Caroline Ashe Your Source in Augusta, GA Real Estate December 28th, 2007
The debate rages on…
There are a lot of people out there that believe that Realtor fees are outrageous and Realtors are way overpaid. That is a debate that has gone on for a long time, and I won’t address it here.
What I will address is the misconception that an agent walks away with huge commissions for a house sale. In most cases, it’s patently untrue, and stems from most people not realizing the number of parties involved and the expenses behind the scenes.
Let’s discuss the payment that Realtors receive when handling a real estate transaction. First of all, the payment is normally handled by the seller. That means if you use a Realtor to buy a house, their fees are not coming out of your pocket. Sure, the fees might be built into the ‘overhead’ of the house price, but all the same, as a buyer you won’t see the cost. As I just mentioned, the fees are paid by the seller at the house closing. It is taken out of the equity (if there is any) of the house before the seller gets their check. That means if the transaction falls through (for whatever reason), neither Realtor gets paid. Realtors fees vary from Brokerage to Brokerage – For example Meybohm Realtors fees are different than Re/Max which is different than Keller-Williams.
Let the Splitting begin…
I’ll walk you through an example of a typical fee split. In a typical sale, there are four parties that split the Realtor’s fees:
- The seller’s agent’s Brokerage
- The Seller’s Agent
- The Buyer’s agent’s Brokerage.
- The Buyer’s Agent
In my case, I work through Meybohm Realtors. They charge 7% for a residential property transaction. Last year the average cost of a home in the Augusta area was approximately $155,000.
7% of that average sale price amounts to $10,850. That’s a high number, but remember we have a 4-way split to follow. The first split is between the selling parties and the buyers parties, so normally each side cuts the number 50/50:
To seller’s agent and broker: $5,425, and then to buyer’s agent and broker: $5,425.
This money goes to the managing broker on both sides, who takes their cut and gives the remainder to the agents. In my case, Meybohm takes 50%, leaving me with $2,712.50. Once again, this varies depending upon brokerage, but even if the agent’s broker takes nothing, leaving the agent with a 100% commission (well 100% of the remaining 50%), they are certainly paying office dues that run around $1,500 a month in addition to their other expenses.
That’s probably the #1 reason people think huge commissions are the norm in real estate. They see a $150K house, they see a 7% commission…Do some quick math…and jump to the conclusion someone just made 10 grand. Wrong.
Uh-oh. Now the fixed expenses kick in…
But wait- there’s more. A real estate agent works as an independent contractor in the eyes of the IRS. The taxes start at 40%, leaving me with $1,627.50. I can get write-offs for certain business expenses, but I’m still going to get hit to the tune of a third or better. (If your CPA is much more ‘creative’ than mine, tell him to call me when he gets out of jail.)
Then you take out an additional 10% for state taxes. I’m down again to $1356.25.
Now, we get to fixed costs: Agency dues (over $300/year), hosting fees ($360/year), IDX/MLS feeds ($200/year), marketing (I average $2400/year), increased automobile insurance (carrying clients requires additional coverage), continuing education required to maintain your license ($300/year), and a cell phone ($200/month). Website development and tweaks I set aside $50/month. Then you have your lockboxes, yard signs, and electronic keys. The key access has a monthly fee of $40/month. In addition, I figure I consume about $200 in business supplies per year.
Then I have the wear and tear on my car and the gas driving people around. I conservatively estimate that at about $200 a month.
My fixed costs alone exceed $600 per MONTH. If this theoretical house sale is my only sale for the month, I’ve made just $752.92.
And the results are in…
Now I’ve shared my split with you before and after taxes, and shared some of my fixed expenses. I’m sure some of you have already computed that if I only sold (1) $150,00 house per month my net income would be approximately $9,035 a year. Now consider that the average agent in Augusta has one transaction every THREE months. That is why there are so many part-time agents! It’s very difficult to get enough business to make it a primary career.
My first year start up expenses, including website, etc were over $7,500. Most established agents will tell you not to count on any income at all for the first 2-3 years.
Typically it takes a minimum of 30-60 days of work for a sale, and then you get your check. This means that unless you have a working spouse, or carry some capital in your checking account, you are always floating expenses before you realize the income. Believe it or not most agents work pretty hard for the wages that they make.
Being in business for yourself requires an extraordinary amount of work and the weekend is the busiest time, since everyone else is NOT working. I get calls late at night pretty much every day. And you should try planning a vacation!
I’m not looking for a pity party. In fact, I do pretty well in real estate, and I conservatively expect my business to double in ’08. But it always makes me grimace when people make jokes about the high commissions. Since when?!? (LOL)
Don’t get me wrong – I love the work – but if you think money is the only reason why Real Estate professionals do the job then you would be mistaken. Because at the end of the day the money is not enough. If you do not enjoy people, homes, and a lot of hard work, you need to find another career.