Why this matters: Learn to estimate the potential income, expenses and initial investment you experience as a newly licensed agent employed by a broker and how to evaluate competing broker firms for suitability with your professional goals and expectations.
Employing broker briefs agent on expectations
Consider an individual who receives an original salesperson license issued by the Department of Real Estate (DRE), commonly called an agent. As newly licensed, they are available for employment by a broker to counsel and assist clients.
The agent receives mailings from local real estate brokers soliciting them to join their office. The agent interviews brokers in an effort to find an office environment with workplace conditions suitable for a beginner.
During interviews with brokers, earnings are discussed. The agent learns most employment arrangements with brokers are formally structured as independent contractors (ICs). [See RPI Form 506]
As an IC employee, the broker withholds no income tax or contributions from the agent’s earnings. Also, the broker makes no employer contribution, such as to:
- Social Security;
- Medicare; or
- Unemployment Insurance.
The agent understands they need cash reserves, or income from other sources, to meet their business and personal cash expenditures for several months. The sense among brokers interviewed was six to nine months normally pass before income is forthcoming from earnings on closings involving new agents. In the meanwhile, broker offices generally do not make monthly advances against future earnings.
The agent obtains an income and expense data worksheet from one of the brokers for analysis of potential earnings and expenditures. During interviews, the agent enters approximations of reviewed amounts the agent understands they are likely to experience during the first year with a brokerage office. [See RPI Form 504]
Further, the agent uses the worksheet to set a goal for the number of transactions necessary to generate after-tax income sufficient to cover personal living expenses.
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Form of the Week: Agent Interview and Income Data Sheet — RPI Forms 500 and 504
Data underlying an income analysis
An income and expense data worksheet functions as a financial checklist of items an agent needs to consider. The form is used to analyze the level of earnings received on the types of transactions the agent is likely to work on, and the variety of business-related expenditures likely to be incurred. The level of broker fees differs from office to office depending on the clientele they attract.
As a prerequisite to an agent’s use of an income and expense data worksheet, the agent separately collects income-related data when interviewing prospective brokers. These data include the:
- price range of property the broker’s office sells, buys or leases;
- number of transactions in the price range the agent is likely to close and receive fees on during their first year;
- gross broker fees generated by the agent’s involvement in transactions during their first year; and
- share of the gross broker fees the agent earns under the fee-sharing schedule the broker offers.
Initially, the agent sets a transaction goal to calculate the dollar amount of gross income as the agent’s likely share of fees. Further, business expenses are estimated and deducted from the agent’s income to set the amount of reportable income before taxes. After estimating income taxes and employee/employer contributions to be paid, what remains is available for the agent to pay personal expenditures, including any income taxes.
An agent’s estimate of the fees they earn and expenses they incur are reliant on accurately setting the goals of anticipated transaction volume. All these data are educated guesswork based on the agent’s diligent inquiries of brokers and their agents — checklist in hand for making notes.
The estimating of an agent’s income
Setting the volume of real estate transactions closed by a new agent during their first year in the business is an essential “numbers game.” Fundamentally, the agent’s transaction efforts often experience a low percentage of the efforts coming to fruition as fees received during the first year in the business.
Converting an agent’s efforts with clients into closings and earnings is an inherently inefficient but effective enterprise during the first couple of years in the business of providing real estate services.
After a couple of years of experience, an agent’s routine evolves into a pattern of transactions which consistently earn fees. Here, a routine bonds the agent to everyone they encounter. The immediate result is increased goodwill which becomes earnings and keeps compounding with time in the business.
To succeed, the type of individual attracted to the business as an agent needs to possess a high level of innate curiosity and enthusiasm for estimating and forecasting income and expenses. A prospective agent, daunted or easily discouraged by the exercise of completing a worksheet, is an unlikely prime candidate qualified for employment in a real estate occupation.
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The broker steps forward, with information
Brokers active in transactions with experience tend to have organized and developed routines which earn fees. Critically, these brokers are better able to anticipate the income and expenses a new agent incurs than agents with less than three years as full-time agents.
A broker’s primary objective when hiring agents is to increase the gross fees the broker receives without a proportionate increase in office operating expenses. For a broker, hiring is a productive endeavor. A capable broker has a plan for agent selection and evaluation which avoids turnover of agents after a short period of employment.
A broker’s full disclosure — upfront and prior to employment — advising the agent of their likely income and expenses, and why the fee sharing and expenses allocations are reasonable, presents a realistic expectation of income the agent may expect.
Again, quarterly and annual transaction goals are set at levels designed to meet projected earnings sought by the agent when employed by a particular broker.
Estimating the agent’s initial cash investment
A broker controls the agent’s interview and gets better long-term results when they initiate the income and expense discussion. The broker is not in charge when they wait until the prospective agent raises questions about earnings, expenses and cash reserves to be expected during a start-up period in the business. Earning a living is the crux of entering and remaining in the profession.
The broker who is ready for an interview with a prospective agent has prepared a worksheet, such as the income and expense data worksheet. The worksheet provides the broker’s estimate of all the expenses and investment the agent is most likely to need cash reserves to pay. This is RPI Form 504.
The broker estimates the initial cash investment the prospective agent is required to make to cover one-time, nonrecurring expenditures. Further, a broker concerned about an agent’s financial stability reviews the agent’s ability to cover personal expenses until the agent becomes financially self-sufficient from fees earned with the broker.
After estimating the operating expenses, nonrecurring costs and personal expenses likely incurred by the typical agent, what remains for the broker is the difficult task of anticipating the gross fees from transactions the agent is likely to close during the first year of employment.
Forecasting gross fees, setting transaction goals
A couple of approaches an agent may use for estimating future earnings are apparent. For one, ask brokers to project a range of the gross broker fees generated by a new agent. The variations need to range from fees generated by a high producer to those by a low producer during their first year with the office. An employing broker knows this data.
The agent enters the various projections of gross broker fees — ranging from low and medium to high — on separate copies of the income and expense worksheet. The agent’s expenses estimated for the first year remain the same for inclusion in each of the worksheets.
Thus, the prospective agent calculates their after-tax income at various levels of transactions they believe they may well close — or need to close.
The worksheet filled out by the agent becomes both a proposed budget and a transaction goal for the agent.
An experienced employing broker confirms whether the prospective agent has the financial capacity to carry their personal and business expenses during the start-up period and not be a risk for the office. An agent preparing for an interview pulls a copy of their credit report from a reporting agency, which are free, to hand to the broker on request.
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The initial cash investment and reserves
Now consider the total out-of-pocket business and personal expenditures an agent incurs for the first several months to start up and maintain their employment with a broker.
An agent needs cash for initial outlays when first employed. A vehicle, computer, clothing and other trappings necessary to properly engage with consumers in real estate transactions require investment. Many brokers, mostly big broker operations, require the agents they employ to pay fees upfront for an expensive (and unrewarding) California Association of Realtors (CAR) membership.
Agents going into sales or leasing need a multiple listing service (MLS) membership, not a CAR membership, to become part of the market. MLS fees are incurred by the agent unless their broker agrees to cover these operating expenses.
Typical business expenditures are itemized in a checklist in Form 504, comparable to a financial statement for the agent’s anticipated net operating income (NOI) within, say, 12 months. [See RPI Form 504]
The broker knows what their existing agents pay for required business expenses and either volunteers this information to a potential agent or provides it after inquiry. Without these disclosures of the costs of doing business, an agent’s analysis of their cash requirements on accepting employment with the office has not taken place.
For management of a real estate office by an employing broker, a review with a new agent of the income and business-related expenditures the agent can expect when employed by the broker:
- reduces turnover of agents in the office;
- reduces the broker’s investment of time and effort hiring and training agents; and
- produces agents whose income expectations are within transaction goals each agent sets for themselves.
Selecting a broker by comparative shopping
After a few years of employment in the business of real estate transactions, efficient agents want greater earnings for their time and talent put into:
- soliciting sellers and buyers, landlords and tenants to retain the office by entering into representation agreements;
- locating properties, buyers and tenants to arrange transactions; and
- performing services related to closing a real estate transaction.
Before an agent walks into the broker’s or manager’s office with a demand for the office to cover more expenses and give the agent a larger share of the broker fees, they first check out the competition. When conducting comparative shopping, the agent gathers information on how other brokers share expenses and fees with their agents, and any percentage differences for an agent’s time in the business.
An agent interested in renegotiating their current employment arrangement with their broker, or moving to another broker’s office, prepares a preliminary financial analysis of their current operating conditions. The agent uses a worksheet to detail data for the past twelve-month period with the:
- amount of fees the agent generated for their broker;
- amount of the fees the agent received;
- operating expenses paid by the agent; and
- net income the agent experienced.
When negotiations result in no change of employment by the agent, the worksheet acts as a budget, a forecast for the next twelve months. Further, any business variables affecting the amount of income and expenses are analyzed and adjusted for the agent to reset transaction goals.
An informed comparison
Armed with comparisons reflected by data gathered on worksheets, the agent seeking new fee splits and expense sharing with their broker does so based on what other employing brokers offer.
Critically, timing in the market has an influence on the outcome. The phase of the business cycle at the time the agent begins negotiations with their broker or with other brokers affects results.
For instance, at the height of a booming real estate market, purchase prices are rising, and fee amounts per transaction increase. In this environment, brokers are more likely to agree to increase a productive agent’s share of the fees the agent generates for the broker.
The agent’s advantage of a better fee split, and cost allocation negotiated in “good times” beneficially carries over into the inevitable slowdown in transactions — and fees — which follows every boom.
Consider this business condition: A new agent entering an office during a recessionary period benefits from a broker’s increased attention to the care and training of new agents.
Also important is the invaluable assistance of experienced agents in the office who during recessions have lull-time on their hands. The extra time afforded by a slower market allows agents to assist other agents, a bonding process important for a new agent’s successful future in real estate transactions.
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