Employing brokers provide a range of amenities for sales agents to thrive at their brokerage. Here’s what brokers need to know to help decide which amenities are best suited for their business environment.
Personal property and office expenses
In addition to insurance considerations, part of being an employing broker is considering which business amenities to provide for their licensed employees – sales agents and broker-associates. The size of a brokerage, in terms of the quantity of employed licensees, is a significant factor in the amount and varieties of amenities a broker provides.
Larger, well-known real estate franchisees and standalone corporate brokers are able to leverage their name recognition to attract agents and broker-associates. Thus, these real estate behemoths customarily offer fewer amenities to their employed agents and brokers. Franchisors require their brokerage firms to pay a franchise fee for use of the company name to attract clientele with branded marketing. This franchise fee is deducted by the broker per transaction from compensation before or after the split. Thus, the franchise fee is borne fully or in part by the broker’s employed licensees.
Since agents benefit from association with a widely recognized “media” broker, the brokerage is less likely to provide competitive amenities. The weight of the brokerage’s name is a sufficient trade-off for lack of amenities available from smaller, lower-profile brokerage operations that require other inducements.
Smaller brokerages thus gain a competitive advantage over larger corporations by providing more amenities and individualized personal attention for licensed employees.
Either way, an employing broker needs to weigh the costs of offered amenities against the benefits they deliver to the brokerage operation in the form of better quality licensees and greater fee generation. In totality, the process is called cost-benefit analysis.
Office equipment and space
The first step for an employing broker is to calculate the costs per licensee they anticipate employing for their use of office equipment and desk space. No published standards exist for the determination and allocation of a broker’s office costs, and thus it is up to the discretion of the individual broker. Once the office costs per licensee are estimated, the broker then establishes a compensation distribution formula best suited for allocating the fees generated by the type of real estate practice the brokerage will conduct.
General office expenses of an employing broker, directly or indirectly incurred due to the existence of agents, include:
- telephone service;
- use of a desk in a specific cubby and common office space;
- business taxes, permits and licensing;
- professional services (such as for an attorney or accountant);
- bank charges;
- insurance – workers compensation, business, errors and omissions (E&O);
- internet service;
- office supplies;
- computers and software;
- payroll – managers, coordinators and administration;
- janitorial and maintenance;
- building operations – owner or tenant [See RPI Form 306]; and
- promotional and marketing expenses, such as business cards, real estate signs and an advertising budget.
Brokerages tend to distribute compensation from fees earned and received through the efforts of licensed employees in two ways:
- a fee split, paid as a percentage of the adjusted gross fee (AGF); or
- a desk fee charged without concern for the adjusted gross fee.
An adjusted gross fee is the sum of the gross fee received on a transaction due to an agent’s efforts, less agreed-to deductions, such as E&O premiums, franchise fees, payments due participating brokers, broker retention of half the AGF when payment is due another participating agent in the office, etc. [See RPI Form 505]
Fee split ratios are not set by law and are negotiated by the broker with each agent by taking into consideration several factors:
- the dollar amount of the average fee the agent will likely generate;
- the frequency of transactions the agent will close in which a fee is earned, such as monthly or bi-monthly;
- the broker’s monthly office operating costs allocated to the agent;
- any deduction from the gross fee or the agent’s share of the fee, such as cost items incurred in marketing and closing the transaction;
- the profit margin sought by the broker; and
- the break-even point as a percentage of cubbies occupied by employed licensees.
Fee splits are also influenced by an agent’s real estate experience and track record at generating fees. Agents with more experience will command higher fee splits since they generally do not require additional training or much guidance from the broker. Newer agents will earn lower fee splits if the broker actively provides hands-on guidance for the agent. For example, a new agent may earn a 40-50% fee split, whereas a more experienced and productive agent may earn up to 60-70%. With time and experience, this ratio can be adjusted through negotiation. Agents working for a fee split are charged for some transaction costs such as E&O insurance and use of coordinators set as either a flat monthly rate or a per transaction expense.
Also, brokerage firms generally charge agents a per copy fee or the actual expenditure for marketing materials. These sums are deducted from the share of the fee received by the agent on the split.
In contrast to fee splitting arrangements, brokerage firms charging desk fees require agents to cover most of the daily office expenses themselves. Here, the fee earned for the broker by the agent is credited to the agent.
From the fee, agreed amounts are deducted, such as transaction costs like an E&O premium and franchise fee. A small percentage may possibly be retained by the broker (say, 10%) to cover items the broker may not charge the agent, such as worker compensation premiums. Further deducted is the monthly desk fee the agent owes the broker, akin to rent.
For example, a broker issues an agent a pin code to use when making copies of transaction documents in the office. The broker tracks the agent’s copy expenses through the code and adds the total expenses to the agent’s monthly desk fee. At the end of the month, the broker either deducts the agent’s expenses and desk fee from their closings that month, or hands the agent a bill for any outstanding expenses the agent still needs to pay.
Agents paying desk fees are responsible for paying all office expenses they bring about and providing their own equipment. An agent even needs to bring their own computer to use in the office space they are renting. The desk fee itself is payment simply for the agent’s use of the broker’s office space and the desk provided. As such, the desk fee varies depending on the type, size and location of the space the agent uses. For example, an agent renting an enclosed office pays a higher desk fee than an agent renting only a cubby with a desk.
When an agent pays a desk fee and is a high-dollar producer, they receive more of the gross fees they earn than on a typical fee-split arrangement.
Brokers need to use an income data sheet when hiring an agent or broker-associate. With the data sheet, they review the costs which the licensee needs to pay, or which are deducted from the agent’s share of any fees they are due when paid by the broker. [See RPI Form 504]
When deciding whether to disperse compensation by fee split or desk fees, a broker considers their profit margin as a return on their capital investment to cover the uninsurable risks undertaken and their managerial time and effort. For example, taking on too many highly experienced agents demanding higher fee splits or charging minimal desk fees may take a toll on a broker’s profits, especially if general office expenses are high.
MLS access and membership fees
Contrary to popular belief, obtaining multiple listing service (MLS) access does not require trade union membership in:
- the National Association of Realtors (NAR);
- California Association of Realtors (CAR); or
- a local Association of Realtors (AOR).
In fact, brokers opting to obtain MLS access without membership will save themselves and their agents significant non-business expenses otherwise annually harvested from licensees ignorant of their options.
Employing brokers who choose to opt out of trade union membership and need MLS access simply subscribe or pay a service fee to obtain full MLS access only, estranged from membership.
Trade union membership does not provide tangible benefits to a brokerage firm, save for networking events. Members of the public do not know a Realtor from a real estate agent, much as they wouldn’t distinguish a Kleenex from a generic facial tissue. However, when an employing broker chooses to obtain trade union membership, the agents employed by the broker are required to match the broker’s membership status. An agent with a unionized broker may choose to be a “paid non-member” of the association and avoid being bound by the trade union rules, one of which is mandatory arbitration between members with fee disputes.
Training for new agents
Another amenity employing brokers need to consider is whether to provide training for new sales agents. Training may be implemented in a variety of ways depending on the broker’s preference and objectives. However, brokers who provide more hands-on sales training gain the advantage of molding new talent to their business model – how they handle clients, property, paperwork and their 40+ work schedule.
Training new agents not only provides the broker with an opportunity to cultivate business practices specific to their brokerage, it attracts more like-minded sales agents to their office. New sales agents are more likely to choose a brokerage offering collaborative training with an experienced broker and their team-leading agents than one which provides no training at all and a weak work-ethic environment. Further, the broker who hires new agents is able to work with a proverbial blank canvas, devoid of prior conceptions and practices which may not be compatible with the broker’s management.
Ultimately, the amenities an employing broker provides are chosen with the objective to help the brokerage run smoothly. The broker needs to decide which system – fee split or desk fee – best suits the brokerage’s long-term business goals. As for the rest, the operative word is “benefits.” Energetic agents and broker-associates are attracted to brokerages providing more benefits, which is good news for brokers looking for new recruits or recruiting licensees to expand their real estate business operations – preparing for the anticipated jump in real estate sales volume in 2018-2020.