Before you can value a real estate brokerage, you must consider different factors such as profit, loss, salary, benefits, depreciation, interests, and other expenses.
Even though real estate brokerages are in the same business, they still differ in valuation.
Most of the time, profit and cash flow determine the pricing for these firms depending on the market situation.
If brokerage owners decide to put up their firm for sale, they need to know their brokerage valuation to see if it is the right time.
This article will discuss some essential ideas and tips for valuing a real estate brokerage with the right approach.
What is a Real Estate Brokerage?
Brokerages are firms that help folks land investments in a bigger market by connecting them to it.
They usually moderate in investing, loaning, and purchasing real estate properties.
For example, they help a buyer transact with the seller.
Brokers may work individually but can also be part of a larger group like a firm or hire agents.
Before an individual becomes a broker, they must follow state requirements and the brokerage exam.
They receive payment through a fixed rate or a part of the transaction they do with the client.
Related Reading: How To Make Money In Real Estate – Know More Here.
How To Get the Business Value of a Brokerage
There are three common ways to value a real estate brokerage.
These approaches are market, income, and asset.
Aside from these approaches, you also have to note some critical factors affecting valuation.
Knowing the different ways to value a firm is vital because not all companies will work with one.
Market
The market approach effectively identifies a brokerage value based on statistical evidence.
Most appraisal professionals think that the market should decide the value of a business, so they use this approach.
Some aspects to consider in the market approach are the appraisal value, assets, interest, and security through market prices.
Therefore, when using this method, the brokerage firm must compare its sales with other similar businesses.
Income
The income approach is the most common in real estate and brokerage.
Most investors also recognize this method as it values the business according to its current and terminal value.
Generally, an income-based method utilizes the profit of a real estate property to determine its fair value before selling.
Discounted Cash Flow
Discounted Cash Flow is an income-based approach that allows you to generate value through cash flow stream, discount rate, and long-term business valuation.
Experts and appraisers acknowledge it as the most accurate way to value any business because of its strengths.
One is that they base the estimation on the business earning power and risk, whether small or large.
Gross Margin of Company Revenue
For brokerages that have less than $2 million in gross revenue, the Gross Margin or Company Revenue Approach is the ideal one.
It is specific in the real estate industry for smaller businesses and when owners use a part of the revenues for the firm.
Gross margin is the sum of a firm’s revenue after deducting all sales fees and costs.
Once you identify the gross margin, you will use a specific percentage to assess the business value.
Assets
Another way to calculate a real estate brokerage value is through asset-based valuation.
It highlights the company assets or their market value without the liabilities in the total.
Once you evaluate the company assets, you need to get the fair market value next.
However, this approach is not common in the real estate industry during valuations because assets are not significant to the company’s overall value.
For example, the company’s equipment, furniture, and software are not part of the computed assets.
When you value the company’s total worth, you should also include the market knowledge that comes in different forms aside from assets.
Related Reading: How To Sell My Real Estate Brokerage – Get To Know Here.
Differences Between Real Estate Professionals
Real estate firms can have other staff attending to clients’ needs.
Some of them are agents, realtors, and brokers.
You may confuse yourself with these three titles and interchange them with each other, but they differ from one another.
Agents assist clients in buying, selling, and renting real estate properties.
They need to have a professional license to work.
Moreover, agents must be under a broker or a brokerage firm before officially transacting with clients.
Meanwhile, brokers are also real estate agents but require additional training and licenses before they work.
They come in between the transactions of buyers and sellers to help them achieve a successful deal.
Brokers can work independently, be under a firm, or hire agents to work with them.
Lastly, realtors are any real estate professional members of the National Association of Realtors.
They can either be agents or brokers, as long as they are part of NAR and follow their Code of Ethics.
Factors That Affect Brokerage Value
Location and Size
Larger firms in a metropolitan location are usually worth more than small firms in a rural community.
If the area is a strategic location, supposedly in a business district, it’ll have a higher value.
It is because they attract more potential if they have more potential clients nearby the office.
Transactions
You can expect a higher value when sellers and buyers opt for flexible payment terms because they appear to trust the firm better.
Clients who pay in total cash assume they don’t trust the firm enough to risk any transaction.
Affiliations
A brokerage can have a higher value when affiliating with trusted regional or national brands.
Results
When a firm has inconsistent results for a few consecutive years before selling it, it may have lower market pricing.
It can be either because of the real estate market or a problem within the organization.
Are Real Estate Brokerages Profitable?
According to a study, brokerages have an average gross margin of 13.8%.
Compared to real estate teams, brokerage companies earn less but still profit.
They don’t spend much profit on advertising and marketing.
Since earnings come from commissions and other possible fees, there may be unstable profit.
How Can You Earn From a Real Estate Office?
The real estate industry offers to pay differently than most jobs.
Most real estate professionals earn through commission.
If you are an independent broker, you’ll get a direct commission when a client has a successful buy or sell transaction.
Your commission depends on a percentage of the property’s market price.
However, you can also set your fixed rate.
Earning through a commission-based job may mean you’ll have unstable profits, but your earning potential is endless.
Therefore, the more sales you have, the more sales you can earn.
Your sales performance must thrive.
Meanwhile, if you are under a brokerage, you still earn a commission and share it with the firm.
Depending on the terms discussed between the real estate broker and firm, they’ll split the commission from the property bought or sold.
Generally, the more expensive the property you sell or buy, the more money you can earn.
However, you need to note that expensive properties may take longer to be off the market compared to mid-priced ones.
So if you focus on selling mid-priced properties, you can earn more for a while instead of a lump sum from expensive ones.
Real estate brokers also earn a fixed salary but are rare in the industry.
They make money from the salary and a bonus for every property dealt.
Related Reading: How To Find Great Real Estate Deals – Check Out Here.
Takeaways
Valuing a business can seem overwhelming with all the factors to calculate and consider.
However, the above-mentioned methods greatly help business owners develop their business values.
These approaches are just some of the most recommended valuation methods in the real estate industry.
Not every approach will work in a single company, so you have to see which one will work best for you.
If you can afford to, it is best to approach an expert appraiser, so you’ll get a fair calculation of your business value.
