Economics of being a real estate agent?

Question

Hi, I was wondering if someone could give me a quick briefing on the economics of being a real estate broker, particularly in CA?

So you make 2.5%ish per home? If you're the buyers agent, what are the other fees involved with that?

if you work for a big firm, how much of that do you keep?

How much does licensing and other stuff cost?

Why do so many people work for big firms? The stead pay check? The office? the leads? Any and all information would be great.

Russell Brazil · Answer

I can speak in generalities of being an agent, and not necessarily speak to the specifics of the California market.

Commissions are all negotiable.  I believe most of the country tends to fall into roughly between 2.5-3% range. Ive earned commissions as low as 1% and as high as 10%, so it really can vary.  In the general range, you likely see in most markets when the number of licensees is high, typically during economic booms, you end up on the lower end of that range, and during recessions when the number of licensees drops, toward the higher end of that range.

Average commissions are generally correlated to the number of licensees. Simple supply and demand economics. Higher supply of agents pushes prices lower. Lower supply of agents pushes prices higher.

Agents who belong to big brokerages generally do so because they get value out of that, either in the form of support, office space, branding.  It is a lot easier to piggy back on a well known companies marketing than to have a name no one recognizes.  Im in the top 1% of agents nation wide, and I choose to be with one of the largest brokerages in the country because I believe in branding.

Commission splits will vary greatly across different brokerage business structures.  You have small no name shops that might just charge you $500 per transaction and you keep 100%. This will typically be a no name brokerage, with no support.  You have places like Remax that will charge you a straight $15k (varies by market) and you keep 95-100%. You have places like Keller Williams that have you at a 70% split til you cap out and give them $35k or so (varies by market) then you keep 100% after that. You have some places that might be 50% til you hit a cap then rise after that.  It really runs the gammit.

Maintaining a license varies across the country. Typically between $3-$5k per year.  Ive seen people quote lower than $3k, but I honestly think they are skipping over a lot of the costs that they dont think about. Licensing fees, board dues, mls dues, e&o insurance, higher car insurance, liability insurance, electronic lockbox fees, continuing education.

Most top solo agents spend between 20-30% of their revenue on operating costs. 75% of your commissions (after the brokerages take) is generally considered to be the average profit margin.  For teams, the team owners profit margin generally is 20-35%.

87% of all licensees fail in the industry altogether and wash out within a few years.  Of the 13% who make it, the median income is like $43k.  The average agent sells 4 homes a year. The average full time agent sells 10. The average sales volume is $1.5 million. (Sales volume is the value of all houses you sold.

The top 1% of agents starts right around selling $12 million in volume per year, and the top agent in the country sells right around $1 billion in volume per year.

Dustin Allen · Answer

That’s a very wide ranging question but I’ll do my best to give you a 30k foot view.

Licensing should be under $1k for the class and license fees. Joining a broker will probably cost you somewhere in the neighborhood of $1k also though I imagine that varies based on the MLS you have to join in your area. That would be for dues and whatnot.

Brokerages vary greatly in what they pay and what they charge. I have heard of 50/50 splits and 80/20 splits and everything in between with even a few outside of those numbers. Generally, the higher your share of the split is, the less the broker will do or provide for you. More equal splits tend to offer more support in various ways. Also, expect to see a monthly desk fee at some places and only transactional fees at others.

Your 2.5% commission assumption may be decent for forecasting expectations but every agent negotiated their commission on every listing. I believe it is against the law for even your own broker to tell you what to charge for commission. Every transaction is different and so are the property types so commissions can vary quite a bit depending what you actually end up selling and how well you sell yourself.

Think about what your expectations are from getting your license and don’t be afraid to interview multiple brokers when you are testing for your license. You are interviewing them just as much as they are interviewing you.

Lee Bell · Answer

Three words.

Produce or die.

That is all.

Dustin Allen · Answer

@Russell Brazil very interesting. I believe mine was broker covered and recouped on closing.

I’ll have to look into that and see if there is reason to carry my own in addition.

Thanks for taking the time!

Russell Brazil · Answer

@Dustin Allen The e&o thing kind of varies both by brokerage and state. I think there are some states that require e&o coverage to get licensed, and other states do not.  Some brokerages get e&o for the entire company and distribute that cost across their agents, some charge a fee at each transaction to cover it, some agents get their own.  I have both e&o from my brokerage, but I also have a personal policy.

Dustin Allen · Answer

@Russell Brazil haha $1Billion! Us small fries dream! The work involved in that sales volume is staggering.

Let’s agree that state by state it varies, my broker straight up hedged to the end of the earth and wouldn’t tell me what I should charge for commission. This particular one was a very unique offering in our area and I felt 10% was well justified if I closed fast. The hints all said 8-10% and I locked him in at 10% because I was confident with the product and my ability to to sell it full asking and fast. We closed full price cash in 22 days.

The slight possibility of of a court action seems to scare many brokers from giving any direction on commission negotiations. It leads to a lot of conversations about “what I generally see...” and “Usually people charge around...”. I’m sure some brokers push that line harder and others a lot less. Point is, if you get someone to sign a contract, that’s what your working for. Why are you worth that commission?

I am interested I  something you mentioned. Do sales agents carry their own E&O insurance on top of their brokerages coverage? I’m trying to remember if you are an agent or broker and that’s the first I’ve heard of carrying indecent E&O insurance as an agent.

Russell Brazil · Answer

@Dustin Allen Your broker can set a range of commissions that is acceptable to him.  You can charge anything you like, you just can not collude with other agents or brokers to set commissions. Just think about it in terms of the discount brokers....they all advertise the exact commission they are charging, because that is set by their company policy.

Economics of being a real estate agent?

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