate Office even better!

Other fees.  Many brokers charge salespersons up to 50 percent of the cost of the advertising of their listings.  Salespersons usually pay Internet access and listing charges, MLS listing fees and other similar expenses.

TRAINING SALESPERSONS

A strong training program attracts good salespersons, increases production, builds loyalty to the company and reduces turnover.  The broker’s training program may be structured to cover four major areas as follows:

  1. Company policies and procedures. The policy manual is the best orientation course for new salespersons.  (The policy manual is discussed in detail below.)
  2. Technical skills. The training program should teach salespersons how to do their jobs.  This means covering time management, goal setting, completing forms for listings and contracts, comparative market analysis, financing techniques and closing costs.  Until a salesperson can fill in forms and discuss costs, it is unlikely that he or she will risk talking to buyers or sellers!
  3. Listing skills. The training program should help salespersons understand the importance of listings, how to prospect for listings, how to prepare listing presentations, how to market listings properly, how to service listings, how to present offers to sellers and how to get from contract to closing.
  4. Selling skills. Finally, salespersons should be shown how to get appointments from phone calls, qualify buyers, show properties effectively, observe buying signs and get contracts to the closing table.

TABLE 3.1                                                    SUBJECTS TO INCLUDE IN THE POLICY MANUAL

General: Expenses
Antitrust policies Floor time
Board of REALTORS® membership Independent contractor status
Brokerage relationships Keys
Commissions Listings
                          Time of payment to salespersons                                                                     Files
                                                   Offset for expenses                                           Servicing suggestions
                                      Schedule of rates charged Newspaper advertising
Company history, philosophy and goals Personal assistants of salespersons
Cooperation with other brokers Personal sales and purchases
Education Referrals—out of town brokers
Expenses Sales meetings
                                  Those the company pays for Signs and lockboxes
                             Those the salesperson pays for Smoking
Office Telephone
                                                    Hours of operation                                                               Answering
                                                           Housekeeping                                               Long-distance calls
Salespersons:
Absence—compensation to another salesperson Employees:
Automobile insurance Contract files
Business cards Hours
Caravan to company listings Office appearance
Confidentiality Secretary
Discrimination Supplies
Dress code Telephone answering
Time off

POLICY AND PROCEDURES MANUAL

Every real estate firm should develop a well-written policy and procedures manual.  The broker should understand that people are more willing to abide by the rules they help create.  It follows that the broker should get the staff involved when writing the manual.  Once the manual has been developed, communicated to and understood by the staff, it will help prevent misunderstandings, promote fair play and ensure that all members of the firm work toward common goals.  The policy manual also guides many of the broker’s decisions with respect to the staff.  The manual should define the company’s purposes and function and should be as complete as possible.  An example of suggested topics is shown in Table 3.1.  All members of the firm should sign a statement saying that they understand the policy and agree to abide by it.

Statement of company’s objectives.  The manual should include a statement of the company’s purpose, its business philosophy for providing professional service and its adherence to a strong ethical code.

Define the company’s function.  This manual also should describe what types of properties the company lists and sells, its policy on property management and the types of brokerage relationships it will take on.

SALES MANAGER RESPONSIBILITIES

The sales manager is management’s link to the sales staff.  The manager is charged with supervising and controlling the sales staff and conducting company sales meetings.

Supervision and control of sales staff.  Some of the manager’s duties in this area include:

  • monitoring sales activities and evaluating the performance of the company as a whole and of individual salespersons (some sales managers give each salesperson a detailed activity report showing the performance for the month and year to date, comparing each salesperson’s performance with the previous year and the salesperson’s goals.);
  • ensuring compliance with office policy and procedures;
  • helping salespersons who have problems;
  • supervising advertising;
  • scheduling floor duty for those salespersons requesting time;
  • ensuring compliance with the law; and
  • ensuring compliance with the NAR Code of Ethics if the broker is a member of a Board of REALTORS® or the National Association of REALTORS®.

Sales meetings.  All salespersons should be encouraged to attend weekly sales meetings, usually held in the company’s staff meeting room.  It is important that the meetings start and end on time.  The program should be planned, have a definite agenda and be presented in a way that respects the attendees time.  Some meeting topics include:

  • announcements about sales and listings for the previous week;
  • announcements about price changes or changes in terms;
  • review of sales activity in the market;
  • review of company goals for sales and productivity;
  • recognition of the salespersons’ accomplishments, such as course completion, designations received, community service, top producer, and top lister;
  • communication between the sales team and management;
  • discussion of recent law changes; and
  • short training sessions on listing or sales ideas.

If a sales meeting is well presented, the salespersons will come away with a feeling of professional fulfillment and the knowledge that their time was well spent.  Good meetings generate company loyalty and increased sales.

SUMMARY

Before opening a real estate office, a broker should develop a business plan carefully for every phase of the operation.  The broker should decide whether the firm will be part of a national franchise or whether it will remain independent.  The number of salespersons and their method of compensation affect the firm’s income and expenses.  The initial costs to open the company and the expenses for at least six months of operations compose the minimum capital necessary to open the company’s doors.  While purchasing a building may be better over the long term, short-term cash availability may require that the broker rent office space.

Projecting the income and expenses depends on the scope of the company’s operations, its market area, economic conditions and the number and productivity of its sales personnel.  The broker must decide whether to pay taxes on an accrual basis or a cash basis.  Another tax consideration is whether salespersons will be independent contractors or employees.  The broker must understand the IRS reporting requirements to avoid penalties.

The most important asset of the real estate office is its people.  The broker must recruit good salespersons continually.  Sources include advertising, career nights, prelicensing schools, other firms and personal contacts.  Whether hiring employees or independent contractors, the broker must be careful to follow all provisions of the fair employment laws and the Americans with Disabilities Act.

The broker should consider each type of commission, analyzing its effect on the company dollar and the satisfaction level among salespersons.  Fixed commission plans, graduated commission plans, 100 percent plans and many other variations are available.

The broker should develop a policy and procedures manual using the feedback of salespersons.  The manual should be complete, and each salesperson should get his or her own.