Spend much time on real estate blogs, internet message boards and the like and it won’t take long to hear Realtor Bashers making wild claims about over-paid real estate agents.
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).
Some facts:
- 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!”
Big deal.
“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!
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A super post as usual, Jay. Our numbers in Colorado Springs are remarkably similar in terms of income distribution and “average” annual wage. Looked at another way, in our market “the average” agent is doing 6 unit sides per year counting condos and townhome sales (and our condo/townhome market is small and low-priced). A seller or buyer should ask how well their needs are represented by an individual that averages a closing every other month. If I was getting advice from my Edward Jones rep on a disability policy and I knew that my rep had almost no cash in the tank, I would be highly suspicious of the policy, whatever the merits. I'm talking about a $62 a month policy. Likewise, someone advising a client on what is most likely their largest financial investment (uh, $1000, $1200, $1600 a month in mortgage payments).. should have some ability to communicate transparently that they are offering advice free of the conflict of debt-motivation.
Jay – pretty much the same thing for REALTORs here in the Calgary market area. Currently just over 5,000 licensed REALTORs with CREB, and most recent stats indicate the “average” agent closes about 3 ends *transaction* per year. Taking into account average prices and our significantly lower commissions, that would mean the average REALTOR grosses under $20,000/yr (well under the poverty line).
Traditionally it's always been the top 15-20% doing 80-85% of the business, and that it's about to change. It also explains why 85% of all new REALTORs are out of the business after 18 months.
Amen. Love the post. You always keep me comin' back!
Great post Jay! The 80/20 rule is alive and well here in the Washington DC area. I've worked in small offices with less then 10 agents and huge offices with 400+ agents and its always the 20% that do all the Biz. Then of course you got the bottom 5% that like to take up 80% of your time( that's Chuck Broker math;0)).
Loving the post Jay. Talk about breaking it down to the ridiculous. A good agent is always worth the cost of the commission. A bad agent fuels the arguement.
Bravo man. Bravo.
I've often wondered if the public was aware that the majority of real estate agents are on their way into or out of the business at any one time. My other question, If the public knew this fact, would they care?
I would argue they should, but who am I to deny someone the right to select their agent solely on the basis that they are also a great barista?
I couldn't have said it better myself. I live and work in a Ontario Canada and it is very similar here.
Love this post! I was raised in real estate by my Mother/Real Estate broker who in good times did well but we certainly were NOT rich. In hard times she took things like a snowmobile and a pony as a real estate commission instead of cash. Let's not even talk about how I got the horse trailer I desperately needed for my 4-H activities
I don't know of any “great” agents who don't work hard for their earnings. How we define “great” is more a matter of values and how much you sold last year is of very little value to me
Thanks Jay – I strolled myself down memory lane with your post!
There are a lot of monthly fees for an agent too. To keep your license and MLS dues and other services all current, it can break your bank. The best agents are the ones that have been able to make it full time because they make enough to offset the cost of being an agent. An agent who does not sell or buy any homes in a year ends up PAYING in instead of making money.
-Tyler
Great post. 15% of our agents in the NWMLS left the business last year, and another 15% are on the way out this year. This is not a job for the timid.
Great points. It is amazing how that 80/20 rule is always in effect. Some of us want to be much higher in terms of production and we keep striving. Just glad that I am way above average. Next time a seller asks you to discount my commission I might pull this out and show how little we sometimes make.
Here in Alberta, Canada a typical commission is a 7 and 3 split. 7% on the first 100k and 3% on the balance with 50% going to each REALTOR. Another way of looking at that is 3% plus $4k. At present the average house price in Calgary real estate market is $475k (give or take). This amounts to $18,250 or about $9k per side. Having said that, there are 2 large segments to the market here, the lower end first time buyers appropriate home, and the higher end luxury home market. As such the $20k estimate above is pretty reasonably accurate for most agents here.
Great post, I would actually like to use this in my listing presentations. People tend to only hear about the million dollar agents and see a Mercedes Benz sitting in thier driveway even if its a Honda Accord.
Part time agents can be good but they usually cost full time agents time and money. Most of them are not available and the other agent ends up doing most of the work on the transactions.
I wonder if you would go see your dentist, doctor or attorney if they worked at it part time trying to make ends meet from a regular job they have at the fire department or grocery store. Put a big bulls eye on your shirt as a broker hiring part time agents. Good luck with the liability
1 million is sales production is 2 million in sales, unless you are lucky enough to have both the buyer and seller. If you sell a house that is 1 million than the listing agent gets 500,000 of production credit and the selling agent gets 500,000 of production credit. But you still get the 3% of 1 million so as a million dollar producer you sell 2 million and get 60,000 typically.
Jay, great post! You really can't put it any better. I think the thing that stands out is the 80/20 rule which I think you will find in just about any industry. You will always have the cream rise to the top. It's a difficult industry and so many people on the outside assume we walk around making boat loads of money. It's pretty clear that many agents that have the benefit of being able to make much money.
Jay, excellent post. I'd be willing to bet that if similar research was done for other sales professionals (i.e. car, computer, insurance, financial services) the results would be similar. The 80/20 rule seems to apply to all professions, not just real estate. It is our responsibility as consumers to do our due diligence. If not, it's caveat emptor. These days we are fortunate to have so many online resources like yours to do our homework.
Great Posts. A good agent is worth every penny. The thing I love is when family and close frineds expect you to work for free.
The 80/20 rule is a given in all sales professions. The challenge for new agents is to learn how to transition from the “80″ to the “20″ group. The key is PERSISTENCE.
Persistence, coupled with integrity and hardwork, will ensure any agent can make a good living in the real estate industry.
Excellent Post! I love this website.
Those are very informative fact Jay. Thanks for sharing. I totally agree. I think that there are some great agents working part time and some lousy ones full time as well. I think a safe rule to play by is doing your own due diligence when selecting an agent. You can relate it to property management. Dont think I would have a guy part time manage a $150k investment that has only been doing it for so long. I think people are much better off going with someone that specializes in what ever it is they are looking to have done. Likewise, if I wanted advice on purchasing or selling real estate. I think that simple courteous questions are wise to ask when interviewing an agent on listing or buying. Thanks again.
A spot on post that in my opinion holds true in any market.
Thank you for writing this article. There is such a misconception in agent compensation. In my experience of selling 200 homes in Texas, I have always saved my home buyers over twice the amount of compensation that I receive from a builder or seller. Having a good agent to help negotiate a deal is the better than a small builder incentive or seller concession.
Hell lot of money!!!
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Great breakdown… if only every prospective real estate consumer knew this, then perhaps our industries social standing would be a bit better.
Wow, this 80/20 rule is amazing. However, it is a huge difference i mean only 20% are making a whole lot of 80%business.
At the end, i would say good agents deserve to get high commissions and not so good deserves nothing.
I am less concerned with how much real estate agents make because like every self employed person it depends on experience, work ethic, etc. What I know is that they are working a lot harder these days for a lot less money. Man how times have changed.
Great post. I wish it was required reading for all buyers and sellers of real estate. I agree that buyers and sellers need to be aware of who they are working with – a part-timer or a full time Realtor who is working the business on a daily basis and is committed to making it their career not just a hobby.
There is absolutely, positively no average. Just in my office, there are agents that make a few thousand a year, to agents that make hundreds of thousands a year. It all depends on you, how hard you are willing to work, who you know, what good connections you have and your ability to take casual contacts into loyal customers.
Well technically joystick, there is an average. But the “spread” between high and low is huge.
Real estate isn't unique in that hard work is the primary thing that makes one successful. In my opinion.
I think they have the 5 % commission from the total sales
@Jay-I have seen similar posts in nature to this all over the web, but this is the first one that utilized numbers and focused on points that a consumer would actually care about. Most consumers could care less whether you broker gets part of the money as all they care about is how much money is leaving their pocket or at least in this case not entering it on the sale of a property.
Great Post and I have to just pray (and work hard) so that I continue to stay in that Top 10%. I also like your point about earning 1 mil in commisions does not mean you earned 1 million dollars. The industry really needs to get away from gross commissions in and switch to Net Income because that the real winner.
Thanks for sharing Jay! Such a very informative post.
It really highlights of what real estate agents typically earn (though it still depends on many houses they can sell and price of the house matters as well).
Hey, I’m a young guy who is seriously considering getting into real estate despite warnings from several people. I just really feel like its something I would love to do. I’m currently involved in the family business and I work 5 times a week from 1-9 and I close the business much of the time. What should I do to get things rolling on a positive note?