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:

proof1

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.