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Most people in America are familiar with the franchise concept: Franchises are popular with entrepreneurs who want to start a business but need help. A franchise allows people to start their own business (for a price) under the name and tutelage of a well-known brand. Some of this country's top franchises are McDonald's (NYSE: MCD) (of course), 7-Eleven, Ace Hardware, and Century 21 and RE/MAX Holdings (NYSE: RMAX), the last two being real estate franchises.
What a real estate franchise does
A real estate franchise, known as the franchisor, does what any other franchise does: It offers brand awareness and national marketing of that brand name that the franchisee (the person who operates the business) works under. That's the reason you've likely heard of the big real estate franchises: Century 21, RE/MAX, Keller Williams, and Coldwell Banker, to name a few.
Name recognition is one of the main reasons people buy franchises. It's typically easier to do business under an existing, known, and trusted brand versus trying to build a business from scratch. Real estate franchises can also provide promotional materials, training, and business software designed to help the franchisee run a business.
Other types of real estate franchising opportunities
Real estate franchises have become more diverse than just brokerage offices with traditional real estate agents, like the ones mentioned above. If you want to become a franchise owner, you could certainly go the traditional route, particularly if you're a real estate broker. But there are other types of real estate franchises to consider.
Here are some nontraditional real estate franchises:
- Hommati: This franchise opportunity offers drone services to real estate agents who include 3D interactive tours, drone aerial videos, virtual staging, and virtual reality tours in their listings.
- Property management franchises: These offer services to real estate investment property owners who want someone to manage those properties.
- Home inspection franchises: These offer inspection services for single-family and multifamily homes, which people typically use before they purchase property.
- HomeVestors of America (the "We Buy Ugly Houses" company): This franchise is for people who want to flip residential and commercial real estate.
- Estate sale franchises: These offer home liquidation services.
How to calculate whether the franchise is a good opportunity
You should research what the franchise says about the potential it offers, but it's best to do your own independent research and due diligence as well. Here's how:
- Look at the industry before you buy: Is the industry experiencing growth? What about your area? Is it already saturated with what you wish to do, or is there a market waiting for you?
- Is the franchise growing? If the franchise is actively selling units, it shows the franchise is likely doing well.
- How much training and support will you get? A sign of a good franchise is the type of assistance you'll receive to get started.
- Does the franchise advertise itself well? You'll most likely pay some sort of advertising fee, so make sure you think the advertising is worth it.
- Talk with other franchisees: Besides looking at online reviews of the franchises you're considering, talk with existing franchise owners to find out what they think about the business.
- Ask to see earnings information: It's a good idea to get three years' worth of financial statements. Most franchises show this in a franchise disclosure document. If numbers aren't your thing, have an accountant look this over.
- Does the franchise excite you? This will be your business, so it should be one you have a passion for -- that excitement usually shows with a business.
How much of an investment is it?
Investment costs vary widely depending on the type of franchise you buy and within franchises themselves, depending on what and where you buy. There are usually franchise fees and royalties to be paid to the franchisor, and those fees and royalties vary as well. Let's look at the initial costs to get into some franchises as examples:
- RE/MAX: Your initial investment is between $42,000 and $284,000, and you must have cash reserves of at least $35,000.
- Hommati: Your initial investment is between $49,920 and $64,995. You must have a net worth of at least $100,000 and have at least $50,000 in cash reserves.
- HomeVestors of America: Your initial investment is between $70,000 and $426,250. You must have a net worth between $70,000 and $426,250 and have at least $70,000 in cash reserves.
How labor-intensive is it?
Starting your own independent brokerage will typically be more labor-intensive than opening a franchise, and that's just in recruiting agents. You're on your own in every respect with an independent brokerage.
Investing in a franchise should make the work easier for you all around. Perhaps the greatest asset is the brand name of the franchise that attracts agents who can provide enough income so that you don't need to sell real estate yourself. Also, franchises already have the processes down and the software available for you to use.
The Millionacres bottom line
Real estate franchises have done much of the work for you, have brand recognition, and offer a proven system. But you pay a big cost for that, both in money and on limitations on how creative you can be with your business. If you're a real estate professional and a real estate franchise sounds like a good fit for you, research different types of franchises -- the typical real estate franchise that buys and sells real estate or one of the support franchises that services agents and investors.
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