Compensation model crucial when creating real estate team

How to decide whether to hire employees, independent contractors or virtual assistants

Editor’s note: This is the second of a three-part series. See Part 1.

You’re working 14 hours a day, you haven’t had a day off in months, and you’re losing market share to competitors because you can’t keep up with all the incoming business. Is the time right to start a team?

Salary image via Shutterstock.
Salary image via Shutterstock.

Part 1 of this series outlined specific steps to take to determine if you’re ready to start a team. Once you have made the decision to start a team, the next step is to determine how to structure and grow your team.

The No. 1 question agents ask

The first question almost any agent who wants to start a team asks, “What is your compensation model?”

Before you can address that question, you must decide the nature of the work the person will do for you. In other words, you have to determine whether the individual will be an employee or an independent contractor.

Employee models

If you’re filling a $20,000-a-year position, the cost to your business of hiring the wrong person can be $100,000 or more. If the position is $100,000 per year (as many agent teams may be), the cost can be $1 million or more!"

The IRS has been cracking down on real estate companies and teams that are bending the independent contractor rules. You will be hiring an employee if you expect them to do any of the following:

1. Work specific hours.

2. Follow your directions on how to do their job, including the type of software or procedures they are to use.

3. Expect them to attend office meetings at certain times.

4. Require them to hold open houses, prospect or do other tasks that you assign.

If you have an employee, you must withhold income tax, any state taxes, Social Security and Medicare taxes, as well as reporting all of this to the IRS.

You are also responsible for providing office space, equipment and workers’ compensation, plus additional errors and omissions insurance. You may also be required to include the person on your auto insurance policy, as well as providing them with health care benefits.

Independent contractor models

In contrast to the employee model, independent contractors work when they choose, have their own equipment and determine their own procedures.

Making this determination about whether your hire will be an employee or an independent contractor can be difficult, especially if you’re hiring a buyer’s agent. In most cases, you want them to follow your way of doing business. You will probably also want to meet with your team at specific times. Again, these expectations put you in the employee model rather than the independent contractor model.

Sample compensation models: the mistake that can sink your business

Many team leaders become frustrated when they realize they are losing money on their team. This often results from the fact that the team lead is paying their buyer’s agent and/or listing agent on splits based upon gross revenue before expenses.

Again, if you’re working as a team, the expenses come off the top. The same is true for bonuses. They are paid on net, rather than gross revenue.

Some typical compensation models include:

1. Buyer’s and seller’s agents who are commission-based: 50-50 after expenses taken off the top.

2. Buyer’s and seller’s agents who are salaried employees plus commission/bonus. An increasing number of agents are using this approach. As a very general rule of thumb, expenses usually run about 15 percent of gross commission income. Consequently, you can pay your employee buyer or seller agent a salary of $30,000 per year plus a 42.5 percent split on any amount over $30,000 in commissions to the agent.

3. Office manager earning a salary of $45,000-$65,000 with bonuses/benefits. This position is almost always an employee position. Good candidates include paralegals, executive assistants, as well as someone who has worked as an office manager in a different industry.

4. Transaction manager (normally an independent contractor) $295-$495 per transaction.

Is the virtual assistant model a better choice?

The answer to this question is, “It depends.” If you need someone to show properties, having your virtual assistant (VA) somewhere else in the world is not going to work.

Many of the jobs in your team, however, can be done virtually. This includes uploading listing data, tracking transactions, managing your social media accounts, creating brochures and fliers, doing mailers, etc.

The great thing about working with a virtual assistant is that it is scalable. Rates range from $10-$100 per hour; however, you pay only for what you use. Unlike the employee model, you have to pay the person his salary, even if there is nothing to do.

Other advantages include the fact that with a VA, you are in a business-to-business relationship. You will issue a 1099 rather than a W-2. This means you don’t have to withhold taxes, Social Security, or provide workers’ compensation. VAs also have their own equipment and offices.

The cost of the wrong hire

If you’re filling a $20,000-a-year position, the cost to your business of hiring the wrong person can be $100,000 or more. If the position is $100,000 per year (as many agent teams may be), the cost can be $1 million or more!

As the saying goes, be “slow to hire and fast to fire.”

In case you’re wondering where to find strong administrative and team support, a number of agents and several major franchises use ProREAStaffing.com. Fees are often in the $5,000 range, but finding the right hire is well worth it.

Want to learn more about whether starting a team is right for you? If so, don’t miss Part 3 of this series.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of the National Association of Realtors’ No. 1 best-seller, “Real Estate Dough: Your Recipe for Real Estate Success.” Hear Bernice’s five-minute daily real estate show, just named “new and notable” by iTunes, at www.RealEstateCoachRadio.com.


Related Articles

Comments