You took the classes, studied hard, and passed your real estate exam. Now what? While you are looking through your options for your shiny new license you may have come across the term “real estate license holding company”. What exactly does that mean?
To put it simply, a license holding company is a place to hold your license. In Illinois, like a lot of other states, brokers and agents are required to hang their licenses with a sponsoring broker. Even though you may be an independent contractor, the sponsoring broker is responsible for making sure you are following the rules and is there in case you have questions or issues with a transaction. You cannot have an active real estate license in the state without a sponsoring broker.
For active real estate agents this is not an issue. They pass the test and join a brokerage, either national or local, and start selling real estate. The problems arise when the agent decides they don’t want to actively work with buyers or sellers or for new agents that haven’t figured out what direction they want to go yet. Traditional brokerages for active agents cost money. Lots of money. That is where a real estate license holding company comes in. For agreeing to no longer actively participate in real estate transactions, a broker can keep their license active for a nominal annual fee by using a holding company as their sponsoring broker.
As you learned when studying for your real estate exam, another rule in the state of Illinois is that in order to receive compensation for a real estate transaction, you must be paid by your sponsoring broker. You can’t receive any compensation directly for providing real estate services, including referral fees. Let’s look at an example of when this comes into play.
You have a neighbor who is looking to sell their house. They know you have a real estate license and they come to you for help. You left your brokerage last year in order to slow down and are not holding your license anywhere. You contact XYZ Realty and tell them you have this amazing house that is getting ready to go on the market and in exchange for sending your neighbor to them, you would like a part of the commission the selling agent earns. How about 25% for your legwork. XYZ Realty unfortunately keeps up on the real estate law and lets you know that they will be more than happy to take care of your neighbor, but they can’t pay you a dime. Ouch.
Let’s look at that same scenario with a license holding company involved. The same neighbor comes to you to sell their amazing house. You are holding you license in a real estate holding company so it is active. You send the referral to your sponsoring broker, let’s call them NextPath Realty. Your sponsoring broker contacts XYZ Realty and negotiates the referral fee of 25%. Your neighbor’s house goes on the market and sells for a truckload of money. XYZ Realty receives their commission and sends NextPath Realty a check for 25% of their commission received. NextPath Realty then sends you a check for 85% of the referral fee and you go on vacation.
Joining a license holding company, such as this one, is easy and a smart move for any broker who is not actively engaged in buying or selling real estate.