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Are all real estate agents rich and overpaid?Published byBrett WarrenAugust 31, 2022 10:30 am
There is a debate in the world about the usefulness and alleged obscene amounts of money earned by some professions.
Its widely acknowledged that real estate agents are not the most trusted professions in Australia.
A recent Roy Morgan survey revealed that just 5% of Australians trust real estate agents, (down 2%) all hitting new record lows for ethics and honesty in 2021.
The four least trusted professions in Australia:
Given stories about gazumping and myths about how real estate agents really do business, its easy to see why the public ranks real estate agents so low.
So, are all real estate agents rich and overpaid?
Heres the truth.
Commission structures for real estate agents
Do you know how real estate agents get paid?
There are two different commission structures for real estate agents - fixed and tiered based - and understanding how these two structures work might give you some insight into how rich they really are.
A fixed commission rate commission is the traditional method when it comes to calculating what real estate agents charge.
It's based on the sale price multiplied by the negotiated commission rate.
For example, if you were to sell a home for $1 million and were charged a commission rate of 1.97% you'd pay $19,700 in commission ($1,000,000 x 1.97% = $19,700).
A tiered commission rate is based on performance and is used as a way to encourage real estate agents to get a higher sale price.
You can do this by negotiating a higher commission rate above an agreed sale price, otherwise known as a "commission accelerator".
A seller would typically agree on a target sale price (or what you want the property to sell for), and then agree to 2 different commission rates if the property sells above or below that price.
Heres an example:
A seller expects a sale price of $830,000.
Rather than a flat 2.5% commission rate, the seller could agree on a lower rate of 2.0% if the property sells for under $830,000 and a higher rate of 6% on everything above $830,000.
This will give the agent a greater incentive to work hard and achieve a price above your expected sale price.
What is the average commission for real estate agents in each Australian state?
Real estate agent commissions in Australia vary from 1.6% to 4% of the total sale price, depending on location and agent competition in that area.
Thats because the simple rule of supply and demand dictates that postcodes with lots of local agents drive competition for your listing.
To get business agents are forced to lower rates to remain competitive while the reserve applies in areas where there are fewer agents.
Comparison service Which Real Estate Agent has a great breakdown of how much real estate agents charge in each state.
The average real estate agent commission in Melbourne is 1.6% to 2.5%.
This increases in regional Victoria because property prices are lower and agents adapt their commission to ensure they earn comparable fees.
Example fee calculation:
If you sold a property in Melbourne for $600,000 and your agent charged a 2% commission, you would pay $12,000 to the agent in commission: 600,000 x .02 = 12,000.
Sydneys average real estate agent commission is 1.8% to 2.5%, only slightly higher than the average in Melbourne.
The reason for such low average commission is because property prices are higher in Sydney (and in Melbourne) than in other Australian cities. Agents can more easily earn a good commission with a low rate.
Example fee calculation:
If your agent charged a 2.3% commission and your property sold for $750,000, you would need to pay your agent $17,250 in commission: 750,000 x .023 = 17,250.
The average real estate agent commission in Brisbane is structured a little differently from the rest of the country, Which Real Estate Agent claims.
Agents typically charge a 5% commission on the first $18,000 of your propertys sale price and 2.5% for the remainder.
This is a popular structure both in Brisbane and regional Queensland.
Example fee calculation:
A property sale of $535,000 at the above average rates would earn the agent $13,825 in commission:
18,000 x .05 = 900
517,000 x .025 = 12,925
900 + 12,925 = 13,825
As Australias capital city, Canberra has a unique real estate market due to the high number of well-paid public servants and the high level of restrictions on land development.
The low supply high demand environment has created high property prices and higher average real estate commissions throughout the ACT.
You can expect to pay between 2.5% and 4% in agent commission when selling in Canberra, which is the highest average real estate agent commission in Australia.
The REIT has created a scale of fees and commissions that they recommend agents use.
Although not regulated, this guides agents on price and has created a high average real estate agent commission in Hobart and regional areas of 3.25%.
In Darwin, the average commission rate is 2.55%.
This is higher than many other Australian cities because Darwin has a smaller population. You can also expect to pay the same average rate in regional NT.
The average agent commission in Adelaide is much lower than in the rest of Australia because prices are much cheaper on average.
In Adelaide, you can pay between 2% and 2.75%, but the higher rate is usually reserved for regional areas, which can go as high as 3%.
In Perth, the average real estate agent commission is between 2.44% and 3.25%.
This is higher than in more populous cities, like Sydney and Melbourne, because property prices are lower in Perth.
3 types of real estate agents and their worth
A real estate agent will earn in direct proportion to the amount of work they put into their job.
Yes, there are a large number of agents who arent worth putting out if they were on fire; thats why you need to interview a few before you decide who to work with.
Here are the 3 main types.
- The Good
Just like anyone that is good at their job they are in high demand.
- They have methods, know online/offline marketing, systems, and a track record of success.
- You will see their marketing and sign boards everywhere on a regular basis.
Yes, a lot of agents go for price reductions as their only option to sell property but not good agents, they know how to do the job properly and they can.
- Price the home correctly in the first place with a clear proven strategy in mind and
- Will find the real reason why the property isnt selling (put all B.S. to the side); its not always because of the price.
I will agree, that some agents have egos larger than the known universe; they need some inherent belief in their own abilities to be able to get up each day and be told to rack off by the next 40 people they speak to and keep coming back for more.
- The Average
Its the old 80/20 rule. 20% of the agents make 80% of the money.
A good real estate agent will continue to learn and hone their skills over their career: others will plod along, lasting maybe a year in a job they were never suited to but were drawn to by the promise of unlimited earning capacity, total work/life freedom and other shiny concepts that cant be delivered without massive effort and constant hard work.
This is why we have a massive influx of Gen Ys entering the industry, but they are lucky if they make it past the 12-month mark.
We also have one of the highest churn rates of new staff and broken dreams as an industry (there is always fresh meat for the grinder in the real estate industry).
- These agents dont have a clear plan, methods, they have no idea about online/offline marketing, limited systems, and struggle to show a track record of success.
- You will not see their marketing and sign boards on a regular basis.
- The bad
When you interview these agents they fold easily when you quiz them about their negotiation ability.
They will resort quickly to commission cutting to get your property listing.
There is an old saying price is only an issue in the absence of value.
Good agents spend a lot of time and money learning how to negotiate so if an agent cannot negotiate his or her fee what will they do with the price of your home?
That question is a cause for concern.
These agents are best characterised by:
- No clear method of negotiation and resort to commission cutting to sign you up.
- Lazy and want to belt the price to below the land value.
- Dont bother with decent signage, then forget to advertise the open house and wonder why no one turns up but uses the excuse of your price is too high for the reason the property hasnt sold.
- Use of particularly bad photography thus targeted by buyer agents on the hunt for easy or cheap deals.
How much do real estate agents earn?
Not as much as youd think.
The truth is that when it comes to how much real estate agents earn, the average agent only makes a modest income of $50,741 per year, according to Payscale.
Of course, there is a difference between a real estate agent and a real estate agency which fuels the myth of individual Real Estate Agents earning big money for selling a home.
The individual agent would only earn a portion of the commission for each sale with the balance going to his or her agency.
It would be common for an individual agent to earn a third of the commission for the sale and the balance going to the agency he or she is working under.
How many hours do real estate agents actually put in?
Just like any self-employed person, you will need a passion for what you do, a crazy work ethic, and have some of the same insecurities as real estate agents (no work no pay).
On a regular basis, many of us work 12-hour days including Sundays.
We sometimes work with clients for 2 years or more before making any money out of the relationship and some we may still be helping 3 years down the track without having done any business.
Risk vs reward
How many tradespeople would do all the prep work and put everything in place to complete the job, having paid for everything needed to get the job to the starting line, only to have to wait perhaps weeks, months or years to realise any form of payment, if at all?
And what if, after all that work and outlay, the whole thing goes pear-shaped and falls over due to something that the real estate agent cant control?
If a real estate agent clocked in and out each time they worked on a particular property, kept a detailed list of associated expenses, and then did the maths from the final commission paid over the time taken to earn it, the rate would work out to be close to the minimum $/hour as defined by the powers that be, in the majority of cases.
I want you to ask yourself this: how many people would work with no retainer, no car allowance, and every weekend, some nights, supply your own stationery, business cards, etc. and you only get paid if you get the results.
Now thats not to say that some sales dont calculate differently.
Those homes that are listed and sold quickly after only a short relationship are obviously, far more profitable from that viewpoint, however, they are the exception, rather than the rule.
Most people take around 6-18 months to sell their home from the moment they get the idea and start checking into it until the day the house settles.
So if you work it out, here is the mega commission you think a real estate agent earns for a sale.
The commission cut up
Lets say an even $10K for the purpose of this exercise and well use all the lowest common variables: $10K commission for 6 months work (180 days).
Lets say at 3 hours per day,
3 days per week (just for argument's sake) = 216 hours = $46.30 / hour (approx).
From that, you need to take the Franchise Fee (if applicable) @ 10% = $41.67 / hour and then take out the cut that the agency you work for gets for an average agent, thats 50% = $20.84 / hour maybe a referral fee.
At this stage, we havent even taken the taxes, fuel, car, phone, training, and other overheads yet.
There wont be many real estate agents retiring to Hawaii any time soon on those numbers.
The reason agents are paid so much is the risk, how many people would go to work 1012 hours a day 67 days, and possibly not get paid?
Seriously think about who would go to work, do their job, be on-call, get dragged away from their family and then at the end possibly not get paid.
The average agent earns $60-$80k per year working hours that most would have their unions shut down a workplace if they would be forced to do, let alone at the risk of not getting paid.
Are real estate agents worth it for sellers?
A good real estate agent earns their fee.
And rememberthe cheapest estate agent is the one who gets you the best sale price not the one who charges the lowest commission.
But what about those top earners?
Yes, there are a few who earn $500,000 a year, just as there are salespeople in other fields that earn that sort of money.
But for every $500,000 earner, I will show you another 500 salespeople who earn less than $60,000, particularly after deducting their car and phone costs.
Successful people earn good money, unsuccessful people do not.
That is how the free enterprise system works, people!
Remember that the skill of a good real estate agent is to get the buyer up in price and negotiate the deal.
The average person does not have this skill and gets less for their home.
Remembermost people do not sell and buy a large number of houses in their lifetime.
For the majority they may sell 1 or 2.
For the most part, sellers are very emotional when selling and at times temporarily insane.
Therefore, you need an objective party handling the negotiations.
The personal sacrifices
The thing is real estate agents can be as wealthy or as poor as anyone, but what people forget is the amount of sacrifice of personal time and energy that goes into successful agents.
To those of you who say they dont deserve what they earn, I challenge you agents make the choice to either work their guts out to make the most they can, or they can cruise by and do the bare minimum therefore earning the minimum wage.
In todays world where even the smallest commodities come with huge price tags, most people have to earn as much as they can to support their families and lifestyles, but oh boy does it come at a price.
Leaving before 8 am and getting home at 9 pm, kids' school events missed, weekends full of open homes and negotiation, and that bloody phone that can never be turned off!
Real estate agents work like a dog.
Do you say theyre always out at lunch?
Most likely its a meeting with a client or a negotiation.
Swan into work whenever they want?
Well sure, theyre mostly out of the office on the road closing deals, doing inspections, or visiting homes for appraisals.
Real estate agents live and die by the work they do and absolutely deserve what they earn.
They give up a lot to achieve success, going from absolutely nothing to a thriving career based on their own hard work and tenacity.
Looking rich is all part of good real estate agent marketing.
Would you trust your most valuable asset with an unsuccessful looking real estate agent?
At this stage, you may be asking yourself how come real estate agents own expensive cars, watches, and offices?
As you probably already realised, agents are all about personal promotion.
To even get an interview as an agent you have to already look the part.
I know many real estate agents that dont really care about what car they drive, but unfortunately we live in a materialistic society.
Sellers make judgments whether we like it or not on such things, whether it be subconsciously or consciously.
Because we look successful, people have preconceived notions that we are living it up but in reality its all good marketing.
I often ask the agents around the office How was your weekend?
The usual reply is Aaaarrrr I was in the office for most of it.
End of conversation.
So, do I really need a real estate agent to sell my house?
Or can I do it myself?
You may still be thinking that if someone WANTS to buy a house THEY WILL, and the Real Estate Agent him/herself will have absolutely nothing to do with that decision!
This is true to some extent but at what price?
If you think real estate agents are a dying breed and you think you can sell your own property for top dollar, I think you should, but just make sure:
- you dont hold back on the marketing,
- have a system of negotiation to get the best offer,
- flexible work hours for buyer meetings
- and do your best not to get emotional.
Although there are many owners who have the ability to sell their own homes, there are millions of others who are petrified at the very thought.
Here is one example that I have seen a few times.
The Sale by Owner vendor has had what he considers to be an excellent inspection with Mr and Mrs Jones.
They are making good buying noises, or so he thinks.
They say We will get back to you.
Two days go by and not a word!
What does the private seller do?
Does he phone them?
The thought crosses his mind that if he does that, he might risk appearing as an anxious seller!
Does he even have their contact details? Does he start to doubt his assumed ability to be able to spot a definite buying signal?
Hmmm! Maybe this is not as easy as I thought!
A good agent doesnt have to worry about these things.
He is not embarrassed to phone Mr and Mrs Jones. That is his job!
A good agent is also a damn sight better in spotting buying signals than the average homeowner.
If Mr and Mrs Jones had been making genuine buying signals the good agent would have had them back to his office negotiating and filling out an offer! That is the difference.
Sellers that get emotional during the selling and the negotiation process usually make irreversible bad decisions (unknowingly), that cost them more than an agent would have.
I have seen it almost on a daily basis and I will admit I made many bad negotiating decisions when I first started.
Thats why good agents spend thousands of dollars on coaching and training and selling systems.
This human element of selling a property is why real estate agents will always be needed.Are you wondering how you should invest in this interesting phase of the property cycle?
If you're like many property investors, you're probably wondering what's the right thing to do at present.
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