And while it’s true that one can make very good money in real estate sales, the simple fact is the vast majority of real estate agents actually earn very little.
Here is some data that was shared by the Arizona Regional Multiple Listing Service (ARMLS) in a “Broker’s Breakfast” this morning. Apply a little simple math, and it highlights what real estate agents typically earn, at least here in central Arizona (though I suspect the numbers are similar across the country).
- At the end of 2008, there were 33,500 agent subscribers to ARMLS.
- 20,466 of those agents (61%) had at least one sales transaction.
- Conversely, that means 39% of agents in the Phoenix area sold nothing in 2008.
- 7,156 agents (21%) had $1 million or more in sales volume.
- Those 7,156 agents had $23.6B of the areas $29.4B in sales transactions (80.1%)
In short, it’s the age-old “80/20 rule” – 20% of the agents do 80% of the business.
What does this mean?
Let’s start with defining “$1 million in sales volume”. This does not mean an agent earned $1 million dollars. Not even close. You may often hear an agent puffing out their chest with pride, proclaiming, “I’M A MILLION DOLLAR PRODUCER!”
“Sales volume” means the value of the homes sold. So if an agent sells one home priced at $1 million, they are one of the coveted MILLION DOLLAR PRODUCERS! Ditto if they sell ten $100,000 homes or four $250,000 homes. You get the idea.
What does this equate to in dollars of actual income for the agent?
Let’s say, for example purposes only, the commission on the sale of a home is 3% of the purchase price. (Before someone jumps all over me, yes, commissions are negotiable. And they vary wildly. But 3% is pretty typical around here. You’ll find some less, and some more.) Simple mathematics will tell you that on $1 million in sales volume at 3% commission, the agent has just earned $30,000.
Let’s not even go down the commission split road. For the uninitiated, real estate agents typically split their commissions with their real estate broker. I’ve seen splits of 50/50 to 90/10 (90% of the commission to the agent, 10% to the broker). There are offices that claim to be “100%” offices. That’s really a fallacy as trust me, brokers don’t work for free. They get money in one form or another from agents.
Then there are of course taxes. And expenses. But for the sake of argument, let’s just say the agent clears $30,000 on every $1 million in sales volume.
Then by ARMLS’s numbers, 79% of the real estate agents in the Phoenix area made less than $30,000 in 2008.
That’s hardly a boatload of money.
I’m sure someone has already whipped out their calculator and determined that the 7,156 agents that did $23.6B in volume averaged over $98K in gross earnings. That’s a pretty nice annual income. But averaged of course, means exactly that. There’s going to be a distribution of incomes in that 20% of top producing agents, and this data doesn’t tell us what that distribution might be. The entry wage to get into that “top producer” group is just $30,001 in annual income. No question though that some of that 20% are doing very well financially.
But still, four out of every ten agents in the Phoenix area made NOTHING in 2008. and eight out of ten made less than $30,000 in annual income (significantly less if one factors in commission splits).
What does this mean for home buyers and sellers?
Finally, Jay gets to the point!
What this all means is that you, oh home buyer or seller, is that you need to be very careful in who you chose to represent you in the sale or purchase of your home. Obviously the majority of agents out there aren’t making a living selling homes. Don’t you want an experienced agent representing you?
This is not to say that a part-time agent, or an agent that has a “real job” supplementing their income is incompetent. I know *many* wonderful agents that are in this situation. (I also know some lousy agents that are in the 20% group). An agent can also receive (or not) a lot of help from their broker, and/or other agents on their team.
Whether the agent you chose to represent you actually makes a living doing this is one of several factors you should consider. But it’s definitely a consideration. No, don’t go asking your prospective agent for their last five tax returns. That’s just wrong, and honestly, it’s no one’s business knowing what someone else earns.
But questions like, “Is this your full time occupation?”, “How long have you been in real estate?” “Will there be times you can’t help me due to other commitments” and similar questions are perfectly acceptable to ask.
Should you rule out an agent that isn’t full time? Personally I don’t think so. I’d rather hear an agent say, “Real estate is my passion, and I’m darn good at it. Yes, I supplement my income but you’re getting me, a great broker and I have tons of support to help you” than something like, “Hire me, I’m in the Million Dollar Club!”. One agent is being honest and upfront, the other one is full of crap.
Whether an agent has a secondary income or not may or may not be a critical factor for you. That depends on you and the agent. If it is important, you should know the numbers and I suspect that much of the general public is quite unaware just how many agents aren’t making their primary living selling real estate.
Now you are more aware.
And that’s the point!