Tuesday, December 22, 2009

Guest Post: Is Your Real Estate Agent Out to Screw You

The following guest post is Part I in a two part superb article by Edwin Ivanauskas. Part II of the article will be published tomorrow. This week and next I am mostly publishing guest posts, as I am traveling with my family in the jungles, volcanoes and towns of Costa Rica. Hooray!

When buying or selling a house, most of us hire a real estate agent. They help us appraise the value of a house, market the house to potential buyers, help with the paperwork and assist in whatever else we might need during the sales process.

But all of this effort comes at a price, as it should. Generally the price of the house takes into account the 6% compensation for commission the real estate agents are making. This means if the house is valued at $200,000, you pay $212,000.

Dealing with agents can be quite diverse. Two of my friends who bought houses help illustrate the extremes of good and bad experiences.

One friend, Rich, used an agent who is a long time family friend and has been helping their family and friends buy and sell houses for over two decades. He gave the exact requirements to his agent and the agent worked hard to make sure those requirements were met (only showing listings which fit the criteria, showing houses whenever Rich found the time in his busy schedule, etc.). It was his first home purchase and his interaction with his real estate agent was spectacular

My other friend, let’s call him Scott, had a vastly different experience. He had very specific requirements for the house (particularly location) and gave them to his agent. Scott’s agent was an old friend who he found out was an agent and she turned out to be fairly green. She continuously sent him house listing that didn’t fit the criteria. She even attempted to get him to sign contracts that were screwing him out of money (she didn’t even read the contracts). He hired a lawyer to go over all contracts and agreements because his real estate agent was too incompetent. He ended up dropping that agent and picking up another one, which was also less than he expected.

This goes to show just how different your experience with a real estate agent can be. To help me get to the bottom of this big divide between good and bad I’m going to explore how agents get paid and how that pay structure might affect the way in which they deal with you.

How Agents Are Paid

To help me, I’m going to build a basic model to show agent commissions and how different things can affect their pay.

Let’s assume $36,000 a year is a decent starting wage for a real estate agent. Let’s also assume they are working 40 hours a week. This means they need to make $18.75 an hour to reach that wage (we will ignore taxes to make this simple). Making a few more assumptions will let us better understand what a real estate agent must do:
  • The median house price is $200,000
  • The commission paid is 6% total, 3% to each agent, meaning the commission is $6,000 per house
Below, I take this information and graph the hours worked on that single house and the compensation the agent makes per hour:

To make the $18.75 required, an agent must work 320 hours per house at the most. However if they spend any less time their pay increases as they can sell more houses that year.

Get Rich Quick?

Now, I’m doubtful a new agent came up with this graph for himself; he tends to use intuition to come to the same conclusion. Here are three different buying agents who have been on the job for just over a year now.

Jane sells a house about every 320 hours for $200,000; this is our baseline and holds up with our above example. Last year, Jane made $36,000. Jane spends as much time as necessary with her clients helping them pick the perfect house.

Tim has found a few things he can do to help him sell houses quicker:

  • He convinces his clients that a house is the perfect price even though he knows it could be lower
  • He mass mails house listings to his clients without having to spend the time making sure they are houses his clients are actually interested in
  • He spends less time showing off houses and doesn’t like to work with his client’s schedule
  • To top it off, he makes sure that you sign an exclusive right to sell so his clients are forced to work with him. Even if they don’t work with him, Tim gets the commission on a sale
Well, in this case Tim is being a bit more underhanded than Jane but is managing to sell houses at the same $200,000 price level but cutting out 100 hours per house. Tim is pulling in $27.27 per hour and $52,358 for the year.

Uncle Willy is the slickest son of a bitch around and has had years of experience in the used car business before moving his career to real estate. He employs the same tactics he used on cars to get people into houses as fast as he can. Uncle Willy has cut down the time he spends per house to only 100 hours. This will get them $60 an hour and $115,500 a year!

While Jane may be the one customers like dealing with the most, Willy is the one getting piles of money in commissions. Being able to cut down the amount of hours spent on each house can dramatically increase the amount of money a real estate agent gets paid.

[Stay tuned for part II of the article coming tomorrow, in which Edwin explains other financial incentives real-estate agents have to work against you. - Shadox]

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Rodney Damron said...

Money is not substantial - stop making money

Bruce Blackwell said...

You should make a video about all of this and post it everywhere.

Anonymous said...

Scott’s agent was an old friend who he found out was an agent and she turned out to be fairly green. She continuously sent him house listing that didn’t fit the criteria. She even attempted to get him to sign contracts that were screwing him out of money (she didn’t even read the contracts).