Putting Real Estate Agent’s Commission in Perspective

   Talk to a real estate agent long enough and they will convince you there is no way they can list your home for one penny less than their standard, customary fee (5-6% of the sale price). If they do, they will have to withhold some of their irreplaceable services, or cry for help, or maybe even declare personal bankruptcy. No way—can’t do it. Don’t even ask. And of course, they are worth every penny they charge.

So, it got me to thinking: how does real estate agent compensation stack up to the compensation for other professionals? One way to evaluate this conundrum would be to compare the yearly take for an “average” real estate agent to that of other service providers. But an apples-to-apples comparison really cannot be made this way because it is just too difficult to gauge just how hard each agent is working. Some full time agents who sell a few homes a year only care to sell a few homes a year.

The only meaningful way to compare real estate agent compensation to other’s is on an hourly basis. More importantly, it must be based on hours of service provided to the customer, not total hours worked. Because there are so many (some would say too many) real estate agents, especially in higher-priced areas, they tend to spend a disproportionately large amount of their time marketing themselves and a disproportionately small amount of time serving their clients. While this self-marketing time is a cost of doing business, it does not provide any service to the customer, and therefore will not be part of this compensation analysis.

Now, real estate agents may decry that they must be compensated for their self-marketing time to make their profession viable, but no other professionals do that. All self employed service providers have to market themselves: plumbers, lawyers, etc. These other service providers charge an hourly rate (or project rate) and their self-marketing is just a cost of doing business, which is included in the rate they charge. A plumber who only unclogs two sinks in a year because of poor self-marketing cannot charge ten times the going rate (or they will find themselves unclogging zero sinks a year).

Since agent compensation is typically a percentage of the home’s sale price, extraordinarily expensive homes and correspondingly cheap homes will tend to skew the compensation numbers, so I will avoid them. For this example, I chose a $500,000 home in Los Angeles. That is an expensive home is some parts of the country, but an average price in Los Angeles.

One last assumption before I start. I assume that the average amount of time it takes an agent to sell a home is 40 hours. I have not seen a scientifically valid study of agent hours worked, but I have talked to agents who seem to think 40 hours is reasonable as an average. My feeling is if an agent is consistently working more than 40 hours to sell a home, they are either not very well organized or are choosing to work with unmotivated home sellers that really string them along.

Now for the analysis. First I will calculate the agent’s compensation:

  • Home price = $500,000
  • Commission = 2.5% or $12,500
  • Broker’s cut = 33% or $4,166
  • Agent’s net commission = $8,333
  • Agent’s hourly rate = $208

Now, here is a list of some service providers in Los Angeles, in 2014, that average less than $208 per hour of service.  These are service providers that can only dream about making $208 per hour. All data is from Salary.com.

  • Physicians
  • Real estate attorneys
  • Pharmacists
  • Plumbers

And because I know that you probably doubt me, here is the proof:

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proof2

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I know what you’re thinking: real estate agents make more per hour than real estate attorneys? And now you know why there are so many real estate agents: low barriers to entry and seemingly disproportionate compensation.

So, the next time a real estate agent tells you that they cannot sell your home for such a small commission, tell them they should have gone to law school.

To see how ReaListing makes customary real estate commission a thing of the past, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

The Real Estate Industry is Full of Hypocrites

Talk to any real estate agent or broker and they will tell you that they put the customer first. One of the reasons they say that is because they have to. In order for them to become a Realtor™, they must agree to abide by the NAR (National Associations of Realtors) Code of Ethics, which insists on such ideologies. The other reason they say it is because it sounds really good. Who wants to work with a real estate agent that puts themselves first?

Pinocccio

The truth is, the real estate industry is full of hypocrites. While saying one thing for public consumption, they do the exact opposite in their actions. (Actually, that is the definition of a hypocrite.) And all the while they are betting that their paying customers (i.e., home buyers and sellers) do not notice.

When it comes to buying and selling real estate, information is everything, and timely information is even more important. Why else did the industry horde its coveted MLS information for so long? Its livelihood depended on it.

Now this information has been unleashed. Third party web sites like Realtor, Trulia and Zillow, as well as public-facing MLS sites, have made this information freely available so buyers and sellers can make more informed real estate decisions. Can anyone make the argument that somehow consumers are not better off having access to this information?

So, now that consumers do have access to this information, how is the industry reacting? In other words, are they still putting the customer first? Not according to recent industry headlines.

Some Realtor groups (here too) have decided to stop syndicating their MLS information to these third party sites. Other Realtor groups have decided to simply delay their listings.

And what has caused this change of heart? They offer up a litany of reasons as to why, but there is really only one reason: the third party sites are selling the leads they generate to the highest bidder (i.e., real estate agents). And the Realtor groups do not like that “their” data is being used to potentially benefit their competitors.

I cannot really blame them for their actions. But it does not change the fact that their actions benefit themselves at the expense of the consumer. And that makes them hypocrites. In a way, I would fee better if they just did away with their disingenuous Code of Ethics and just admitted, like every other for-profit company, that their behavior is dictated by their desire to maximize profits. The consumer would be better served with this novel form of honesty: forewarned is forearmed.

At the end of the day, everyone in the real estate industry’s number one priority is self preservation. They will do what they need to do, or what they think they need to do, even if it means putting their customers second. It is okay…just don’t rub your Code of Ethics in my face.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

When it Comes to Real Estate Agents, Do You Really Get What You Pay For?

Try to negotiate commission with a seasoned real estate agent and you will invariably get one of two responses:

1.      If I cut my commission, I’ll have to cut my service

2.      You get what you pay for

The responses are by rote, and so automatic that you wonder if the cerebral cortex is even involved in the reply. The intent of the responses, of course, is to end the debate (over commission).

Money in hand

The first response is laughable. Since real estate agents do not get paid a penny until the home actually sells, eliminating any service that jeopardizes the sale of the home reduces their commission to zero. Naturally most sellers do not see it that way and tend to nod their head in agreement. Negotiation complete.

The second response is more interesting, and begs the question, when it comes to hiring a real estate agent, do you really get what you pay for?

Now I am not going to take a real estate agent’s word for it, since their answer is clouded by a conflict of interest. What I would like to see is something a little more objective. Perhaps a survey by a disinterested third party with no stake in the outcome. And as luck would have it, it has already been done, by Consumer Reports, no less. Consumer Reports is probably the most well respected organization looking out for the interest of consumers. Oh, and did I mention that they are independent and non-profit. Can’t get any more objective than that.

What did the Consumer Reports article, titled Home Sellers Can Haggle Broker Commissions, have to say about the relationship between real estate agent compensation and service? How about this:

  • Sellers who paid commission of 3% or less were just as satisfied with their brokers performance as those who paid 6% or more.
  • Sellers who paid more were more likely to have regrets about the selling process.
  • Sellers who paid more wish they were more assertive in negotiating their fees.
  • Paying less does not hurt the quality of service.

That is pretty damning evidence against assertion number two. Based on the survey responses, a case could be made that the more a seller pays the less they actually get. That is the exact opposite of assertion number two. While the service is statistically no better, the higher commission definitely comes with a boat load of regret.

Real estate agents will undoubtedly respond by saying that higher commission agents sell homes for higher prices, thus justifying their additional expense. Of course they will have no proof of that. It will be just one more unsubstantiated assertion agents use to try and end the commission discussion. But the discussion is not over—it is just beginning.

As technology makes information more available and the agent-seller relationship morphs into more of a partnership among equals, it is only a matter of time before home sellers ask themselves the question posed in the title of this post. And if I were a real estate agent, I would be concerned over the way they answer it.

To learn how ReaListing helps sellers negotiate less regrettable commission with agents, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

You Still Need a Real Estate Agent, But Not for as Much Anymore

It was not too long ago, before the proliferation of the Internet, that the residential real estate industry had a stranglehold on the buying and selling of homes. Buying and selling of homes is about information, and the real estate industry had a monopoly with their Multiple Listing Services (MLS). Anyone who tried to buy or sell a home without the help of a real estate agent was relegated to For Sales signs and local newspapers.

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Back in those “glory” days of residential real estate, a commission structure was established in the industry that required sellers to fork over a percentage of their equity to be able to leverage that information. The price was high—often disproportionate to the service actually delivered, but what choice was there? The industry controlled the information, so they made the rules.

Fast forward to today, circa 2014, and a lot has changed. The information once horded by the real estate industry has been liberated by a plethora of third party websites and information brokers. Home buyers and sellers now have access to the information once only available to real estate agents. And with that information, consumers have been doing a lot of what real estate agents used to do. Consequently, there are many things for which real estate agents are no longer needed.

What kinds of things? How about advertising a home for sale? For free, any home seller can advertise their home for sale on a website like Trulia and Zillow with greater reach than any MLS. MLSs still exist, they are just not as valuable as they used to be. What about buyers? No longer do they have to wait for their agent to “find” them a suitable home. Now buyers tell their agents what homes they want to see. And how about home pricing? Buyers and sellers now know the market price of homes just as well as agents. The CMA (Competitive Market Analysis) will soon become a thing of the past. It is a relic of a bygone era.

The bottom line is, buyers and sellers do not need real estate agents for as much anymore.  As a result, they have formed a new sort of relationship with agents, one that did not exist until very recently. I suppose you could call it “For Sale With Agent” (or To Purchase With Agent). These relationships are more indicative of a partnership than that of a hired hand.

So, if all of this is true, it begs a question: Why hasn’t the commission structure changed? If real estate agents are not needed for as much, why should they continue to make as much (percentage-wise)? The only answer I could come up with is inertia. A body in motion will maintain its heading until something big enough comes along and knocks it off its course.

Home sellers still need real estate agents, but not for as much any more. I suspect it is only a matter of time before sellers realize they do not have to pay them as much any more either.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

The Best and Worst Uses for Agent Performance Data

If you do not happen to be deeply immersed in the real estate industry, you probably do not realize that there is a war going on. The war is over whether and how to make real estate agent performance data available to the public.

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Agent performance data, gleaned from actual agent transactions, would provide very specific and objective information on the past performance of individual agents. The information could include things like…

  • The number of homes an agent sold in a year
  • The average sell price of those homes
  • The average number of days it took the agent to sell those homes
  • The average percentage of the asking price the agent got for those homes

This would really be fantastic information to make available to consumers to help them in choosing an agent. Far better than the more subjective rating systems available today. But like most things in the real estate industry, progress does not happen without a fight.

The consensus quickly forming in the real estate industry is that eventually this information is going to get out (like somehow it is in prison). The question now becomes, how best to do it? And the answer is, it depends on who you want it to benefit.

The first shot in this war was actually fired by NAR, the National Association of Realtors, which represents about a million real estate agents nationwide. They came up with this idea called AgentMatch. The idea behind AgentMatch is that consumers would go to the site, enter information about themselves and the home they are buying or selling, and AgentMatch would come up with the best real estate agent for the consumer, based on agent performance data. This idea was met with such venom from the real estate community, that it was quickly abandoned, as it should have been.

Regrettably, there are now some for-profit companies (here, here and here) doing the same exact thing. And where does that profit come from? The agents, who are willing to pay to be at the top of the list when a consumer searches. It makes you wonder why they even need (or use) the performance data. At least AgentMatch was attempting to be objective.

These “matching engines” highlight the worst possible use of agent performance data: letting someone other than the consumer use the data to decide who should be the right agent. Making the agent choice for the consumer is filled with troubling questions. What are the criteria being used to decide? Is it biased in some way that is detrimental to the consumer? Are the results influenced by paying agents?

Only time will tell how and when the real estate industry finally liberates agent performance data. Their biggest concern seems to be that if they make the raw data available to consumers, it could be misinterpreted. By misinterpreted, I supposed they mean it will be used to choose an agent other than themselves. But this fear is unfounded, and also a little insulting. It assumes that consumers are not smart enough to interpret the data on their own and make a beneficial decision for themselves. Is it possible that a consumer will make a bad choice after reviewing the data? Of course. But that is no different from making any bad decision in the market place with an abundance of information. The real estate industry is not in a position to protect consumers from themselves. They should make the raw data available, letting the smart consumers make intelligent choices while letting the inexperienced ones learn from their mistakes.

So what is the best use of this data? As one input in the agent selection process. Ideally, the consumer can use this data as a final filter when deciding on an agent to work with.

Suppose a home seller finds three agents they might like to list their home. One of the ways to narrow the choice might be to conduct interviews. A second selection criteria might be online reviews. And a third deciding factor might be to compare the raw data of these three agents side-by-side. This is no different from when someone applies for a job and a combination of their past performance (i.e., their resume) and their job interview are used to select a candidate.

The above idea not only mentions the best use of the data, but also highlights the best way to use the data: for comparison. I agree that the raw data for a single agent is almost useless. What does it mean that an agent sells homes for 95% of asking price on average? Is that good? Is that bad? In isolation, the numbers are meaningless. But use that same data to compare three agents selling similarly priced homes in the same neighborhood during the same twelve month period, and now you have very useful information.

I do not know how long it will take for this data to become freely and easily available to the consumer. The information actually exists right now, piece-meal, on the various third-party web sites, but I doubt many consumers will take the time to sift through it. Here is hoping that an industry that purports to encourage consumers to shop around for the best agent, makes the data available for them to actually do so.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.