One of the most often asked questions on the BiggerPockets Forums is from relative newbies wondering if they should get their real estate licenses. I have seen this question on almost every forum topic, asked at least once a week. On the surface, it seems like there are only perks.
There are definite benefits to having a license:
- Instant “Rebate” When Purchasing: This is easily the number one reason I got my license. I am not a high-volume flipper. I buy one property at a time, fix it up myself, and then sell it when I’m done. I add considerable value to the property, listing every home I have ever sold for more than $100,000 above what I paid for it. Just that $100,000 will cost you $3,000 in typical commissions or save you an equal amount when you list it yourself.
- MLS Access: This is especially helpful for comparative home sales so you know what properties have sold for recently.
- Property Access: Get in to see the houses when it works for you. My husband works from home, and our farm area is our neighborhood. When a property gets listed, we immediately make the earliest appointment to view it. We don’t have to call our agent, who then has to call the listing agent to set up a time.
But getting a license isn’t just calling up the state licensing commission and asking to be added to their list. If you are starting from ground zero — that is, no prior licensing — it takes a serious time commitment and an initial outlay of cash to not only earn your license, but to become a member of the several different professional organizations that go along with having a license.
So what does it take? Let’s look at the different steps involved in earning your license.
Unfortunately, there isn’t a national system for licensing; each state has their own rules and regulations. I live in Colorado, and we are a fairly progressive state, real estate agent licensing-wise. Here are the expenses related to earning your real estate license in the state of Colorado.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Expenses Related to Acquiring Your Real Estate License
The great state of Colorado requires 168 credit hours of study to be eligible to take the state exam. I did a little Googling and found a company called VanEd that is completely online. (They offer licensing courses for about seven different states.) I have young children, and going to a physical classroom for those 168 hours wasn’t really feasible for my family. Taking courses online, I could watch and re-watch the lessons again and again. I could take 10 hours this week and not do anything else for the next 3 weeks if I so chose.
The total for my VanEd courses was $695. This price includes a test preparation course, which was invaluable to me. I started my classes at the beginning of November and took (and passed on the first try) my state exam at the end of February.
State Licensing Exam
While the course cost includes the exam prep, it does not include the cost of the state licensing exam. It cost me $85 to take the exam the first time. Since I passed with flying colors, I didn’t have to take it more than once. If you don’t pass, it will cost you $80 each time you sit for the exam. It’s worth passing the first time.
OK, now that you have paid for the course and the exam, you’re done, right? Not even close…
Fingerprinting & Background Check
Being a real estate agent allows you access to any property listed on the MLS. Most homeowners aren’t home when the house is being shown. You must pass an FBI background check to be allowed a real estate license. In order to pass said background check, you have to submit your fingerprints, along with your Social Security Number.
How do you get your fingerprints to them? Two ways: certain testing facilities will do it for a fee, or you can go to your local police department who will also do it for a fee. The testing facility will do an electronic fingerprint, which has a higher success rate, meaning the prints are more easily read than the traditional ink pad fingerprint done at the police department. The testing facility I used charges $56.75, which includes the $39.50 state processing fee and their own $17.25 processing fee. The police department in my city charges $10 to fingerprint, on top of the $39.50 state charge.
Most states require newly licensed agents to work under the supervision of an Employing Broker for a period of two years. Unlike other fields, there are fees charged for being associated with a particular brokerage. The fees vary widely, but are usually a monthly “desk fee” and a portion of your commission earned for every house sale.
Honestly, these fees kept me from getting my license for a really long time. Desk fees I was quoted were up to $1,500 a month. New agent commission splits can be up to 50% of the commission, meaning you only pocket half of what you earn. That seemed a bit steep for me. I read about a company founded by an agent who felt the same way and ended up with a $52/month desk fee and a flat rate of $499 per property bought or sold.
Errors & Omissions Insurance
All licensed agents are required to have errors and omissions insurance. Your license will be suspended immediately upon board notification that your insurance has lapsed, so this isn’t something you can go without. Figure $350-$400 per year.
My office requires me to be a member of my local Realtor board. With that membership comes inclusion in the National Association of Realtors. Dues are paid yearly. 2015 Dues are $562. To become a member of your local board, you must take an ethics class to the tune of $65.
The MLS (Multiple Listing Service) is where the majority of properties are listed. The amount of additional information available to MLS users can be pretty substantial. My MLS has a bit of software that analyzes comparable properties — that is, properties similar to the one you are considering.
While it isn’t perfect, it helps give a quick look, which lets me know if the property is worth looking into further. Access costs $117 every quarter, $468 per year.
State Exam: $85
Background Check: $39.50
Desk Fee: $624 ($52 X 12 months)
E&O Insurance: $374
NAR Membership: $562
Ethics Class: $40
MLS Access: $468
First Year Out-of-Pocket: $2,923
While it won’t be the exact same for you if you are in a different state, this is a fair estimate of what it will cost, both time and money, for you to earn your license. These out-of-pocket expenses are just the beginning. I haven’t factored in any marketing costs, including business cards and signs. It has been a few months since I earned my license; I am sure I am forgetting something that would push that out-of-pocket total over $3,000.
To Be or Not to Be (Licensed): That is the Question
So back to the topic at hand: should you get your license? It certainly isn’t necessary to obtain a license before you start looking for deals. If you are new to this, perhaps it would be better to have an experienced agent to help walk you through your first deal or two. Factor in the commission you will pay when you sell the house before you make the offer.
On the other hand, if you plan to — or already are — executing multiple transactions per year, you could reap huge rewards by earning your license.
Has earning a license helped you in your investing? Do you wish you hadn’t spent the time and money earning it?
Let’s help each other out by sharing our experiences in the comments below!