How Do Real Estate Agents Get Paid?

I've started writing about common questions that buyers and sellers have, and, believe it or not, how we get paid is still one of them.  To understand the payment process, we first have to go over the legalities of licensing.  Each real estate company has one broker for legal purposes.  At Pearce, for example, I'm that person.  All agents at Pearce "hang" their licenses with us, although some of them are salespeople (who must work for a broker), and some are brokers themselves (who could work independently or can work for another broker).  Over 90% of real estate companies across the country have fewer than ten agents, and the broker sells him- or herself.  That makes Pearce Real Estate one of the largest firms in the State, and across the country.  The principles of agency, however, are the same regardless of size.  It's also useful to note what Realtor designates (and it needs a trademark sign, which is above my pay grade on a computer!):  It means that the company, and therefore all of its agents, belong to the National Association of Realtors, agree to abide by its Code of Ethics, and can participate in the Multiple Listing Service (MLS).  Most local firms are Realtor firms if they sell residential real estate, and, increasingly, commercial firms are not. We are, and we handle both types of property.

When a seller signs a listing agreement, or a buyer signs a buyer broker agreement (and those two contracts are basically equivalent), they sign with the broker in charge.  Only the broker in charge sets the rules--commission rates and terms--or can legally change or cancel the agreement.  Most compensation is offered through the MLS:  When a listing is posted there, it has a BBC (Buyer Broker Commission) offered, and the listing firm is required to pay that amount to the broker who represents the buyer, unless a change is agreed to by both firms, or firm if it is a sale with both brokers at the same company (which we call an "in-house" sale).   In order to have an in-house sale, both buyer and seller must sign a Dual Agency agreement.

When the property closes,in most cases, the closing attorney makes out a check or checks to the brokerage firm--checks cannot be made out to individual agents.  Firms differ widely in the way they compensate agents within their firms, both in the percentage of the check that goes to the agent, and in what expenses they pay toward the transactions.  In addition, some (usually national) firms also charge buyers and sellers "transaction fees", which are paid on top of the commission, and go only to the real estate company. In some cases, the commission is divided evenly between the listing side of the transaction and the selling side.  Increasingly, the listing firm keeps a higher amount, and offers a BBC that is less than half of the total.

Agents are legally independent contractors, so they don't get a salary, or a regular paycheck.  They earn money only when property closes or rents, and they share that with their firm.  It used to be that the firm got half and the agent got half, but now it can vary.  Some companies pay higher amounts (sometimes much higher percentages) to the agent, but often charge them for their desk, their postage, their copies, and their marketing.  Many transaction-related expenses are borne by the agent personally.  If he or she takes you to lunch, that comes out of his or her pocket.  If a problem arises during the selling process, and is paid for by the broker, that is also often coming out of the agent's share.  If you were referred to your agent or agency by another real estate agent or company, either here or somewhere else, that agent's firm can be receiving up to half of the total amount paid.

If all of this is making you feel as though the poor agent is at the bottom of the heap, you could be right, especially if you don't end up selling or buying, and they get nothing for all of their work.  What my goal is, however, is to make you understand what they make, and when, and to help you appreciate their excellent efforts on your behalf!

Finally a Market in Balance?

There have been some very positive reports about sales in our region recently. I have written about some of the reasons for the Shoreline’s improvement, like the time that’s passed since Hurricanes Irene and Sandy, but the broader market appears to be healthier also. When discussing the Shoreline, I made the point that prices had come down to where the value proposition for many people was just too compelling to wait longer, and that it stacked up well against other places where second homes are also popular. That also seems true in the non-waterfront sector. There are two factors that stand out: one is that inventory has moved, leaving less supply for the same, or increasing, demand; and two, that prices are often more realistic than they were a few years ago.

SMART MLS, our local MLS service, recently published a shocking statistic. Its records show that only 16% of listings entered into the system sell! That number may soon be going up, though, if demand continues to improve; however, it illustrates what happens when sellers price their properties too high. Buyers don’t feel compelled to act, and other sellers follow that lead and also overprice, leading to even more sluggishness in sales, while buyers hang around until prices fall. That dynamic has been playing out in our area, unfortunately, for many years. While it has always been true that a portion of the inventory is overpriced, that rate has accelerated as demand, units, and median sales prices all fell. It becomes a vicious cycle, and owners who need to sell begin to do what we call “chasing the market down”. That means that they start high and keep lowering the offering price, until they ultimately end up closing at a lower number than if they had priced correctly to start. The recent news that sales are more robust and inventory thinned out makes me think that prices are realistic, or more realistic than they were when people could still fixate on what they paid for the house ten or fifteen years ago (a period during which values have overall declined).

Like any other cycle, a good boost can start the opposite effect, where competitive prices lead to more sales, which leads to lower inventories, which leads to higher prices, which leads to more listings, and finally again to more sales. No one could be happier than we will be, if that’s where our market is headed this fall!

Have It Your Way

The current plethora of informational sites displaying residential property reminds me of the old Burger King slogan:  Have it your way.  If you want alerts, apps, price ranges, school districts, agent ratings, or almost anything else, it's available on the internet, usually on multiple sites.  Even though Trulia is owned by Zillow, for example, they maintain two separate sites (clearly, it's easier to be a consumer than to be an agent trying to keep all listings and profiles updated!).  If you prefer one display over another, go for it.  If you like the search parameters of another site, have that one delivered to your inbox also. Want to know what an outside evaluator thought?  Check our Squeakly report. For those who choose to search through the site www.hpearce.com, we can wrap our contact information around the property data from the MLS. 

If you go back in time (I'm writing this on TBT), clients, who were then called customers--no buyer brokerage existed yet--had to come into a real estate office, to pore over a physical book of listings. That book came out every two weeks.  If you wanted to know what had sold in the past, and at what price, that was in another book, which came out every 6 or 12 months.  Books couldn't leave the hands of a Realtor, so there was no examining the inventory in the peace and quiet of your own home.  It's amazing to me, in fact, but more people log on to our site between 5 and 7 AM than at any other time.  They certainly weren't in a real estate office at those hours!

Given all of the options, it's easy to be overwhelmed by too much information.  Most people now know that Zestimates are off by 20%, on average, and more on the high end.  It's not surprising that outdated and expired listings appear in a Google search.  That's why, according to consumer studies, most buyers and sellers want to sit down in person at some point in the process.  That's why we're here.  Call us at any time--ok, maybe not at 5 AM, although I do get emails from agents at that hour--and help us add the "special sauce" that Burger King boasted of adding to the Whopper.  We call it market knowledge, and it isn't edible, but it is good!

Live Time Chat

As we tread further into the brave new world of digital marketing, we try new ways of reaching and serving our clients all the time.  This week, we have begun offering "live time chat" on our Pearce website.  People who log onto our site between 8 AM and 1 AM will see a pop-up box after they begin browsing, that will offer them the chance to talk to a person immediately.  While that person is not an agent, and will ultimately be referring certain questions to our offices during business hours, it represents our latest attempt to give buyers and sellers what they want, when they want it.

It's certainly been a long journey since the days when buyers had to come into a physical real estate office, and sit down with an agent to go through "the book".  That was the MLS compendium of currently listed real estate properties, and it came out every two weeks, with the latest in inventory available twice a month.  Twice a year, we could buy a book that had the sales for the past six months chronicled for our use.  We didn't give out maps or addresses of listed properties, and most information we did give out was only available on little cards, that we kept in a little box that looked like something in which you would store recipes. It seems strange now, but it was what we had, and it seemed normal to us!

We've gone all the way in the other direction now, and you can find out almost anything about a property, currently listed or not, with the flick of a finger on a mouse.  It may not all be accurate, but it is readily available.  Real estate agents, on the other hand, have morphed too; they've become consultants and counselors.  They no longer control the information, but they are adept at interpreting it, as well as in streamlining the process of buying or selling.

So, if you are scrolling the internet at midnight, and you happen to talk to our live receptionist, think for a moment of how much things have changed!  And how much they still remain the same--we're still here to help you in any way we can, to make the very best real estate decisions for you, your families, and your firms.

Waiting for Spring

While I am snowed (or iced) in tonight--again!--I am thinking once again about how happy I am that real estate is not as time sensitive as some other industries. If you had a restaurant this week, or a theater, or an airline, you would be losing revenue that wouldn't be replaced, in many cases. With real estate, it's different. I was looking at Google Analytics tonight, which tells us how many people look at http://www.hpearce.com/, and from what sites those people reach us, and it was amazing. Every snowstorm for the past month had a huge spike upward, showing us that prospective buyers and sellers are using the downtime we've all experienced when there just isn't anything to do in all this snow, and they are using it to look for real estate on the Web. They can't get out to look at property (we didn't even officially open our offices today, preferring to leave the roads to those who absolutely need to get to work), but they certainly are thinking about it.

That's great news for us. We already know that a bad, snowy winter is usually devoid of sales, but that it is generally followed by a robust spring market. All that searching on the internet, and all that time cooped up inside, leads to a frenzy of springtime real estate activity. If that's the normal pattern, what on earth will we see this spring? Real estate flying off the MLS in April and May, we hope! So, if you are a potential seller, use this indoor time to de-clutter your home and do all those fix-it projects. If you are a potential buyer, keep surfing the net--we'll be waiting for you when the sun shines!

Independent Contractors

Yesterday I explained to a client that real estate agents are independent contractors. I know that most people realize that real estate agents, and companies, only get paid when someone buys or sells a piece of property. But sometimes I doubt whether they know the full extent of what that means. It means that agents don't get paid for their time. Or their gas. Or the lunch that they might buy you when you spend a long day looking at houses. Or their cell phone. Or their car, car insurance, and repairs. Or their real estate license, continuing education, Board fees, and MLS fees. Or the extra advertising and marketing that they may do on your property (while our firm pays for postage, advertising, and training, many firms charge agents for those services). It's expensive to be a real estate agent, and even more expensive to be a real professional, with all the tools.

Indpendent contractors, who don't get salaries or benefits, deduct their business expenses themselves. In effect, they run their own small businesses. They affiliate with brokers, and use the branding and offices of those brokers, but they don't work set hours. We aren't even allowed to carry worker's comp insurance on them. They assume the costs of working, and, as I often say, they "eat what they kill" in terms of compensation. They get paid for what they do, when it goes well. When it doesn't, they bear the risks.

Why, you may ask, did I decide to blog about this now? The simple answer is that, when I was told by this client that he understood that an agent only got paid when he bought, and that those were the breaks, I'm not sure he really got what he was saying. I guess it gets down to the Golden Rule, as most things do. How much time would you spend doing work for someone and not getting paid, before you felt that it was unfair?

Clients didn't create our compensation system in the real estate industry, and I'm not asking them to be responsible for changing it (although I would certainly love to change it!). I just want them to understand that, if they aren't serious, or they aren't willing to stay with someone until the transaction is completed, then they are really asking for services for free. And the way you treat someone who is doing you a favor may be different than the way you behave if you think it's someone's paid job to help you. It's that simple, and that complicated.