REAL ESTATE AGENT NEWS
How to Evaluate Real Estate Franchises
by Michael Volkin

There is no doubt that if you want to start a real estate brokerage in this economy, purchasing a franchise is definitely the route to take.

Nine of out ten business fail in the first year, even mores- over the next five years. However, with a franchise, over 80% of the businesses are successful. Why? Because you will be purchasing a proven system.

The real estate industry is dominated with numerous regulations, rules and high fees that “reinventing the wheel” is a huge waste of time and money.

Unfortunately, in the last few years there has been an onslaught of new franchised real estate companies that are carbon copies of one another. There are numerous companies to evaluate when choosing a brokerage but more importantly there are numerous fees to evaluate as well.

A word of caution. The below material is not meant to scare you, merely educate you. This brief article will prepare you immensely when deciding on which real estate franchise to purchase.

You might already have a company in mind. The intent of this article is twofold:
1. To allow you to fully examine a company you already have in mind and reinforce or eliminate this company based on the below criteria.
2. To help you evaluate the numerous companies and decide which best matches your goals.

Renewal Term Fees

All franchises have renewal terms. Approximately 60% of real estate companies require their franchisees to pay renewal fees to renew these terms. These renewal fees are typically a few thousand dollars and are required every year or every few years.

These franchisors claim these fees are for administrative costs, technology fees or other support related costs. This is essentially a junk fee. Do not choose a real estate franchise that charges renewal fees. These fees should be included in the costs that are collected during the normal course of business. Companies that charge renewal fees aren’t concerned with their franchisees financial independence.

Territory Size

Real estate companies make their money by zoning small territories for their franchisees. Zoning by zip code is the most common type of territory to offer. Several real estate franchises only give territories by the mile! Paying a high initial franchise fee and portion of your profits for exclusivity to only one zip code, or one mile, is unacceptable. Avoid any real estate franchise that offers exclusivity to a territory based on mileage.

The best value by far is the ability to purchase a franchise by population, not mileage. People move and populations change. If you purchase a particular zip code and over time over half of the population migrate elsewhere, you will be left with half the business you originally thought you would have. Take Hurricane Katrina for example. That storm left thousands of families displaced in New Orleans and to date many of those families have never returned.

Additional Branch Fee

It goes without saying that when you buy a real estate franchise you will want your franchise to grow. Growth should be to the benefit of the franchisee, not the franchisor. However, many franchisors charge an additional fee for branch offices. If you have plans for owning a small brokerage of 6 or less agents, then this fee won’t matter to you. However, if you want a franchise with unlimited potential this fee will have a huge impact on your bottom line.

When considering a real estate franchise, always ask the franchisor about additional fees for branch offices.

Office Requirement

Statistics overwhelming show that clients don’t like going to real estate offices. They would much rather meet in their house or a neutral location (such as a local coffee shop). Statistics also show that most agents prefer to work out of their house. With a computer and printer, this can easily be accomplished.

A brick and mortars office is large expense for a broker. The broker must then pass that expense onto the agents in the form of higher commission splits. This makes everything more expensive. A real estate franchisor should have the technology available for a franchisee to work out of their house.

Any company that requires the franchisee to maintain an office should be avoided at all costs. This is a large, expensive and unnecessary expense with an old-school mentality. Your real estate franchise will never reach your desired level of success within the confines of a brick and mortar office.

Percentage of Profits

Perhaps by a lack of imagination or a lack of leadership, franchised real estate companies are dominated by one out-dated type of business model. This business model calls for a percentage of sales on gross profits (typically between 4 and 6%).

Do not buy a real estate franchise that collects fees on a percentage of gross profits. At first, this might seem like an acceptable form of payment. However, you want your real estate franchise to be large and successful or else you wouldn’t be spending thousands of dollars and hours investing in one.

The first rule of business is to always think big. If you truly believe in yourself and your abilities you must know that building a large successful real estate brokerage is well within your capabilities. With your franchisor collecting a percentage of gross profits, you are paying a higher fee the most successful you become, when in fact that opposite should occur. This type of fee constantly drags down your profit margin and returns your success rate back to normalcy.

Always look for a company that charges their franchisees a monthly fee per agent. This type of fee structure is much better for franchisees that plan on growing a successful brokerage.