You place huge amounts of trust in them to hold your best interests at heart, and to guide you to find a place that you can call home for the foreseeable future. However, transactions can get very messy and your agent might not be able to do much about it.
To empathize with their circumstances and understand what’s happening, let us take a look at the industry from their perspective – we promise you, it is not a pretty picture.
How A Real Estate Agent Operates
The allure of being a real estate agent is high. It is a very rewarding job for anyone who yearns to work with people and help them find a home. They get to savor many aspects of entrepreneurship such as managing their schedule, potentially reaping larger rewards due to the higher risk involved in the business, and building a business off the ground.
Being a real estate agent is tough. While it is simple enough to get certified and get started – and perhaps because of this lower barrier to entry than most other professions – making it big as an agent requires a ton of grit and determination. Most don’t survive the harshness of the profession, and this is evident from the extremely high turnover rate – over 80% of agents quit their jobs within their first 5 years.
Generally, the work for an agent would be similar till they make it to being in the top 5% at which point their business has grown large enough that they wouldn’t have to worry about acquiring new customers – they can sustain their business solely on referrals and repeat customers. Such agents tend to work on the higher tiers of markets (more expensive property affords them the luxury of working with fewer customers, but being able to dedicate all their time to the few while making good revenue) and tend to have been in the industry for years – it is not uncommon to hear of agents who have been in the industry for over 20 years. You would likely have to be referred to such an agent, and they are rather hard to come by (especially for lower and middle-end properties).
For the remaining 95% of agents who are still working to making it big, while there would further nuances in their day-to-day depending on how long they’ve been in the industry and how good they are at their job, for the sake of simplification, we’ve classified them as one large group. For them, their average could be split up into thirds – a third of their time spent on marketing (online, such as social media and email marketing, and offline), a third on managing paperwork and scheduling for their current customers and a third spent on the ground. running around the neighborhoods, showing you homes and making sure you find a home you love.
Most agents will tell you their favorite third is the last one – the first two in their minds would probably be necessary evils. But while they own almost every aspect of their own business, there’s a huge problem with how they get compensated.
Why They Are Powerless
Agents split their commission with their broker (or brokerage) on every transaction. These splits can range on average from 5% to 30% of what the agent would make upon closing (which is usually 3% of the price of the home paid to them by the seller) – generally, the bigger name brands demand a higher % as they claim to provide better leads and opportunities for their agents.
The big injustice is that the value that a brokerage provides to their agents is significantly lower than how much they take from their agents. The agent is handling the bulk of their business but retains much less in return, which further dictates that their efforts be spent more on things they tend not to enjoy (like marketing and admin/paperwork) instead of spending more time with you, the home buyer.
Work independently of a broker/brokerage isn’t possible either because every agent is required by regulation to operate under a broker (a broker is an experienced agent who’s been in the industry for over 2-5 years, depending on the market regulations, and has further licensing and legal responsibility). Note that brokers who run smaller brokerages tend to be awesome folks who are directly vested in the home buyer’s success since they’re working to build their business and rely on your referrals. This falls apart with the large name brokerages that spend tens of millions of dollars on marketing rather than focusing on generating business through organic means.
Such brokerages also employ thousands of agents, from whom they take a % of the commission, and rely on quantity over quality to justify their razor-thin margins (after all, their customer acquisition costs are significantly higher as they have to rely on marketing spend instead of free channels such as word of mouth/referrals). Their customer segment shifts away from home buyers to agents, ie. they tend to market to agents to attract them to their brokerage.
Larger brokerages are also focussed on the larger picture and tend not to have incentives tied with individual transactions. Inherently, agents will receive less support in their transactions and in building their business because they are just one out of tens of thousands of agents that are under the same brand. Even in the situations that transactions go awry, they do very little to support their agents or the home buyer (ie. you) – and sometimes transactions fall through for reasons individual agents will not be able to fight against because of larger forces (like banks, law firms, governmental boards, etc) that refuse to play nice. All of this is just a cesspool of systematic inefficiency and misaligned incentives.
This is where all of this affects you directly. You are losing out on every opportunity to have a better home buying experience because institutions that claim to have your best interests at heart, obviously don’t. To a large extent, they don’t care if your transaction falls through, because they can just rely on the next person to buy a home instead.
And there is very little your agent can do about this (we hate the current system and our mission is to fix this for you, both as an agent and as a home buyer, and we wrote expansively on this in The Hutsy Manifesto – Everything wrong with real estate and why the modern home buyer deserves better).