Boutique Brokerage vs. Big Brand Franchises

Before we dive into the differences, let’s first gain an understanding of how real estate professionals operate – specifically in the state of Pennsylvania.

When it comes to residential real estate, there are really 3 different types of licenses:

1. Broker
2. Broker Associate
3. Salesperson

First, the Broker – every licensee must operate under the supervision of a broker.  This broker is referred to the “Broker of Record” for a real estate office.  The Broker of Record is basically the one that everyone answers to – and the one that is most often answering to the state.  A broker’s license has education requirements of 240 additional hours in specific courses, among other things.  The education is the prerequisite to the broker examination.

A Broker Associate holds the same license as the Broker of Record; however, they’re still operating under the broker.  They’re not responsible, typically, for others in the office, and operate independently as a salesperson.

A salesperson holds the most basic of the licenses for residential sales in PA.  The licensee has taken 2 courses – approximately 75 hours.  Real Estate Practice and Real Estate Fundamentals are the required courses.  Neither of these courses cover specific real estate law for Pennsylvania.  These are general real estate classes.

So, that was boring.  But, it’s very important to understand.  Most often, the first question you ask someone when you discover they’re in real estate is “Which company are you with?”  For some reason, people find this to be an important question.  I never understood why – but, I guess if one is educated on how the business works, it could be a valuable tool in determining who to work with.

In a nutshell…  the person that you’re talking to is the person you’re going to deal with – good, bad, or other.  If you’re in a situation where “Keller Williams” or “Re/Max” needs to get involved…. you’re already in too much trouble for it to matter – and so is your agent.  I guess that people find the brand name comforting?  I find that to be a big mistake.

The large franchises often employ a mix of seasoned professionals, and brand spanking new licensees.  So, what you get can vary greatly.  It’s no different with a boutique shop; however, I would venture to guess that there are fewer new licensees in boutique shops, because they don’t offer the support and training that the franchises have.  Typically, agents will get their experience at a franchise, and – if they’re smart – get out and go to a boutique.

The most significant difference between boutique and franchises is invisible to the general public.  It’s mostly compensation.  All brokerages are businesses, and how they make their money is generally the same model.   Brokerages often offer two models:  100% commission and Split/Cap.

The Split/Cap is the most common.  The “split” is the % of the agent’s commission that is retained by the brokerage.  These range from 10%-50%.  These are negotiated when the agent comes on board.  A new agent will typically be on a “60/40” or a “70/30.”  This means that they’d keep 60% or 70%, respectively, of the commission they earned.  They continue like this on a fiscal year, until they hit their “Cap.”  The cap number for a brokerage is somewhere in the $15k – $25k per year.   Once they’ve paid the brokerage that money, then they go to “100%” commission.

The 100% commission plan consists of a monthly feel that will annually add up to an amount comparable to the “cap.”

Franchise offices also have a “Franchise Fee” which is typically a 6%(ish) tax (for lack of a better word) that is charged on every sale.  This goes to the corporate office and is used for marketing the brand.  S0, even at 100% commission in a franchise, you’re only getting 94% of the money.

Boutique offices are much more flexible.  They aren’t typically bogged down with huge overhead, and large fancy offices.  They offer a lot of things as an a la carte service.   They still offer the same plans as above – but the numbers are much, much lower.  For example, a Springer agent may pay $300 per month ($3600 per year) to collect all of their commissions and be “100%”.

The flexible plans of a boutique agency can benefit the seller’s – as all commissions are negotiable.  Many franchises have policies in place that will require the agent’s split be paid based on a 3% side (each transaction has a buyer-side and seller-side commission).  So, if an agent were to list a $100k property and charge 1% for their listing side, and they were on a 70/30 split, they would make $100.  (1% of $100k is $1000; however, they need to pay their 30% based on 3% which is $3000 – so, they owe the brokerage $900).  How flexible can that agent be with their commission?  As a boutique agent, I would get the entire $1000.  The structure of the agent’s compensation can impact what you pay to sell your home.

Lastly – consider this….  You’re hiring an agent to negotiate on your behalf and get you the best “deal” they can on your sale or purchase.  If they couldn’t negotiate the best deal for themselves, what confidence should you have that they can negotiate the best deal for you?

So, once you ask where an agent works, follow that up with “Why?”.  You can follow that up with asking about licensing – make sure you’re getting the best professional for your money.