Over the past decade or more, the Real Estate Industry has witnessed the emergence of a number of new real estate franchise models that have upset the traditional real estate franchise brokerage concept.   For the potential franchisee, wading through the different offerings can seem somewhat daunting and reviewing a franchise offering circular and/or talking to the franchiser's representatives sometimes can and should seem somewhat cryptic.  This is, to a degree, understandable.  Franchiser's necessarily should be cautious in representing potential earnings or projections, since in truth, the potential earnings and ultimate success must be projected given certain assumptions not only of the market, but also on the individual ability and commitment of the potential franchisee - and, of course, the franchisor. 

One should be very wary of franshisors who's talk and verbal claims are not the same as the offering circular; and/or especially of those who claim some aspect of their system is 'coming' soon.

Previous visitors will note a change in our website.  We had previously (as originally stated)

"attempt(ed), in this review, to break out the pertinent items that should be considered by someone interested in purchasing or affiliating with one of the real estate franchise networks.  It should be noted that we have attempted to gather as much information as is possible about each of the evaluations we offer here, but WE CAN NOT AND DO NOT guarantee the information is accurate, since we have relied upon a vast array of sources, up to and including, what brokers, agents and others have shared with us."

and we had reviewed numerous franchise offerings and systems, rating many based on the editors' opinion based on information derived from a variety of sources and stated,

"It should be further noted that the editor's ratings are purely OPINIONS of the editor, based upon the information reasonably and readily available at the time.  If any information given is found, or thought, to be inaccurate, please notify the editor and corrections will be made.  Send corrections or comments to editor@realestatefranchisereview.com."

We went on to review, initially, a dozen real estate franchise offerings and give our opinions of what we thought were the strength and weaknesses of each.  Our plans were to continue our reviews and add additional reviews with time. 

We had cautioned our readers that these were only opinions and these were based upon the best information we had available at the time.  We, of course, added disclaimers and attempted to be as impartial as was humanly possible.  We were contacted, on a few occasions, by readers with minor corrections of fact that were quickly made to the reviews in question.  These usually had little or no bearing on our overall view or rating of the franchise offering.  We had stated the following:

Legal Disclaimer: The information found on this web site is not a franchise offering or an endorsement for any franchise system and should not be construed as such. The RealEstateReview.com makes every effort to maintain accurate franchise data but does not guarantee nor assume liability for incorrect data. We recommend that anyone seriously interested in pursuing any franchise opportunity, to review that franchise's Uniform Franchise Offering Circular (UFOC) with an attorney and accountant.

One thing we failed to consider, however, was how we would handle a situation where knowledge gained later would significantly lower our opinion of a particular offering. If we went back and 'slammed' the offering, would we then become the target of retribution, or even legal action for our opinion? 

We started this web site to inform potential buyers of real estate franchises.  The more we learn and experience the more difficult it is to accomplish this feat by evaluation of individual franchise offerings.  We had two choices 1) shut down the site completely, or 2) revamp the site by doing away with specific reviews of branded systems and offering things to look for and/or avoid without mentioning specific brands.  We chose the latter.




Methods of Compensating Real Estate Agents

Traditional Model                   100% Model                    New Models

The Traditional Model
The vast majority of real estate agents are compensated by a broker sharing the gross commission amount that the agent generates and the broker collects.  When someone refers to the 'traditional model', they are generally referring to this type of arrangement. The broker must remember that in order to recruit and retain agents that the compensation for the agent is a tremendously important consideration. Not only will the broker agent split be important, but so too will be the royalty fee paid by the broker to the franchise network, since this is usually taken off the top of the gross commission prior to the split between agent and broker.  The percentage split amount agreed to by the broker and agent usually reflects the amount of services and support the broker provides and can also reflect the volume of business the agent brings in. 

In some cases, the split amount will change throughout the year based upon year to date gross commission generated by the agent.  In other words the agent's portion of the split may grow based upon reaching certain plateus of gross commission revenue.  For example the agent's split may be 50/50 for the first $25,000 of GCI (gross commission income), then 60/40 from $25,000 to $50,000, then 70/30 for GCI between $50,000 and $75,000, then 80/20 for $75K to $100K, and topping out at 90/10 on GCI exceeding $100K.  The puzzling thing about this type of arrangement is that usually the new year brings a reduction back to the original level, so the agent starts over climbing the split ladder (which is a strange way to reward performance). Most arrangements of this kind are based upon yearly production, however we have heard some models using a quarterly performance level to determine the next quarter splits.  Some brokers, however will use a performance split based upon the previous year, so an agent may not ever revert back to an "original split' but the entire new year split is based upon sales from the previous year.  As long as production remains high from year to year, the agent's split remains high for the new year. 

A typical traditional broker/agent split may look like the following example.
1. Gross commission for the transaction = $10,000
2. Franchise Fee (to corporate) at 5% = $500
3. Advertising Fee (to coproate) at 1% = $100
4. Remaining Commission = $10,000 - $500 - $100 = $9,400 
5. Split 50/50 = $9,400 / 2= $4,700 to the broker and the same to the agent.

Note that what was termed as a 50/50 split is actually a 47% split due to the franshiser royalty fees in this example. 

In a traditonal model with splits, often the broker will provide a desk and telephone free of charge to the agent and will bill the agent only for long distance, postage, copies, mls fees and dues, and E & O insurance.  Some brokers will charge for/or coop local advertising.  Most will also provide the agent with yard signs but when they do it usually carries the company telephone number (as does most coop advertising) and any sign riders will be the agent's expense.

This model will generally attract a number new agents, because they have relatively low risk and low startup cost.  If the agent sells little or no property, he is out a relatively small amount of money.  Most franchises with this type of model will provide a 'boot camp' training program for the new agents.  The traditional models tend to have a fairly high turnover of agents due to the influx of new agents and because top producers soon tire of 'splitting' large GCI amounts with the broker.

If an agent becomes highly succesful, the broker will have a high chance of losing the producing agent to a competitor offering a better split, or to the '100%' split model broker. 

The 100% Split Model
This model is the other extreme from the traditonal model and is termed a '100% Split Model'.  In theory, the agent recieves 100% of the commission generated.  However, in most of these models, there is a royalty or advertising fee (or both) to the national franchise and the agent pays the broker a 'desk fee', monthly office fee, a management fee and/or various other fees.  Additionally the agent will generally carry all the expenses of running his business (telephone, internet access,furniture, postage, copies,E&O, advertising, yard signs, lockboxes, etc) and may also be required to share the expenses of the broker's office (utilities, etc).  It can be a successful model, especially for the very top producer's and in very hot markets.

This model will generally attract only the most experienced agents and definitely not the part-time agent.  New agents tend to shy away from this model because of the start up expenses (furniture, signs, etc), fixed expenses (desk fees, management fees, office rents, telephone, etc) and the high variable fees necessary to successfully promote 'their' business.  Additionally many franchises under this type model, provide relatively little training or support and leave the new agent to figure it out on their own in a highly competitive culture. 

Experienced, highly successful agents may desire this setup as the fee's will generally serve to in essence 'cap' what would otherwise be paid through splits.  If their level of business was consistently high, they may and probably will, actually net more in this type of arrangement.  The downside is that those fees and expenses would have to continue to be paid even if their sales slowed for whatever reason (illness, personal committments, slowing market, seasonal fluctuation etc.)

It is easy to see that if it was costing the agent, for example, $1,500 in fees and office rent per month and $1,000 per month in promotion, advertising, etc, for a total of $2,500/month, that he would fare better using the same example we used in the traditional model, for the one transaction.  If the agent, however, has just the one transaction over a 2 month period, the he clearly makes less net over the period.  

To illustrate:
1. Gross commission for the transaction = $10,000
2. Franchise Fee (to corporate) at 5% = $500
3. Fees / Office Rent etc to Broker = $1,500
4. Business Expenses = $1,000
4. Remaining Commission = $10,000 - $500 - $1,500 - $1,000 = $7,000
5. No Split = $7,000 to the agent.

With an additional month's expenses and no transaction the next month would be $7,000 - $2,500 = $4,500 net after two months.

This type of arrangement can, however, be much more lucrative to a high producer and in a hot market, these brokerages will tend to lure many of the top agents from the traditional brokerage.  Conversely, if the market slows, the so called 100% brokerages may lose a significant number of their agents.  The office culture in these brokerages tend toward a highly autonomous, highly competitive nature as the individual agents are more focused on their 'own' business rather than the brokerage as a whole.

The New Models
As we stated in the opening words, many new models have emerged over the last several years and many observers, including the editors of this review, believed that the traditonal models that failed to adapt could be left behind as relics of the past.  The recent slowdown of the market has delayed this consequence and many of the traditional brokerages are making somewhat of a comeback.  Agents have been forced back to traditional brokerages or face getting out of the business. 

Consumers are demanding more and the succesful agent of the future must provide it to prosper.  And agents are demanding more in order to meet these demands, as well as to provide a lasting foundation for the future.  Franchises were adapting to meet those agent demands.  In the hot market that existed prior to the 2007 / 2008 meltdown several new models were making tremendous in roads.

The pre 2007 market had led to the emergence of several new models.  Some have implemented wrinkles which articulate methods for their associates to build income by helping build the company These types of programs attempt to address the agent's need to build not only extra income, but a 'parachute' for leaner times and / or a retirement plan and/or exit strategy from a demanding career.  Some bear a resemblence to multi level marketing.  Still others are taking the discount brokerage approach which offer a varying degree of service levels.

These models all differ and comparing the benefits or weakness of each, in addition to more traditional models, can be a little like comparing apples and oranges.  Some resemble the tradtional models in terms of splits and agent compensation, while others resemble the 100% model with some twist and variations. 

One thing that we cannot rate, and probably the most important aspect that a potential franchisee should evaluate, is the character and competence of the franchise company personnel.  If you do nothing else, be a 'show me' prospect.   A good 'snake oil' salesman can convince you of many things.  If they say they have something (for example 'training', etc) make them show you.  If they say they have a new fantastic web site coming, talk to them when they get it and can actually show it to you - or better yet, get on line yourself independently of the franchisor coaching.  Pretend to be a real estate buyer yourself.  If it looks and feels amatureish, it may very well reflect the franchise group themselves.  If they come off with some reason that they cannot show it to you now, walk and don't look back.  If they claim to have something "coming soon", make them show you where they are and a committment in writting of the release date. 

Again we must caution the reader of our disclaimer and again point out that these are OUR opions only and should NOT be relied upon to make any decision on a franchise.  editor@realestatefranchisereview.com .

Good Luck
The Editors