Part 4. Raise the Threshold in Real Estate. The Rapidly Evolving Real Estate Compensation Situation.

Part 4 of a 4-part series.

The average US real estate agent earns a median gross annual income of $56,000+. Many agents practice today as a part-time hobby, and the field needs to be cleared of non-professionals. They are often incompetent because they don’t do enough deals actually to gain any expertise in the field. Would you want a surgeon who operates once a year to perform your open heart surgery? Or a mechanic who works on one car a year to rebuild your engine? Practice makes perfect. This is the most expensive transaction that most people will make in their lives. Hopefully, the compensation structure changes will clear the field of people who have not gained any expertise. I can say with confidence that the US does not need 1.5 million Realtors. We probably need about half that.

During the pandemic, the unexpected real estate boom had people pouring into the business. They could get their license online, and they sat back and took orders without much of the usual effort to generate clients because people were desperate to change their lifestyles and make self-motivated moves. We are finally seeing the necessary attrition based on all of the factors affecting what it takes to be a successful agent.

I listened to a webinar the other day with a bunch of random real estate agents on it. A thousand-year-old agent raised her hand and said, “Who’s even going to know if we get a buyer agency agreement signed? How will anyone even know?” And that is why we have a problem. There are agents who have no business operating in this profession.

80/20.

Real estate suffers from the 80/20 rule. Twenty percent of the agent population have robust, thriving businesses. I am going to say that about another 30%-40% have solid businesses. The other 40%-50% are part-time amateurs who don’t do enough transactions annually to navigate challenging scenarios. Some of these 50% are not in major real estate companies that service relocation referrals. They are very small companies or individual brokers who do real estate as a side hustle, not affiliated with well-known brokerages.

Broker owners don’t want part-time non-producers in their branches. They soak up resources, take up the branch managers' time, and can create liability issues. That is why License Holding Referral Companies exist. When it is revealed that they don’t have what it takes to make it, they can move those folks into a non-producing status. 

It's not hard enough.

I read an article in USA Today that said that the commission costs were so high because the threshold was so high to get into real estate.  I let out a muffled scream. I would argue that it is not nearly high enough. If you can memorize, you can get a license. It does not involve critical thinking skills or business strategy, and the requirements vary from state to state to get and maintain a license.

Some states require very little continuing education. While they have improved the classes to be more up-to-date in continuing education regarding consumer protection, etc., it does not prepare a person for what it is really like to run their own business as an independent contractor. The threshold is basically whether you can survive one year without any income, which is what it often takes for an agent to get their first transaction.

We have to mentor them.

While most brokerages offer regular training to their agents, it is typically not mandatory, and the amount they can offer depends on their resources. Brokerages need to do more to facilitate mentoring in our business and identify early on those who lack the right skills to be successful.

The challenge is that people will get a license before they ever meet with a broker, so they don’t really know what it takes to be successful. The broker is willing to take a shot on them because you never know who has the right stuff and the right connections. According to NAR, 75% of agents fail in the first year, and 87% leave the business after five years. Can you imagine how many would enter the business if it were easier and cheaper? Practicing real estate isn’t for the faint of heart.

Let’s go, team!

I get it. Everyone has to have a first, but no one wants to be the first. That is why having a partner/mentor/team leader to guide the new agent avoids the pitfalls for both the agent and the client.

I like real estate teams and partnerships. Often, a skilled team leader brings newer agents onto their team to backfill the tasks the team leader doesn’t have the bandwidth to handle or doesn’t want to handle. The lead may be a listing agent, and they bring agents onto their team to handle buyers. The team members gain experience and can observe how a solid salesperson operates.

The challenge with teams can be that they often operate like a mini brokerage within a larger brokerage, and the team lead may be a great salesperson but may not be experienced in managing employees or people who work for them. But as far as setting an example of what it takes to develop the business, they do a great job. I suspect the attrition rate is much lower for people who are part of a real estate team versus coming into the business as an individual agent. Creating teams or partner situations can also help set up succession plans for aging agents who want to ease into retirement.

As an example, I have a good friend who sells high end real estate in Los Angeles. A few years ago, she brought her adult daughter, who had never been involved in real estate, into her business. Her daughter started out handling social media, marketing, and technology. My friend is highly experienced in negotiations, pricing, and contracts, and she knows the local neighborhoods she serves very well. She is accustomed to working with high-net-worth people who often have attorneys or representatives involved in their transactions. It would have been very difficult for her daughter to break into that market on her own. Now, when my friend is ready to retire, her daughter has gained enough experience observing her mother to take over easily.

The high end may stay status quo.

Getting into the high-end multi-million dollar sales range is a different ball game. A different skill set and level of expertise are required. Those deals can take months to find the right buyer and can be very difficult to negotiate. The marketing costs can be astronomical. A lot of money is at risk; it takes skilled professionals to navigate those deals. Most of those transactions already come in at a lower negotiated commission percentage because of the high sales price. It will be interesting to see how those properties are affected. I have a feeling that not much will change in that arena. The sellers and buyers can easily pay what they need to, so they have a skilled agent in that space to represent them. Those agents know how to articulate their value.

Let’s unvarnish it.

Reality TV has put a gloss on real estate that needs to be removed. It’s not real, it’s acting for TV. I would be much more interested in the behind-the-scenes stuff that gets cut out. But that is not interesting for public consumption. It’s the actual reality of long hours, weekend work, lots of paperwork, and often challenging clients.

Launching a real estate career is expensive because generating their first client often takes nearly a year unless they come with a sphere baked in that is ready to give a brand new agent a go. The cost of the necessary licensing, software, CRM, equipment (computer and printer), educational resources, marketing, Board and MLS membership dues/fees, events, insurance, website development, etc., can be quite high. Some companies do offer some resources to their agents at no cost, but there are hard costs, like the special errors and omissions insurance required, printed materials, dues, licensing, health benefits, car insurance, gas, etc., are all on the agent.

Worth every penny.

Stellar agents know how to negotiate and understand legal landmines to keep clients out of trouble. They have valuable connections and resources. They network with agents who have potential buyers for that specific property. They work really hard.

There are many incredibly professional, ethical, and smart real estate agents and brokers in the US. It is unfortunate that the media and the general public are blasting them right now about how much they earn. The good ones who make this a serious full-time profession are worth every penny. Real estate should be a revered career path. A byproduct of this settlement will be stepping up professionally and hopefully eliminating low producers. The pros will adapt.

Keep the RD in your corner.

Relocation Directors protect their sources of business from hobbyist agents. Brokerages that handle relocation have highly trained and vetted agents. The Relocation Director establishes the criteria for participation, which is why requested agent referrals are so painful. The agent may be a fine person, but they may not meet a high level of performance that the Relocation Director knows is necessary. The requested agent scenario allowed by RMCs needs to stop. They put everyone in jeopardy.

You can count on the Relocation Directors to ensure that corporations, relocation management companies, and their transferees are working with the best professionals to meet their needs. They are hand-selected by that RD based on their observations and what they know about that agent from inside the company. They may not be reality TV stars, but they are solid producers who love to help families and do it with the utmost ethical behavior and expertise.