How Much Are Realtors Worth?

Many people don't want to pay the traditional 6% commission (3% to listing broker and 3% to selling broker) so they turn to discount brokerages in order to save a quick buck regardless of the service or competence of the agent they hire. But aren't some agents worth more than others?

If Ebby Halliday wanted to list your home, would you tell her she isn't worth 3% and ask her to reduce her commission? Would you tell Virginia Cook to take a hike because you would rather list your $1.5 million dollar home with a no-name, start up, discount real estate brokerage? Of course not.

If you list with a discount brokerage then you should expect discounted service. With all of the criticism surrounding Realtor commissions, how has no one come up with a commission structure that consumers are truly happy with after 106 years? The sad truth is that no one ever will because consumers will always be cheap and Realtors will always have a poor reputation.

Listing Agent vs. Buyer's Agent

Now that Pandora's Box has been opened we might as well explore it.

Listing Agent - represents seller's best interests, pricing the property correctly for quick sale while negotiating the highest sales price for the seller.

Buyer's Agent - represents buyer's best interests, finding the right home for the buyer and helping them negotiate the lowest price for the home.

After reading these descriptions, which agent do you think the seller should ask to reduce their commission? Since the buyer is working against the seller's best interests you would think the seller would be more likely to reduce their commission but yet this is not the case. (This is why I love bringing buyers to FSBO's. They have no idea we are taking them to the cleaners. I am representing my buyers yet the sellers are so happy I brought a buyer they start yakking and spill all the beans and they pay me just as any other seller would but without the professional representation. I win, my client wins, seller loses but has no idea.) But I digress.

So who works harder in your opinion? If one or the other doesn't deserve a full commission how much are they worth? Bring it. I can handle it.

RE: How do Realtors Get Paid?

I received the following comment from a reading posing a tough real estate question regarding Realtor commissions.

Selling a $250,000 house and selling a $500,000 house aren't all that different, but the commission is double on the $500K house. That makes no sense to me. What's the rationale behind it?

I wish I had a solid answer for you, dear readers, but unfortunately I don't. My only rationale behind comes from our friend Einstein's theory of relativity. This same argument applies to many professions and not just real estate. There are many people out there today with the same job description and responsibilities but are being paid unequal salaries across different companies and professions. Usually, the larger the company, the higher the salary. CEO's of Fortune 100 companies are getting $50 million dollars for simply resigning which doesn't make sense to the average person. This same disgust for overpaying someone unfortunatley applies to real estate for many people.

So what do I do differently for a $250,000 home versus a $500,000 home? Nothing. I work just as hard on the $250,000 home as I would on a $100,000. But why should the person selling a $100,000 home pay more than a person selling a $50,000 condo? This same logic can apply across the board. ($1 million dollars and up is a different story and the marketing level and dollars spent increase.)

There are many real estate business models out there offering discounts to the seller. They'll list your house for a flat fee, etc. But almost always, they will offer the agent that brings the buyer 3%. This is what doesn't make sense to me. Someone is willing to pay an agent 3% to bring a buyer whose job it is to help that buyer negotiate the LOWEST price for that home. Meanwhile the sellers want to give less than 3% - and sometimes nothing - to the representative that is there to help them negotiate the HIGHEST price for their home.

It is also important to note that many high end properties $1 million and up almost always utilize the assistance of a well known area Realtor. You rarely see these properties try to sell For Sale By Owner or hire a small real estate firm. (You will NEVER see a $3 million dollar FSBO or using a discount brokerage) Common sense would tell us someone who lives in a million dollar property is probably smart and more than likely business savvy and yet they choose to use a a Realtor to help sell their home. Even if they ask their agent to reduce their commission they are still being paid more than a $500,000 home.

So what's the answer? Is a new real estate business model needed? The current discount brokerages are not prevalent in Highland Park or Preston Hollow and are seen more in East Dallas in new construction homes. So this tells me the average consumer feels a good listing agent is worth what they are being paid regardless of sales price and percentage.

I should have an articulate and impressive answer but I simply don't. But I would love to hear your thoughts on the matter.

How do Realtors Get Paid?

The common misconception is that when a Realtor sells a home they get 6% of the sales price. Now we all know commissions are negotiable and technically this statement is true, but what people don't realize is that half of the commission goes to the buyer's agent, or selling agent. Let's look a the following example on how a new-to-the-business agent would get paid on a $300,000 sale at a 6% commission.

Sales Price: $300,000

$18,000 Gross commission to Listing Broker
-$9,000 Given to cooperating Buyer's Agent

$9,000 Gross commission to Listing Agent
-$540 Most large companies charge a 6% affiliate fee

$8,460
-$4,230 Most new agents start at a 50% split with their company

$4,230
-$635 Let's assume the agent spent 15% of their commission marketing the property

$3,595
-$1,079 Take out 30% for tax purposes

$2,516 Agents Net Income

If the agent sold 13 homes at at average sale of $300,000 that's $4 million worth of real estate sales in one year! Wow! This agent must be rolling in the dough! But in reality that would equate to a net income of $33,500 for the entire year. And that does not include any other costs such as buying office supplies, gas and other business expenses such as magazine, newspaper and direct mail ads. You can see that a "successful" agent in this business can very easily net less that $30,000/ year with 13 sizeable transactions.

So the next time you see an email or postcard from a Realtor that says, "Multi-million Dollar Producer", you should probably feel sorry for them.

Redonkulous!

The U.S. Federal Trade Commission and U.S. Department of Justice just released a "Competition in the Real Estate Brokerage Industry" report that calls for a repeal of real estate laws, rules and regulations that limit choices for consumers, limit competition for new brokerage models and don't appear to provide any justifiable benefits for consumers. The report also suggests that industry commission rates have been relatively inflexible and calls for an in-depth study of commission rates and fees.

(Written with sarcasm) I can certainly see why! The commission fees in 1991 were $9,389. In 2006 they were a whopping $11,549! And when that 5.02% commission is split between 2 cooperating brokers that is a mind boggling $1,080 raise for each broker after 15 years. This is an outrage and real estate agents certainly do not deserve such a lucrative increase in income. It is very clear why our federal tax dollars should be spent on such an in depth - and expensive - study. Kudos to you DOJ & FTC. Kudos.