Are you considering taking the leap of faith and heading out on your own, but you don’t know if you should start your own brokerage from scratch or purchase a real estate franchise? It’s OK, I have been there too.
In my 28-year real estate career, I have built two independent brokerages and was an investor in two franchises with Keller Williams Realty. Not to say that I have all the answers here, but I can shed some light on some of the questions you may have when deciding between starting an independent brokerage and buying a real estate franchise.
Here’s a quick rundown of the pros and cons of each from my experience, and some questions you need to answer for yourself before making a decision.
Do You Have a Clear Vision & Business Plan for Your Brokerage?
If you already have a clear vision for your brokerage and you feel you have a strong business background, then opening an independent brokerage may be the right decision for you. This is because franchisors (the parent franchise company) have already figured out the vision and the business plan for their brokerages, and they are typically inflexible to changes. Imagine a McDonald’s franchisee adding tacos to their menu—that would never fly!
If you are driven by your own vision, one that doesn’t align with the franchisor’s vision, then you’re typically not a good candidate for a franchise. On the other hand, if you have the drive to build a brokerage but don’t have a vision or a solid plan, then a franchise may be the perfect solution for you.
Before you make your final decision, there are other things you must consider, like how you are going to attract agents and how much it will cost you to get your brokerage up and running.
The Benefits of Purchasing a Real Estate Franchise
When it comes to hitting the ground running, franchises have many advantages. Franchises typically have brand awareness, processes, procedures, and software already in place so you don’t have to make these decisions. The idea behind purchasing a franchise is having a proven model and systems that will allow you to grow your brokerage faster, and with less risk, than you could on your own. Yes, the upfront costs can be steep, but the benefits and reduced risk can be appealing.
Franchises Can Be Easier to Sell
One of the commonly overlooked benefits of a franchise is that there are often other in-company agents and franchisees waiting in line to buy a franchise when a territory opens. Therefore, you may be able to sell your franchise brokerage quicker and for more money than you could an independent brokerage.
The Benefits of Opening an Independent Brokerage
The unique benefits of opening an independent real estate brokerage are unparalleled. One of these is that you can be as creative as you choose.
One of the main issues with franchises is that there are barriers to entry: Many franchises have qualifications and requirements that you must meet before you can be considered a candidate. This can range from your past real estate achievements to your overall net worth. People also complain about all the rules you must follow. These seemingly arbitrary prohibitions are there to sustain a cohesive brand and prevent internal conflicts among franchise owners. These rules include things like charging agents the same splits, maintaining a minimum number of agents and employees, and ensuring all of your office space is located inside your territory.
These rules make sense if you are operating a franchise. However, as an independent brokerage, you can charge your agents whatever you wish to negotiate, grow your brokerage as fast as you see fit, and seize opportunities by opening offices wherever you choose (or not at all, if that is your plan).
With independent brokerages, you can create a unique brand because you are not restricted by the franchise’s marketing materials and trademark. This can include your messaging, tag lines, colors, and logos—allowing you to further differentiate yourself from the competition. You already know, if you’ve read my other articles, that I love differentiation!
So if you have the desire to be creative with your brand, logos, and messaging, and you don’t want to be subject to additional rules, then creating and building your very own independent brokerage might be the right path for you!
Do You Have Systems to Recruit & Retain Agents?
If your goal is to have enough agents so that your brokerage provides enough income that you no longer need to sell real estate yourself, then you may be shocked to learn how much of your time will be spent just recruiting agents. I found myself spending two to four hours each day on this task.
But your efforts don’t stop there. Once you have recruited them to your brokerage, you need to retain them by meeting their needs throughout their real estate career. This includes providing new agent training, marketing assistance, the latest software, and brand awareness. All this while offering competitive splits and fee structures.
Individually, these are each manageable, but over time, it can become a monumental and expensive task for an independent brokerage to provide all of these services. Since your real estate sales skills won’t help you here, you will still need to create systems for recruiting from scratch if you decide to start your own brokerage.
Real estate franchises provide the processes, procedures, and software systems to fulfill most of these requirements. This allows you to focus on the task of recruiting instead of the never-ending development of new offerings to attract agents. Most franchises also create additional training and events to build a company culture. This is all thoughtfully designed to develop agent loyalty, thus assisting you with the retention of your agents.
It may sound great to have these systems and processes provided for you, but first you need to look at the overall expense associated with opening a real estate franchise.
How Much Money Do You Have to Invest Into a Real Estate Franchise?
One of the largest differences between starting your own independent brokerage and purchasing a franchise is the upfront cost. If you open your own independent brokerage, you can bootstrap it by starting in a smaller office or co-working space and using software off the shelf. You can see more on this topic in my previous article, 7 Things I Wish I Knew Before Starting My Real Estate Brokerage.
Purchasing a franchise is buying a proven business model. Franchisors have standards for everything from office space and furniture to equipment and software. Therefore, you will spend more money earlier on to bring the office up to the franchise brand standards. That being said, there are lesser-known real estate franchise business models, like NextHome, that have minimal office requirements that can save you money on the startup costs.
Initial Franchise Fee
Franchises have an upfront fee ranging from $10,000 to $50,000. This is in addition to training and office buildout. For example, the median total cost of opening a RE/MAX or Keller Williams franchise today is just over $140,000, and the total cost can be as high as $350,000.
Royalties
In addition to the upfront cost, franchises also charge an ongoing royalty. This typically ranges from 3% to 6% of your company’s gross commissions, or it’s a monthly fee of $25 to $400 per agent. Some franchises may charge both ways. However, managing brokers typically tend to pass royalty fees on to the agent.
Commitment
Franchise agreements are traditionally for terms of five to 20 years, with renewal fees at each interval. The renewal fees are typically 50% of the initial franchise fee. You will want to factor this into your long-term financial plan.
The final element you must consider when investigating the franchise route is the availability of the franchise opportunities in your area.
Are There Real Estate Franchise Opportunities in Your Area?
A franchise territory is a geographic boundary around a franchise that prevents another franchisee within the same company from opening an office nearby. This prevents competition (in terms of recruiting, not sales) from within the company. Many of the most common national franchise brands have long ago sold off their franchise territories in most major cities. This can make purchasing a franchise tricky in some areas, especially if you want a great location.
Although franchisors like RE/MAX are tapering off the practice of large franchise territories, they still take into consideration the impact a new franchise would make on their existing franchises.
What Do You Do if the Franchise Territories Are Sold Out?
Sold-out franchise territories traditionally leave you with one of three options if you truly want to own a franchise:
- Partner or become an investor in an existing franchise.
- Join a lesser-known franchise brand that has availability in your area.
- Select an up-and-coming area that hasn’t been expanded into as of yet.
Some franchises offer other arrangements for investors when all their prime territories are unavailable. For example, Keller Williams is now permitting existing franchisees to partner with agents who wish to run their own brokerage within the existing territories. This allows agents who want to have ownership of a franchise, but don’t have the capital or territory open to do so, to have the support and systems like a Keller Williams franchise.
This change creates a new way for agents who desire the opportunity to build a small brokerage without the expense of a new franchise and the risk of building an independent brokerage.
Our Top Real Estate Franchises
Real estate franchises are as different as the agents who work for them. Start by doing your research to find the right fit for your values, budget, territory, and long-term plans. There are plenty of real estate franchises to choose from, and your own financial situation and location will further narrow down your choices. Here are our top five picks based on reputation, pricing, resources offered, training, recruitment tools, and technology:
| Brokerage | Best For | Franchise Fee | Total Investment |
|---|---|---|---|
| RE/MAX | Brand recognition | $17,500 to $37,500 | $43,000 to $286,500 |
| Keller Williams | Recruitment support | $35,000 | $183,200 to $337,980 |
| Sotheby's International Realty | Luxury market | $25,000 | $40,600 to $315,500 |
| Realty ONE Group | Technology and marketing | $15,000 to $22,000 | $44,200 to $224,500 |
| NextHome | Industry disruption | $4,250 to $8,500 | $15,200 to $214,000 |
Please note that these numbers are general estimates. With the exception of Keller Williams and NextHome, most brokerages don’t publish their franchise fees and investment expectations. This does, however, give you an approximate idea of the kind of money we’re talking about and a good jumping off point for your research.
At the end of the day, it all comes back to those core values that keep you motivated in business and in life. If the mission of the brokerage doesn’t line up with yours, it’s not a good fit, no matter the financials.
What’s the Best Real Estate Company to Work For?
Bottom Line
There are a lot of things you must consider when making the decision to go out on your own. The decisions you make now may forever affect the success of your brokerage. So do your research and write out a list of pros and cons to opening an independent brokerage versus making the commitment to purchasing a real estate franchise of your own. In the end, the time you spend upfront may save you tens of thousands down the road.
Bringing It All Together
Did we miss anything, or do you have any experience with building an independent brokerage or franchising that you would like to share? Let us know in the comment section!
