Myths And Lies: Why Do Real Estate Agents Make So Much Money?

Myths And Lies: Why Do Real Estate Agents Make So Much Money?

It's a great question and one that I asked many years ago, which prompted me to get into the real estate business in the first place: Why do real estate agents make so much money? And the answer is so complicated that I can't do it justice in just one blog post. So I'll simply scratch the surface here and leave the rest of the issue to other posts like the one where I drew upon the insights of Penn and Teller.

I wasn't really prepared to start addressing this issue now but then I ran across this cute little infographic the other day that attempts to answer the question and I couldn't resist the need to dispel the myths and lies that it's propagating. I've copied the infographic into the bottom of this post. It was originally produced by Diggsy, which apparently is now defunct, but the infographic lives on in Internet immortality, having been copied and passed around numerous times.

Diggsy's answer is based upon several misconceptions and sleight of hands:

  • While it's true that the average realtor is doing $240,000 deals, plenty of them are doing much bigger deals and in Chicago averages of $400,000+ are not unusual.
  • They based their calculation off the low end of their own listing commission range.
  • They assume a 50% brokerage split but the more productive agents can pay as little as 10% to their brokerage and some brokerages replace the traditional split with only a small monthly and nominal per transaction fee.
  • They take off income taxes?!?!?!?!? Like...only realtors pay income taxes?
  • $150 for Internet Marketing? Very few real estate agents spend money on Internet Marketing. They don't even know how to do it.
  • $350 for open houses? A) Open houses rarely sell properties and B) Most of the open house I've been to are on a $0 - 75 budget - mostly 0.
  • $80 for gas means they are driving about 300 miles. Unless the home is in the Nevada desert I don't think so.
  • The $800 for direct mail, while realistic,  is not a legitimate cost of selling a home simply because it rarely works and the real reason realtors do this is to show everyone in the neighborhood how active they are so they can get more high commission listings. It's the realtor's personal marketing expense.
  • Their total hours are not off by much. However, they show way too much time spent on open houses, not enough time on showings, and way too much time on staging.

Diggsy got pretty caught up in the weeds and missed the big picture. The fact of the matter is that many real estate agents DO make a killing on individual transactions and many ALSO make an overall killing. Yet, many do not do well. According to the National Association Of Realtors data for 2013 the typical real estate agent made about $48,000, which is not that much. So how can all of this be true at the same time and what did Diggsy miss?

First, the biggest challenge that real estate agents have is not selling homes but rather selling themselves - i.e. generating business. Either a realtor is spending a huge amount of their time trying to get business or they are sitting around twiddling their thumbs waiting for the phone to ring. Either way they need their huge commissions to cover their unproductive time.

Second, not all listed homes sell or they certainly don't sell quickly. So the homes that do sell quickly essentially subsidize the cost of selling the homes that don't sell quickly - or at all.

Third, the traditional real estate commission model with it's flat percentage at all price points ends up subsidizing the sale of lower priced properties at the expense of higher priced properties. As I always tell our prospective clients, it doesn't take twice the effort to sell a $1 MM home that it does to sell a $500,000 home so why should the commission percentages be the same?

Of course, the solution to this problem of exorbitant commissions and cross subsidization is either sliding scale commissions and/or realtors charging by the hour. Only then will the consumer get what they are paying for.

#realestatemyths #realestate #realestateagents

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