Are real estate agents overpaid?
GUEST OBSERVATION
Over the weekend I saw many social media posts of the number of homes auctioneers auctioned off on the day. Some numbers came in between seven to 11 properties sold by a single auctioneer.
Then there were the articles and reports of properties being on the market for as little as 13 days on average across Sydney.
I began to once again ponder on the costs involved in selling a home. More to the point, I wondered about the time given to the sale of the homes by the real estate agents (REAs).
This raised two questions.
- Is if the real estate professional an overpaid individual.
- Do we need to re-think the way REAs are being rewarded for their services?
Looking at figures closely
The majority of auctioneers in the field on a Saturday charge on average $500 per auction for attending and overseeing of the auctions. The mean time spent on site by the auctioneer is 30 minutes to one hour. Agents, as we know, on average are charging 1.7% in commissions off the sale price.
Added to the costs of selling a home is vendor paid advertising (VPA), which averages $1,500 per property. Allow me to once again do the math and break it all down to get a better understanding of what it costs to sell a home.
Keep the following numbers and values on hand.
- Median Home Values in Sydney: $844,000
- Average commission equal to: $14,348
- Vendor Paid advertising: $1,500
- Auctioneer fees: $500
- Current - Average listing period in Sydney: 13 days
The following question began to re-surface in my mind. Are REAs overpaid? Some will no doubt refute this article and say: "Mate! If you pay peanuts you get monkeys!” Please bear with me and let’s look at the above figures in dollar values per “hourly rates” being charged, before you stone me.
For most of us, we learn early in life, the level of service you expect to receive is usually in line with the amount of money or value you are willing to place on it.
Is the above premise, however, true of the real estate industry or have we fallen into a bad habit into accepting a payment structure that may be seen as out-dated? Will the public wake up to this soon?
This article is designed to further explore the above notion and to make a cost analysis comparison of professional services provided and client relationship between other professionals and the real estate industry; a cross-comparison in the value for hourly rates charged. You may say, a “pound for pound comparison” with other professionals and industries.
It is noted by the majority, professional service providers may study up to six years to attain their qualifications, their preparation forming a basis for the fees charged. Once their degrees are obtained, there are ongoing inductions of on-the-job training as a minimum requirement; in particular the legal, finance and medical professions commonly known as continuing professional development/continuing educational development (CPD and CED), or internships.
A real estate agent however, may sell a home whilst in the care of a fully licensed REA and only after completing a three-day course and receiving a certificate of registration from the NSW Office of Fair Trading.
I note that a licensee in charge of an office a fully licensed REA, or a certificate holder, must undergo further courses and training. But these requirements are not as rigorous as most professions. At times a breakfast presentation or a half-day workshop meets the criteria.
Notably, the question persists, "are real estate agents overpaid?" I for one believe this question has crossed the minds of many vendors. Vendors that have sold and currently have properties on the market. Perhaps this is a question that will emerge over time and occupy the minds of the soon-to-be vendors.
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To answer this puzzling question, I have compiled a series of graphs using the example of the legal profession as a cross-comparison.
Bearing in mind other professions also have similar fixed hourly/service rate charges.
I have used the legal profession sample as they break their service rates to six minute increments to itemise their bills and accounts. These are increments that allow you to account for detailed work on a case/matter at hand and determine what was done exactly and in detail for the fee being charged.
Time Sheet
KEY
Interview: a solicitor will interview the client for 30 minutes to 1 hour, which is usually at no cost. Phone calls, emails and other services performed can be charged at six minute increments or to round off say, $30 for each duty performed.
CMA: a REA agent will attend the home and provide a “comparative market analysis” to the prospective client also at no cost.
A solicitor’s brief may take up to three hours to prepare and this may be at a fee of approximately $300/hour. The REA, on the other hand, on being the successful candidate, may take up to three hours to collect contracts, organise photos and organise the advertising of the property. Yes, and for the ones that still use signboards, attend the property to erect the signboard.
Local data shows that a local Sydney property on average will be on the market for 30 days, in some areas for as little as 13 days, and national data shows property is on the market for an average of 80 days. A legal case can run for days but it is billed on actual hours the legal person spends on the matter specifically.
The legal profession is used as the control group to gauge and compare the performance of the test subject: the real estate agent. The agent’s entitlement of fees, such as commission, which is charged contractually and the perceived assumptions of what a REA does for the commission paid, can be two distinctive notions.
By adopting the use of a simple timeline spread sheet, we may be able to better represent what takes place during the marketing campaign and gauge a per hour cost of the property sale. Assumptions are made in the time actually spent when listing and marketing a property for sale, both by the REA and the vendor.
This view stems from the writer’s experience in running a personal business and in the employment of brand real estate offices over the years. I have also interviewed a pool of agents independently and gathered similar (anecdotal) evidence, which is reflected in the chart below:
The average sale of a home has been estimated to take 12 hours. Made up of: preparation time, open house inspections and post-sale time spent on paperwork as well as, valuation and pest and building inspection access.
Given the above figures (time versus cost comparison) it may be asserted there is a wide discrepancy in fees paid and charged when the sales process is broken down by the actual time spent on the sale of a home.
While understandably these figures may seem surprising and even alarming to some property owners, I do not wish to scare, but rather, to educate and highlight to vendors the need to know and ask, whether they are really getting value for their money’s worth.
It is time vendors requested a detailed and comprehensive breakdown of fees, times and costs (i.e. itemised invoices) similar to those produced by other professional industries. I stress this even more and in particular when VPA is being charged as an added cost of sale.
In a knowledge rich world, Vendors need to ask questions not only upfront, but also throughout the sales campaign to ensure that they are getting value for money.
Questions such as: ‘Is my Real estate agent really marketing my property effectively enough?’ and, ‘Are they over relying on traditional signboard and costly newspaper advertisements?’ should be asked if doubts ever arise.
The next time you are approached by an agent, you should arm yourself with simple questions to ask before you sign over your rights to sell what may be your most valuable asset.
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Traditional marketing, traditional sales approach
Are real estate agents worth what they are being paid? My personal opinion is no. If the agency is relying on basic marketing tools and not keeping up with current trends and technology. A further no if the agent is not contributing to the sales campaign, by demanding VPA.
More time should be focussed in the preparation of the property, assisting the vendor in any way possible to achieve the best price. Not to mention working hard to making sure the property settles after achieving an above average price.
I do not subscribe to “paying peanuts” either. The REA should be well rewarded if he or she can show his or her value in the success of the sale. Keeping in mind, historically REAs were being paid 2-3% commissions on properties when the median price of a home was less than 50% what they are now.
Other themes stem from this:
- Has it become too easy to enter the industry?
- Will there be a rising market of vendors selling their own homes due to high costs in having agents sell for them for the service being provided?
- Is the industry ripe for “sell your own home” ventures?
- Is there another alternative to commission structure and hourly rate structure?
KEY COMPARISONS:
- Interview/CMA: A lawyer interviews or briefs the prospective client to give general advice in respect of the issue. In the most part, this is free. The REA provides an on-the-market analysis CMA to sell his or her service to the potential vendor.
- PREP/BRIEF: A lawyer prepares a brief at an agreed fee of a/hourly rate to determine the validity of the case and advise the client accordingly. The REA prepares the property for market this includes: photos, advertising, videos, and virtual tours in the most part.
- OTM/RTC: A lawyer “runs the case” RTC by the amount of time spent which is charged to the client on a six minute interval (lawyers charge for time actually spent working on the case matter). Whereas, the REA works on a fixed commission, but we are making the assumption the property is on the market OTM for six or eight weeks and the REA spent one to two hours per week showing the property to potential buyers.
- Costs: A lawyer will incur filing fees and these fees are added to the charges. The REA may incur advertising costs if the vendor does not contribute with Vendor Paid Advertising.
- Total Hours: The lawyers’ fees are fixed on an hourly rate and the case may run for an undetermined period of time; remembering the lawyer only bills for time spent on the case. The REA has a fixed fee but figures would show that in general, Sydney properties are currently on the market for on average four weeks and nationally 11 weeks.
- Charges and Average/Hourly rates are self-explanatory. The total average hours spent in the sale of a home are 12 hours. The total charge on an hourly rate by REA is therefore $950 per hour if the vendor did not contribute to costs of advertising.
Now you may seriously ask the question, “what did the agent and auctioneer” actually do for the sale of the home? If you can answer this with great confidence, and believe they deserve the $950 per hour rate, you can throw the first stone.
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EDWIN ALMEIDA is managing partner and licensee-in-charge of Just Think Real Estate.