| I have seen several social media posts in the last few months sort of defending Real Estate agent pay. I have mixed feelings about them. On one hand, I really don’t think the general public understands the way agents are compensated. On the other hand, I completely understand why some members of the general public really don’t care. I don’t really want to go on socials trying to defend my chosen (and this is important) means of compensation and career. Instead, I would like to share some things about that topic with you in a more controlled and less “sound bite driven” medium. A few bullet points first: 1) I don’t know of another private industry where compensation has been as publicly and venomously debated as this one has over the past 2-3 years. From a very public lawsuit that our professional organization folded under, to laws and rules about how we conduct business amongst each other (not even with the public) to make compensation “more transparent” (spoiler alert, the new way is actually less transparent). 2) I also don’t know of another industry that has as low of a barrier to entry that truly has unlimited earnings potential. 3) I ALSO don’t know of another industry where the continuum from lousy to incredible is so wide and varied. From a rookie agent that truly understands the business but lacks experience to a seasoned agent that is lazy and entitled to a 2 year in the industry but 60 transactions true professional to someone that saw this as a quick buck but has no clue or desire to learn to a long time, dedicated agent that has committed his or her life to serving clients, and everywhere in between, this industry allows anyone in. In some ways that is a good thing. In others, it is definitely not. What it really does is create a huge, and I mean huge, pool of people for the general public to wade through and hope for the best. 4) Even with all the chatter and lawsuits and such, the general public does not know, understand or probably care about how an agent’s pay is divided up. The movement for transparency is making the initial number front and center but it does not make the real numbers public. This is what much of the Realtor posts that “defend” compensation are trying to do. 5) Every effort to make those numbers transparent comes across as whining, complaining and defending–and no one cares. Understandably, people respond with “you chose that career” or “oh, poor baby, you ONLY got to keep X of my Y money.” Many of those responses include an anecdote of some experience that person had with a lousy agent. “All my agent really did was open the door for me and then showed up at closing and got this massive paycheck” So what do I want to do differently and why use up this week’s platform to write something that may come across as whining, complaining and defending? Great question. I do believe in educating. I also believe in transparency. And I do believe that an agent that has invested in themselves, that works hard for their clients–and knows what that even means, and is a true giving servant, deserves the compensation we make. And I believe that people that have the anecdotes I mentioned above (just opened a door…) have never had a great agent. So, here goes: What is involved in being a great agent: –education–it should not stop with the initial schooling or minimum to keep your license –connections–your agent should be a connection point. They should spend ridiculous amounts of time making connections, seeking out professionals to help their clients, getting to know service providers, etc. One of my goals in life is to be “the I know a guy guy.” –curiosity and study–different from education, your agent should spend time in the stats. They should look at whats happening in their selected markets and understand the way the market is trending. Yes, they should have to look at comps every time because each house has its own sort of spin on the lense but they should immediately have an idea of value or at least placement in a market because they have studied it recently –focus–Some agents will disagree with me on this. Its ok, they are allowed to be wrong. A great agent focuses on a specific submarket and is quick to refer out business that distracts them from that submarket. I do not list homes far outside my market. It isn’t fair to the listing client or to my other clients that need my attention. It makes way more sense to refer out the business to someone that specializes in that submarket. –customer focus–this should go without saying but we will say it anyway. Agents should focus on their clients’ needs more than on their own. They need to be able and willing to tell a client to walk away and not be hesitant because THEY need that paycheck. The only motivation should be what’s best for the client. It is sad how often this one is violated. How Agent Compensation Works: Pretty much always agent compensation is a percentage of the sales price. It can be 1%, 2%, 2.5%, 3%, 4% or more sometimes. Many, many times it is 3%. A lot of the time the seller ends up paying 6% total compensation as the listing agent offers what is called “co-broker participation”. Why has this evolved this way? Great question. Starting in the mid 90s we saw the concept of buyer representation hit the market. Before that, every agent was a listing agent and could show houses also. But their main focus was on their listings or at least their office’s listings. This made it difficult for buyers to see all of a market’s offerings and for that buyer to have real access to everything. Buyers agents changed this as their job, their client, was the buyer. Their loyalty was to the buyer. And they charged the buyer. Well, very quickly it was determined that buyers often didn’t have the cash to pay the agent on top of their down payment, lender closing costs, etc. BUT sellers had the equity and were already paying their listing agent. PLUS they were sometimes paying some of the other expenses on the buyer’s behalf (closing costs etc.). So, savvy listing agents said, hey, we want these cross company buyer agents to show our listings, it definitely makes our life easier, so we will proactively offer compensation to that buyer agent and just divide the commission we already negotiated with our sellers. This caught on and became the industry standard. It didn’t cost the sellers more than was already disclosed and negotiated, it got more eyes on the listing and it also gave the buyers an option to have their own representation in a transaction. Fast forward 20 years and you have some sellers asking why they should “have” to pay for someone else to have an agent. It is a great question and one that a savvy agent should be able to answer with an explanation like above but also with a discussion on marketing and simple ability to buy. BUT it is crucial that they say, “well, you don’t HAVE to, but here is why it makes sense to.” And a buyer’s agent should NEVER say to their client, “don’t worry, you don’t have to pay me, the sellers will.” That buyer has to understand that the buyer’s agent compensation is THEIR expense and hopefully the agent can negotiate it to be paid as a concession from the seller. OK, that was all important background and context and you can see why a sound bite driven social media post is not sufficient. There is a lot of nuance and understanding that needs to happen in order to understand. Now lets look at what compensation really looks like. It’s easy to see the number on your settlement statement and get sticker shock. I totally get that. But that number gets diced and chopped many times. 1) it is important to know that a real estate agent is a 1099 straight commission independent contractor. This matters because there is no salary, no 401k, no health benefits, no income tax holdbacks on regular paychecks. ALL of those items W2 employees have held out of their regular paycheck are instead paid independently. 2) An agent is running a small business. They are responsible for all the things a business would do–employees (I have my Missy and I pay her a salary), advertising, travel, education, professional memberships (just being a REALTOR in NAR is over $600/ year and that is just one of the organizations I am a member of) 3) An agent does not get paid unless aa transaction closes. This is very important. So when you meet with an agent to pick their brain or they come look at your house for a consult or they spend a couple hours on the phone with you going over numbers or they show you 10 houses. AND THEN you don’t use them, they gave you that time. They gave you the expertise they have accumulated over their years and transactions and education– and you sought out– for free. And worse, for another agent’s benefit if you went with someone else–that really nice on site agent at the model home or your cousin that lives two counties away but doesn’t really know the area and is just getting started and needs the paycheck worse than you do anyway. I say all this to say that many, many hours are spent uncompensated. 4) The brokerage takes a portion of the commission. This can vary wildly. Some will take as much as 50%. Some will only take a flat fee. But they take some. 5) The agent pays for all the marketing at your listing–signs, lockboxes, flyers, Facebook ads, MLS access, Zillow premiere access, professional photos, drone footage, etc., etc. The list can be endless. So here is a typical breakdown of one transaction pay: House sales price $500,000 3% commission $15,000 cut to brokerage (20%) $12,000 remaining Income Tax (including self employed) (30% budgeted) $8400 remaining Listing expenses: photos– $500, drone $300, advertising $200, saving for asset replacement (signs, lockboxes, etc.) $20 — $7380 remaining Employee–$4200/month so per transaction is tricky depending on how many transactions. But for this market, let’s say 2 per month $5280 remaining Retirement, medical, etc. $1000– $4280 remaining $4,280 from this transaction. This pays for the hours spent on this transaction, NEVER less than 20 hours PLUS all the hours spent on the business itself (refer to making connections, marketing, etc.). Let’s allocate 60 hours to that if we consider two transactions per month. This works out to $53.50/hour. Not a bad wage at all. But this assumes we have two transactions per month. Sometimes there are none. The point is this, before you look at a big number on a settlement statement and say “oh they make way more than enough”, understand how that money is chopped up and ask if they make too much or you chose the wrong agent. A great agent will always, always, justify their pay. Sorry for the long read. If you made it this far, I appreciate your curiosity and willingness to dive deep into my transparency. Also, if you made it this far, please send me someone to work with. I would love to help you or your friends and family. And you know I am going to take great care of them. |
