How to start a real estate brokerage

Very few people talk about how to create a brokerage. This will make the process a bit clearer.

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Start with a corporate entity and a managing broker

Every state has its own process to forming a brokerage. The first step will be to check with the state real estate licensing body for requirements. Unfortunately, this information is often gated behind portals for licensed agents. The components usually include the following:

• Corporate entity: you need a corporation or LLC in the state of the brokerage. If you don’t have one, you will have to create one. You can do this online for a few hundred dollars.
• Managing broker (also called broker of record): if you are not a managing broker, you will need to find and hire one. You may also need a document promising that unlicensed owners will not oversee real estate operations.
• Office in the brokerage state (and maybe signage): most states require a physical office. This is for inspections and oversight. Sometimes the brokerage name must be displayed on a visible sign.
• Escrow account: some states require the brokerage to open up a dedicated escrow account. There are plenty of banks that do this for almost no money.

Once you have the above, you’re ready to start your brokerage. The managing broker will submit an application to the state real estate commission. There will almost certainly be a fee in the hundreds of dollars. After applying, there may be an on-site inspection. Congratulations, you just opened your brokerage!

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Create a fee/split structure and service strategy to recruit agents

Many brokerages start with a handful of agents, often including the managing broker. Often these agents worked together as a team and then branch out on their own. In other cases, a brokerage starts with a founder or two who need to recruit agents. Either way, the brokerage will have to work on the following:

• Contracts and split structures: employed agents have to sign independent contract agreements (ICAs) with the brokerage. The brokerage will need to have this documentation once it is running. The brokerage will also need to have an established split structure that is attractive to agents.
• Non-agent support staff:  There are many full-time roles that brokerages hire. Brokerages must decide if they need to hire any of these to start. Many brokerages will at least hire a part-time office administrator. Many brokerages target a ratio of staff to agents in order to decide how many people to hire.
• Branding: The brand positioning of a brokerage is often very important to agents. Agents must include brokerage branding in any advertisements. If an agent is going to join a new brokerage they will want to be confident the brand is strong, even if it's new.

After these are in place, you’re ready to hire agents and build a local brokerage.

Expanding to new markets

Most successful real estate brokerages only operate in one state. Because licensing occurs state-by-state, expanding beyond the first state can be challenging. Often, brokerages repeat the process above over and over. But in some cases, there is reciprocity between states. This allows a brokerage to operate in other markets with the same corporate entity or reduced requirements. Reciprocity agreements are typically posted on each state's licensing body website. Some states also assess each reciprocity request on a case-by-case basis.

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But not all states have reciprocity. For example, if you have a Pennsylvania license, you can easily open a brokerage in Maryland because of a reciprocity agreement between the two states. But you might have to open up a completely new brokerage to operate in New York, where there isn’t reciprocity. Without reciprocity the process is time consuming. With reciprocity you still may need a different managing broker for the state. Many brokerages try to optimize this process by creating regional headquarters in markets with the most reciprocity agreements.

Reasons to start a brokerage

There are a handful of reasons to start a a brokerage:

• Avoid paying fees to a brokerage: You are an agent and want to run your real estate business end-to-end and hire other agents. You also don't want to give any of your commissions your brokerage anymore. This is the traditional route of building a brokerage.
• Advise on real estate: Some companies may advises customers on the sale and/or rental of real estate. This could include a real estate listing site or a relocation company. This is a bit murky because marketing real estate can be okay in some cases. This is why Zillow and Apartments.com can operate without real estate licenses. But Zillow has elected to get licensed as it gets closer to transaction services.
• Collect commissions: Some companies that are not traditional brokerages would like to get paid for when they do help someone find a home. This is often why tech companies that start off as search portals get licensed. These companies may not get shut down or fined immediately for operating without a license. But it is almost impossible for them to get paid without a license. Licensed brokerages will not risk their legal status paying an unlicensed entity.
• Posting on the MLS: Some companies simply want to post on the MLS without paying an agent. Rental portfolios and developers often need to post many units on the MLS. But they don’t want to pay agents each time they have to do this. Similarly, a data company may want to see the latest sales in their market to create reports. Neither of these situations involves a transaction that requires an agent. But the brokerage license itself provides access to the MLS.
• Creating an in-house brokerage: Many times large corporations buy, sell, or rent enough properties that they can either save money or generate revenue by moving this operation internally. This often happens with retailers or tech companies with many offices.