News Flash: 90% of Real Estate Agents Are Not Needed

There are about 5 million homes bought and sold each year in the US, give or take, and most of them are bought and sold with the help of a real estate agent. Buyers almost always hire an agent to help them buy a home because it costs them nothing, and somewhere around 90% of home sellers hire an agent to help them too. So, how much real estate agent effort does it take to buy and sell all these homes?

We know from a 2002 study done by the California Association of Realtors that the average transaction requires about 20 hours of a seller’s agent’s time. (This study was done long before the widespread adoption of Internet home advertising. I would assume that number has gone down since then.) If we assume the same number of hours for the buyer’s agent, we come up with about 40 hours of total real estate agent time to complete the transaction. So, let’s do some math.

There are 5 million homes that change hands each year and each transaction requires about 40 hours of work for a total of 200 million “agent hours” of work. A full time job in the US is considered to be 2,000 hours per year. Let’s assume agents work full time and do nothing but help buyers and sellers. Then we take 200 million agent hours and divide by 2,000 hours per year of work and we come up with 100,000 real estate agents. That is the number of agents it takes working full time to help people buy and sell homes in the US each year. The problem, of course, is that there are over one million real estate agents in the US. What the heck are all these extra agents doing?

The way I see it, either 90% of real estate agents are not helping buyers and sellers or 90% of each agent’s time is spent on something other than help buyers and sellers. That does not make for an overly productive industry.

Now, you might make the argument that it takes more than 20 hours of work to help a buyer or seller. Fine. Let’s assume it takes twice that long: 40 hours for each agent for a total of 80 hours. That still means 80% of real estate agents are not needed. If 80% of the real estate agents left the industry tomorrow, every single home buyer and seller who wanted representation would still get their full allotment. There would be no shortage of agents.

You might argue that agents need time to market themselves to find new customers so they cannot work full time helping clients. That is true. But 90% of their time? And if 80% or 90% of real estate agents left the industry tomorrow, the remaining agents would not have to market themselves at all—buyers and seller would find them. The remaining agents would make more money while spending less time marketing themselves and more time helping clients. Sounds pretty good.

So, will 80% or 90% of real estate agents leave the industry? Not voluntarily, but then again, neither did the buggy whips makers.

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Should Real Estate Agents Make More Than Engineers?

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.

Engineer

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.

The Consumer is King in Real Estate, Except When it Really Counts

If you spend a lot of time trolling the real estate industry—which most consumers don’t—the buzzwords du jour are consumer-centric. “The consumer is king. Case closed. Period. There is no going back,” claimed an article on the Inman News website awhile back. Why this has not been true for the past fifty years is a mystery to anyone. I suppose it is a consequence of the universal unleashing of information in the real estate industry due to the prevalence of the internet. Perhaps it was easier to be agent-centric when they had a stranglehold on all the information. Not so much today.

King

But for whatever reason, I am glad the industry has finally come around to putting the needs of the buyers and sellers first. They do, after all, pay everyone’s salary. So, I was a little disappointed to read last week that the California Association of Realtors (CAR) is going to out “Code of Ethics” violators to members only. In other words, which agents are in violation of their code of ethics will not be made available to consumers—the ones most harmed by the violations. That is the kind of information, if made available, that would be extremely helpful to buyers and sellers in vetting a real estate agent to represent them. But, it would be an even more powerful deterrent for agents, knowing that consumers can easily discover their dastardly deeds. If you want to eliminate unethical agent behavior, you have to make it costly to engage in it. Just outing them to other agents is an insufficient penalty.

I do not know whether to be grateful that the association is doing something more than nothing with regard to the violators, or disappointed that they did not take the more aggressive step of alerting consumers. But it is certainly not unexpected. They do, ultimately, represent real estate agents and not consumers. The association actually has a financial incentive to never out violators to consumers: they risk losing a dues-paying member.

Perhaps someday the real estate industry will embrace true transparency, put the needs of their customers ahead of their own (like it states in their code of ethics), and believe that buyers and sellers are best served by the quality of member agents and not the quantity of member agents. Now, that would be consumer-centric. Until then, all buyers and sellers will continue to be in the dark about which agents strictly adhere to their code of ethics and which ones just brag about it.

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.