Residential brokerages and how they work

Understanding the role of real estate brokerages is challenging. The structure doesn’t always make sense. Brokerages exist to protect the public and ensure agents follow rules. But as real estate changes, the laws for brokerages have mostly stayed the same

‍

Brokerages exist for real estate oversight

A real estate brokerage is the company that employs a real estate agent. We discussed the agent and managing broker role and structure in an earlier post. So why do brokerages exist if agents are already licensed?

‍

Ensuring agents follow the law

To be a licensed agent, you must be employed by a brokerage. This is referred to as hanging your license. The idea is that a brokerage has experience and knowledge in real estate. As a result, they can make sure the agent is following relevant laws and serving the public.

‍

Collecting payments and preventing fraud

Almost every state requires that commission payments go to the brokerage. This makes it harder for a rogue agent to steal money from a client. It also means that brokerages control the flow of money to their agents. It is simply easier for the state real estate licensing authority to audit brokerages than agents. An agent must typically submit a form, called a commission disbursement authorization or CDA, in order to receive a commission. This form often includes a checklist showing that required steps were followed on each transaction.

‍

Holding documents

Many documents stay on file at a brokerage. This includes disclosures to clients and assorted contracts. Like payments, this makes it easier for the real estate licensing body to conduct audits. Many brokerages do not pay agents until they receive all required legal documents.

‍

Being accountable

A new agent may have nothing to lose by breaking the law. But an established brokerage overseeing many agents does. The real estate brokerage structure holds the brokerage accountable for agent actions. This encourages brokerages to train agents and ensure compliance.

‍

Brokerages are also companies. Agents are both employees and customers

Brokerages have an interesting balance as companies. In strict legal terms, brokerages employ agents. This is often as an independent contractor, and in rarer cases a full-time employees. But if a brokerage provides bad service to agents, those agents go elsewhere. This is because an agent only hangs their license with one brokerage.

‍

Negotiating salaries, fees, and benefits with agents

Hiring in real estate isn’t usually the same as it is in a full-time job. The process is a negotiation, covering the split and incentives. Independent contractor agreements (ICAs) brokers negotiate with agents can cover:

• Nature of employment: most agents are independent contractors. They make their own hours, follow their own processes, and pay their own taxes and health benefits. In some cases, like at Redfin, agents are full-time employees. 
• Splits and duration of contract: ICAs almost always cover brokerage fees and time frames associated with them. Agents may face penalties if they leave before the end of the term. Splits and incentives may change year-to-year.
• Signing bonus: Upfront payments for joining the brokerage. Sometimes these payments account for lost business during the transition for high-performing agents.
• Marketing budgets: Many brokerages will offer money towards marketing for agents. This can be favorable to a cash bonus. Marketing likely increases an agent's earnings. And it's possible the brokerage can get marketing services at a discount.
• Administrative budgets: Sometimes brokerages provide an allocation for assistants or transaction support. This might be because an agent is losing access to a preferred assistant they had at their old brokerage.
• Office space: Agents, especially high-performing ones, often get preferred desks or offices. In many brokerages this is a symbol of status as much as it is a valuable working tool.
• Stock or profit/revenue share: Some brokerages award stock or revenue share programs to agents. Many vest or grow over time, meaning the longer the agent stays the more shares or revenue they get. It also means there may be more to lose if they leave.
• Covered fees: Some brokerages will pay for licensing, continuing education, Realtor fees, and others. But most don’t. These add up, and some agents join companies like Redfin to avoid paying these fees out-of-pocket.

Providing agent services and supporting staff

Many brokerages provide support staff to agents. The larger the brokerage, the more likely it is they have these functions in-house:

• Sales manager: a hybrid of a coach, recruiter, and business advisor. Sales managers are aren’t usually full-time agents anymore. Agents often view Sales Managers as their first call when they have an issue. Sales managers elevate brokerage performance by improving current agents and recruiting new ones.
• Transaction coordinator: A transaction coordinator or TC helps agents with transaction processes. This includes title/escrow, coordinating inspections/repairs, collecting documents, and final closing. Some brokerages charge for these services each transaction.
• Marketing: Internal marketing professionals vary significantly by brokerage. Some brokerages have no marketing support and work with outside agencies. Others have teams of marketing professionals. They help design brand assets like logos. They also put together ads for post cards, Facebook, and other marketing channels.
• Listing manager: A listing manager helps seller's agents prepare all listing materials, post on the MLS, coordinate showings, and submit related document to the brokerage.
• IT: Many agents love having IT to handle their tech problems. But IT support varies from brokerage-to-brokerage.
• Office administrator: Front desk greeting and administrative support for the office. Many agents don't have the budget for an assistant. As a result, the office manager or office administrator can act like a shared assistant in some cases. Many office administrators are also notaries.
• Unlicensed assistants: Agents often hire unlicensed assistants to help with tour scheduling, paperwork, and marketing. Sometimes brokerages hire shared assistants to work with multiple agents or teams.
• Legal: Access to a company legal team. this is particularly valuable given the large number of documents in real estate.

Brokerages are sticky and have power from regulatory structure

It’s important to note that it’s annoying to leave a brokerage. There are a number of reasons:

• Brokerages control listings and payments: Remember that all payments go through brokerages. Clients technically hire the brokerage to support their listings, not the agent. This means if an agent leaves they have to ask their client to leave with them. It also means that a brokerage may still be collecting payments after the agent's departure. Both of these usually get solved, but they’re very annoying to deal with.
• Non-competes: Many brokerages have non-compete arrangements that prevent agents from easily moving to another brokerage in the same market.
• Stock incentives and profit sharing can go away: many agents join their brokerage for lucrative revenue sharing or stock arrangements. Sometimes these go away when they leave the brokerage.
• Independent contractor agreements are multiple years: Agents get locked into multi-year contracts. They may have to pay back incentives if they leave early.
• Paperwork is tedious and downtime hurts: the fact that an agent must hang their license means they will have to find a new brokerage if they leave. When they do find a brokerage, transferring a license may take time. Not being able to work for even a week or two can impact earnings significantly.

Economics of brokerages, company dollar, and market stats

A common starting brokerage term for profitability is company dollar. This is what the brokerage retains from agent earnings after paying out commissions. Brokerage profits are calculated by subtracting operating expenses (staffing, marketing, office leases, etc.) from the company dollar. The diagram below shows the cash flow of a typical brokerage.

Profit levers - charging agents versus growing agent business

Often, people assume all brokerages make their profits from commissions. But agent fees can be quite lucrative for brokerages. Let’s look at a scenario.

‍

A brokerage has 100 agents, charges an 80% split, but has a $1,000 monthly fee to cover its services ($12,000/year/agent). Let’s assume each agent generates $50K in gross commission income. Finally, the brokerage pays $1.2M to support a 15 person staff and office space. The brokerage will make $1 million on commissions (100 agents x $50,000 GCI x 80% split) and $1.2 million in fees (100 x $12,000). Brokerage profit will be $1 million ($1 million in commissions + $1.2 million in fees - $1.2 million in expenses). You will notice the brokerage makes more money in fees than commissions. The brokerage may then focus on recruiting more agents as a primary way to grow profits.

‍

Ultimately, brokerages that employ lower-performing agents tend to favor agent fee-heavy programs.

The average brokerage doesn’t earn much

NAR reports that there were around 105,000 brokerages in 2017. here are $70B in annual real estate commissions. This means the average brokerage generates ~$670,000 in gross commissions. Using an 85% average split, the average brokerage keeps just $100,000. This is not a lot of money to run a business on, especially if the managing broker is not a practicing real estate agent.

The largest brokerages are huge but only a small share of sales volume

Average brokerages don't generate a ton of commission revenue. But the top brokerages do. And top brokerages generate significantly more revenue than mid-tier brokerages. The number-one brokerage in REALTrends’ brokerage ranking generates $176 billion in sales volume. Using an 85% agent split, that means they take home over $750 million after paying agents. By contrast, the number-100 brokerage generates less than 1% of that revenue. And the number-500 brokerage takes home somewhere between $2 million and $3 million. Yet, the top brokerage is still only generating just 5% of industry volume using our earlier sales volume estimates.