What are the requirements to start a real estate brokerage in California? *Updated 2023*
So you want to set up a real estate brokerage? Well, we will explain the steps how to set up a your own brokerage in the state of California. Keep in mind that there are various ways to structure a business, so, for this article, we’ll the most typical method that properly structures a scalable and compliance-oriented brokerage.
Get Your Broker License
The first step is to obtain a real estate broker license from the California Department of Real Estate. If you want to know the requirements to obtain a real estate broker license then CLICK HERE.
Technically speaking, once you are a licensed broker you can ‘broker real estate.” You can do business as a sole proprietor. For example, you can conduct a real estate transaction as “Your Name, Broker,” and get paid a commission. If only things were that simple. While a broker license is the minimum you need to broker a transaction. There is more involved if you want to start a brokerage or even operate as a one-person real estate brokerage.
Choose Your Entity
When you start a real estate brokerage you have to decide whether you want to operate as corporation or sole-proprietor. Virtually all established brokerages are corporations. There are benefits and drawbacks to incorporating, but the main reason that brokerages are corporations is for legal protection. If you decide to not incorporate, then you are operating as a sole-proprietor. This means that you are personally liable for the legal dusputes that arise from your transactions. You are probably thinking, ” I don’t want to be personally liable, I’ll incorporate.” Well, before you incorporate, you should know the drawbacks.
Drawbacks of Incorporating
If you plan to start a real estate brokerage that’s scalable you will eventually need to incorporate, but it comes as increased start up costs.
The cost to prepare the paperwork and file articles with the Secretary of State
There is a minimum state Franchise Board tax on your corporation of $800 per year (even if your brokerage makes no money)
The Department of Real Estate will charge you TWO licensing fees in addition to your personal broker license
You have additional paperwork with meetings and corporate resolutions.
There are additional fees for annual filings with the Secretary of State.
This just names a few of the additional responsibilities. These are easier to manage when you have an established real estate brokerage with multiple licensees and revenue, but expensive and costly when starting out.
Choose a Name for Your Brokerage
Let’s say you decide to be ABC Realty. Ideally, a broker would incorporate and create a legal entity. Let’s call ABC Realty, Inc. Now, many brokers incorporate to protect themselves legally in case someone sues them. The idea is that their company would be sued, rather than themselves as individuals. Virtually any real estate brokerage consistently engaging in business is a corporation. However, this means a couple things: 1. That the corporation must be approved (licensed) by the Department of Real Estate – more paperwork – more fees. 2. That there will be a minimum corporate tax to the franchise tax – increased accounting work.
Don’t forget, there needs to be a physical place of business. It can be the broker’s home address, but, honestly, what broker wants to use their home address as their publicly displayed business address. It definitely lacks privacy.
Now, ABC Realty, Inc. will need to join a trade association to access forms, the MLS, a lockbox, etc. That really comes down to more fees and paperwork.
So, at this point, we have the individual broker license, the corporate real estate license, the incorporation paperwork filed with the state, the office, the association membership, is there anything else? Yes.
Any reputable broker will have errors and commissions insurance. Think of this as catastrophic insurance for your real estate company. While not legally required, if you plan to bring on any salespersons at your brokerage then this is a requirement. A common company for E&O insurances is CRES. Again, this means more paperwork and money, you’re looking at over $1000 for the most basic policy. If you add agents and start doing a lot of business your premium can easily climb to over $10,000.
Now you have the external infrastructure in place. At the point you will need to work on your internal policies, branding, and marketing.
Let’s start with policies. You will need a policy and procedure document that is built into your independent contractor agreement. You will need to create a list of required documents, and a system for collecting that paperwork. Remember, all real estate records must be kept for 3 years and available upon request by the Department of Real Estate.
You will need to design your logo and company materials, even a letterhead. For marketing, you’ll have to decide if you are marketing to recruit more agents, or if you are marketing to consumers. As the designated broker your resources and abilities are limited.
Once you are up and running, you will find that you are bombarded with compliance paperwork, accounting tasks, and record keeping. Time must be divided between keeping the brokerage well-oiled and functioning properly and marketing. If you spend too much on keeping the company organized then you may find revenue decline. If you focus just on bringing in business and ignore managing the company, then you are bound to make a mistake or fall behind on maintaining files or accounting.
I don’t mean to discourage you, building a brokerage is an adventure. However, it’s also a way bigger project then anyone can foresee. For example, even when the organization is running smooth and your time is managed well, you may get drawn into atime-consuming matter that throws a wrench in your schedule. You may get demand letters from a state or county agency requiring you to fill out lengthy paperwork . You might even get a subpoena to attend a court hearing for a personal matter of one of your agents, just because an attorney wants the agent’s employer at court. Expect the unexpected
If you are up for the challenge then go for it, but there is an alternative. You can build a team with a pre-existing brokerage and essentially outsource all of the work I’m talking about. You can be part of Balboa Real Estate’s 100% commission program. With this, you can build your own team, be part of an established company that is insured and has full broker support, all the branding tools, and just pay a small flat fee per transaction. Contact info@balboateam.com to learn more.
