Why are real estate agent commissions so high in the US?
Specialist · Galveston, TX · Member since 2018 · 13 posts · 14 votes
Why are real estate agent commissions so high in the US?
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Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
2y@Yongming Huang for the inference of why do real estate agent's "make so much" let's follow the bouncing ball of the math to find out what "so much" actually is.
Let's talk median U.S. home price: $410,000.00
And "median" commission to list: 5.2%
First know that 5.2% get's split; 2.6 for listing broker and same for buying(selling) broker.
One needs to comprehend that in vast majority of cases there is (a) The Brokerage, such as KW, eXp, Remax etc etc. (b) Team and to that team leader (c) the actual agent.
In a majority of cases the Team is who "farmed" the lead. That cost's $. They have to build and host a marketing machine. This is website, various ad's, persons running and managing the various platforms, ad's, running of such. persons be it donestic or VA's to respond to inquiries, perform follow-up task's. All this is $$$$ going out to turn these "raw" contact's into actionable leads. Some of the best rates of conversion are "as high as" 35% conversion. That means 65% of the work goes for nothing, NOTHING, zero revenue potential, just spent capital. Than, of that 35%, the highest rate I have seen is 78% turning into signed client's. Think on that, only 3/4 of 1/3, so that whole is getting way smaller. AND those don't always end in completed business either, and revenue only comes from achievement of conclusion.
So it is safe to say, the business has to pay for 100% of it's operations, from about 7% of it's intake potential client's. 93% are JUST an expense with NO revenue produced.
So, to get that $410k listing, you spoke with 7 potential sellers, signed 1 other and worked it that expired not selling. And for that 7 you were in contact of discussing potential with 25 people, for a few hours each. And for that the team filtered through 100+ people. Which to get those had system that provided resources to 1,800+ website visitors etc..
So your listing is sold. Congrat's that's a $21,320.00 commission. But remember, split between brokers so for your side it's only $10,660.00. But your Team handed you that lead and need's there 50% split to keep the staff employed and developing lead's to hand you. So now your at $5,330.00. And your brokerage has there split bringing you too $4,530.50. BUT, it does not end there. Your a 1099, so you have to pay your own tax's, so after allocating for that what you ACTUALLY get is $3,624.40
You spent 60 hours talking to and working with potentials that resulted in 0, to land on this 1 that DID result in income, and spent another 30 hours in total on this, making for 90 hours labor investment too achieve $3,642.40. Or, $40.27 per hour.
You navigated the legal complexities, negotiated like a hero, pressed to get your sellers there best outcome, and you made almost half as much as your CPA, an Electrician, nearly 2/3 what you could be earning if you did plumbing or painting as a living.......
Reality is Real estate agent's, at median, make "as much as" $40.27 per hour.
So I ask, is $40.27 hr some huge crazy expensive price for doing all the things for most people BIGGEST financial transactions of there life. Mind you real estate attorneys generally start around $300+ per hour.
So what should they be at? $20hr, same as the person who carries your food? Is that how we value Real Estate Agent's today? On par with someone who retains what you say for 90 seconds and carries food for 40 step's? Sorry, I forgot, we champion those for skill of carrying our food and give out tip's left right and center to them, and for r.e. agent's we vilify them saying why can't they do it for 3 ramen packet's and a sugar cube.......
87 Replies
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes2y
Quote from @Carlos Ptriawan:
Quote from @Dawn Brenengen:
Quote from @James Hamling:
Quote from @Joel Owens:
You are thinking from an INVESTOR standpoint buying multiple properties a year or every other year based on NUMBERS.
HOME BUYERS unless get job transferred sell or buy a house maybe every 5 to 10 years. So often there is a big gap in changes since they lost sold or bought with forms and how the market is. For that they want a local specialist and not a computer because it's an emotional decision for them. Different worlds. That is why companies have been trying to cut out the broker and agent on the residential side for decades and it has not worked. You get a small percentage of the FSBO and others that try it but not mass adoption. That's the flaw in trying to automate everything that involves emotional thinking and decisions especially home buyers.
Not sure why so many keep missing this "Human Factor" to things.
Humans are Emotion Machines who happen to use logic at times. This is why attempt's to put things into purely logic based enviroment's, well they don't tend to do so great.
Buying a toaster, printer ink, not much emption to it, hence Amazon dominance. A new auto, well, we see how online only attempt's keep going bankrupt while dealerships working in human interaction keep thriving.
Home remodeling can EASILY be made fully online, and every attempt has gone bust. Because it's a lot of $, a lot of emotion, and the sales person is not just an order taker, there a sherpa to the process, decision point's, and human feel good when having another human help guide through it all.
Colleges have "advisors", remodeling has "consultant's", real estate has "agent's", wedding's have "planners". All these positions are "sales who sherpa".
Until ai can fulfill that emotional aspect, people will need other people. Humans are a pack-animal, eon's of a village wise-man, and that's what these positions fulfill today.
If humans were capable of working in perfect logic, sales pitches would just be sending a spec sheet, war's would not exist as they hold 0 logic, and a whole host of other things that as we see life is very much the opposite.
Roofstock does what it does because it's an emotionally neutered environment, where actions are logic based and removed of emotion. Buying and selling a primary residence, completely different.
Perfectly said. Not everyone NEEDS an agent, but most prefer to work with one. If you're an investor with a lot of transactions under your belt, you are probably totally comfortable with the process and don't need one. But the vast majority of the public does not fit that category.
Correct, currently there's a SFR fund liquidating thousand homes and they used 1% commission agent only. Yes most people still needs realtor and most investor prefer very low commission realtor structure because it would reduce expense.
I know a Brokerage who recently went through this.
Made a "deal" with a huge fund. Turn's out I know the fund, and informed them who the actual fund was, and there eye's got big in surprise but also thinking $'s would rain from the sky. I warned em, it won't end well for them. But they did it anyways. Thought volume would make it all work. Did the tiny fee thing. Spent huge manpower getting things set and going. Than month's on end and ton's more manpower constantly trying to optimize it, refine, get more efficent because for "some reason" it kept costing more then thought and not making nearly as much as hoped. And so they did the idiot's journey, as it didn't work out they decided they just needed to try harder, do more.
Fast forward many month's. Brokerage had to shut store-front, last over half of staff. Had to slash marketing, which then reduced business, making less revenue so had to slash more. It was a tail-spin down.
Today, the "big small brokerage" is now 3 guy's working out of there homes saying they still don't "get it", they "should have" made soooo much $, because volume etc etc...
Yet another on the pile of corpses at "Discount Brokerage Graveyard".
You get what you pay for. Ya far next to nothing, how can you expect next to everything? Because of tech? Tech can do a lot, it's not magic, it makes thing efficient, efficiency has limits. There are limit's to how cheap good get's.
As said previously, the plaque above my offices/business read for all to see "We do 3 kind's of services here; FAST, CHEAP and GOOD, you can choose any 2". If it's Fast & Cheap, it won't be good. If it's Good and Fast, it won't be cheap.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Dawn Brenengen:
Quote from @James Hamling:
Quote from @Joel Owens:
You are thinking from an INVESTOR standpoint buying multiple properties a year or every other year based on NUMBERS.
HOME BUYERS unless get job transferred sell or buy a house maybe every 5 to 10 years. So often there is a big gap in changes since they lost sold or bought with forms and how the market is. For that they want a local specialist and not a computer because it's an emotional decision for them. Different worlds. That is why companies have been trying to cut out the broker and agent on the residential side for decades and it has not worked. You get a small percentage of the FSBO and others that try it but not mass adoption. That's the flaw in trying to automate everything that involves emotional thinking and decisions especially home buyers.
Not sure why so many keep missing this "Human Factor" to things.
Humans are Emotion Machines who happen to use logic at times. This is why attempt's to put things into purely logic based enviroment's, well they don't tend to do so great.
Buying a toaster, printer ink, not much emption to it, hence Amazon dominance. A new auto, well, we see how online only attempt's keep going bankrupt while dealerships working in human interaction keep thriving.
Home remodeling can EASILY be made fully online, and every attempt has gone bust. Because it's a lot of $, a lot of emotion, and the sales person is not just an order taker, there a sherpa to the process, decision point's, and human feel good when having another human help guide through it all.
Colleges have "advisors", remodeling has "consultant's", real estate has "agent's", wedding's have "planners". All these positions are "sales who sherpa".
Until ai can fulfill that emotional aspect, people will need other people. Humans are a pack-animal, eon's of a village wise-man, and that's what these positions fulfill today.
If humans were capable of working in perfect logic, sales pitches would just be sending a spec sheet, war's would not exist as they hold 0 logic, and a whole host of other things that as we see life is very much the opposite.
Roofstock does what it does because it's an emotionally neutered environment, where actions are logic based and removed of emotion. Buying and selling a primary residence, completely different.
Perfectly said. Not everyone NEEDS an agent, but most prefer to work with one. If you're an investor with a lot of transactions under your belt, you are probably totally comfortable with the process and don't need one. But the vast majority of the public does not fit that category.
Correct, currently there's a SFR fund liquidating thousand homes and they used 1% commission agent only. Yes most people still needs realtor and most investor prefer very low commission realtor structure because it would reduce expense.
I know a Brokerage who recently went through this.
Made a "deal" with a huge fund. Turn's out I know the fund, and informed them who the actual fund was, and there eye's got big in surprise but also thinking $'s would rain from the sky. I warned em, it won't end well for them. But they did it anyways. Thought volume would make it all work. Did the tiny fee thing. Spent huge manpower getting things set and going. Than month's on end and ton's more manpower constantly trying to optimize it, refine, get more efficent because for "some reason" it kept costing more then thought and not making nearly as much as hoped. And so they did the idiot's journey, as it didn't work out they decided they just needed to try harder, do more.
Fast forward many month's. Brokerage had to shut store-front, last over half of staff. Had to slash marketing, which then reduced business, making less revenue so had to slash more. It was a tail-spin down.
Today, the "big small brokerage" is now 3 guy's working out of there homes saying they still don't "get it", they "should have" made soooo much $, because volume etc etc...
Yet another on the pile of corpses at "Discount Brokerage Graveyard".
You get what you pay for. Ya far next to nothing, how can you expect next to everything? Because of tech? Tech can do a lot, it's not magic, it makes thing efficient, efficiency has limits. There are limit's to how cheap good get's.
As said previously, the plaque above my offices/business read for all to see "We do 3 kind's of services here; FAST, CHEAP and GOOD, you can choose any 2". If it's Fast & Cheap, it won't be good. If it's Good and Fast, it won't be cheap.
LOL, you are exactly right that that discount brokerage only has 3 people: 1 broker, 1 agent and 1 TC LOL and they're all operating over discord channel only Haha LOL but some of these guys are pretty doing well in my market, if they're buyer agent they are giving back the buyer commission minus agreed flat rate to the buyer during closing. I guess because of most buyers here are techies (and try to save penny LOL) then this model works, most of their transaction was 90% on buyer side and 10% on selling side.
As for 1% flat fee brokerage that's used by the fund, I don't know the rest of story. But yes you are correct that those discount brokerage works for certain type of buyers only. For most newbie that needs actual visit to the house then they need traditional way.
- Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes2y
Hey @Yongming Huang - I'm an investor, broker, and a homeowner that has paid commissions... so I can give my $0.02 from all sides of the table here.
Whenever people make comparisons to how much another profession is being paid overseas... that's got to be the most incompatible comparison to exist. Why do doctors in the US get paid more than doctors in India...? It's our capital & free market at work.
Keep in mind that the market determines the overall commission rate... YES I agree there are a lot of agents/brokers out there that oversaturate the market but like the pareto principle applies to everything else - more than 80% of those licensed agents are doing barely/no business.
Someone else in the comments mentioned how this ruling (even though it will be fought in appeals court for another 10 years) will put more upward pressure on commissions because guess what? A lot of agents/brokers will just exit the business.
Market supply & demand - it's how our economy works. Let's not compare apples & oranges.
- 2yBill SchrimpfBusiness MemberReal Estate Agent · Reno, NV · Member since 2014 · 353 posts · 189 votes
Quote from @Yongming Huang:
I have watched several discussions, including David Greene's video, around the recent lawsuit against NAR and RE brokerages. Learned a lot but there is one thing I just don't understand.
If we look at the numbers, there are 1.3M - 1.5M agents nationwide and there are 5M - 6M transactions each year. So that translates to 3-4 transactions per agent per year. Obviously that's an oversaturated profession. So my question is why doesn't that drive the commissions down?
I understand that RE agents provide a lot of value to their clients and they have their expenses, etc. But it looks like the plaintiff's attorney asked a legit question: Why the commissions in the US are 2 - 3 times higher than that in other countries? This is baffling to me, too. Can someone help me understand this?
Most people in the US just don't negotiate, on much of anything. I was just in Mexico, super touristy area. Most people from the US would ask street vendors how much or pay the sticker price for whatever trinket. No negotiation, its cultural, in my opinion. Yes, some people haggle, most dont.
A very small percentage of agents or brokers handle a majority of transactions, so using averages of about 4 transactions leads to a false conclusion.
Comparing US commission to foreign commissions is an apples to oranges comparison. Its like asking why the French dont speak Mandarin.
ERA Realty Central - Bill Schrimpf58 Reviews - 2yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Quote from @Yongming Huang:
I have watched several discussions, including David Greene's video, around the recent lawsuit against NAR and RE brokerages. Learned a lot but there is one thing I just don't understand.
If we look at the numbers, there are 1.3M - 1.5M agents nationwide and there are 5M - 6M transactions each year. So that translates to 3-4 transactions per agent per year. Obviously that's an oversaturated profession. So my question is why doesn't that drive the commissions down?
I understand that RE agents provide a lot of value to their clients and they have their expenses, etc. But it looks like the plaintiff's attorney asked a legit question: Why the commissions in the US are 2 - 3 times higher than that in other countries? This is baffling to me, too. Can someone help me understand this?
It really depends on the agent. Many (most) have not taken the time to hone their craft, but pretty much every time we've went up against someone that didn't have a competent agent, we've been able to negotiate much, much more than the 2.5%-3% that it would have cost to pay a competent agent. It is true, the vast majority of agents are incompetent, but I've worked with attorneys as a financial advisor, banker, and sometimes an expert witness in foreclosure cases. Many of them are downright incompetent as well. They plaintiffs' attorneys argued that realtors making too much at 2.5%-3% but they had no issue keeping 30%-40% of a Billion dollar verdict. Before you say "they went to law school"...my retort is "so what"? Lot's of realtors have MBAs and other advanced degrees. Realtors work very, very hard and most fail. They drive around for countless house showing houses only to have clients visit an open house and sign a contract with another agent. It may seem like realtors get paid too much...and honestly some agents are downright incompetent and shouldn't be in the business, but there are many really, really good agents that, just like good attorneys, are hurt by the bad ones. End of rant.
- Member since 2018 · 12 posts · 8 votes2ySorry, real estate agents don't do home inspections or title work. If you think adding an inspection contingency should get you 3% you are out of your mind. Some realtors are worth 3% or more. Some are worth much less. I've dealt with both. Right now they all charge the same where I live and for buyers and sellers doing 1 transaction every ten years, they will never know the difference. For those of us doing more transactions, we know the difference.
Quote from @Tim Jacob:
A reduced rate would mean reduced service. That would lead to people who always go with the cheap getting the bare minimum home inspection, title work, etc. These are all bad ideas. The argument was that the buyer will pay their agent directly instead if the seller paying both. Trying to haggle the buyers agent down to less than 2.5% is ridiculous. By the time the agent is done working between showings, writing contracts, negotiations and inspections irs weeks of work. They ain't working for minimum wage and never will. You get what you pay for not sometimes but all the time. If you nickel and dime the agent what you really want is to be swindled somewhere in the transaction whether it be the inspection negotiations or title work being done wrong. There are plenty if things I see lately where I get poor service because done corporation has some free extra service with purchase of something but it would have been better if I just paid for the so called free thing and got what I actually wanted. That's where this is headed if you think the answer is let's undercut peoples pay more and more.
- 2yTim JacobPro MemberReal Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
I obviously know agents don't do inspections or title work but what should be understood is that for the consumers saying how can I cut my fees you get what you pay for. A lot of people say let's go with redfin for the bare minimum commission. For a buyers agent especially that person isn't going to see a bunch of homes with the buyers. They will see the bare minimum. They aren't going to recommend the best title companies or inspectors. They aren't going to manage the clients expectations which sounds like an issue for you. A good agent will do these things. A really good investors agent will have renovation experience and give line item ballpark breakdown of what renovation or repairs will be with options instead of simply saying a new kitchen costs 15k. A good agent might actually know some minor ways how to cure title issues though the title attorney will as well. Ofcourse if you go with the cheapest agent you might just go with the cheapest title company. After all what could go wrong. Then you find out the seller also sold the home to 3 other people. Are there bad agent charging 3%. Maybe but if they are new but asking an experienced broker things they don't understand you are getting a better experience then redfin or another 1% agent. If people have 1 bad experience with a 3% agent because they didn't do due diligence for instance to find a decent investors agent, which they could on here, I don't think the next step is let's go down to the 1% option because what's the difference. That's the greed talking. The best thing like many things is to pay fairly but do due diligence prior to hiring to ensure you get quality service. Between the 2 you will get the best experience.
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes2y
I have YEARS of EXPERIENCE in real estate, construction and real estate development. I KNOW my local area, and market. In challenging times the agents that are used to the low hanging fruit leave. The serious agents, know that in these times, we need to know the market, and go the extra mile. I live in Redding, CA, Corelogic says our appreciation rates going to be 7.6%. Why? Because we have little supply and high demand, meaning agents are in an extremely competitive market, and have to go the extra mile, know their business, our area, and have a clientel, etc.
Last month I paid my yearly dues to the Board of Realtors, $750. Monthly $60. Plus we have Websites, CRM, Marketing, Insurance, business licenses, Fuel (huge expense in an area where a listing can be 30-45 minutes away sometimes) networking events, fundraisers, etc. (I do the same with my construction business) The regulations and fees in CA are horrendous. Taxes are high. Fuel is through the roof.
We often pay for the clients home warranties, inspections, or ? On one recent listing (where I've discounted my fee) I went by and noticed there was a roof leak. Clients are out of the area. I had someone come over and put up a tarp, called to get a temp repair, and will have roofer there today to give a bid on a new roof. Later I went and picked up one of my clients flying into town at the airport to take her to pick up her rental car. She wasn't here on business, but building relationships is what it's about.
Every sale isn't easy. I've had clients I've shown 30-50 houses to, over several months before they find the one that works. Others that wanted something specific, not on the market, so I did marketing to the subdivisions they wanted.
Real Estate isn't the easy money everyone thinks it is, no matter what market you're in. Higher dollar markets require all the same things, it just costs more to do.
- Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 737 votes2y
Quote from @Karen Margrave:
I have YEARS of EXPERIENCE in real estate, construction and real estate development. I KNOW my local area, and market. In challenging times the agents that are used to the low hanging fruit leave. The serious agents, know that in these times, we need to know the market, and go the extra mile. I live in Redding, CA, Corelogic says our appreciation rates going to be 7.6%. Why? Because we have little supply and high demand, meaning agents are in an extremely competitive market, and have to go the extra mile, know their business, our area, and have a clientel, etc.
Last month I paid my yearly dues to the Board of Realtors, $750. Monthly $60. Plus we have Websites, CRM, Marketing, Insurance, business licenses, Fuel (huge expense in an area where a listing can be 30-45 minutes away sometimes) networking events, fundraisers, etc. (I do the same with my construction business) The regulations and fees in CA are horrendous. Taxes are high. Fuel is through the roof.
We often pay for the clients home warranties, inspections, or ? On one recent listing (where I've discounted my fee) I went by and noticed there was a roof leak. Clients are out of the area. I had someone come over and put up a tarp, called to get a temp repair, and will have roofer there today to give a bid on a new roof. Later I went and picked up one of my clients flying into town at the airport to take her to pick up her rental car. She wasn't here on business, but building relationships is what it's about.
Every sale isn't easy. I've had clients I've shown 30-50 houses to, over several months before they find the one that works. Others that wanted something specific, not on the market, so I did marketing to the subdivisions they wanted.
Real Estate isn't the easy money everyone thinks it is, no matter what market you're in. Higher dollar markets require all the same things, it just costs more to do.
It's mostly wholesalers and gators attacking realtors. Out of spite and jealousy!
- Member since 2022 · 75 posts · 73 votes2y
Quote from @Wale Lawal:
This is a very sensitive question @Yongming Huang but all I will say it that the barrier to entry as a Real Estate Agent is very low, hence the poor reputation for some agents.
The honest truth is that 20% of the 1.5M agents are the ones doing 80% of the business.
The remaining 80% of agents barely sell 1 house in 2years due to many reasons like lack of commitment to the profession, poor or average skills, improper training, lack of tools and mentorship to be a great agent, etc.
At the end of the day, you will always get what you pay for.
Saying that Agent commissions are too high in the United States is subjective and we can debate or discuss this for several hours.
Hope this helps.
Thank you
I was going to say the same thing as @Wale Lawal. It's the 80/20 rule. And remember, a lot of agents don't take home 3%. They take out brokerage costs, splits, then have to minus 25-30% for taxes. And not all agents are making 3% off every transaction. Commission is ALWAYS negotiable. For example I only do a 1.5% listing if I'm representing them for a purchase.
- Member since 2023 · 1 post · 1 vote2y
I have RE clients in the USA where I work, and overseas (ireland, France, England, Wales and Scotland), and most of my clients are retired bankers and what we in the US call attorneys (some licensed in the US). It is true the agents get paid less,
but ALL the agents do is show the property .... that's it.
The US equivalent of attorneys write the contracst and negotiate for sellers and buyers. Agents are not involved in financing or inspections. Agents don't hand hold the clients and attend closing. Essentially, the agents are showing agents and that is it.
But when you put all of the fees together, it approaches US costs, maybe a little less. But in the US, agents perform a lot of functions through to closing not done by lesser paid agents overseas.
I still fail to see how NAR does anything for us. They sold Realtor.com (now owned by Co-star). We use Showingtime (Zillow), and buy leads from our competitors, Zillow and Realtor. com. All our content generated by agents has been sold and monetized and and we get nothing. Time to kick NAR to the curb, start a new national association or even just have state associations, and own our own MLS systems. Then we are no longer bound by the NAR settlement.
Sincerely, think about it.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes2y
Steve Mashura,
NAR partners with businesses to peddle whatever wares to newly licensed agents as a benefit that sucks them dry of any start up money.
NAR has some lobbying efforts that help with legislation from time to time but other than that pretty worthless.
I was REALTOR first year in business over 20 years ago and saw no value. Have been principal broker in commercial real estate for decades.
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