Real estate agents care about selling homes, but their brokerages do not

The title of this post is sure to spark some controversy or even animosity from fellow real estate brokerages. I believe that there is a fundamental flaw in the real estate industry regarding agent and brokerage compensation. What is the goal of every real estate agent? Agents want to sell as many homes as possible to earn the highest commission from those sales. What is the goal of the brokerage that they work for? A logical assumption would be that brokerages also want to sell as many homes as possible, since they earn commission from every sale just like the agents. However, that is not true for an alarming number of real estate brokerages today. Many brokerages want to maximize the number of agents who are licensed with their firm and often seek agents who only close a handful of deals each year. This maximizes their income from administrative and desk fees, insures the highest possible commission split from sub-par agents, and insulates them from the volatility and seasonality of commission income that their agents experience. Real estate brokerages should exist to sell as many homes as possible. They should not exist to maximize their earnings from fees charged to agents.

A few definitions are in order before I discuss further. In order to be a licensed real estate agent, you need to place your license with an established real estate brokerage. That company is managed by a “designated broker” or “managing broker” whose job it is to oversee all of the agents whose licenses reside at the company. Most real estate brokerages do not employ agents as employees, rather the agents are independent contractors who operate under the oversight of the brokerage. There are a few brokerages who do take the extra step of making their agents employees, but that is still fairly rare. Agents are usually subject to a commission split for some initial amount of their income. After that limit is reached, they typically earn 100% of the commission. There are also ongoing monthly desk fees, franchise fees and transaction fees that are payable to the brokerage as well.

Brokerage Income Example

Let’s take a look at a hypothetical example to show you just how messed up this practice is. Brokerage A is a company with 20 top-notch agents. Each of those agents closes 18 transactions per year at an average sale price of $400,000. Brokerage B is a company with 72 mediocre agents who only close 5 transactions per year at an average sale price of $400,000. Both brokerages typically receive a 3% commission on each sale. They both have the same commission split of 75% agent/25% brokerage up to a limit of $25,000 to the brokerage. After that commission is paid at 100%. Both have identical transaction and desk fees. Monthly desk & franchise fees are $500/agent and each transaction is subject to a $200 transaction fee. Let’s take a look at the numbers.

  Brokerage A Brokerage B
Number of Agents 20 72
Yearly Closed Deals per Agent 18 5
Average Sale Price $ 400,000 $ 400,000
Total Sales Volume $ 144,000,000 $ 144,000,000
Gross Commission per Agent $ 216,000 $ 60,000
Total Gross Commission for Brokerage $ 4,320,000 $ 4,320,000
     
Net Commission to Brokerage $ 500,000 $ 1,080,000
Net Commission to Agents $ 3,820,000 $ 3,240,000
Net Commission per Agent $ 191,000 $ 45,000
     
Desk & Franchise Fees to Brokerage $ 120,000 $ 432,000
Transaction Fees to Brokerage $ 72,000 $ 72,000
     
TOTAL INCOME TO BROKERAGE $ 692,000 $ 1,584,000
TOTAL INCOME TO AGENTS $ 3,628,000 $ 2,736,000

Brokerages Love Mediocre Agents

Are you as surprised by these numbers as I am? Both brokerages sold an identical number of homes for the year (360) and both earned $4.32M in gross commission income. Brokerage B pocketed 129% more income than Brokerage A, yet Brokerage A has 20 “rock-star” agents. How did they do this? The brokerage companies earn WAY more money by employing armies of mediocre agents who never reached their commission cap limits. The commission splits are way more favorable to the brokerage for low-earning agents, plus by increasing the number of agents in the office, your monthly desk fee income also skyrockets, in this case by a whopping 260%.

There must be tremendous benefits that brokerages give to their agents for these big brokerage fees, right? Wrong. The primary benefits that an agent receives from a brokerage is somewhere to “hang” their license, a brand name to associate with, insurance coverage and broker oversight of their transactions. Agents remain responsible for their own marketing and lead generation, plus virtually all of their expenses.

Don’t believe me? Go around and interview to be a potential agent at numerous brokerages. Many have extremely low bars to entry and simply want an army of low-producing agents to fatten their brokerage income. Brokerages will try to attract armies of mediocre agents under the assumption that each mediocre agent has a network of friends and family willing to use them as a real estate agent each year. The mediocre agent ekes out a modest living via their personal network, and the brokerage takes home fat commission splits and fees. This is why the quality of agents remains strikingly low in our industry and is also a primary factor in why commission rates to sell your home remain so high.

The successful brokerages of the future will be companies who align themselves with the top-producing agents, not ones who gorge on the fee income generated by mediocre agents.