I’m currently buying a home in a very expensive area (Los Angeles). Average house prices here are significantly higher than most of the US; in the areas we’re looking they’re in the $800k for a small fixer-upper, with closer to $2 million for a recently redone 3br/3ba pretty common. There are definitely properties on the beach and in the other more desirable areas that are $10+ million and like people said, they don’t sell as often, but the bread and butter sales here are still going to be close to a million. I would imagine this leads to a generally higher income for realtors here, but given the higher cost of living, the higher competition in general since people want to live here, I’m sure it’s a struggle for up and comers.
I would bet the sweet spot for realtors/real-estate agents isn’t the multi-million dollar mansions that have a very limited pool of potential buyers, but instead either new-build upper-middle class suburban homes that are under 1-2 million, or possibly one tier down from there. My thinking is that there are a LOT more buyers available, and someone willing to work hard could move quite a few of those in the time it might make to sell one of the multimillion dollar houses, and actually make more money in the same amount of time.
The way I always understood it was: the 6% is split 4 ways. The seller’s agent. The seller’s agent’s agency. The buyer’s agent, and the buyer’s agent’s commission.
So if I bought a 400,000 house, with a 6% commission (the standard at the time), that’s a 24,000 total commission. Each of the 4 parties (The two agents, and their agencies) got 6,000 dollars.
When we last sold, there was booming housing market. The selling agents would often take a lower commission on the selling part to get the listing, but they couldn’t negotiate away the buying agent’s part. So we paid 5% commission: the buyer’s agent split 3% between the agent and the agency, while the selling agent split 2% between agency and agent.
But they got the full 3% to split on the house we purchased.
On the show referenced above, “Million Dollar Listing”, the main guy points out to one of his newer employees that chasing after the $30 million dollar listings is not how you make a living. Having a steady of more normal priced houses, which in LA is much higher than much of the country, is what pays the bills. In terms of how it gets decided who gets to sell what, I don’t get the sense that’s a decision made by the company. Every realtor we’ve contacted or been contacted by is operating more or less independently when it comes to getting sales. I doubt there’s any company wide leveling of the playing field, and why would they want to do that anyway? Better to incentivize their sales people to hustle and make the sales.
That example is from a single company. The real estate industry is lots and lots of companies so the competitive market is going to set the rates, not a central planning commission.
Yes, that is why I posted the thread asking. I provided some insight why I wondered, but wasn’t suggesting that small example was reflective of a much bigger industry.
Real estate is a bit different as realtors mostly act is independent brokers, even if they work for an agency. It’s a bit different from a product-based corporate sales model where their targets and commissions are set by some sales manager in corporate HQ.
IIRC, this was the Ross Perot problem. The usual IBM salesmen were content to drift along making their cushy commission with minimum effort. Perot apparently was such a go-getter he hit his annual limit (IBM had a limit on commissions) within a month. IBM wouldn’t budge on that rule, so he quit and started EDS writing software - since so many of his customers said “these computers are great, but what we really need is software to run on them.”
As for real estate, I would imagine the pareto principle applies too. There are only so many expensive houses to go around. As others mention, the effort to sell a $10M or so house is probably much higher than the effort to sell one in th $500,000 range, but that agent will sell 10 of those for every one that is available - and for sale - in the rich area.
My late brother-in-law owned a nice mansion and a decent amount of land, but the building was built around 1900 (as was the stables/garage) and needs some serious work to bring it up to snuff; enough that my nephew speculated that whoever bought it for several million probably will tear it down and build a modern house on the site.
I heard something similar about Vancouver real estate - that old houses from the 1950’s and earlier, the buyers (often from the East, looking to park money) would tear them down and build monster houses on the lot. The real value is the land for many cities, not the house if the buyer has money to burn.
Lately in Canada, the market seems to be flooding with companies like Purple Bricks that instead of a commission charge a flat fee. Someone whose $100,000 house now sells for $1M or more probably doesn’t understand the need to pay the standard rate of 7% just to unload the place the same day it goes on the market. OTOH, the price of a giant mansion is sufficiently arbitrary that it probably makes sense to engage someone to go beyond commodity marketing.
I recall something a few years ago that said the rate was actually 7% on the first $100,000 and 5% on the remainder. But that is split 4 ways - seller and buyer agents and their respective agencies. So your agent personally is making maybe 1.25% on your house, his incentive is to just sell the thing ASAP for whatever price and move on, not to try to eke a few thousand more out of the buyer. An extra $100,000 on the selling price, a huge amount extra, puts only $1,250 in his pocket. How many days would they have to work to talk the price up that much? Freakonomics I think discussed this problem in their book.
I assume the guys at the Porsche or BMW dealership make more that the salesmen at the Hyundai dealership too…
We don’t normally have buyer’s agents where I live, so the concept is a bit alien to me. But the system described above seems like an obvious conflict of interest - if I’m the seller I want the sale price to be high so my interests (at least in theory, pace Freakonomics) are aligned with those of the selling agent. But if I’m the buyer I certainly don’t want my agent to be paid on a percentage basis.
Estate agents are having a hard time where I live (Middle England) because there is a shortage of sellers. I get regular leaflets telling me that they have buyers waiting should I want to sell and offering flat fees or low commission.
If you watch those “real estate porn” shows on the Home and Garden channel, the buyer’s agent typically ends up with lines like “this one’s slightly above your stated budget but I think you’ll love it”. So, trying to ratchet up the commission. For good measure, they show a house or two that’s within budget but not as desirable.
Around here $1.5 million houses are selling in days if not hours, but there isn’t that much inventory.
Agents started offering extras like free staging to get clients, but I’m not sure if that is necessary any more - or if there is enough time to do it, since you don’t want to stage your house when you are still in it.
I think a big factor is connection to the community. We have some agents in our area, I wouldn’t list with one across town. One agent lives down the street, so that would be a possibility.
I assume there is some negotiation of commission, since in a market like this one it should be easy to audition a few agents to get the best deal.
One more factor around here - there are agents of different ethnicities who I suspect attract clients of that ethnicity.
Just FYI, we’ve had several threads here in the past few years (including this one from last year) about House Hunters and similar shows, and the drama (and actual house hunting) in those shows is largely, if not entirely, staged.
@Czarcasm provided several links to stories about this, in that older thread:
Coaxing the budget upward is pretty much SOP for buyers agents. People are more likely to buy a house they like for more money than they can afford than to buy a house that they don’t like that they can.
Every single realtor we have ever used has played this game. They realize it will be hard (read: time consuming for them) to find a house that meets our requirements in our budget. If we see enough houses we might find one we can live with (has all the must-haves and maybe even a couple of nice-to-haves, definitely not our dream house), but this could mean 20 or 30 showings and we might even give up.
On the flip side, after talking up the listing price, within a week of securing the listing the pressure to drop the price will start.
Now my wife is a realtor, a rather unsuccessful one. She will not play either of these games. She has advised several clients not to make offers at a price that would stretch them financially. She’s had three brokers in five years, because the first two kept pressuring her to pressure her clients.
My wife and I watch Million Dollar Listing on Bravo a lot. I feel like the brokers try to price the properties realistically based on what they neighborhood market is doing. The sellers tend to push them to try to get more (obviously). I think most good brokers realize you don’t earn a commission buy pricing yourself out of the market.
What I noticed is that as a buyer, our broker tended to push us to offer above asking price (so as to be more enticing to the seller and avoid a bidding war). As I typically did not give a shit (and am a bit of a data nerd), I typically just offer what I think is reasonable based on price per sq ft for the building (even taking into account floor, Manhattan vs NJ view, etc).
Maybe not at the million dollar end of the market but many sellers are inclined to list with the agent who gives them the most optimistic estimate of what they can realize. They think the agent is going to “fight for them”. But as soon as the 90 day listing is signed it’s one excuse after another about why the price needs to drop.
In normal markets.
Right now no one knows what you can realize because prices seem to be rising by the week. A house in our neighborhood that sold for $299k in 2019, suffered massive water damage this last winter, listed for $399k which I thought was insane. It sold for $428k in 48 hours. No repairs, no inspection, no contingencies. Closed in two weeks, which I assume means a cash buyer.
In practice, the incentive for both agents is simply to reach a deal quickly. An additional $10,000 on the sale price translates to only an additional $150 to each agent, pre-tax.
People in wealthy areas almost always make more for the same jobs. I don’t see why real estate agents should be different.
If you live in a wealthy area, there are probably plenty of high-paying jobs around, so real estate agents would likely have to be paid more to compete. Or, another way of looking at it, if wages for agents in wealthy areas dropped too low, agents would leave the industry and seek other jobs.
Buyers probably also want their real estate agents to understand their neighborhoods and their buying priorities. If real-estate-agent-in-a-high-income-neighborhood was a poorly paying job for that area, the agents couldn’t afford to live there. I was glad my real estate agent lived in the neighborhood where we were shopping. Buyers would probably prefer an agent who can talk with experience about the local schools, the local restaurants, and the best recreation sites rather than about the commute times from the adjacent low-income area.
IANAREA but it seems to me that -like any sales job - being a real estate agent is about connections, ingratiating oneself to clients, and getting referred by previous clients. And I assume the trick is to get your foot in the door, often by working as assistant to someone already in the door. I assume people with $10M mansions don’t have their butler open the phone book and start with AAA1 Property Sales. (Or…Google “Real Estate Agents in my area”) They ask their tennis partners at the country club. So, it’s 90% connections, connections, connections… and how you performed determines what happens next.
Whereas, with the mundane marketplace it will be about volume. Referrals may work, but RE cold-calling (i.e. those flyers, “we can help sell your home”) is probably important too. I sold my last home based on a friend’s referral for an agent. I don’t know how I’d pick if I had to sell now. (I had this house built, so the agent was attached to the house builder, we had no “buyer’s agent”. And the price was list price, in a seller’s market. I assume their commission included the upgrades we added for the builder.)
It’s a bit different, in that the compensation is tied to the value of the homes being sold, not just generalized wage inflation in expensive areas.
I suspect though, that there’s probably a sweet spot in terms of volume vs. value where real estate agents make the most money- like being able to sell 5 450k houses in a month, versus 3 750k houses. You’re not going to make the most money strictly concentrating on the most expensive mansions, nor by chugging through massive volumes of slum houses. Your best bet is probably the upper middle class houses that are 2/3 of the way to the most expensive ones.
That’s where your most successful real estate agents are going to cluster.