Succession Planning for Real Estate Brokerages

Many real estate firms are small businesses managed by one broker. What would happen to the firm and its listings if the managing broker was no longer able to serve in that role? In this article, we will address those questions as well as offer tips for a planned succession in the brokerage.

Every firm should have an emergency succession plan in place to not only avoid disruption of its business but also to protect its assets and clients. If the brokerage is a corporation and the corporation is a licensed entity, the process for making a transition to a new managing broker could be addressed in the corporation’s bylaws - it may be as simple as appointing a new managing broker and filing the necessary paperwork with the real estate commission.  However, in states where a corporation does not hold the real estate license or if the firm is a sole proprietorship or single member entity, a more elaborate plan is needed. A well-designed emergency succession plan will contain the following elements:

• The name of a successor to the broker or a hierarchy of individuals to succeed the broker.
• Instructions about the location of current client files, escrow accounts, and information about the brokerage’s licensees.
• Information about former client files, bank accounts, contracts, insurance policies, and association/MLS membership information.
• Information about current liabilities.
• Information on how to access computer accounts, voicemail, and other important passwords.

Another issue the firm will need to address is how to handle pending transactions when the managing broker becomes incapacitated.  How these transactions can be handled will vary by state. Approximately 15 states have laws that allow for the appointment of an individual on a temporary basis to close transactions that are under contract or have offers pending and to terminate all other listing or buyer representation agreements. Brokers should review their state’s laws and address the requirements of state law in their emergency succession plan, as some states allow the broker to pick the successor or list potential successors. 

Here is a list of the states with laws on this topic:

In states without a statute or regulation, closing pending transactions may be more difficult. In some states, giving power of attorney to an appropriately licensed individual may be sufficient to allow the substitute broker to complete the transactions. However, not all state real estate commissions will recognize another licensee taking over the clients of the former managing broker. In those instances, the new broker may need to have the clients transfer their listings to the new broker to complete the transactions. Brokers should discuss their options with their attorney when creating their emergency succession plan.

Of course, most brokerages will not need to utilize an emergency succession plan when transferring its leadership from one broker to another. If the firm is having one broker succeed another at the firm instead of selling the business, here are some best practices in succession planning:

1. Identify the individual or individuals who have the skills to lead the firm forward and confront the future challenges that the firm will face.
2. Expose candidates to all aspects of the brokerage’s operations so the individual has a good understanding of the firm’s business.
3. Once successor is chosen, introduce successor to all important individuals who are involved with the firm, whether it is the firm’s directors or other business partners.

Succession planning is an important issue for all real estate brokerage firms to consider. Having an emergency plan will help protect the firm’s clients and assets if the managing broker becomes unexpectedly incapacitated. A planned succession will allow the firm to seamlessly transition existing business to a new business broker, but the process for transferring the listings will vary by state.