Are you familiar with how Agents get paid?

Question

I’m going to explain to everyone the payment structure of a Real Estate Agent. I sense there is a disconnection between investors and agents because both parties do not understand each other as well as they should. Investors want the most amount of money while an agent wants the most amount of money from their commission. Basically we all want more money! It’s what keeps us going as agents, investors, and the laymen.

Have you said one of the following statements? “My agent is charging me too much in commissions”or “Do I have to pay the standard commission?” My favorite, “Can you cut your commission?” If you said one of those statements, you’re not alone. In matter a fact, I became an agent to cut the commissions too.

Here is the tricky part: there is a lot of money going to an agent but they DON’T GET ALL OF IT! They get a tiny piece of that big commission they are charging you!

The breakdown:

(Disclosure) Under law, I cannot share what my broker-agent split is with other agents. Because there are real estate agents on BP, I have to use different numbers. For this example I’m going to use a 50/50 broker-agent split.

You’re selling your house for 100k

7% commission

Two agents: Buyer and Listing Agent

50/50 Broker-Agent Splits

Here we go:

100,000 * .07 = $7,000

7,000/2 = 3,500 (Buyer Agent gets 3.5 and Listing Agent gets 3.5)

3,500/2 =1,750 (Broker-Agent 50/50 split)

Already an agent has been cut down to 1.75% commission.

1,750/6 = 291.66/month (typical house takes 3-6 months to close)

An agent will make under 300 dollars a month selling a 100k house for 6 months. I didn’t include expenses because it varies per agent. This is on a 7% commission, most agents could work for 6% but a 1% deduction can be significant to an agent.

We all want to cut costs and make more money. I just hope this enlightens some of us and brings a better understanding of Real Estate Agents. This is why we do what we do and charge a commission.

Tanner Marsey · Answer

An industry that is ripe for disruption. I know most on here will disagree

James Mc Ree · Answer

The level of performance varies dramatically agent to agent.  I respect your example @Nick Rutkowski.  Using your example of the $100k transaction yields $1,750 for the agent.  You did not call out what the agent actually did.  It is not "countless hours".  It is many activities for sure and you are correct there is no guarantee of payment.  The unfavorable factors you point out are really no different than any other sales job.

Consider your same formulas for my $350,000 new construction house I am selling.  That selling agent will get $5,250 over 6 months.  He would get the same payment if he sold it in a month too!  He wrote a poor MLS description that I re-wrote.  He posted it in the MLS in all-caps.  Over 6 months, I had to tell him 4 times to update the pictures as progress was made.  I took the pictures.  No proactive reports or recommendations and, not surprisingly, no offers or even meaningful contacts.  Fired at the end of August and on to a new agent.  He didn't get paid, but I didn't get my new build house sold either.  I wasted 6 months of marketing time.  He had real estate agent fees to pay, but really lost nothing.  I lost carrying costs.  Had he done a minimum of work, this would have been a nice payday for him.

My primary agent goes with me to a property and points out every subtle defect.  She has steered me away from multiple properties due to structural or other issues she saw that I did not notice until she pointed them out.  She knows the areas (values, crime, etc), builders from the 1950s, normal characteristics of the houses in each area and of course the property buying/selling process inside out.  She has over 30 years experience as an agent, investor, gut-rehabber and landlord of tens of properties.  Her children all followed her into real estate as investors.  Her value is phenomenal and I am happy to pay her!  She does put in the time and is very responsive.  She gets the same 1.75% the dud above would get.  See the problem?

The industry needs reform and it is slowly happening.  The MLS has been cracked open to the public so buyers and sellers no longer need an agent just to see what is available.  Commission prices are starting to vary a bit.  It would be great if there was a reliable way of rating agents and reading their reviews.  That would quickly sort the wheat from the chaff.

Good agents do work hard.  As virtually every industry is pressured to cut costs, I think the realtor portion of the real estate industry will continue to feel that pressure.  I hope costs come down as the process becomes more efficient and buyers/sellers can self-provision even more.

Lynn McGeein · Answer

The median home listing price in the US in April 2019 was $226,800, at least according to a search I just did, so $100,000 is an extremely low example, feels like you're skewing your  argument to justify it.  Using the median US list price would make the individual agent cut at your 50/50 split scenario $3969 at 7% or $3402 at 6% for the median home listing price.  And your 50/50 split is usually the worst-case scenario as many brokers offer better unless you're brand new and training.

I think all agents, and I am one, need to be more cognizant of the seller's current reality, where an agent is asking them for 6-7%, then the buyer usually asks for 2-3% in closing assistance, and that's before their own seller fees, depending on area transfer taxes, local attorney's fees, repairs or staging needed to sell, etc.  So a seller is easily being pressured to pay 8-10% of the purchase price to sell what is usually the biggest asset they own.  If you take the cost involved as a percentage of their actual equity, if any, not total purchase price, the percentage is ridiculous.  Something has to give.

The industry needs a transformation, with fewer brokerages and fewer agents working for lower fees but higher volume, where total cost to sell including commissions falls to 3-5% total for a median-priced home, whether it's percentage or flat fee.  The business model that gets that right will do very well in the near future, and I hope I work for them.

Nathan Biller · Answer

@Nick Rutkowski I think your explanation is super helpful to somebody coming into the industry; thanks for simplifying it as much as possible :)

I was watching Brad Inman's interview of Redfin CEO Glenn Kelman and he was talking about how he has been trying to save buyer's money for years but gave up because most buyer's believe they're getting an agent for "free". However, it has been my experience that the buyer is the one who is actually paying the entire commission since the buyer is the only person that typically brings money to the table.

I've looked at FSBOs before where the owners says something like "I'm going to list with an agent in two weeks for $200k, but if you buy it before then I'll let you have it for $188k." The current big NAR lawsuit could decouple the current setup where the seller is technically paying for the buyer's agent which *could* have the effect of buyers choosing to go unrepresented. Redfin already offers a Redfin Direct program where a buyer chooses not to have representation and thus the seller saves money and the net offer is better for the seller.

I totally agree with @Jim Goebel on aligning incentives. Commissions are ALWAYS negotiable. I also agree with @Lynn M. that a business model that figures out how to deliver this for less will do well in the future. Zillow might start giving it brokerage services at some point as they move into insurance and mortgage. They could write it off as a loss leader and still come out way ahead!

Frank Wong · Answer

I think sometimes people from the outside view agents commission and just seen that large dollar amount that they make all the money on that deal.  What they don't see is the hundreds of emails, phone calls, driving, showing, writing contracts, weekends lost from their family to help their clients and be available 24/7.  It's a profession that we do all that work and countless hours and have no guarantee if we will get paid. Now you have some understanding of what we do.

Russell Brazil · Answer

60% of brokerages with such pay structures go bankrupt every recession. It has been tried...and it will continue to be tried...the problem is they all go bankrupt.

Jim Goebel · Answer

@Nick Rutkowski

More agents need to be open to performance agreements/ commissions tied to performance.

This better aligns incentives between a buyer/seller and their agent.

Marcus Auerbach · Answer

While the industry is legally very regulated, the compensation model is totally open - as a customer you can choose flat fee brokers, full service brokers, discount brokers, go FSBO, sell to iBuyers - the industry is being disrupted all the time.

At the end of the day, the free market sets the price. Agents have a close to 90% drop out rate in year one and similar in year two. According to the NAR the average income is about $33k and half of the agents make under 10k a year - lots of part timers.

It is survival of the fittest. If you think agents make too much money, you can try to become one! If you are really good, you can make a very nice income and the sky is the limit. But it is a very hard and demanding job and only 3% of agents do it well - and over 25 deals a year.

And I am sorry if I step one part time agents toes here, but between regular homes, raw land, condos and new construction, etc etc if you dont do a signfificant volumue and learn from all these deals you may end up in a situation where your client knows more than you!

And that's also what the consumers don't understand. They think all agents are the same.

Same for new investors, who want to get licensed and contiousley choose to hire someone not competent (themselves)...

Michael P. · Answer

Just do one listing in NYC a year make = 12 months work in Cortland

Nick Rutkowski · Answer

@Tanner Marsey

Nope, I don’t disagree. Between anti-trust law suits and iBuyers the industry is quite disrupted.

Are you familiar with how Agents get paid?

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