Are Realtors Worth the Commission?

In the world of real estate, everyone wants a deal. Sellers want top dollar for their homes, while buyers want the best deal for the home that they purchase. The general question of real estate commissions is one of much debate, and one that all agents have struggled with.

I find many people when looking at the commission on the sale of a house do what I call “the quick math”- 5% to sell my house? So you are going to make $15,000 on the sale?????? (Assuming a $300,000 home)

Well, no. As large as this number seems, it is a worthwhile exercise to see how it all breaks down. First off that $15,000 is split 50/50.  The typical real estate transaction is set up like the following chart illustrates:

As you can see from the above chart we actually end up with a much smaller percentage at the end.  The chart above is based on the average solo Real Estate Agent as well- expenses can be even higher for teams or for agents that offer more services.  For example with our team- before the property even hits the market we have spent close to $1000 in expenses.  Our listing package includes:

  • Staging consultation
  • Pre-listing Home Inspection
  • Professional Photos and Virtual Tour
  • Professionally Designed Coloured Flyers

In addition to these costs, we have 1 part time admin and 1 full time marketing professional who do all of our back office paperwork, marketing , online uploads, feature sheets etc. Our administrative team helps to support us behind the scenes, and allow us to provide a better overall service experience for our clients.

What this means is that we spend $1000-2500 in marketing, advertising, wages etc. towards selling a property and in the end if it doesn’t sell- we are simply out that money.  These costs do not take into account the time invested or cost in gas.

How many people out there would sign up for a job that you could potentially work 40+hours invest $2500 and end up with nothing at the end?   Anyone adverse to risk definitely wouldn’t.  Now obviously the reason realtors do this is because there is a large reward compared to the risk for those that are running a strong business at a high enough level.  If you are a competent and self-driven and ethical individual, real estate can be a very rewarding and lucrative business.  Unfortunately, most realtors don’t fall into this category.

Pareto’s 80/20 principle is very evident in the real estate world.  In this context it states that 20% of Realtors conduct 80% of the business out there.  I find this to be very true. The perception amongst the masses is that realtors make too much money and are overpaid for what they do.

But let’s look at the statistics in the Kitchener Waterloo Real Estate board- last year there were 1,217 licensed realtors registered with our board.  In that same year there were 6,562 sales.  So if we take the number of sales and divide that by the number of realtors we end up with an each agent selling an average of about 5.3 homes per year. If we times this by our average commission ($2750) from above we end up with approx.  $14,575 of gross income per year.  That’s gross income!  So the average agent is actually below the poverty line.

Now, there are some variables that distort these stats like part-time realtors, inactive licenses and the 80/20 principle discussed above.

Thankfully our team is in that top 20%, and you can see not all realtors are raking in the money.  The ones that are doing well have proven themselves and built systems and deliver a high level of customer service.

I think this is a bit of a soft spot between my brother and I.  My brother is an engineer- probably one of the smartest people I know.  He spent 5 years going to the University of Waterloo in one of the toughest programs there is.  From time to time we get together and discuss each other’s career paths and I can tell there is some resentment in the fact that I make a fair bit more money than he does and yet I did not go through the grueling program that he did.  He talks about how we are overpaid and that commissions are ridiculous for the work we do and the training we have. To be honest it frustrates me.

He doesn’t see the 12-14 hour days, the on call 24-7, the evenings and weekends, the emotional ups and downs.  He just sees the nice paychecks and the ability to create your own schedule.  Sometimes I wish I had a 9-5 job where I could just turn off and have a life outside of work- especially with our newest addition to the family- our son Lochlan.  But when a client is selling their home – one of the biggest investments they make in their life- it’s an important time and we need to be there every step of the way.

I try to explain to him that this is why we get paid the way we do- we do the job that no one else wants to do.  I try to put it into context and ask him what kind of money an Engineer would make if they only worked evenings and weekends, were on call 24-7, work all sorts of overtime and were risking making nothing on every job they did if they didn’t do it successfully.  That engineer would be making time and a half or even double time, right?

I think one of the things that frustrates people sometimes is the speed of the sale.  There are times when a listing goes on the market and can sell in 1 day or less.  Often times clients think ‘wow we must have under priced the property’ or ‘it sold in a day and you still get paid the full commission’?  To which I would ask, ‘ok if it doesn’t sell or takes a really long time to sell does that mean you will pay us more’?

The issue of ‘underpricing’ is an interesting one, and is often misunderstood. To me the market recognizes an underpriced property and in most cases there will be multiple people interested bidding the property up to market value.

This is always tough for us as realtors- if it sells to quick- we underpriced it and didn’t earn our commission.  If it sits on the market for a long time- we are not doing our job.

It’s a dammed if you do dammed if you don’t scenario.

What’s important to take away from this is, if it was easy, everyone would be doing it. Or at least more people would be successful at it. The attrition rate for realtors in our region is 70% in the first year

A good realtor performs a number of functions in the real estate transaction and this is where we earn our money:

  • Education about the market– what’s selling, what’s not, where is the market is trending
  • Preparing the house– timing the market, advice on upgrades and repairs to net best return, staging, photos
  • Marketing the property– getting it noticed by buyers and by other realtors, online, MLS
  • Negotiations– negotiating offers for the best possible price, taking emotion out of the equation
  • Liability – we carry errors and omissions insurance so that if something by chance goes wrong, we are the ones being sued, not you
  • Organization– keep the client organized and on time with deadlines, paperwork etc
  • Time Leverage– free up the clients time- no answering calls, showings, open houses etc
  • Streamline the process– make the transaction as smooth as possible with checklists and timelines to keep client on track
  • Provides Value– adds value to client even after a closed transaction through events, information, gifts etc.

If you have a realtor that does all of these things they will not only save you an abundance of time and headaches but if they know their market and price accordingly they will more than pay for themselves over and over again netting you more money in your pocket. The idea is to make the process as easy and stress free as possible. A good agent is worth the commission. The key is finding a good agent who is working in your best interest to net you the most amount of money with the least amount of hassle.

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