Plan for Pain, Spend for Success

Whether you’re fresh to the real estate business or you’ve been selling homes for years, it always pays to take a close look at how you’re spending your hard-earned money.

August 1, 2007

Excerpted from 21 Things I Wish My Broker Had Told Me.

Until you get a steady flow of deals in the pipeline that produces a steady flow of checks to your bank account, you’re not going to be at ease in the real estate business.

How much do you realistically need to have set aside? First of all, you just need basic living expenses: Money to pay your rent, buy groceries, and buy gas. You can give yourself an idea of how much that is by figuring out how much you’ve spent in the past eight months.

Second, how much are you going to need to invest in your business? As you know, real estate is not a job where you can spend a thousand dollars on a business wardrobe and then take a bus to work every day and collect your first paycheck in two weeks.

Real estate is a career where you invest a thousand dollars or so in a business wardrobe, plus you’re going to spend a few hundred dollars on prelicense school, and probably a hundred dollars more just to take the exam and (assuming you pass it the first time) get your license. That’s money spent up front just to give you the right to walk in the door of a real estate office and sit down at a desk. Now the real spending begins.

Don’t Lose Sight of Spending

Curtis Hall, a top producer for RE/MAX Anasazi Realty in Tempe, Arizona, warns new licensees that they simply cannot lose sight of what he calls “cost centers.”

“You have to learn how to make the phone ring on a shoestring budget. You can’t lose sight of your budget. Ever. You think you’re poor now [just starting out]. You haven’t seen anything yet. For the next two years it’s going to seem like all you ever do is write checks.” Unfortunately, many real estate brokers, managers, and recruits don’t talk to new licensees about the importance of budgeting and keeping close watch on how much is going out.

Hall, for instance, has been in the business about 17 years and is one of the top producers in his region. He sells between 60 and 75 houses each year, and his typical transaction is around $165,000.

Because today he works for RE/MAX, he keeps 100 percent of his split of the commission. (Many other real estate brokerages have followed the RE/MAX example and offer their top agents 100 percent.) But because he keeps his entire split, he also is obligated to pay for everything that he uses in his business. His office does not help him pay for anything and, in fact, charges him a “desk fee” in exchange for using its space and its name as a base for his business.

So how much does a top producer spend? “Let’s just go down the list,” he said.

  • Accountant. "I have to have an accountant. That was $832 last year."
  • Conventions. $3,000. “You’ve got to go to conventions,” he insisted. “You constantly need to be out there meeting people and hearing people talk about their business and how they are doing it, what’s working for them and what isn’t. You constantly need to expose yourself to new ideas. Anybody who says they don’t have enough money to go to conventions, I say you’ll never have any money if you don’t go to conventions.”
  • Dues. $5,100. That seems like a high number, but, “I belong to a lot of things. They are a business expense. I belong to the Real Estate Educators Association and the Residential Sales Council. I belong to the Realtors® association. I also belong to the Women’s Council of Realtors®.” The Women’s Council? For a man? Says Hall, “Don’t let the name fool you. And this is something new agents should know. One of the first things I did when I got my license was join the WCR. The truth is, women dominate this industry. Whether you are a man or a woman, you need to associate with people who are successful. That’s why I joined the Women’s Council, and it’s the smartest thing I ever did. I’ve learned more there than anywhere else.”
  • Entertainment. $7,000. That is a high number and certainly not one that new sales associates can expect to ring up for a while, but it does point up the fact that as you work with more buyers and sellers, your entertainment expenses are going to mount up. The most common example is when you have a buyer and you are showing houses. You can’t look at an endless stream of houses without taking a break. It may mean a coffee break in the morning, lunch in the afternoon, and maybe even a snack later. Remember: You’re probably not going to be working with just one individual. Often, you’ll have both the husband and wife in the car, and a lot of times you’ll have their children, too.
  • Fixups. $3,700. “Handy Andy is a guy I hire to go out to the house and help the seller deal with minor problems before the house goes on the market. Or I might send him out to help the new buyer settle in. He’ll do things like make sure the locks are changed and new keys are made up for the new owners. He might fix a light switch, put a new washer in a faucet. Just those nuisance things that a new owner doesn’t want to bother with the day they move in.”
  • Insurance. “As soon as you go into the real estate business, your auto insurance is going to make a leap. If you’re using your car for business and you’re chauffeuring people around, your insurance is going to go up. Also, don’t forget, you’re probably not getting any benefits because you’re an independent contractor. That means you have to pay for your own life insurance. Health insurance. If you’re smart, you’ll get disability insurance. Those can add up to some very big numbers.”
  • Fees, Fees, Fees. “There are fees for the multiple-listing service. I have my own Web site, that’s another $551 per year. Legal fees, $72. License renewal every two years, $125.” “Referral fees,” he said. “I paid out $38,912 in referral fees last year. Subscription fees to professional journals, $334. Computer expenses (laptop, desktop, and Palm), $10,600 per year. Fax machine, $224. You need a cell phone. Office supplies, $2,100. Continuing education — you’re never out of school in real estate. There’s another couple of hundred per course or seminar. Plus, you’re going to need For Sale signs, and you’re going to need business cards.”
  • Marketing. $34,243. “Doing what it takes to get the phone to ring with buyers and sellers on the other end. The broker doesn’t pay for any of that. That’s all personal marketing. I’ve also hired a publicist ($11,300) who writes up press releases about me and organizes my advertising. New agents don’t need anything like that to begin with. But I also spent more than $1,000 on postage. That’s sending out postcards and letters just to keep my name in front of my sphere of influence.” One of the smallest buys you’re going to make in real estate are your business cards, yet they are one of the most effective instruments out there. There is a tendency for new agents to skimp on business cards —overcome that urge. You need to have business cards that say “I’m a success,” not business cards that say, “I printed this business card on my home computer. Spend a little more and hand them out like candy.

Adding It Up

Like many veteran agents, Hall has seen a number of new sales associates come into the business, think they are doing well, but then realize at the end of the year how little they actually are putting in their pockets.

“They work hard and things get going for them. Pretty soon they see they’ve made $100,000 in commissions their first year. But they don’t budget. They don’t pay attention to what they’re spending. Then they get hit with taxes. [Your broker doesn’t take withholding out of your commission checks, like employers do in other jobs.] If you’re not paying attention to what you’re doing, you’ll be out of the business in two years.”

“Things your broker won’t tell you? He won’t tell you to save your money and not spend everything you make. I know top producers who are years behind in paying their taxes. That’s not what you want to have happen.”

His advice: “New agents need to have a financial plan. They need to set aside — without fail — a percentage of every commission check, and it needs to go into some kind of retirement fund. If you look across this industry, I’d bet there isn’t one in ten agents who is saving money for the future.”

Frank Cook is the author of 21 Things I Wish My Broker Had Told Me (Dearborn Real Estate Education, 2007), providing advice for rookie real estate practitioners.