A couple of days ago in an article for Inman News entitled "Realtor® Ranks Swell but their Pocketbooks Don't", Glen Roberts reported what we agents already knew: that despite the huge increase in housing prices over the last ten years with the accompanying public perception that agents are making gobs of money, the truth is quite different.
In actuality, Realtor®'s median income was down 3.2% in 2006 compared
to 2004, while their 2004 median income had dropped 5.6% from 2002.
Roberts quoted Chang-Tai Hsieh, an associate professor of economics at
University of California, Berkeley, who said that the median-income
drop for Realtors®
"is clearly driven by the fact that there has been excessive entry in the last two years. You would expect to see some exit in the near future, but as soon as housing prices pick up we're going to see more entry and then that's going to drive down (income)."
While there are top-producing Realtors® who make a lot of money, "on average Realtors® are not making much money."
Hsieh said that while typical Realtors® may not make much money, he believes that the prices consumers pay for real estate services are "extraordinary" and that those services "shouldn't be costing that much." His analysis of Realtor® commission, population and income was cited in a real estate competition report released this week by the U.S. Justice Department and Federal Trade Commission.
"What is particularly tragic about this industry is that not even the Realtors® benefit from this," he said. A much smaller group of real estate professionals, who charge for hourly work performed, could create a more efficient marketplace."
Hallaluyah to Professor Hsieh who confirms what I have been saying for years: that the commission model in real estate is broken. Back in 2000 in an article for Realty Times entitled "Is the Commission System Unfair?", I wrote that commissions have evolved into a truly lose-lose bargain. Because the consumer is essentially paying for risk mitigation, commissions are an extremely expensive way to pay for real estate services.
Professor Hsieh is absolutely correct: real estate services shouldn't be costing so much and they wouldn't if consumers were to pay for the services themselves rather than what is essentially an insurance policy with services thrown in.
The other side of the lose-lose proposition is what is happening to the agent. Professor Hsieh is also correct that what is tragic is that Realtors® are not benefiting from being paid by commissions either. As I point out in my book Ripping The Roof Off Real Estate, when I teach my consulting course, the Accredited Consultant in Real Estate (ACRE™), live to agents, I always ask them to do the following exercise: Take their gross commission income last year and divide by 12 so they now have their average monthly income. Then divide that income by the total number of hours they estimate they work in a month. If they can't estimate that, I tell them to break it down into a weekly figure. "The sad truth is that with all that the requirements, training, liability, and continuing education, the average agent today earns less than minimum wage."
Yet, for the most part, the real estate industry refuses to start providing some responsible options that give the consumer real value for their real estate dollar yet pays the Realtor® fairly for the valuable contribution they make. Part of the problem is the Realtors® themselves - for the most part, agents don't think in terms of hourly worth. When agents get a large commission check, they almost always forget how many unpaid hours (and transactions that fell apart) that check has to cover. The commission checks for the transactions that close in fact have to subsidize all the work done for transactions that don't, not to speak of all of the "free" services that agents are expected to provide.
Paying a much more reasonable price for real estate services will also require a paradigm shift for the consumer: if they want to pay for the services themselves, they are not going to also get the insurance policy. The consumer needs to understand that they can't expect an agent to continue to provide free market analyses and "tour guide" services. They need to understand that if they want to pay more reasonable real estate fees, they can't also expect to pay an agent contingent on getting their desired outcome. Services rendered need to be paid for and nothing in this world is free. If we want to get out of this lose-lose scenario, both the consumer and the real estate industry itself needs to accept this reality.
To continue to stick to a broken commission model is to see a future of continued decreasing compensation for hard-working agents while leaving the public priced out of vital services and representation. The public will continue to be at the mercy of hucksters who would have them believe that selling or buying a home is no more difficult than selling used clothes at a yard sale.
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I have noticed that the buyer/consumer tends to want all the free services and are really not ready to sign a Buyers Brokerage agreement unless you stipulate that the Seller will pay commission. You are right, nothing is free, although as real estate agents we have trained the public to believe that all the information we give them on the phone, through faxes and emails is free. The answer of course is to have an appointment and consultation with the buyer. But most want to meet you at the property, have you open the door, give them the information and disappear. Since 9 out of 10 realtors run out the door to meet the buyers at any time, without any notice, or qualifications, it is difficult to convince the buyer to come in and sit down and talk first.
As an industry we have done this to ourselves. When I try to discuss this with agents in our area, the answer is..."if I don't meet them there, someone else will".
I for one would much prefer to perform the duties you outlined, as a real estate consultant, but it will take much training and promotion to distinquish your services from those of the real estate agent. I do agree with you, but will still have to compete with the old models!