So why do agents get paid so much commission?
It’s a question sellers have been asking for some time now. Regardless of whether you’re in Europe, the USA or Australia and we’re going to expose the biggest reasons for this model right now.
Commission was the best available fee structure for selling a home under the previous era of ‘traditional real estate’. But technology and the digital age mean that this is no longer the best structure available.
So here are FIVE reasons why.
1) Expensive, inefficient and complicated businesses
Traditional real estate businesses were set up in local franchises. They normally had a retail shop-front in every suburb, with a franchisee running the office.
Each office had its own rent and receptionist. These were times when local agents had more knowledge on the market, and it was hard to know what was available for sale or what a home was worth without an agent.
To service demand, agents in the office would go out and list properties for sale, and then get paid commission for a successful sale. In Australia this hovers around 2.2%-3.3% of the property’s sale price.
In the USA there is a different model in place where commission can be up to 6% but marketing is included, not charged separately.
But out of that fee a large portion would get paid to the franchisee, who then had to pay his admin staff, his rent, other expenses and marketing costs. Finally he had to pay the franchisor or ‘head office’.
Before the digital revolution, there wasn’t a more efficient way, so this was the best agencies could afford to charge. But as we’ll show beyond doubt, this has all changed.
Sellers do not benefit from having an agent with too many overheads, rents, admin staff and franchise fees to pay. So this is no longer a justification to be paying commission.
2) Agents waste their time
If you want a window into traditional real estate culture tune into a real estate seminar. 95% of what real estate trainers teach is how to ‘win more listings’.
Real estate is overly competitive and as a result agents focus on one thing… ‘Listing’ properties for sale. No effort goes into customer service and getting better at selling for clients.
There is almost no effort in training put into showing agents how to get more eyeballs on a property or achieve higher sales prices.
Especially in Australia.
Agents waste their time being too similar to each other, which focuses their attention on competing against each other rather than serving clients and chasing buyers.
Agents only have so much time in a day, yet they are encouraged to spend 3 hours everyday ‘prospecting’ for new ‘leads’ to convert into listings.
Then they have to book in appointments to give presentations… so there goes another 1-3 hours. If up to 6 hours is spent ‘prospecting’ then where is the time to convert those listings into actual sales?
The truth is agents need to charge the commission they do given the low amount of properties they can sell a year by using their time in this ineffective way.
3) Agents have their time wasted
The traditional agent is not all to blame. In truth they are hardly to blame at all, because they go into an outdated industry that does not set them up to succeed.
Whilst real estate looks simple from the outside, there are hard-working agents who simply have their time wasted. How you ask? Let’s start with who they have to communicate with:
- Sellers and Vendors: A good agent will have several of these to liase with at one time, and provide updates several times a week
- Multiple prospective buyers for each listed property: chasing calls that don’t answer first time, email enquiries, and scheduling inspections, following them up for feedback
- Related parties to facilitate and close a deal: From photographers, signboard companies and admin staff to mortgage brokers, solicitors and accountants
- Other members of their own team
Then on top of all this they will have to facilitate:
- Countless listing presentations that choose another agent and waste 1-2 hours of meeting time and likely hours of preparation
- Building & pest inspections as well as other inspections for the property that prove trivial
- Driving around contracts and paperwork to be signed by multiple parties
- Chasing up payments
4) Lack of technological uptake
The Franchise business model was the best for its time but its structure was not set up to update over time. This is one of the biggest reasons why agents get paid so much commission.
Each big brand office in your area is essentially a separate business run by a franchisee. As such it is hard to roll-out changes that every office in a network will agree with.
It also means that these fragmented offices are unwilling to come together to centralise their overheads and cut down the extra expenses.
FACT: Technology and social media can help agents get more eyeballs on property campaigns in this era and sell properties faster.
FACT: Technology can cut out time spent on most manual processes described above, and this will only improve over time as the buying and selling process becomes more digital and online.
Yet real estate agents are not traditionally required to have digital skills. This is why they have become so vulnerable, along with their commission-based structure for payment.
5) Traditional Agents who cut fees under-performed
Traditional real estate agents who lowered their commission to get listings did not perform well. It’s clear to see why from the above.
By lowering fee but not making any structural changes to the manual processes, time wasted and business set-ups, all agents did was cut margins.
Whilst that gets a few more listings, it does not streamline things and merely creates more work for the desperate agent. That’s why the cut-fee approach is not a good one for sellers.
If it was, we would have seen a steady decline in commission rates over time internationally. But we haven’t. Instead, established agents are still able to charge high commissions.
Digital Real Estate
So that will likely answer the question “why do agents get paid so much commission?”. Rather than the expert knowledge agents have or their work ethic, the reasons are largely structural.
That’s why structural changes in a digital real estate model are the solution to lowering the fee required to do a good job. There is no point saving $15,000 on fees when the property sells for $50,000 less.
The digital age of real estate instead works to streamline the entire process. It works to get that high sales price. But by cutting out the time, waste and expenses, it passes on more savings.