Do real estate agents get paid too much for their service?

​John and Emma, after much thinking, and debate are ready to sell their home. Emma explains, it is an emotional decision, but we need the space since our babies are growing up. ​

They have taken the time to talk to experts, like their accountant, financial planner, mortgage broker and real estate agent. John says, "we are confident we have all the information necessary to take the next step."

In a meeting with their agent Adam, John and Emma expressed dismay at the high cost of selling a home. The cost is almost 5% of the value of our home. It is close to a hundred thousand dollars for a two-million-dollar home. No wonder we see agents driving fancy Mercedes and BMW cars since they are making so much money. John and Emma wonder if Adam can shed some light on why it costs so much to sell their home.

Adam was happy to do so. For one, his clients deserve to know why they are paying such money. Second, clients would be more at ease and cooperative with him and willing to listen to his suggestions. Third, he is fully prepared for such explanations since he has gone over them more than he can remember.

To begin, Adam explains the four main reasons for the high cost of selling a home.

• The commission is commonly split among four.
• There are many expenses involved.
• Starting and running a business involves risks.
• "You get what you pay for." 

Now, let's get into more details.

The commission is commonly split among four.

Adam refers to an example from a different industry: oil companies. Years back, gas prices jumped to a new high, and people expressed their frustration with these companies. You have likely seen the pie-shaped chart stock to the gas pumps. To bring transparency, oil companies break down the cost of gas on the pump for people to see. The idea is to share the blame and introduce transparency to gas pricing. These pie-shaped charts broke down the cost as following the lion share is the various taxes, next is the crude oil, and other minor expenses and finally the company profit. 

The real estate sales commission follows a similar trend as you may have expected. The sales commission is split in four ways, buyer brokerage, buyer agent, seller brokerage and listing agent. The bulk of the commission, commonly 2.5%, goes to the buyer's brokerage and agent. The listing brokerage and agent get between 1-2.5%. As you can see, I get a small portion of the commission as a listing agent.

Note that sellers generally work directly with the listing agents. And it is the listing agent that takes care of the many steps of the selling process. All that said, brokerages also play a crucial role in the selling process, albeit mostly not noticeable by sellers and buyers. For example, the deposit money is always placed in the brokerage's trust account to protect clients. 

Agents incur many business expenses.
To better grasp the expenses involved, you need to understand that a real estate agent operates as an individual business.  Many costs associated with starting and continuing a business apply to a real estate agent. 

(1) Brand marketing
We do not have the survey for Canada, but we know realtors spend $500 million on advertising annually in the US. We can make a rough estimate of $50 million in Canada - it is not unusual for top agents to spend a few hundred thousand dollars in advertising a year. There are online advertising, mainly Google and Facebook, all sorts of printouts, bus shelter, billboards and many more. In fact, there is a growing list of advertising companies trying to get a share of the real estate advertising money.

(2) The listing promotion
You see the most significant difference among agents in the listing promotions. The listing promotion is good for the seller, and top agents take this seriously. The listing promotion may include (1) professional photography, videography, printout, signage, online marketing, social media marketing. Some agents may offer free staging; however, staging can be costly, so specific terms and conditions may apply.

(3) Business related expenses
The real estate-specific expenses include membership dues, real estate insurance, and ongoing education. The business-specific costs are office space, operational, internet, phone, accounting, vehicle, and technology. Active agents committed (or stock) to these expenses for the long term because of the lease terms and contracts associated with these expenses. So, agents cannot stop the payments just because business slows down for any reason.

Starting and running a business involves risks.

At the time of writing this article, there were over 60,000 real estate agents in Ontario, most of them in Toronto. Many quit their paycheck jobs to join the elite of moneymakers in real estate. Quick research on the internet will show that over 90% of the agents incur many expenses yet are waiting for the commission check to realize. Hundreds graduate and get their real estate license every year, and a similar number finally quit and get back to other monthly paid occupations. Starting and running a business is not for the faith of the heart; uncertainty can be nerve-racking.
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So as with any business, the higher risk is part of the realtor's life. They may go for months without a paycheque while expenses do not take a break. Hence a bigger commission pay compensates for the risk, long wait, and long hours to build one's business. There are also more minor risks. For example, some sellers may change their minds two weeks after listing their home. Agents have plenty of stories where they spent countless hours with buyers showing them properties. And those buyers decide to wait for a few years before entering the market again. Yet, as I mentioned before, bills do not take a break. 

Conclusion: "You get what you pay for." 

​Adam concludes his explanation; many agents can barely earn decent money in the business. Yes, a small percent of well-branded agents are making a lot of money. However, these agents have what it takes. In other words, they have worked hard and taken the risk for many years to establish their business and gain your trust. They have the knowledge and experience to provide the service - earning their commission.

Finally, I admit, there are some charlatans agents in the business for a quick buck. Sellers and buyers must be vigilant to avoid such scammers. A clever remark to always remember is, "you get what you pay for." 

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Author

The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: drdavidkg@gmail.com or by phone: 416.990.2424
Are you thinking of selling your home? I will be glad to share my marketing strategies with you.