Thursday, November 08, 2007

How Much Do Real Estate Agents Earn?

Many people think real estate agents make huge amounts of money. Some do. Most don't. But lots of consumers want to know "how much"? Because agents are so easy to poke fun at, the media often try to present the figure in a way that indicates real estate agents are overpaid.
Maybe we'll bust a myth about that. Maybe not. During the writing of this blog, we'll calculate how much agents earn in commissions. Right now, as we write the blog, we don't know what the answer will be except that commissions are down from last year. We intend to calculate the figure as we go.

So let's start.

The median average sales price in America right now is $211,000 and we're currently on a pace to sell 5 million homes. Simple multiplication provides a dollar number on which the total real estate commissions will be based. Over 1 trillion dollars worth of homes sold. That's a lot.

Most of those sales will pay a real estate commission. Folks think that the typical commission is 6%, but it varies and by law is negotiable. Some "full service" agents charge seven percent. There are "discount brokers," too - and sellers will make different kinds of deals with companies offering different levels of services.

Combining all that together, the average commission charged per deal is between 5% and 5.5% depending on the region. Although the national average is probably around 5.14%, we'll go with a figure of 5.25%, just to play on the safe side. (In eastern Massachusetts, it is typically lower)

That comes out to a total of $55 billion. The number is probably high because the estimate for 2006 was a total of $61 billion. Sales are much slower this year and prices are down. But we'll go with $55 billion. According to estimates, between 22% and 27% of the total goes to the company. That leaves between 78% to 73% for the agents. Sure, some experienced agents have higher splits. Some have lower splits. Some even get paid a flat fee or a salary. To make it easy, let's assume that the higher end applies - 78%. That leaves $43 billion for the agents.

How many agents are there?

Though it is hard to put a number on it, states like California estimate they have one licensed agent for every 52 citizens. The Wall Street Journal estimates there is one real estate agent for every 75 people in America. That would be over 4 million agents! Though that many might be licensed in their individual states, most of those aren't actively selling homes. We won't use that number.
The National Association of Realtors claims 1.3 million Realtor members. Most of those are agents, but not all are actively involved in the business. At the same time, not everyone selling real estate is a member of the National Association of Realtors, either. They are still real estate agents, just not Realtors. Even lenders and appraisers are selling real estate nowadays.
So how many folks are actively working to sell real estate? Approximately 1.25 million says the Journal.

That sounds about right.

The average agent, then, would earn about $34,400 based on current values at the current sales pace. Some more. Most less.
Less an average 14% in expenses that the agent will incur. Total? $29,584. And that's only if they earn the full commission on the sale. The fact is, most sales involve 2 agents that split the commission equally.
How do we check the figures? According to independent sources, the average commission charged per house in the USA in 2007 is $11,000. With 5 million sales, that would be...(we promise we didn't check this in advance...)

Total commissions of $55 billion.

From Armstrong Field Real Estate's November 2007 Real Estate & Mortgage Newsletter

Monday, November 05, 2007

It's A Buyer's Market....So When Are You Going to Buy?

A buyer's market is technically defined as: "A market condition characterized by an abundance of goods available for sale."

The in-depth definition from the same source is: "When a buyer's market exists in commodities, the buyer is able to be selective in purchasing contracts, as there are many individuals wishing to sell. Furthermore, these buyers will generally be able to purchase contracts at lower prices than those that were previously prevalent."

The simple version is: when no one else wants a product of value -- buy it, because the price will be lower whereby you'll be able to maximize your investment for future gain. In essence -- buy low, sell high.

When it comes to purchasing real estate, it's not as easy as investing in your 401K or savings account. Those are simple. You can select as little as $1 to invest each month or as high as the law will allow -- thousands per year.

Most people really don't worry about how the stock market ebbs and flows as they are using the practice of dollar cost averaging to invest: "Dollar cost averaging is the practice of investing or saving money at specific times, regardless of market conditions or your personal financial outlook," according to a beginners guide to investing from The idea is that if you keep investing over the market levels (low and high) you will, through the law of averages, make money in the long haul.

The challenge with that type practice in real estate is that you can't slip into real estate investing. We don't buy our housing investments month after month with prices up and down. Instead, we slap down the down payment when it's time to buy. And wherever the market is, is where we start.

The best strategy for real estate and the best way to make money in real estate is to buy low, when the conditions are in the favor of the buyer to buy. Your start-up purchase is where you "begin" your investment growth -- and that's why I submit to my buyer friends the above headline question, again: "It's a buyers market. So when are you going to buy?"

Today in many markets you can buy a house for 5 to 10 percent below asking price. For a $300,000 purchase, that's between $15,000 and $30,000 off your mortgage. On a 30-year fixed rate mortgage at 6 percent, that reduction in mortgage amount would save about $180 per month (more than $2,000 per year).

In addition, many sellers are willing to help with closing costs just to sell their house. For example, in Fairfax County, Virginia (just outside the Washington, D.C. area) half of the 3 bedroom 2 bath single-family homes sold in the last 30 days included a seller subsidy ranging from $500 to $15,000 (the average seller subsidy was $8,790).

Then there are the prices. While they have been flat over the last couple years, they are starting to increase. This is where your research on the housing market must turn local. The national numbers mean nothing to you when it comes to investing in real estate. Where are your average prices? Are they flat, deflating or appreciating?

Nevertheless, there are hot pocket markets. In the DC area, there are several zip codes that, when looking at the numbers, are technically in sellers markets. In these areas, homes are selling in under 60 days, prices are up, unit sales have outpaced the level from a year earlier and total sales volume is expanding. The thing is, though, the pressure from surrounding zip code markets keep the prices from escalating as fast as their potential.

Let's review -- you have plenty of housing inventory from which to choose. Sales are slow, so sellers are offering thousands of dollars in incentives to tempt you to buy. Prices are flat. Interest rates are still historically low. Sounds to me like the buyer who has been waiting on the sidelines needs to get off the fence and pull out his checkbook.

From the November 2007 Armstrong Field Real Estate online newsletter - Real Estate Update