The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Why Real Estate Brokerages Don’t Hire Employees

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NYC real estate agents seem to have extraordinary lives. They choose their hours and which days they want to work. They make allreal estate brokerage hire employees sorts of money on big home sales. Most people don’t realize that brokerages rarely hire NYC real estate agents as employees. This means they have no salary or stable income. We will discuss the real estate brokerage fee business and how real estate brokerage firm structure it. This explains the growth of online or virtual real estate brokerages.

Instead, they are independent contractors that work with an agency or a brokerage, rather than necessarily for them. And all of their earnings are commission-based. There are a few different reasons why this is the case. But it’s beneficial to both parties involved, the real estate brokerage and the real estate agent themselves. In this guide, we’ll explain how this metric works. Why the brokerages prefer it this way, and why many agents don’t want to be employees. So if you’re considering becoming an agent yourself or you’re just interested in the process, this article is for you. So let’s dive right in and learn all about the real estate brokerage-agent relationship.

Real Estate Brokers: Employees or Independent Contractors?

For those of you who don’t know the difference between an employee and an independent contractor, you might scratch your head. How are real estate agents getting paid if they dont work for anybody as an employee? Well, that’s the thing with independent contractors. They more or less work for themselves. As the name implies, they are primarily independent of an employer or agency, able to do their own thing. But when it comes to real estate agents, they are still overseen by their overarching real estate brokerage. The brokerage still has to supervise the real estate agent since the deals run through the brokerage. They also negotiate real estate brokerage fees and split.

Therefore, the agent splits their commission with the brokerage. Or we guess you could say that the other way around. The brokerage or agency splitsReal Estate Brokerages their commission with the agent that brokered the deal. The IRS provides a better term for the type of workers that real estate agents are: statutory non-employees. Not actual employees of the brokerage, but also not fully independent contractors. This enables the brokerages and the real estate agents to skirt some labor laws and tax laws. This framework benefits everyone involved.

Hiring a W-2 Employee vs. Hiring an Independent Contractor

Regardless of everything else, brokerages prefer the real estate agents not to work as regular employees. It is significantly more challenging to doreal estate brokerage fee than bring on an independent contractor. The process of setting up a W-2 employee is far more time-consuming. It requires far more paperwork than an independent contractor (or “statutory non-employee”). There’s also more risk involved in paying a salary, as not all agents will close deals and earn the brokerage money.

According to this whitepaper by the NAR, twenty-two state statutes permit real estate brokers to treat their real estate salespeople as contractors. The broker simultaneously exercises its mandatory supervisory duties under the law.

a) Unemployment protections

Firstly, regular employees need to have unemployment protections provided by their employers. This requires the employer (in this case, the real estate brokerage) to pay additional taxes. These taxes then go towards funding unemployment benefits. If they bring on non-employees instead, they don’t have to pay these other taxes.

b) No payroll service

Secondly, W-2 employees must run through the payroll service that the brokerage uses. This isn’t nearly as bad if the brokerage alreadyonline showing of a house has a payroll processing company set up and ready to go. But if they don’t and they were to start hiring employees, they’d need to go through the process of doing so. Instead, bringing on some independent contractors allows the brokerages to circumvent this.

c) Statutory non-employees for taxes

The IRS considers real estate agents to be “statutory non-employees.” It makes an exception for the real estate brokerage industry if three factors are met:
  1. The real estate agent must carry a license
  2. Substantially all payments must be directly related to their sales and not hours worked.
  3. An agreement exists stating that the brokerage does not treat the real estate agent as an employee for federal tax meeting
There is no tax withholding as independent contractors receiving a 1099 essentially operate as their own business. They are responsible for withholding tax themselves (i.e., through quarterly estimated tax payments). Paying an independent contractor is like paying an outside vendor. Brokerages don’t need to worry about how they will handle their tax withholding or filings.

d) No workers’ compensation benefits

Lastly, companies and businesses also need to provide workers’ compensation benefits to their employees. The Affordable Care Act exempts real estate brokers from having to offer health care coverage to their agents. Authorities designed this insurance protection to provide benefits and medical care to employees who are hurt or become ill due to the job itself. Real estate agents constantly travel all over the place and walk through properties. They could end up getting hurt from time to time. Having to provide workers’ compensation for everyone would cost the brokerage even more. But with non-employees, they don’t have to.

e) Office managers and secretarial staff might be employees of Real Estate Brokerage firms

Office managers have licenses themselves. However, they typically don’t have to go out, source, and execute deals. Therefore office managers are usually classified as employees due to the nature of their work. They supervise agents.

f) Easy process of hiring an independent contractor by Real Estate Brokerage firms

Hiring an agent as an independent contractor couldn’t be easier. All brokerages need to associate or approve the licensee in eAccessNY and then execute a separate contractor agreement that will govern the parties’ relationship, including commission splits, desk fees, etc. New agents who just passed the state licensing exam can apply for their salesperson’s license online. They can get approved the same day by their sponsoring broker. Agents changing brokers need first to ask their current broker to disassociate them in eAccessNY. This process can take up to 48 hours for the NY Department of State to process. Once an agent has been disassociated, they need to provide their license number to their new sponsoring broker. The latter can then pay $20 and re-associate them instantly.

Real Estate Agents Prefer Not to Have a Salary

The only thing that matters ar the real estate brokerage fee. Even if real estate brokerages decided that they did want to hire real estate agents as salary employees, there would be an absolute uproar. That’s because real estate agents would much rather work on commission than getting paid a salary like a W-2 employee.  After all, good real estate agents don’t want to have a consistent paycheck. They want to count on themselves to sell some significant properties and cash in on that commission. Just think about it. Let’s say a real estate agent could get a solid $100,000 salary. Sounds pretty good, right? That’s a great living. But what if, during that year, the real estate agent sold $10 million worth of property?

If they’re only collecting on one side of the deal, making 3% on each sale, that would be $300,000 in commission. This is before any split with the brokerage. And top agents will routinely get 75-25 splits or even higher. There are even plenty of 90-100% split firms in NYC that only charge small monthly and real estate brokerage fees. So why would they prefer to have a salary that limits their potential versus betting on themselves to outperform that fixed salary? They can make significantly more in commission!

A drop of productivity: you eat what you kill in a Real Estate Brokerage firms

If real estate agents were salaried, it would lead to two different outcomes: bad for the industry. First, great real estate agents would have theirvirtual real estate agents productivity drop. If their pay isn’t a function of how much they sell in property value, why would they continue to work that hard? Second, lazy real estate agents would be even lazier. Because they can receive a salary regardless of how many sales they made.

Real estate agents join the industry to earn commission on million-dollar listings, not to make a salary. The best salespeople will always want to work for commission. They maximize the real estate brokerage fee.

Again, both of these outcomes would be bad for the real estate industry. And these are the big reasons why real estate agents prefer to work on commission rather than for a salary. Earning potential is just about unlimited when working on commission. The better you do, the more you make. A salary limits their ability to earn money and leads to laziness and lower productivity in the long run.

Written By: Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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