Agents Only Blog

Earlier this week I wrote a three piece blog article on real estate commissions explaining how the industry works, how agents are employed, and how commissions are paid out. Although I tried to remain neutral and not interject personal opinions in that article, one of the things about real estate that has always intrigued me is the attitude most new agents bring into the industry (i.e. it’s a get rich quick gig where the work is easy and the payout is ridiculous high). In my opinion, this mirrors the difference between perception and reality in the way the general public views real estate agents as well.

In researching for that article I found some very interesting real estate industry statistics that paint a very interesting picture about what it means to be a real estate agent which I would like to share here (and this time interject my own personal viewpoints). I apologize in advance for not saving the web links to the sources (I didn’t intend to add this piece). However all my sources were found with some simple Google searching (and a lot of it comes from the National Association of REALTORS at www.nar.org).

What it is like to be an "Average" Real Estate Agent…

- The average full-time agent works 46 hours a week. 1 in 5 agents work 60 or more hours per week.

Part of the perception problem- even with agents within the industry- is that all an agent does is show homes. (A mine-numbingly simple task that can be argued is obsolete thanks to the internet.) Yes there are a lot of internet search tools available to today’s buyers, but if you don’t have a strong understanding of the real estate industry or the local market, it doesn’t mean you know how to interpret the data. A good, knowledgeable agent (and let me add that I fully understand many agents don’t fall into that category) will spend time on every transaction crunching statistics trying to interpret the data to make sure their buyer doesn’t get burned (this is a whole blog article on its own). Suffice it to say, this is hours of office work that a lot of new agents don’t realize exists.

Then there are the inspections- a good agent attends them with (or on behalf) of their clients. Plus there is the negation process after you receive the inspection report, working with the lender, inspector, appraiser, other agent and title company, as well as all the paperwork required by the state, broker or lender to get the deal to close. On the selling side, a good agent spends time helping a client stage their home, offering advice to make it show better, holding open houses, soliciting other agents for feedback (which is a fulltime job itself), providing feedback to the client and of course marketing.

I should also note that each transaction is its own beast. For every “easy” deal there is another client that has three contracts die before things work out, a difficult or emotional client that defies logic and consumes an agent’s time, or another agent whose lack of knowledge, arrogance, or apathy for their own client quadruples the amount of time it takes to make a contract close. All said I would estimate for every hour an agent spends with a client there is 4-5 hours of administrative work to manage the client/contract and another 4-5 hours of marketing to bring in the client.

More important, in residential real estate weekend and evening work is quite common since you have to work around the schedule of the buyers- so the fact that the agent may be at home at 2pm on a Wednesday doesn’t mean the agent isn’t working their fair share of hours.

- The average full-time agent has 9 years of experience but has been at their current brokerage for 2 years.

Getting paid 100% commission unfortunately means some months you feast and others you starve. At the same time federal regulations that define independent contractor status prohibit a broker from using a lot of the traditional perks an employer might use to retain a traditional employee- such as health insurance, benefits- even logical things like helping to market or grow the agent’s business. No matter how much you may like your broker, office, or coworkers, ultimately as an agent you are forced to take an “every man for themselves approach” in order to survive. This means the successful agent is resigned to “shop” brokers for better compensation deals- because a little more from each commission check can mean the difference between making it in real estate and failing.

- Hotjobs.com says the average agent earns approximately $31,000 per year. I’ve seen other sources that peg it at $33,000-35,000 per year.

Compared to the average hourly waged employee running a cash register at Wal-Mart or waiting on tables at Applebee’s, this is probably a pretty good income. However, compared to most people’s perception of what real estate agents make it’s significantly lower. A lot of this has to do with the fact that most people see the total commission being paid on a real estate transaction, but they don’t understand just how many people get a part of it beyond the initial agent- or the expense the agent might actually have to generate that commission. For example, one of the top listing agents in our office retains two full-time salaried employees to process administrative paperwork at a total cost of $100,000 per year- and that’s an expense she has to pay every month even if nothing sells. Combine this with the stats below.

- 10% of agents earn less than $17,600 per year.

How is this possible? I have seen statistics from various local associations of Realtors that show the average agent in their geography processes a low of 1.9 transactions per year (I believe that was Massachusetts) to a high of 12 transactions. Depending on where you live, that’s an average of one sale every six months to once a month. I can no longer find the Missouri statistics but I believe it was somewhere around 6-7 transactions per year (basically one sale- or paycheck- every 60 days).

- An Inman News study shows that 61% of all real estate commissions are earned by the top 25% of agents. The bottom 25% of agents only earn 3% of the total real estate commissions.

In other words, forget about the 6-7 transactions per year average. A few agents are doing 6-7 a month and the rest are going months between transactions- and paychecks.

One theory on why the industry works this way is that success breed’s more success. However my theory is that being a real estate agent is no different than any other business- to be successful you need a solid business and marketing plan for how you are going to attract new customers and a critical mass of start-up capital to pay for the initial marketing and expenses required to be successful- and most new agents have neither.

I have seen statistics that show the average first year income for a new agent is somewhere between $12,000-14,000 (on the low end) to $22,000 (on the high end). Realty Times did a survey of people in licensing school and found that more than half of the people got into real estate expecting to make over $40,000 in their first year. 23% assumed they would make over $60,000 in their first year. (See this article.) Clearly reality and perception is out of line.

Here are a few other first year agent statistics:

- Inman News did a study and found 10% of new agents quit in the first year and another 16% quit in the second year.

- The California Association of Realtors did a survey that showed 57% of new agents quit real estate within the first five years.

So the failure and burnout rate is high for real estate agents. Perhaps the unrealistic income expectation combined with the work hours has a lot to do with it. One statistic that has eluded me is the divorce rate for established agents- which I expect is also higher than the national average due to the excessive non-traditional work hours and inconsistent pay.

Although these statistics can be pretty gloomy, don’t look at them as a reason to stay out of real estate as a career so much as a need to plan and prepare prior to entering. Ask yourself questions like, “how will I survive if there is no income for six months or there is a zero month?” If you don’t know a lot about real estate as a business, put together a plan for training yourself on things like financing, construction and understanding client’s needs.

In our own case, Kimberly entered real estate sales in a back end fashion- with 10 years of industry experience in other roles (mortgage broker, rehabber, builder, property manager) that allowed her to be both a newbie and an expert at the same time. More important, she had a second income to support her during her first year at Prudential Alliance.

My interest and formal classroom training in real estate started over five years prior to getting licensed. More important, I moonlighted on my corporate sales job for over a year helping Kimberly market and grow her business prior to joining her- even traveling with two laptop computers so my employer’s IT department wouldn’t spot my work on their laptop. When I finally quit my job to join Kimberly, I had saved up several months pay to cover our expense- which we quickly burned through to pay our bills.

Overall, we both work over 60 hours a week. However because we enjoy what we are doing, the hours (on most days) doesn’t seen oppressive. For example, today was our first Sunday off together in months- and we spent the day driving around an area of town we don’t know very well looking at real estate trying to get to know the area better (go figure).

Posted by Darin "Sid" Cameron at 09:16 PM | Permalink | Comments (0) | TrackBacks (0)

Over the past two days, I have discussed how real estate agents get paid by showing the relationship the agent has with their employer, how most employers pay their agents and by looking at all of the various options that exist within the real estate industry. If you haven’t read the previous installments of this article, I suggest you start by reading installment #1 here.

Finally, We Talk about Commissions…

To keep this simple, let’s look at a typical full-time residential real estate sales agent. When an agent meets with a seller to list a home for sale, the selling agent and the seller will determine a commission structure in advance to the home being listed. Legally, this is always negotiable but it can be a flat-fee or a percentage of the home’s sale. There can also be agent bonuses or other incentives for a quick sale. Generally, the broker (see Part 1) sets guidelines as to how their agents should structure commission as a part of their overall business plan- however if the broker is a member of a multiple listing system (MLS) then there may be additional requirements as to how the commission has to be structured.

The MLS

A multiple listing system (MLS) is where a selling broker agrees to payout a percentage (or split) of the sales commission to any other member of the system who brings in a buyer for the property. Even though the exact split is unique to every listing (and determined by the seller), the system allows agents who represent buyers to avoid having to negotiate commission with the selling agent on every single deal (or require their buyer’s to pay a commission). Generally, most markets have one major MLS which is usually managed by the local Association of REALTORS (some larger markets may have multiple system’s). The MLS will also have basic regulations as to how member agents can market their listings as well as how buyer’s agents can show them (to create standards and keep everything fair for all parties).

Why all of this is important is because if your broker is a member of the Association/MLS (and most larger brokers are), a seller’s agent will have to submit all of their listings to the MLS, specify the commission split up-front, and post the listing in the MLS database for all other agents to see and sell (there are exceptions to this but they are unique to each MLS so I won’t be discussing them here). A typical commission split is usually somewhere around 50/50 or 60/40. So, if your seller agrees to a commission of 6%, you will probably agree to pay the buyer’s agent’s broker 2.5% to 3% with the selling agent’s broker keeping the rest.

Although a significant percentage of agents and brokers are members of the MLS, not everyone joins. If you join a broker who is not a member, you might be expected to not only list homes but bring in a buyer for the listing as well (or negotiate a commission split up front with a buyer’s agent before they can show the home). Although there are legitimate reasons to not join your local Association/MLS, a significant percentage of home sellers like the benefit of having exposure to all of the potential buyer’s agents (so unless you have a specialization that is unique, you might find it difficult to get clients without the MLS membership).

Non-Traditional Brokerages

This brings us to discount or flat fee brokerages. Despite the marketing hype, discount and flat fee brokerages have been around for a very long time. However the rise of the internet has reduced the start-up costs and created quite a few “internet” based brokerage (although state licensing laws still apply). As the purpose of this article is to discuss how an agent gets paid, I would like to avoid the debate over which business model is better and stick to compensation. But understand, in most commission-based residential real estate transactions the seller generally pays commission only when a property sells (which means an agent or broker might incur marketing expenses they will never recoup if the property doesn’t sell or they get fired by the seller). That may not be the case in a flat-fee scenario.

Flat-fee brokerages may take payment up front or credit card payments at the time a seller places a listing (or they may take it upon sale). If the brokerage is a member of the MLS, they may also require the seller to pay a commission percentage to a buyer’s broker on top of the flat fee (once it sells). A $2,000 flat fee paid up front with another 2.7% paid to the buyer’s broker would be a fairly average transaction from what I’ve seen. Over the past year, the state of Missouri has passed regulation to specify the minimum effort a brokerage must provide a seller (receiving offers and submitting counter offers). This is due to internet brokerages that were basically taking their fees up front and then doing nothing for the client (not even putting them into an MLS).

Many of the really low cost flat-fee brokerages (those that charge under $1000) are often one person shops (because there really isn’t a place for agents in their business model). Of the larger flat-fee brokerages that do have agents, an agent might get a percentage of the fee, or might get paid for “add-on” sales- such as selling the buyer a real estate lawn sign for their yard, or selling the buyer add space in the broker’s newspaper ad. In these cases, the brokerage will establish a “menu” of marketing solutions for an agent to sell to a seller.

Although discount brokerages get lumped into the same category as flat-fee brokerages by most agents, the truth is it’s a different business model. If you join a discount broker, you are basically getting paid the same way as the traditional “full-service” agent would get paid (commission after the sale)- only you are agreeing to provide your service for less commission (and will generally provide less marketing to compensate). In many cases, a discount broker’s only marketing might be to put the listing into the MLS for buyer’s agents to see. As an agent at a discount brokerage, you are generally expected to make your money one of three ways- make up your discount by selling in volume, live off of a lesser commission, or use the listings as a tool to make contacts with buyers (and make your money off of the buyers).

Understanding Commissions…

Now let’s go back to the traditional residential agent working with traditional full-service listings that are a part of the MLS. In St. Louis, the average commission rate is right around 6% of the home’s sale price (again, every listing is unique) and the average home sale price is somewhere around $200,000. For our example, we will use these numbers and assume the split between the buyer’s broker and seller’s broker is 50/50. For the record, when one agent represents both the buyer and the seller, you have what is called “dual agency” and the one broker gets the full commission. Many agents will discount dual agency as a marketing tool to get buyers- although in St. Louis the average number of homes that sell under dual agency is less than 5%. For our example, we will assume there isn’t dual agency.

Upon closing of the sale, the seller pays the selling BROKER the commission who then pays the buyer’s BROKER the commission split. For our $200,000 home, that’s $12,000 total commission which the selling broker then gives $6,000 of to the buyer’s side. Please note that the commission is paid to the BROKER, not the AGENT. Every broker will have their own unique plan for paying agents.

When it comes to paying agents, most brokers will give a percentage of the commission to the agent and keep the rest. It is not uncommon for a new agent to start out at 40-50% or less. Since successful agents are constantly being courted by competing brokerages, the split the agent gets generally goes up the more successful the agent gets. How much commission the broker keeps (i.e. where the broker’s split starts and stops) generally has to do with how many services the broker is providing the agent “for free.” It is not uncommon for top agents to keep 90% or more of their commission.

There are also brokerages (many RE/Max franchises for example) that allow the agent to keep 100% of the commission but then charge the agent a monthly flat-fee (even if nothing sells) as well as fees for any services provided (faxing, copying, desk space, phone usage, newspaper ads, etc). Since real estate sales can often be an up and down business, it is up to the agent to decide which business model is best for them.

There are also other parties that may get a percentage of that commission as well (besides the broker and the agent). Franchises generally take a percentage of the commission (Prudential, for example, keeps 3% of all sales). Referral fees can also occur if the agent found the client through a referral from another agent. These normally are 20-30% of the commission. Examples of this would include: relocation buyers referred to an agent by a relocation company, a seller referred to an agent by another agent across town who doesn’t want the listing or an internet leads referred to an agent from their own broker’s corporate headquarters. In most states it is illegal to pay a referral fee to anyone who isn’t a licensed agent (although agents in other states are acceptable). Only the broker, however, can pay the fees.

So, back to our example: Let’s say the agent is fairly successful and has a 70/30 split with the broker (with the agent keeping 70%). That leaves $4200 of the $6000. If the franchise takes another 5%, you now have $3990 (which we’ll round up to $4000).

Where Does that Money Go?

Most people believe that agents "get rich" selling real estate- on even the smallest of properties- because they never calculate the commission past this point. But realize, there is a lot more to understanding total compensation than we have just covered.

First, you need to pay your marketing expenses (advertising, promotions, etc). This can be simple things like business cards and personalized real estate signs with your name on them, or more complex things like websites, 800 numbers, billboards, postcards or newspaper ads. A general rule of thumb for a successful agent is to spend 30% of commissions on marketing to find the next customer (or advertise a listing).

If you are a new agent, you might find yourself spending 70% or more on marketing, whereas an established successful agent might spend very little (because they are living off of repeat or referral business). Although I have met new agents who have successfully established themselves without marketing (using plain old hard work and a lot of raw sales talent), the truth is those people are few and far between. For the most part, new agents who don’t spend something on marketing usually fail.

The National Association of Realtors estimates the average agent spends at least $8,000 per year. For our example, let’s figure you will spend 30% on marketing (and for the record, I wish I only spent 30%). That leaves you with $2,800 left in commissions in our example.

Meet Your New Business Partner...

To keep things simple, the next thing the agent should plan on is to pay income taxes (we’ll estimate 15%). Since the agent is an independent contractor, they also need to pay FICA and Social Security- things a traditional employer might take out on your behalf. There is also additional tax- sometimes called the self-employment tax- that is basically the tax your employer pays on you that you never see- so figure in another 15%. That leaves you with $1,960 in commission for our running example. (By the way, if you are going to be an agent, by all means find a good accountant to tell you how to pay taxes, what is tax deductible and what isn’t, etc.).

So, on a $200,000 home sale, a fairly good agent could expect to keep just under $2,000 in commission after broker/franchise splits, reoccurring marketing expenses and taxes.

The Real Estate Catch-22

The interesting thing to note is how an established agent can earn significantly more money off of the same sale than a new agent. If a veteran (successful) agent is getting a 90% commission split and has virtually no marketing cost (because they rely on repeat clients and referrals), then they can easily take home $3,500 from that sale. Compare that to a rookie who is only getting a 40% commission split- they are left with just under $1,200 on the same sale (and that’s assuming they don’t have to spend more than 30% on marketing). As you may have guessed, this is the problem with being a new real estate agent. Not only do new agents have fewer prospects for clients, but they have to work harder and spend more money on marketing to get them. Yet at the same time, newer agents can easily get 50% less commission on the same sale so they have less to spend on the marketing they need more of!

But Wait Ron Popeil, There’s More!

Before you rush out to spend that $2,000 in commission, I should note that I’ve only mentioned MARKETING expenses. There are other reoccurring and fixed expenses to know about as well that go above and beyond marketing.

Many states (Missouri included) require agents to carry “Errors and Omissions Insurance” to protect you in a lawsuit from an unhappy client. This is a per agent fee even if you are on a team and the contracts are all run under one agent (or you don’t actually sell anything). I can’t find the exact cost, but I believe I pay $300-500 a year for this.

Many brokerages also have various fees they charge their agents (I personally refer to them as “bullsh**” fees). My broker charges their agents a “technology fee” of $25 per month per agent to pay for the technology in our office (which is far less than most so I’m not complaining too loudly).

You also have membership fees into any professional organization you join- the most common of which would be your local Association of Realtors which you will probably want to join (if for no other reason so you can get access to the MLS). These fees can add up to several thousand dollars a year. As a new agent, plan on having $1000 ready to give your local Association/MLS as soon as you get your license. You will also be required to take continuing education every two years (pricing can vary, but expect to spend $500 or so every other year).

After that, you will probably have to buy your own computer (and software), cell phone (and service), digital camera (to take photos of homes with), office supplies, and (of course) a car to haul around clients. I would also recommend talking to your auto insurance agent to make sure you have enough liability coverage should a client be injured in your car.

If you work from home (even part-time), you will probably want to buy for your home office a fax machine (everything in real estate is faxed), color laser printer (for printing flyers), office furniture, high-speed internet and a business phone line.

As your business grows you might want to consider a toll-free (800) number for relocation clients to call, professional binding equipment for quality looking proposals, staff assistants (which can be paid in commission (if they are an agent) or as a salaried/hourly employee, sales management software, etc. If you get an assistant, you might need to buy him or her a computer, software, etc.

Want to start your own brokerage? Visit realtor.org for the things you will need to do that. General rule of thumb is to have $50,000 ready to invest (more if you want a franchise).

The final thing to consider would be personal expenses that might be covered by your traditional employer that an agent doesn’t get because they are an independent contractor. The largest of these would be health insurance. We pay approximately $400 per person per month for our plan (and the coverage isn’t that good). We do not have dental or vision.

(Editor’s Note: Much of this stuff is tax deductible, so consult your accountant first.)

Summary

The most important thing to realize in understanding real estate compensation is to understand that you truly are working for the client (buyer or seller) and not the broker or brokerage. Other careers might emphasis the importance of a happy customer and might fire you should there be too many customer complaints, but when the day is over your salary, hourly wage, or even commission is being determined by the employer- not the customer. That is usually not the case in a real estate career; without clients there isn’t a paycheck- and the product you have to sell is yourself, not some gadget or other tangible product.

As a self-employed person, you need to realize there is a fine line between being self-employed and being unemployed. I know of an agent who has spent 40 hours a week, every week, for the past 4-5 years working in real estate as an agent- answering the phones at the office trying to get leads, sending out postcards, calendars, magnets, etc. This agent even has a website, a sign on the car, a name tag on the suit jacket, everything “the book” tells an agent to do to get business. Despite all of this, the agent suffered through a drought of more than 24 months without a commission check. That’s more than two years of full-time work- and marketing expenses- without a single penny in pay.

The purpose of this example isn’t to cast doubt on a real estate career or end the article on a sour note, but to make the most important point there is. If you want to know how you get paid in real estate, the answer is to know the industry, select your specialty, train yourself to be an expert, sharpen your sales skills, work hard, make your clients love you and market better than the other agents around you. After that, the commission checks will take care of themselves.

(Note: I found some very interesting statistics on the real estate industry while I was writing this piece that I will publish later in the week.)

Posted by Darin "Sid" Cameron at 12:43 PM | Permalink | Comments (0) | TrackBacks (0)

Yesterday I started a discussion on how real estate agents get paid by discussing the relationship the agent has with their employer and how most employers pay their agents. Today I would like to continue that discussion by explaining all of the various options that exist within the real estate industry because my experience is that most new agents are unaware of all the options they have available to them. If you haven’t read the first installment of this article, I suggest you start by reading it here.

Kinds of Agents:

There are over 50,000 licensed real estate agents in the state of Missouri alone, and nationally there are over 200,000 new licenses issued each year. Suffice it to say, it would be a pretty tough industry to work in if we were all doing the exact same thing. That’s why the next part of this discussion is to look at some of the various options, or specializations, real estate agents have available to them.

Residential Real Estate

The vast majority of licensed real estate agents (just under 75%) work in residential real estate- which means they are selling residential homes or condos that people live in. Although the majority of agents I’ve met I would classify as generalists- meaning they work with anyone to sell anything- there is a growing trend to specialize on a specific kind of client, property or geography. By specializing, this allows the agent to standout from the crowd of other agents as an expert in their field.

The most common specializations include people who focus on just buyers or just sellers. These are broad specialization. Within them you will find agents who take a much more targeted focus of working with just first-time buyers, condo buyers, loft buyers, retiring buyers, relocation buyers, buyers of luxury or vacation homes, buyers of farmland, etc. You may also find selling agents who just work with a similar subset- selling condos or lofts, farmland, luxury homes, vacation homes, etc.

Obviously where the agent lives and works has a lot to do with these specializations. If an agent lives in a typical suburban environment (like Chesterfield, MO) they probably aren’t going to be successful selling only vacation homes or farmland because the suburbs just don’t offer a lot of either (a better location for that specialization would be in a small town like New Melle, MO or near a vacation home community like Lake Innsbrook). With this in mind, another common subset is to focus on the specific geography an agent lives or works in- like an agent who only sells lofts in a downtown loft district (like Downtown St. Louis’ Washington Street) or within a small neighborhood or community (like St Louis’ South City or a standalone town like Eureka, MO).

Another specialization is working for a new home builder selling just the builder’s new homes. These jobs are often great for beginners since some states won’t require an “agent” to be licensed (since they fall under a “for sale by owner” clause). They also often carry a salary (as an employee) or a draw against future commission (as a contractor) so you aren’t unable to pay your bills while you wait for that first home sale to close. More important it’s a great way to learn a lot about housing construction and real estate.

Other agents focus on the buying or selling of foreclosed or R.E.O. homes (Real Estate Owned by a bank). Along these lines there are agents who work with real estate investors in the buying or selling of fixer-upper or rehabbed homes or rental properties (My own sales team has created a division to specialize in just this).

The other form of specialization is to work on a sales team or at the corporate headquarters of a brokerage and only handle part of the real estate process. For example, on our sales team we have an agent who handles all of the paperwork that occurs from the time a contract is written to the time it closes. That allows our other agents to not get bogged down with paperwork and focus on clients. These people are called Processors or Transaction Coordinators and may or may not be an agent and may get paid a part of the commission, a salary or a combo of both.

Some real estate teams will also have inside sales reps (people who talk to clients on the phone and work leads) that partner with an outside sales rep (basically the person who leaves the office and works with clients directly). You may also have agents who specialize in marketing and lead development, sales management, or other areas of management and coordination (such as a relocation coordinator who manages the relationships with large corporate companies in order to get relocation leads for their buyer’s agents).

Commercial Real Estate

Commercial Real Estate is the selling of office space, retail space, manufacturing or warehouse space (basically everything other than a standalone home or condo someone lives in). In real estate, this is generally considered the other side of the coin from residential sales- meaning you either do one or the other. Why the two are usually separate is because they attract different kinds of buyers with different agendas (corporations and businesses looking to make money instead of home owners looking for a place to live). More important, the contracts, state and local laws, even the requirements of the sellers are different than that of a home buyer.

Within Commercial Real Estate you will find people who specialize in office space, warehousing, retail, manufacturing or residential investment (apartment buildings). Within all of these specializations, you will also see people who specialize in larger properties and people who specialize in smaller properties (because the business who seeks 20,000 sq feet of warehousing is vastly different to work with than the business who is seeking 2,000,000 sq feet of space).

As an agent trying to decide between residential and commercial real estate, realize that the large commercial real estate agents can get huge commission checks when a multi-million dollar deal closes but might have to wait (and work) for years to earn that check. As I don’t work in commercial real estate, I would encourage anyone looking into it to talk to commercial agents about the up and downs of their business.

Although few agents do both residential and commercial (at least successfully), there are generally no legal requirements that separate the two. As a result, there is often times overlap. For example, a four unit apartment building could fall into the light (i.e. small) commercial space or could be sold by a residential agent. In small (rural) towns you may find that commercial retail property (like a small store front) and residential property still fall on the same agent’s desk because there isn’t enough commercial property for sale to warrant a specialist. The decision of how a property is sold (and by whom) is really up to the seller. As an agent, it is really up to you to decide what you can handle and what is over your head.

Other Real Estate Options

What most people don’t realize is that there are a lot of other things to do with real estate experience (or a license) besides sell a home. Being a property manager managing other people’s investment properties, for example, will usually require a real estate license. Many appraisers, lenders, lawyers and developers will also get licensed.

There are also real estate people working for most large corporations buying and managing their holdings. On top of that there are real estate people at railroads, utility companies, local and state government agencies, cell phone companies, etc that buy or lease land for the roads, railroad tracks, power line and highway easements, as well as buildings, cell phone towers, governmental zoning and assessment, etc. Depending on what state you are in, these people may or may not need a real estate license (and might be salaried employees rather than a commissioned agent).

There are also a lot of jobs for an experienced real estate person in the supporting industries that touch real estate- title companies, insurance companies, lending, appraising and inspecting just to name a few. Also, with 200,000 individuals getting licensed each year (and every licensed person needing continuing education) the real estate education industry has become a sizable industry in its own right.

Limits! What Limits?

The real estate industry also gives you freedoms that other industries just don’t have. Even though many agents focus on a specific geography to sell in, there are no requirements to do so other than to be licensed or registered with the appropriate governmental agencies. As such, I have met several agents who sell homes in the St Louis area during the week and at the Lake of the Ozarks on the weekend (Lake of the Ozarks is a vacation community roughly 2-3 hours outside of St. Louis). Because both towns are in Missouri, and a lot of the lake buyers are out of St. Louis, it works for all parties.

I have also met “snow-bird” agents who sell homes in Missouri during the summer and Arizona or Florida in the winter (they are licensed in both states). In this case, their specialty in the winter is to work with Midwesterners looking to buy that winter home (and they had a partner back in Missouri to work with clients over those winter months while they were gone).

There was even one agent I ran into who had listings in both Kansas City, MO and St Louis, MO- towns which are 250+ miles apart. Don’t ask me how they accomplished it or why they were doing it, because it’s still a head-scratcher for me. But all that matters is that it works for you and more importantly your clients.

Full vs Part-Time Agents

This brings us to the other major aspect of agent compensation that makes every individual unique- many agents perform other tasks besides selling properties. Thanks to that independent contractor status we discussed yesterday, it is quite common for agents to have a full-time or part-time job outside of the real estate industry and only sell homes on the side. For example, I know an agent who is a full-time medical sales representative who looks at real estate as a few extra dollars a year on the side. New agents may also maintain a job on the side in order to stabilize their income until their real estate career takes off.

Real estate is also often a “secondary” family income for a spouse or partner that would otherwise be a stay at home parent or spouse. Even though these agents don’t have another income producing job, they may still work less than full-time at real estate. (Usually agents who work “less than full-time” will have a specialty that focuses on family and friends as clients because they don’t have a large advertising budget or the time to handle an extensive marketing plan).

Even full-time real estate people may split their time between real estate sales and other tasks- often to provide a turn-key solution to their clients. In both the commercial and residential space, for example, agents or the companies they work for may provide things like property management services (leasing, renting or maintaining a building after the sale).

Agents may also serve dual hats by being a real estate investor, builder, general contractor, rehabber or owner/worker of some other related business- such as a construction company, appraisal company, a mortgage company, or property management company. In many cases the agent’s sales leads might come from the other side of the business (or vice-versa). The only requirement is that the agent discloses their roles in all of their businesses and follows all state laws regulating both industries.

All of this effects compensation because the “agent” in question isn’t spending all of their time focused on selling properties. On my own sales team, for example, Brad Padratzik- manager of The St Louis Agent Team’s Investment Division- also runs a small contracting company that paints and lays flooring. Although it might seem to be a distraction from selling, the truth is most investment clients appreciate the fact that Brad can offer a more “turn-key” solution- and that leads to repeat business. (By the way, this is why real estate is a perfect career for someone with attention deficit disorder…)

Tomorrow’s Installment

Tomorrow we will wrap up this discussion with how commissions are paid out and how much money an agent can expect to make.

Posted by Darin "Sid" Cameron at 12:23 PM | Permalink | Comments (0) | TrackBacks (0)

Recently I had a new real estate agent ask some very simple questions about how agents are compensated. Although it may seem surprising that someone who has taken the time and expense to get licensed hadn’t done the investigation into how they would get paid once they had their license, my experience has been that it’s actually quite common. With this in mind I thought I would take the next few days to write a three part blog on how the real estate industry works, what your options are as an agent, and how agents get paid.

One of the problems with having this discussion is that no other industry presents you with the wide variety of options, specializations and freedoms that the real estate industry has to offer. As a result, compensation plans vary drastically based on what kind of real estate work you are doing. Compensation plans can also vary from one real estate company (called a brokerage) to another and even between agents within a company doing the same work. To add to this complexity, state and local laws will change how the industry operates within each state and where you live will also impact compensation (i.e. agents in a city often have a very different experience than agents in a small town).

To understand this better, let’s start by explaining the relationship a real estate agent has with their employer.

Understanding Who You “Work” for…

The first piece to understanding real estate compensation is to understand the structure of the real estate industry- which varies slightly from state to state because of variations of state laws. In most states (including Missouri) you have two major parties involved in real estate- Brokers and Agents. What’s the difference? Legally, only a broker can "technically" sell real estate; the agent works under the broker’s umbrella and license. As a result, to be a licensed agent you must have a broker who “holds” your license for you. Without a broker affiliation, an agent selling real estate is doing so illegally (even one with a state license).

Confused? This is literally 2-3 chapters of the real estate certification class and I don’t want to take the time to discuss it all here, so think of it this way- a broker owns and runs the real estate company (brokerage) and the agent is the one who does the daily work with buyers and sellers. With that said, a broker may have thousands of agents in multiple states working under him or her or the broker can be a one person shop (where one person serves as both the broker and the agent).

For the record, becoming a broker really isn’t much more difficult than becoming an agent. In Missouri you first become an agent by taking the agent class and test, then after two years you are eligible to take the broker’s class and test. (The two year wait is new as of 2006). I always joke that the difference between an agent and a broker is about $400! (i.e. the cost of the second class and test...)

But seriously, the real difference between being a broker over an agent is just having more career options. Outside of running your own brokerage, the state requires every real estate branch office to have an office manager who also has to have a broker’s license. So if you aspire to management, the extra step to a broker's license is the first step to get there. Many agents (myself included) will also get a broker’s license just to show they have a higher level of training than the average part-time agent (this is called being a broker-agents). Even if you are a broker, office manager (called a broker-manager), or a broker-agent you are free to sell real estate like an agent.

The final point here is that you should not confuse a broker or brokerage with a franchise. A franchise is simply a national or regional marketing organization that a brokerage may belong to (these are names like Prudential, RE/Max, Coldwell-Banker, Century 21, ERA, Exit Realty, Keller-Williams, Assist-2-Sell, etc). Owning a real estate franchise is no different than owning a McDonald’s or Subway restaurant franchise- although you own and manage your own shop, marketing is regulated at a national level to give the appearance of continuity from town to town.

In larger markets you may also find multiple franchises of the same company. In St Louis, for example, there are over half a dozen RE/Max franchise, and the second and third largest brokerages in town are both Prudential- Prudential Alliance (the broker my team is at) and Prudential Select. Although they both have that Prudential name, they are owned an ran by different people.

Understanding How Agents get Paid…

Since the average first year real estate agent is someone who enters the industry from another career (generally outside of sales), the next piece to understanding compensation is to realize that it will probably be unlike any other job you have ever had. First off, the vast majority of real estate brokerages “hire” agents as independent contractors. (I’ve seen statistics from the National Association of Realtors that shows that number as high as 90%.) Being an independent contractor means you technically aren’t an employee of the brokerage- you are a self-employed person who “contracts” for work with the brokerage.

The distinction between being an independent contractor over being a traditional employee is that your broker doesn’t pay you an hourly wage or salary- you are only paid based on output (i.e. commission on sales). They also do not hold or file federal or state withholding taxes (FICA, Social Security, etc) for you (you need to save up money and send it in each quarter yourself). Your employer is also limited by law from providing you benefits (health insurance, 401K retirement benefits, etc). In return, you have some amazing freedoms. Broker’s have minimal input in how you run your day to day business- you can not be told to work set hours, attend mandatory meetings or trainings, what to wear or even where or what types of clients you can work with (within limits).

So what does this really mean? With this freedom comes the need for amazing self-control. There won’t be anyone standing over you forcing you to go to work every morning, so it is all too easy to put off work and allow yourself to fail (or burn yourself out by working 7 days a week). Even though your broker can’t tell you when to work, they can fire you for not producing sales.

The act of getting licensed also doesn’t train you how to be a sales person or teach you anything substantial about real estate. Since brokers can only encourage you to attend trainings, whether or not you learn anything about real estate is up to you (and is often at your own expense). More important, very few brokers will supply new agents with qualified leads or clients. As a result, you are responsible for finding your own clients and marketing yourself. By and large, you are the sales force, marketing department, bookkeeper and accountant of a one person company who doesn’t get paid a dime unless something sells.

Tomorrow’s Installment

Tomorrow we will explore the various kinds of real estate work that exists for an agent to do, and then follow it up on Wednesday with a discussion on how commissions are paid out and how much money an agent can expect to make.

Posted by Darin "Sid" Cameron at 11:55 AM | Permalink | Comments (0) | TrackBacks (2)