Changing the Compensation – Part 1

If the reason the cost to consumers hasn’t come down in the real estate business is due to the number of agents and the way they are compensated, then maybe it’s time to look at changing how agents are compensated.  Unfortunately the people who have the power to influence legislatures, the National Association of Realtors®, and most of the Multiple Listing Services throughout the country, don’t want to change how real estate agents are compensated.

In general, I would agree that real estate agents themselves are not overcharging their clients.  Of course, you do get some agents who get a listing, stick out a sign, put it on the MLS and do nothing else.  If it sells, they get paid.  If it doesn’t, then they haven’t invested much in the process.  But most agents don’t do this.  They make the effort to get the home sold. And because each agent’s individual costs are so high, the commission rate is necessary to keep agents alive.

The brokerage firms know the large number of non-productive agents.  Agents who merely make enough to stay in the business or are really doing real estate more as a hobby.  A friend of mine equates selling real estate to playing the slots in Vegas.  The slot machine pays off just enough to keep them in, hoping that the next time will be the big payoff.  Gambling is a good analogy to beginning real estate sales.  You really aren’t in control, it’s just a matter of luck.

And what about the agents, that supposed 20% who do 80% of the transactions?  The agents who are “making it”, the ones doing the double-digit number of transactions each year?  They don’t want to loose their commissions.  Maybe some of them have found a way to make it work.  But with the incredible onslaught of new agents we have had in the last several years, even the old timers who have the game down are suffering.

Say you can cover your fixed costs by doing three transactions; fixed costs being licensing dues, MLS dues, office desk or technology fees, advertising, office supplies, and anything else that you need to do to simply stay in business.  Anything more three transactions is over and above your fixed costs.  So beginning with transaction number four, you start to actually have money to cover your personal and family cost of living.

For every new agent who comes in and does one or two transactions, that is taking the profit out of an established agent’s business.  For every friend, family member or acquaintance who uses this new agent, that is one deal that is not available to the seasoned agents.

In other words, if the brokerage firms weren’t constantly recruiting new agents, the agents who had been in business longer would be able to do more transactions.  And more transactions should equal more money.

So the real advantage to the seasoned agent is in changing the way the system works.  They won’t have the fixed costs and there should be more transactions out there for everyone.

And, if there is a mentoring, training or apprenticing program in place, then maybe we can all stop complaining about the other agent who doesn’t do their job, the contracts that are so badly filled out we counter to get things straightened out, and the agents who seem to think this is just a great way to get rich quick.

®2007 by Judy Kane