Are you considering buying a real estate franchise brokerage? Purchasing a real estate franchise brokerage is one of the most popular options for real estate agents, team leaders, and even independent real estate brokers who want to build their own real estate brokerage and one-day exit the business.
Franchise brokerages have many advantages for those looking to build their own brokerage. As a franchisee, you can run a business with a proven model using the same systems as many successful business owners that have come before you and getting the support, backing, and recognition of a national or global real estate brand.
But is purchasing a franchise really the best option for you if you want to start your own brokerage? Although there are many benefits to purchasing a real estate franchise brokerage, there are also a few unknown disadvantages that can be detrimental to your business in the long term. Especially if you want to build a business strong enough to one day retire from real estate.
From nagging start-up requirements to territorial limitations, franchise brokerages can have their downside as well that are commonly overlooked by the excitable entrepreneur. That is why in this article, we outline the top 4 reasons you should NOT buy a real estate franchise brokerage:
- Inflexible Rules and Vision
- Start-Up Qualifications
- Upfront Investment
- Franchise Territories
Table of Contents
1) Inflexible Rules and Vision
The first reason why you should not start a real estate franchise is that franchisors have a strict set of rules and regulations that franchisees must follow within their own individual business plans to sustain the franchise’s brand. As many of you know, the biggest advantage of starting a franchise is the fact that you can immediately plug into a system that has a proven track record of success. But that same advantage also comes with the biggest limitation, which is that franchisees must follow certain rules and run their business a certain way according to their franchisor’s business model.
If you are an entrepreneur who likes to get creative and have a lot of your own ideas infused in your business plan already for your brokerage then it may come up as a point of conflict when your franchise brokerage require that you run your business their way instead of your own.
For example, most real estate franchises require that their brokers charge all of their agents the same splits and caps or within a certain range. This is because franchise companies must keep their offices around the world to a certain extent of consistency to maintain their brand image and business model. Also, most franchisors have requirements for the number of agents and staff members that each franchisee must have in order to remain operational. This can become an issue in a few ways.
If you are in a down market when business is slow, it may be to your financial benefit to cut down on your payroll and only have a limited number of employees and paid staff on hand to help run your brokerage. As an owner of a real estate franchise brokerage, you could very well be required to keep a certain amount of staff members on your payroll even if it means that you are taking a financial loss.
Another issue that comes with owning a franchise brokerage is the inflexibility of marketing and branding. Franchisors have very strict guidelines on branding, which includes the usage of logos, colors, images, tag lines, and recognition. Although it can be beneficial because most real estate brokerage franchisors will run marketing for you for a fee, it is nearly impossible for an individual franchise to differentiate themselves and build their own unique brand.
By owning a real estate franchise brokerage you are essentially an extension of the bigger brand that belongs to the franchisor. You might think that it gives you more recognition in the market being associated with a globally recognized brand, but for the uneducated consumer, you are just the same to them as every other franchise under the same brand.
2) Start-up Qualifications
So you’ve decided to buy your own real estate franchise after you’ve weighed the pros and cons. You are excited and can’t wait any longer to start building your very own real estate brokerage business. But wait, it’s not that simple, it never is with owning franchises.
One of the biggest mistakes that real estate entrepreneurs make when deciding to purchase franchise brokerages is that they completely overlook the qualifications and whether or not they are actually eligible to be a franchisee candidate for the franchise they decide to purchase.
Almost all real estate franchises have heavy qualifications and requirements that a prospect must meet in order to even be considered as a candidate to open an office. These usually range from a certain amount of previous experience and achievements in real estate, either as an agent or a manager, to your overall net worth or liquid assets that you have on hand to ensure that you can operate your business to your best extent.
It shouldn’t come as a surprise to you that a franchisor will want to uphold their brand and image even when they make it very clear on all of their marketing that each office is independently owned and operated. And with extensive qualifications, the franchisor’s intent is to ensure that each of their brokerage owners can actually run a business.
Having these qualifications is a great way to safeguard both the franchisor and the franchisee, but with the growing popularity of owning franchises in real estate and with that, a decrease in market share, candidates are going to have much more competition when it comes to securing the rights to a franchise brokerage from their company.
Also, an important point that most agents at independent or rival offices seem to miss is that franchisors are much more likely to sell franchise rights to a broker who’s been loyal to their company and have spent a substantial amount of time as an agent of their brand than to a broker who is coming from a different company.
That does not mean that it is impossible for an independent or rival broker to purchase a franchise, especially in growing markets where the subject brand has a low market share, it just means that they are much more likely to sell to a broker who has actually been with their company as an agent or manager and knows the ins and outs of their systems.
3) Upfront Investment
The third reason why you should not purchase a real estate franchise brokerage is also the reason that tends to be the most common one people point to when they actually do decide against opening a franchise.
That is the start-up investment that you have to make.
Like we mentioned earlier in the article, real estate franchises have certain standards that you must abide by when you decide to open or take over a branch in your market. These standards usually come with hefty fees that you will either need to pay out of pocket or get a business loan for.
As a real estate franchise owner you are subject to use the same marketing, internal systems, equipment, softwares, and branding. All of these usually come as a package bundle when you purchase the franchise initially and is required by the franchisor.
In today’s market, the initial franchise fee for a real estate franchise excluding all other expenses such as training, marketing, office development, etc. ranges from $10,000 – $50,000. To put this into perspective, the actual total investment that you would need to put down in order to open a franchise office is between $150,000-$300,000 after factoring in all of the start-up costs both required by the franchisor and your own business plan.
On top of the initial investment, all franchises charge their franchisees an ongoing royalty tax on their office’s production. Usually, this can range from 3-6% of the monthly gross commission income of the office or a flat fee based on the number of active agents you have in your office. Although this fee is usually passed on to the agents at your office, this can be both a blessing and a curse.
If you pass on your royalty tax to your agents, you do get to keep more of the total income your office generates each month. But, on the flip side, passing on yet another extra fee to your agents after charging them desk fees, splits, broker review fees, errors & omissions, and their own monthly MLS dues can later become an obstacle that you have to overcome when you are trying to attract and retain talented agents.
Lastly, real estate franchise renewal agreements come with the dreaded renewal fee. Usually around 50% of the initial franchise fee, the renewal fee is something that a franchisee needs to calculate into their long-term financial plans. Typically franchise agreements are around 5-20 years, and during each interval where you want to continue running your office, you must pay a renewal fee.
4) Franchise Territories
The last reason why you should not purchase a real estate franchise is one that can be frustrating for the franchisees who are actually very successful in running their offices.
As many of you may know, franchises have territories, which are geographical restrictions within a certain macro market area that only allow one office of their brand to be opened within each territory. This helps the franchisor prevent competition amongst franchisees within their own brand. Think about it, have you ever seen two McDonalds locations right next to each other?
The same can be said for real estate franchises, if two of the same offices are opened right next to each other, then they would have to compete against each other to recruit agents to their office over the other. If that’s the case then the franchisor is essentially intentionally setting one of those offices up for failure.
In many instances especially in hot markets, popular real estate brands have already sold out all of their territories for franchising rights. That means that the only way to purchase a franchise under those brands would be to buy an existing office up for resale or move to a completely new territory. In many cases, a broker can be completely qualified to open a franchise office, but is unable to because there are no available franchises in their territory up for sale.
Territorial restrictions can not only be tricky for aspiring franchise owners. They are also a major pain point for successful franchise owners who are looking to expand their market share.
Many times when a real estate franchise owner becomes successful in running one office, they will be looking to open or take over other markets in their area. But due to the reasons we described above, a franchise broker may be stuck with their one office because they aren’t able to purchase the rights to a new territory that has already been sold to a different investor. This puts handcuffs on the brokerage owners and inadvertently limits their business potential in an effort to protect the business interests of the franchise company.
This is why most franchise brokerage owners are usually stuck with just one office, or at best a few territories within their local market even if they turn a massive success with what they first started out with and have the capability to successfully run their business in multiple states or even countries.
Bottom Line
Buying a real estate franchise can definitely have its advantages. You are buying a business system that has proven to work and you get the backing and support from a nationally recognized brand that has helped hundreds or even thousands of other brokers succeed.
But all of that comes at a very steep price that every serious entrepreneur needs to consider before diving headfirst into planning to buy their very own real estate franchise. Assimilating into a proven system has its perks but it also means you are bound to run your business according to someone else and not yourself.
There is no question that partnering with a proven system is the best way to start any business in any industry, but especially in a competition-intensive industry like running a real estate brokerage. As a brokerage, your unique value proposition is the only thing that you have to offer to the marketplace of real estate agents that you are trying to attract and retain. Starting all over completely from scratch with no proven success can be a tedious effort that ends in failure.
But that does not mean that buying a franchise is your only choice to partner with a proven system for your real estate brokerage business. In fact there are a few ways that you can enjoy the same company support and proven systems without having to go through a tedious qualification process and put down a substantial investment.
The Alternatives to Buying a Real Estate Franchise
There are a few alternatives to purchasing a real estate franchise, especially if your goal is to eventually exit the business and retire one day. But here are the most common and the best alternatives.
Starting a real estate team is not only a great alternative to buying a real estate franchise, but it is also a great alternative to opening a brokerage in general. As a team leader, you get to run your very own business and receive income from the production of your team. For those that are looking to start their own brokerage but have no idea where to start, building a team within your current brokerage can be a great first step as well.
When you run your team within your brokerage you are able to essentially do the same things and enjoy the same systems and support as you would by starting a franchise brokerage except you are not responsible for any legal issues, reviewing contracts, substantial investments, tedious qualifications, even getting a brokers or business license. A team leader is essentially a real estate franchise inside a real estate franchise.
But what about the limitations? As a team leader within a traditional independent or franchise brokerage your market share is even more limited than the real estate franchise brokerage owner. You are essentially only able to do business and attract agents to your team within the limits that your brokerage operates in.
If you are a team leader who wants to expand your business to other markets in the country or even to other countries, you are no longer limited to the one option of opening franchise offices in your desired locations to do business in. eXp Realty, the world’s first-ever cloud-based international independent brokerage is allowing agents, team leaders, and brokers to grow their real estate team businesses into every state in the US and multiple different countries through the one of a kind revenue share model with no red-tape, no territorial restrictions, no pre-qualifications, and no expensive start-up costs.
To learn more about how you can take advantage of this opportunity as a serious growth-minded real estate entrepreneur, click on the button below and schedule a free no obligations consultation call with the fastest growing organization within eXp Realty.