Brokerage: Why not start your own firm?

Edifice's picture
Rank: Neanderthal | 2,527

Maybe not you specifically, but the teams that are pulling in $1mm+ in fees.

I know several teams in NYC whose book of business is their own (especially those in tenant rep or IS) but stay at a firm that takes $350,000+ to print marketing materials and keep data subscriptions paid up. The few I've asked this question of say something to the effect of "ah too much work/paperwork to start it up." Doesn't seem that plausible for people who, in my experience, already work very hard.

Searched far and wide on WSO but doesn't seem to have been talked about. Perhaps a good discussion.

Region: 
United States - Northeast

Comments (20)

Aug 16, 2018

You just need connections, look how successful beech street capital is, founded in 2009 with just 3 people from Fannie Mae and sold to capital one a few years later

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Aug 16, 2018
Edifice:

Maybe not you specifically, but the teams that are pulling in $1mm+ in fees.

I know several teams in NYC whose book of business is their own (especially those in tenant rep or IS) but stay at a firm that takes $350,000+ to print marketing materials and keep data subscriptions paid up. The few I've asked this question of say something to the effect of "ah too much work/paperwork to start it up." Doesn't seem that plausible for people who, in my experience, already work very hard.

Searched far and wide on WSO but doesn't seem to have been talked about. Perhaps a good discussion.

Not a broker, but I would imagine it is because when you are pulling in that kind of commission cash, it's because you're working every possible moment you can to bring in and execute on deals. Now go and start your own firm; either you are now spending several hours a day on administrative tasks (and not interfacing with potential clients) or spending many thousands of dollars on people to do it for you. Essentially, you are taking a minimum of 10% of either your cash flow producing time, and spending it on something that won't earn you money, or taking 10% of your cash and paying people to do that for you. Maybe that number is slightly off, but you get the point.

Some of the all star brokers have extremely favorable commission splits. If you're good enough, you can command well over 50% of the commission for you and your team. So if you're a team like Harmon & Spies (as an example), why in the world do you move on from taking your nice majority piece of the commission, which carries no risk and no overhead, and start your on firm, which requires a ton of extra work and risk, in return for almost no additional gain? Does making the extra 10-15% of the commission really compensate them adequately for the massive expansion in risk?

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Aug 16, 2018

Good input, thanks.

Power of the firm brand is important, but interesting that even when people are pulling in $3mm in fees and are on a 70/30 split, they still feel the firm is providing $900k in value to their business. Or more realistically, someone at that level in CRE is on salary + bonus, where they're giving considerably more to the firm than they're bringing in.

Understand the risks with opening a shop, but notable to see where brokers draw the line in an already risky (meaning you only eat if you kill) industry.

Aug 16, 2018

Most people don't understand the risk, effort, knowledge and discipline to own your own business, and it's exhausting. If you're doing that much business development it's hard to do both all the time. Deal goes sideways/there's a dispute? You have to hire a lawyer out of your own pocket to sue for commission. Need some research done? You have to pay the ridiculous fees for a subscription to XYZ research. Need a financial run done? You have to pay the annual Argus licensing fee(s). You want something printed on fancy paper? You have to buy all of the printing equipment, material, etc. You want a nice office to bring clients? You have to fork out the cost for the rent & overhead. You can see very quickly how these costs add up. Not to mention that in most cases the brokerage house is the cost center where the support staff receives their salaries from, so that 900K figure above, for example, gets eaten up very quickly by labor costs and the things I mentioned above, and that doesn't even include things like employee healthcare and insurance costs, which are substantial.

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Aug 16, 2018
Edifice:

Good input, thanks.

Power of the firm brand is important, but interesting that even when people are pulling in $3mm in fees and are on a 70/30 split, they still feel the firm is providing $900k in value to their business. Or more realistically, someone at that level in CRE is on salary + bonus, where they're giving considerably more to the firm than they're bringing in.

Understand the risks with opening a shop, but notable to see where brokers draw the line in an already risky (meaning you only eat if you kill) industry.

I don't think you're fully understanding the concept of "risk". Take your example; if I am the broker at [XXX] firm, I have literally no risk aside from my own ability to produce. I'm paying these guys 900k a year, and in return I get a ton. From a strictly financial viewpoint, I'm not responsible for rent, for various fees and the costs of maintaining back office personnel, etc. Does that equate to 900k in dollar value? Obviously not, because otherwise the brokerage firm would be taking a bigger percentage. But it might be close. Hell, even if it's half, it's still worth it. Take the brand value out of it (because most top dog brokers have their own clients, which is why firms court them and not the other way around),

At the end of the day, it's a question of how much those extra couple hundred thousand dollars are worth. Look at what just happened with Eastern Consolidated, or TOWN; fairly successful companies go down the drain because they can't support the overhead. If I'm a successful broker, why the hell am I putting my cash and my reputation and my career at risk to claw back another 5-10% of my earnings? Yeah, you can scale and profit off of other broker's clients as well, but now your carrying those folks until they bring down a deal. In a zero sum industry where "eat what you kill" is the maxim, I can 100% see why the very elite players are wary of having to share what they kill early in order to participate in what be pretty paltry pickings in the future.

And to tie it into another thread on the forum, at some point the money isn't worth it. If I'm making $1.5mm a year with the opportunity to make as much more as I can bring down, why am I taking all this risk to make a couple hundred extra thousand dollars? Put that extra time and effort into bringing in more clients.

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Aug 16, 2018

The company you work for helps bring in clients. If you work for CBRE and are selling a building you seem much more reputable than a no name brokerage.

The amount of deals that your name brand brokerage company brings you counteract the commission you split with your company.

Aug 16, 2018
thepropertydude:

The company you work for helps bring in clients. If you work for CBRE and are selling a building you seem much more reputable than a no name brokerage.

Only if you're a scrub. The big boys have clients and bring them to whatever shop they work for. Cushman is thanking every god they've ever heard of to have Doug Harmon (haha, realized I've been confusing him with Dan Harmon from Rick & Morty) on their team; Doug Harmon doesn't give a shit what it says over the door, just who gives him the biggest splits. That should tell you everything you need to know

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Aug 16, 2018

Why take the risk of starting some new no name shop and dealing with other crap in starting a business, when you're already pulling in millions at a brand name like a CBRE?

Aug 16, 2018

Well the idea would be that if you're bringing in a lot of business, you're not a no-name and do have solid, trusted contacts. I guess the more entrepreneurial ones want to take their relationships elsewhere.

Wonder how many do go independent and continue to kill it but they don't make the news because they don't care about the PR the way a firm would...

Aug 16, 2018

Because compliance fucking sucks.

Aug 16, 2018

A newbie broker, but I will throw in my two cents. The research department actually contributes a lot to the team I belong in. They help gather all the comps, make all the ppts, present all the necessary data (market trends, reports), and etc. This saves up a lot of time for the team. Also, the fact that the company provides access to databases such as landvision, realquest, RCA, prospectnow, etc, contributes a lot as well. My senior broker actually earned 1M+ this year already and has confirmed to me that A LOT of people come for the name of the company.

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Aug 16, 2018

One thing I would like to add on is that bidding is actually very common. And that is one of the times when the brand name participates. Also, you can work on out-of-state deals for 50-50. For example, referring to a deal that I have worked on, a big electronics manufacturing company looking to find a industrial property to lease will attract tons of 3PL companies to run the operation for them. Those 3PL companies will try to work with the right broker from the right brokerage firm. They are not going to hire a no name broker when they are going to compete with other bidders who have CBRE, C&W, and JLL working for them. Also, it is going to be CRAZY hard for you to win that bid just because you can't get better, more accurate information about those out-of-state deals than the brokers who actually live and work in those states.

Aug 16, 2018

I agree, research team is very important to the business. Didn't mean to imply research staff wasn't deserving of the firm's income; mostly that a top broker could employ 1-2 analysts on their own dime at their own firm. What's your team like (size/roles)?

Aug 16, 2018

3 brokers including me specializing in industrial real estate targeting a niche market, which I can't specifically talk about. We have a research analyst who is directly helping our team, but she also helps 2-3 other brokers/teams. Research analysts can be easily replaced/added, but having to replace/add the systems, templates, databases, etc? That is going to be hard and expensive.

Aug 16, 2018

Been a broker since 2001. Had an office at one location until 1/2009. One full time assistant and my rent was about $2000mo. I had a few agents but they all sucked. Anyway, just to keep the doors open with one full time assistant was $10kmo. Imagine if you need two of them and a research team, etc. It could hit $20k mo fast. Also, back around 2005 the State of Ca and all their glorious wisdom required brokers to have workers comp insurance on 1099 agents WTF??? So, having agents costs money even if they don't make any money.

Today I contract everything out in an effort to not have so much emotion tied to my business decisions.

In 2008 my revenue decreased by 50% from 2007. I still kept my full time assistant for that full year (2008) because she was a single mom and I knew her long before she worked for me. I also paid her health care which in 2008 was $1200mo.

With contracted TC's and loan processors, they don't make money until I do. Sometimes I'm stuck doing things an assistant should but that's ok.

I'm at a Regus shared office in La Jolla. It's great. Zero start up capital required. No printers to buy, no servers, no cleaning, no shred force bills to pay. Totally easy to open up shop at these places.

If you're on a heavy hitting team pulling in $1mil+ a year in fees and have a 70% split, I'd probably not leave given all the support the big shops offer. I've always been on my own and it would be tough for me to go to a large firm.

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Aug 16, 2018

I'm glad you chimed in and touched on the shared spaces. Are your research subscriptions and marketing costs most of the overhead?

Noticed from other threads you're independent; long-time lurker and I've always found your writings to be valuable.

Aug 17, 2018

I have fairly low overhead. Prospect Now is only $85mo for the county. I do pull lists from it...about 300 owners at a time. That's only $75. I don't use CoStar for two reasons. One is I've been in town so long that if I need a scoop on a building I'll just call a broker buddy or the listing broker direct. Also, in SD we have the apartment directory of all owners and their phone numbers. That's about $1200 year, so CoStar isn't really needed.

I don't know about other regions, but in San Diego MF listings of 5+ units are still listed in the MLS, whereas even a small commercial deal will not be. So, if you're into MF and in SD, the MLS will have tons of data too.

I haven't done marketing in nearly 20 years. But I'm starting to now. Depending on the results of a test batch of direct mail, I might spend $1500mo there. Not sure yet. The mailer lands throughout next week.

With marketing of $1500mo to very specific owners, my overhead is in the $3000 - $3500 range. In June I closed 5 deals so my TC fees were high. It's overhead but TC fees are good overhead :)

Thanks for the compliment!

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Aug 16, 2018
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