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Do You Have Enough Money To Become A Real Estate Professional?

Written by Posted On Tuesday, 06 August 2002 17:00

Real estate is a state-licensed profession, subject to statutory regulations as well as a long list of standards of practice, but that may be the least of your hurdles. Do you have enough money in the bank to finance your new profession?

For some, the best indicator might be to look at who is already in the profession.

For many who choose real estate as a profession, the choice to become a real estate agent often comes after other careers. According to information from the National Association of Realtors' 2001 Member Profile Study, only seven percent of Realtors report that real estate was their first career. Realtors tend to be former managers, salespersons, teachers, homemakers or administrators. The average Realtor has 13 years experience, which supposes that many got into the profession at about the age of 39.

Who is the average Realtor? The average Realtor is a 52-year-old female sales agent grossing approximately $47,700 annually. Seventy-four percent of Realtors are married, with median gross household incomes of $92,800. Eighty-eight percent of Realtors have some college education, compared to 51 percent of U.S. adults, according to the U.S. Census Bureau. Nine out of ten Realtors own a home, and nearly half own rental properties. Realtors with bachelors degrees earn 30 percent more than Realtors without a degree.

So what does this information tell you? That most Realtors have backup - and that is what you are going to need to make it in the industry.

Look at what the average Realtors have in common - they have more education than the public, they have experience that comes with age, they usually have another wage earner in the household, and they have enough wherewithal to own property and buy more property.

Does that indicate an economic barrier for the entry level? Yes, it does, and that could explain why people don't typically enter the profession out of school, or at least until their student loans are paid off.

In fact, the average age of Realtors has increased over 20 years, from age 42 in 1978 to age 50 in 2000, creating a crisis of youth in the profession. Almost a third of brokers are 60 years old, and sixteen percent of brokers are over 60. Only 12 percent of sales agents are under the age of 35, compared to 29 percent in 1978.

Becoming a real estate professional could boil down to whether or not you have the money to ante up. The older you are, the more likely you are to be able to finance your new profession.

Real estate is a business for self-starters, and it takes a lot of wherewithal to tough out the rough times. That means you have to have seed money and good money management skills because in most cases you'll be paid on an irregular basis. You have to have enough to bet on yourself and to cover your expenses until you start selling some homes.

Here's how it works. In all states, brokers, a higher form of real estate licensure that includes management of salespersons and fiduciary responsibility to clients, hire salespersons to be their agents. Salespersons are also licensed by the state and can perform tasks for the public as agents of the broker, except in Colorado where agents are licensed as brokers and brokers pass a broker's exam to become managing brokers. Salespersons have limited responsibilities to the client. When a salesperson presents a contract to a seller or buyer, it is done so in the broker's name. That means whatever you earn, you will split with the broker.

Salespersons' licenses are much easier to obtain than broker's licenses, as brokers' licenses generally require both time and experience in addition to test-passing, while salespersons can start serving the public as soon as they are licensed and hang their licenses with a broker.

In most cases, salespersons are hired to bring business in to the brokerage, and they are paid on commission, on an average split of 60/40. No sales? No commission. Very seldom will you find an opportunity to sell real estate for a salary, and if you do, expect to be paid on a draw against commission, or a salary against a goal. If you don't meet the production goal, you're out of a job.

Typical commissions are between four and six percent. If you are serving one side of the transaction, you'll split the commission with your broker, the other side's broker and the other side's agent, which reduces your take to between one and one a half percent of the transaction. If you represent both sides, you can make as much as three percent on average. If you are a broker and do your own selling you can make as much as the full six percent.

How many $100,000 homes can you sell at $1,500 apiece? The average home in the U.S. sells for about $160,000.

Getting started can also mean significant expenses, including meeting educational requirements (as many as 45-90 hours of higher learning or adult education, depending on state requirements,) getting licensed and paying applicable fees, and joining the appropriate associations so that you can access multiple listing services (MLSs) to have inventory to sell. MLSs are the unions of real estate - they protect the industry and make it easier to do business, but in most states, you have to have multiple memberships in associations to participate in the local MLS.

Over 90 percent of homes that are listed by real estate professionals are found in MLSs. Some states allow all licensees to access their local MLSs which are typically only open to members. Other states allow MLSs to be closed to licensees who aren't members of the local Realtor association. To join, you must be a member of your local, state and national association of Realtors. These costs, while worthwhile to most members, can run into the hundreds of dollars. Monthly MLS fees can run between $20 and $60. In addition, you will have to purchase software to access the MLS system, and get training to use the MLS database, which can also run hundreds of dollars.

Real estate is a mobile profession. Nine out of ten Realtors own or lease a computer, but they also employ cell phones, pagers, lockbox technologies, and other technologies in order to do business. Advertising costs to promote homes and to get name recognition can run in the hundreds or thousands. The average Realtor spent $1000 on self-promotion in 2000. Seven out of ten also maintained home offices, in addition to using office space supplied by their brokers.

All totaled, the average Realtor spends 14 percent of personal gross income on business-related expenses, or about $6,600. And the ratio doesn't improve for high earners. Realtors grossing over $100,000 annually spent $26,300 on business-related expenses.

If you and your pocketbook don't fit the average Realtor demographic, don't despair. The industry offers a lot of growth opportunities. Who is going to buy or run the brokerages of the 60-year-old brokers nearing retirement? The industry is actively seeking new people, especially young people, to bring fresh perspectives to an aging profession. In fact, membership to the NAR and local associations is at record-high levels.

Take it a little at a time. Take your coursework while you're still employed elsewhere. Start saving money on the side. Build up approximately six months of income so that you can survive a job change. Start telling everyone you know of your intentions to enter the real estate business. Start building a database of names and contact information so you will have prospects to call when you start selling real estate. Interview brokers and find out what their training programs are. You may be better off taking a job with a brokerage that offers lower commission splits if the broker brings in business and shares it with agents. Offer to shadow or work as an assistant for a top agent until you can break away on your own so you can be paid while you learn and watch how a pro brings in business. Some agents pay well enough that you may never leave the team.

There's no way to tell you exactly how much money you will need to become a real estate professional, as every market is different. One way to find out is to interview local brokers and agents and ask them their opinions. Tell them you would like to become a real estate professional and what should you expect? A good broker will also suggest that you write a business plan so you can measure your progress. When you present the plan to the broker, he or she will tell you if your expenses and sales goals are reasonable.

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