Q: It seems that over the past 10 to 20 years, real estate prices have increased at a rate which far exceeds inflation and the general increase in the cost of living.
If this observation is accurate, how do Realtors justify maintaining a 6 percent commission on the sales price? Aren’t they effectively getting a whole lot more money for a relatively same amount of work?
I’m sure I’m missing a key point here, but I’m not sure what it is. Please help me figure this out.
A: While the average commission used to be 6 percent, or 3 percent per side of a transaction, the average commission rate has dropped fairly significantly over the past few years, thanks to efficiencies and new business models put into place via the Internet.
According to the National Association of Realtors (NAR), the average commission is now around 5 percent. More people are using discount brokers, some of whom will list your property for free (or nearly for free) in the local multiple listing service and will rebate up to 75 percent of the commission received to the buyer (although the seller will still pay 2 to 3 percent).
Clearly, the commission structure is changing, and from what I hear, Realtors aren’t all that happy about it. (If they were making scads of money, you wouldn’t be hearing that.)
One issue is that the cost of doing business as an agent has increased, as has competition. Today, NAR has more than 1.2 million members, and there are an estimated 2 million agents nationwide (many who don’t belong to NAR). When I first started writing about real estate in 1988 (and I’m dating myself here a bit), NAR had maybe 600,000 members.
While more properties are being sold, we aren’t quite at twice the number of homes sold twenty years ago, so more agents are chasing the business. They pay a lot more for advertising, for the now ubiquitous virtual tours, videos, marketing materials, and for Internet and web-related costs.
Right now, we’re in a tough buyer’s market. I think listing agents and brokers are earning their commissions because it’s taking a long time to sell property. That means holding more open houses, spending more time showing the property, advertising more and expanding the marketing options for the property.
Being an agent is a business, like any other, and if you’re good at it you’ll make a good living. But the average Realtor earns less than $50,000 per year — hardly a fortune.
Are some agents making more money? Yes. But others are earning a lot less.