I am always going on I know, about the real estate industry and how it has to change. This post is no different. As an insider, a critic and a long-time real estate agent I can see the fat. I can see where the real estate business has become bloated. And that bloat is passed onto consumers in the form of commissions.
I know consumers want change. Any home seller wonders why it costs $20,000 to sell a $400,000 home. That’s craziness. They blame the agent and that hurts. It is not our fault. We are the front line foot soldiers, the worker bees and the featured extras in this drama.
I think we all can agree that a disruption is coming to the real estate industry. We can’t go on this way. The world has changed but the real estate industry hasn’t. Most people think the disruption will somehow bypass the agent, but that is not right. One of my 365 Rules about Real Estate is that you cannot buy a house on the internet. Agents are the knowledge knowers, the facilitators and the action takers, the movers and shakers.
It is the brokerages and the associations that are going to be bypassed. That is where the costly waste and redundancies currently reside. Consumers see the agents. We are the visible front of the conglomerates that own the business.
How much do real estate agents really make?
Perpetuated in the real estate industry is that agents make the big bucks. They don’t. Well some do, the 80/20 rules tells us that. But the average Realtor makes about $40,000 a year, hardly big bucks. Most professional realtors dress well and drive a nice car, but that is part of the drama – “fake it till you make it” and most realtors are out of the business within three to five years. According to Trulia, 90% of agents don’t see their second anniversary in the business!
Follow the money
So if agents aren’t getting rich, it must be the brokerages right?
The large holding companies, parent companies and franchisers give real estate brokerages only slim margins to operate on. I’ve been in every real estate office in the region. I’ve met the owners, the brokers of record, the office mangers…and they are not rolling in dough. They do alright. But they are not flying down to Costa Rica to spend the weekend at the villa.
I also know that brokerages don’t spend a lot of money on their agents or offices. They run a pretty tight ship. They have expenses for the office, for insurance…for I don’t know what.
The goal of real estate brokerages is headcount. More agents mean more money. The formula that many brokerages use is they take 30% of all commissions received until the agent reaches about $40,000. (After that they take 5%). If you do the math that is about $12,000 off the top to the brokerage for all agents reaching the industry average. Not too shabby. Other brokerages have desk fees of about $1000 per month, so the result is the same. Where does all that money go? I don’t know. Next level up I suppose.
Real estate is too complicated to empower the consumer to buy or sell their own homes. If it is not a realtor helping them through the process then it will have to be a lawyer, a lender and a psychologist. (I can only imagine how that will go.)
The disruption will allow the home buyer or consumer to gather enough information so that they can make smart decisions. The internet is all about information, but no one has figured out yet how to pull it all together in one place in a logical way. And logic is the other problem. People don’t buy or sell logically. They do it emotionally and there is nothing that the internet can do about that.