True Gotham

Long time readers of TrueGotham know that although I feel like a 6% commission is well worth it when you hire the right person to represent the sale of your home (podcast), I'm also one who believes we will see hybrids of the current 6% model arise and that the driving force behind this change is the consumer who is fed up with paying 6% and not getting all that much for it.  As I have said time and time again, that's totally fixable--choose a different broker who brings more to the table.

In New York Times writer Hope Reeves' piece That 6% Is Getting Harder to Earn some light is shed on the uptick in consumer demand for more service for that 6%.  

Brokers say that the current market is requiring them to be more creative, to spend not only more money but also more time and effort to make a sale.

Joan Goldberg, a broker at Brown Harris Stevens in Brooklyn Heights, sees herself as a sort of broker-contractor. She has a team of people — painters, contractors, gardeners, stagers, house cleaners, handymen, haulers — at the ready to whip her listings into shape.

“People are often overwhelmed by the prospect of selling, and it’s my job to get them to see that their home will show better and sell for more if we can just take away some of the layers and layers of personal items and grime they’ve accumulated,” Ms. Goldberg said.

For the most part, she does the hiring and scheduling, and she said that she tries to get each client as fair and economical a deal as possible. Sometimes, she winds up paying for some work herself or simply doing it herself.

“I like to plant flower boxes, and I change them weekly and water them if the owner forgets to,” she said. “I often go to the flower district early in the mornings or out to the big nurseries on Long Island to get just the right thing to put in a pot on a brownstone stoop. But, then, I’m a bit of a perfectionist.”

Ms. Goldman also routinely buys new trash cans and paints the street address on them in an effort to make the best impression when prospective buyers arrive to see a listing. “Some people carry plastic bags for dogs,” she said. “I carry them so I can pass by my listings and pick up trash.”

This is not a new phenomenon but perhaps more agents are catching on finally that if you're going to ask a seller to pay 6%, you better make them feel like your worth it.  Most of the successful brokers I have done business with over the past 16 years have their own arsenal of people who can step in and help a seller snap their property into shape and many of these same top real estate professionals have yearly business plans that allot a certain percentage of their own personal commissions to marketing both on a personal level and for the properties that they represent. 

There is one area in which no amount of money can replace and that is experience.  And experience is never more important than in a challenging real estate market.  Here are some examples of what a savvy real estate professional brings to the table to earn their commission:

• The savvy of pricing properly according to current market psychology and conditions.
• The savvy of conducting negotiations with honesty and integrity to yield the best price for the seller and a positive experience by all.
• The savvy of being able to relate current market conditions and buyer behaviors to similar markets in the past...those who have been selling for 10 years or less in Manhattan have NEVER seen a difficult real estate market.
• The savvy understanding the most effective tools for marketing each specific property.  Some advertising mediums are better than others for different types of properties.
• The savvy of representing a property as accurately and transparently as possible to the consumer effectively managing expectations and generating prospective purchasers with "real" interest in the property.  Video is the most powerful marketing medium to achieve this result.
• The savvy of exhibiting the personality and character that enlists buyer trust.

And finally, let's take a look at the typical commission breakdown to grant insight into where your 6% is going.  In this example, we will take the average 2BR/2BTH Manhattan Co-op apartment and assume a sales price of $1,500,000 with a 6% commission of $90,000 to be split between the seller's representative and the buyer's representative:

Seller's Agent 3%-Seller's agent firm receives 50% of 6% or $45,000.00.  That is split with agent's firm who pays for some marketing, advertising, web site, and branding. So the average agent is left with $22,500.00 of which a conservative 30% goes to taxes after deductions...or should.  This leaves $15,750.00 for the agent before paying for many things out of their own pocket.  Let's break it down on an hourly basis:

• Assuming an average time on the market from start of marketing to closing of 131 days or 18 1/2 weeks (per 2007 4th Quarter Prudential Douglas Elliman Manhattan Market Overview) and a very conservative estimated average of roughly 2 hours per day 6 days per week (yes, we work Sundays at least and many of us work 7 days a week) of the following:
  • Regular meetings to discuss and plan marketing strategy
  • Organizing and completing floor plans, photos, and video
  • Gathering information from management company regarding every facet of building from offering plans and financial condition and history to house rules and Board requirements.
  • Fielding email questions and phone calls regarding the property
  • Scheduling open houses and individual showings of the property
  • Reviewing offers and financial portfolios of prospective purchasers
  • Negotiating offers to procure best terms for seller
  • Preparation of Deal Summary and dissemination to buyer and seller's attorney along with offering plan and financials to buyer's attorney in timely fashion...immediately upon acceptance of offer.
  • Facilitating a timely execution of contract by effectively communicating with all parties involved.
  • Gathering, reviewing and preparing Board application for review by Board of Directors for Co-op.
  • Overseeing processing of Board materials to insure prompt dissemination to the Board of Directors.
  • Assisting to schedule interview of prospective purchaser by Board of Directors.
  • Upon approval, facilitating the closing by effectively communicating all parties needs to respective attorneys, managing agent (closing agent), and banks if necessary.
  • Attending closing.
  • Often times their is work to be done post closing like assisting with the forward of mail, tying up loose ends regarding repairs, helping with the facilitation of moving, and general questions that arise once a seller has moved out and the buyer has moved in.
  • Assume an agent pays for their own video (roughly $600 for a property of this size) and other miscellaneous marketing pieces (super conservatively $400)

So for all of this effort, and this is indeed the typical amount of work that goes into the average transaction, her/his agent nets $14,750.00 or roughly $66/hour ($99/hr pre-tax income-corrected thanks to commenter Julie) of that $90,000 commission that the seller pays.  We're not talking minimum wage here but we are talking numbers that are significantly less than I would guess most people suspect.  And this doesn't factor in the properties that agents work diligently on for 6 months or more that never close for a number of reasons.

BTW...for the average $200,000 home in the United States, this would work out to $27/hour pre-tax income and although those agents don't have the Co-op process to deal with, in most markets they do write their own contracts

So if you decide to pay your seller's agent that $66/hour ($99/hr pre-tax income corrected thanks to commenter Julie), make sure that your getting the biggest bang for your buck and that s/he knows exactly what to do to earn that commission.

Tomorrow I will breakdown the other 3% of the commission that goes to the buyer's agent.

Your math is flawed. First you're taking taxes out before coming up with $/hour. Anyone who is paid by the hour is paid $/hour before taxes. You are just trying to make the number look more reasonable. I would also expect you to deduct any out of pocket expenses and not pay taxes on them.

My math is definitely flawed but my math isn't really the point here and if it was more accurate, I think you would be even more surprised at the numbers.

That said, I'm abundantlly clear that my calculation results in a NET (after tax) amount. The 30% tax figure already considers deductions or we would be paying closer to 40-45% in taxes. I was afraid that the perception of this post would be that I was defending the 6% commission when in fact my objective was to point out what 6% gets you if you hire a savvy real estate professional. Note my comment and reference to a past blog post in the opening paragraph that I'm completely open to new and creative payment structures and wholeheartedly believe a change is imminent.

The real point here is that many believe a commission of $90,000 yields an agent $45,000 and that's just not the case. I know this belief to be true because I have friends and family always suggesting that they know how much I made on a deal...and they are way off. On top of that, I was ultra conservative (and I mean super-ultra) in my estimation of time worked on each deal and personal monies spent. I also didn't include all of the wasted time on properties where sellers "change their minds," etc. I suspect the average hourly rate would be significantly less if I had taken these things into consideration so cut me some slack on my math.

Lastly, I didn't calculate the amount of the company's expenses regarding advertising, marketing, technology, etc. I'm just suggesting that there is a reason that 6% has effectively been the norm for so long and it's not so real estate agents get rich as the average income of an agent in this country is about $25k per year.

Great post, but I agree with commenter Julie: you're making $99/hr, not $66. Taxes are calculated after income, not before. It's kind of undermining your post.

Thanks David and Julie for that matter too. Are there any CPA's out there that want to take a crack at exactly what an agent would make in this transaction? I hear you both but I don't want you to miss the point of the post. I made a mistake but please try to see that the point is that a good agent does much more than what most expect and for a lot less than most expect as well.

Great post! From a fellow PDE agent.
You are absolutely right, it is not about the $99 or $66 per hour rate.
It is about every sellers' misconception of how much we get paid. Sometimes I feel like they forget how many times we have to show properties until it is sold. If everytime we show a property is an hour,( if we do not have any assistants) and we show the property 200x before it actually gets SOLD, then it works out to be 200 HOURS of work, on top of open houses on weekdays and wekends, email exchanges, board packages, marketing efforts, mailers, prof photos, virtual tours...etc.

We work for our money. We are not on a salary where we can hide behind the office computer and do myspace all day long!

Thanks for the post, Doug!
It was a huge exhale for me.

Does this mean you would be willing to do consultation at $100/hr?

If I thought I could earn a decent living and do more volume, I would absolutely consider and hourly consulting type arrangement. That said, I would charge more per hour than $100 and I would require a retainer.Noah from UrbanDigs and I both think that there may be room for this model somewhere down the road. If it happens, I would bet resentment would still develop from consumers regarding billing.

If your agent doesn't do much you suggest to get "a different broker who brings more to the table". Did you ever consider that I don't need my agent to do much? Why would I try and find more things for them to do just to justify their outrageous commission? I recently had to pay a 5% commission on a $850,000 sale. That is a commission of $42,500 (before tax and all other fees as the other lady pointed out). I negotiated a 4% commission with him originally but his brokerage refused to accept it. My agent spent absolutely no more than 10 hours on the transaction and that is if you include his driving time. So that works out to $4,250/hr! It is irrelevant that the buying agent, selling agent and brokers all take a slice, because in the end I still paid $42,500 and got no where near that value in return. The realtor commission structure is outdated and ridiculous and needs to change.

With all due respect Bob, if you don't need your Realtor to do much, then you should have either hired a discount broker on sold the home on your own. I'm not and never will suggest that someone should be paid a 5 or 6% commission for not bringing huge value to a transaction. That said, if you were happy with the price you got and you sold your home quickly, you ma want to give your agent some credit for effecting an expeditious sale. If not, I'm sorry and next time try it on your own.