It depends who you ask: a real estate agent or an engineer. Perhaps a more objective questions is, do real estate agents make more money than engineers? Well, let’s do some math.
Let’s pick a nice ordinary place like Atlanta, GA. In fact, lets get more specific and pick a particular zip code in Atlanta: 30331. This will make for a good example because it is a fairly low cost area for homes.
According to the National Association of Realtors (NAR), real estate agents have a median experience of 13 years. So, we will compare them to engineers with approximately 13 years of experience. According to Salary.com, an Electrical Engineer 5 (46% of which have over 15 years of experience) earn a median income of $113,570 in the zip code 30331. (NOTE: I chose electrical engineers because they are amongst the highest paid of all the engineering disciplines.) Assuming a 2,000 hour work year, that equates to approximately $57/hour wages.
Now, let’s see what a realtor makes in Atlanta, 30331. According to City Data, the median home price in 30331 is $120,000. I will assume the standard 6% commission (3% for the buyer side and 3% for the seller side) for this property using a full service real estate agent. I know there are discount brokers out there and some agents will take less than 3%, but rarely for such inexpensive homes. Percentage discounts are usually for much more expensive homes. I do not think the 6% assumption here is unrealistic.
Continuing, 3% (for each agent) of $120,000 is $3,600. What percentage of that $3,600 does the agent get to keep? It depends. Some agents pay a transaction fee and keep the whole thing. Some pay a monthly fee to the broker and split the commission. To be conservative, let’s assume the agent keeps two thirds of the commission and the broker gets one third. Now, we have just one last calculation to make.
How many hours does a real estate agent spend servicing their client, on average, from the start of the contract until the home closes? A 2002 survey by the California Association of Realtors (CAR) found that the time required to serve sellers is about 20 hours. But, I will give agents the benefit of the doubt and assume a sale, takes on average, 40 hours of their time.
I am sure you can talk to a real estate agent that swears they spend more than 40 hour per client on average, but why is that? Is it because their service goes above and beyond, or is it because they are disorganized, or is it because they consistently work with unmotivated buyers and sellers? My feeling is, that if a real estate agent is consistently spending more than 40 hours on a transaction, with today’s technology, they are doing something wrong.
If we go along with the 40 hour number, we come up with an hourly rate for a real estate agent of $60/hour, which is about 5% more per hour than an electrical engineer earns with equivalent experience in Atlanta.
Of course were I to choose a more expensive area code, the comparison difference would be much more dramatic. Let’s choose Irvine, CA 92612, where home prices are much higher than those in Atlanta. An Electrical Engineer 5 in 92612 makes $64/hour. The median home price in 92612 is $625,000. Assuming a 5% total commission (2.5% for the buyer side and 2.5% for the seller side) and the same agent/broker split, we come up with an hourly rate for the real estate agent in Irvine of $260/hour or a whopping 400% more than the engineer.
Agents will be quick to point out that they have expenses which engineers do not, which is true. But, being self employed, they also have tax advantages the engineer employees do not. And there is one expense agents do not have, at least not by necessity, that engineers do have: college tuition, that can easily exceed $60,000 for four years at even a state school. And that does not take into account the cost of an advanced degree (over 50% of Electrical Engineer 5 have advanced degrees).
Agents will also point out that unlike engineers, who collect their hourly salary for all 40 hours, agents have to spend some of their time trolling for new clients. Once again that is true, but irrelevant for this calculation, which compares engineering productive hours to real estate agent productive hours. And besides, it is the agent who has chosen to be a self employed entrepreneur with all its benefits (e.g., set your own hours) and determents (i.e., having to drum up new business).
The purpose of this analysis is to put into perspective that, from a productive hourly standpoint, real estate agents make a really good living, even if they only sell a few homes, and even if those homes are in Atlanta, GA. So, the next time you try to negotiate commission with a real estate agent and they claim that just cannot do it for a penny less, tell them they should become an engineer.
If you need help negotiating your commission with a real estate agent, visit ReaListing.
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.