1650 E. River Road
How Real Estate Agents Make Money
This may seem like an easy topic for the public to understand, but most don’t. This post will explain how the real estate agent business works.
First, nearly all real estate agents work as independent contractors for their company. Almost any real estate brokerage will “hire” any real estate agent, assuming the agent has a clean background. The more agents a brokerage has, the more business they can potentially do, making them more money and allowing them to have a larger market share. Many people here in Tucson, Arizona, place great importance on a premium name like Long Realty, ReMax, or Coldwell Banker. However, I or nearly any other agent could switch to one of these companies in about 20 minutes and it would be no big deal. I have branch managers of these super-large brokerages trying to recruit me every week. While there are certainly pluses to working for such a brokerage, there are also minuses, which is why I currently stay at Tierra Antigua. Every company operates just a little differently, and that is why agents prefer one to the other. There really is no right or wrong, better or worse.
Now that that is covered, let me explain how real estate agents make a living. There are many misperceptions out there. A real estate agent only makes money when a sale closes. At that point, the brokerage’s share of the commission check is sent to the agent’s brokerage company which dispenses it accordingly. Typically, the total commission is divided evenly between the seller’s and buyer’s brokerages. A new or average agent will most likely receive only 50% of the money received by their brokerage. So, if your brokerage receives a $6000 commission (which is about average for a Tucson sale), the agent’s share is now $3000. The agent may need to pay for mailings, monthly rent for office space, assistants, legal costs, supplies, long distance costs, or advertising to sell the listing, etc. All this comes out of the agent’s check and goes back to the brokerage. Furthermore, the agent must deduct his or her own taxes, the amount of which will vary depending upon how the business is run. Above and beyond that, there is the obvious expense of advertising to obtain new clients that the individual agent shoulders. Many people think agents get paid to do open houses, drive people around looking at homes, and offer guidance throughout the sale process. This is not the case. It’s an all or nothing business proposition. If the sale doesn’t close, the agent doesn’t earn a penny. All successful agents understand that they will not be getting paid for 100% of the work they do. Many promising deals will not go through. I would say that for every 10 promising deals I at least begin work on, only 2-4 will be completed in the current market. That’s actually a good ratio! I have seen some inexperienced agents only be able to close 0.5 of every 10 promising deals.
Here is another eye opener. For every 100 people who become real estate agents (get a license, start working, and work at it full-time), only 50 will still be in the business in 2 years. Only 5 (in this market, maybe fewer) will still be full-time real estate agents in 5 years. Everyone knows someone who tried to do real estate and it didn’t work out. To be brutally honest, this job is not for everyone. In fact, it is for very few. There is a tremendous amount of pressure and a great deal money on the line at all times.
People imagine being a real estate agent means driving around in a Mercedes or BMW showing clients their dream homes. Who wouldn’t want to make an “easy” 6k for doing that? However, the reality is that it’s not easy. (And, remember, we already went over where most of that 6k goes.) Ninety-five percent of the agents out there don’t have much experience at all. Very few jobs can be counted as prior experience. What job trains people to negotiate hundreds of thousands of dollars, prepare legal contracts, follow complex procedures, deal with intense financing situations (aka mortgages), and try to give guidance based on information that isn’t always factual? What job can prepare you to give advice in a situation in which a buyer who has made an offer is having trouble obtaining a loan? Do you cancel or stick with it, hoping that they can satisfy what is needed ASAP and be able to close on the sale? In short, a real estate agent’s job is extremely challenging.
The moral of this post is that if you are looking to buy or sell a home, don’t just hire an agent because of their brokerage company’s high profile. Agents work at the company of THEIR CHOICE, not the brokerages’ choice. Any brokerage will hire just about anyone. Instead, evaluate an individual agent’s experience. Then look and see how the overall picture aligns with your goals and needs. While it’s rare, I sometimes see people hire agents who are ill prepared to handle the sale of anything, much less the client’s largest asset.
July 28th, 2008 at 6:21 am
You are so right about needing to look at the individual agent’s experience…many do not have it! It is a hard business to be successful in - Iand of course some sales are easier than others. I’ve had a few transactions though where I think all said and done I only made about $2 an hour!