Thanks for your question, which has certainly raised a lot of interesting comments. I, too, will side with those wanting to be paid by the hour as this would mean I'd be compensated whether a home sold or the buyer purchased. No one would ever agree to pay for my services on this basis since Realtors are as much revered as we are devalued, and paying by the hour would require a consumer's acknowledgment of the skill of a Realtor.
I'd like to address, however, this myth I've read and is seemingly perpetuated by many buyers or sellers that Realtors are making unwarranted and extraordinary sums of money on transactions. While it certainly does seem high--if I could keep every penny I made from that commission--one has to understand that the commission assumes the "risk" the Realtor takes in doing a lot of work for clients or potential clients for naught. Since we are both in California, might I break down the cost of being a Realtor so that you might have better understanding of the fees? Oh, please keep in mind that no one is making 3 percent commission on a deal anymore.
To be a Realtor in California, whether you sell a home or not, there are fixed expenses associated with the practice. These fixed expenses come in the form of "desk charges" to be with a broker, board memberships, MLS membership, database memberships, marketing company referral fees, office supplies, car insurance (we need more of it than regular consumers), continuing education, telephone costs, website hosting, and Supra key rentals. On the average, if you are an active Realtor working this business as a profession and NOT as a hobby, this fixed cost is about $1200-1500 per month.
Once a Realtor has a transaction, there are then costs associated with the servicing the client, such as travel and gas, advertising, marketing costs, web costs, database access charges, report fees, printing, emails, and time. As one Realtor noted, on the average, a Realtor must work with between 10-12 clients in order to close one deal--so the cost, even if it is only $300 per client in reports and travel x 12 clients, means that the average Realtor expends $3600 to make the one commission. If the commission is the average 2.5 percent on a $800K home (which is a higher than average price of the home selling today--the median is $500K here in Santa Clara), the commission is $20k. Subtract from this the fixed costs of being a Realtor with the variable costs of handling the transaction, and the net total to the agent is -$1600 (that's negative $1600) before the broker's cut, which may be as little as 10% for a negative (-)$3600. On the average, Realtors are closing about one transaction per quarter, so all things being as mentioned above, and the agent is making $80K in gross commission, losing $18K in fixed costs, $14400 in variable costs, and $8K in broker's fees for a grand total of $39,600 for one year's work performed 7 days per week during the day and the evening. I'll bet you make more than that for a 40 hour work week.
Of course, there are REO agents selling as many as one or two transactions per month, so they're making a lot more, right? Wrong. My friend who is an REO agent pays all the same fixed fees that I do, except that for his 2 percent commission on the sale of the REO property, he will lose 40 percent to the Asset Management company for the right to sell the home. He's still doing all the same things a Realtor must do to advertise a property for sale--$500 in flyers, $1500 in newspaper ads, $350 in web marketing and adverttising, $350 in emails to Realtors for a total cost of $2700 in transaction related variable expenses. Here's how he makes out on an $800K sale: Gross commission on an $800K home at 2 percent is $16000, less 40% to Asset Manager -$6400, less variable fees of $2700 and broker commission of 20 percent or $3200 and my friend nets a whopping $3700 on the sale BEFORE the application of any of the fixed costs. Again, an extremely small return on the investment of 50-60 hours of work per week.
Truth is, Hawkeye, Realtors are their own business operators and, unlike you, a salaried employee, there is always a cost associated with every dollar we make, so whether a client buys or sells there is a cost and that cost is not guaranteed to be covered by a sale. The CPA, the doctor, the attorney, on the other hand, gets paid whenever he/she works with a client--and, therein, is the reason for the different fees structures.
Thank you for your question and for this opportunity, I hope to debunk some of the misinformation regarding the sizeable and unearned commissions paid to Realtors today.
Grace Morioka, SRES, e-Pro
Area Pro Realty
San Jose, CA