THE MONEY SIDE OF REAL ESTATE!

I am writing this because there seems to be holes in what people know about the nature of real estate, and the bottom line--money. People work for a living for a variety of reasons, but the most important is to earn money. I want to first explain how agents earn money. The most common is commission. The seller pays a commission that is normally split between two agents, one representing the seller and one representing the buyer.

At first glance this seems like a huge sum that the seller pays. Let us take as an example the sale of a home for $200,000. The commission on this home, although totally negotiable is averagining 6%. That would be a cost to the seller of $12,000, or $6,000 to each agent. If the seller did not pay the entire commission, then the buyer would have that $6,000 expense in addition to the normal loan closing costs and the down payment. In Germany, the buyer shoulders the entire cost of buying a home, including all commissions, and that is why many don't buy homes until quite late in life. In this country we have a system in place that allows home ownership at a much younger age.

So let us see what happens to that $6,000 that each agent receives. There are many kinds of plans available through the different real estate companies, but we will look at the two most common. Re/Max is a 100% company. So that $6,000 would be given entirely to the agent. But Re/Max does not work for free. The costs of running the company are passed on to the agent. Re/Max Performance charges per month $75.00 for the ads that you see on television for Re/Max. Our particular company also charges $151 for the company ads that you see in the local newspaper. Re/Max charges $520 for management fees, $120 of that goes to Re/Max International and $400 of that stays with the company so that I can go to my broker with questions. They charge a sliding scale of $325 to $1,650 for office expense. This includes the office and desk that they furnish, utilities for the building, errors and omissions insurance and the staff to set showings and process files. Then there are fees for the telephone system, internet service, long distance, MLS fees, copies , and other miscellaneous fees which total $100 to $150 per month. All together I pay about $1,200 per month for the use of the Re/Max building and the Re/Max name. This is what is called my chargebacks. This is the same fee to me whether I sell one home or 5 or some months - none. So let's take that $1,200 out of the $6,000 leaving $4,800.

Let us now look at the more common method that agents work under, the split with the real estate company. This is also a sliding scale, from 50/50 to 80/20. This depends upon the experience of the agent, and how many closed transactions they may have. A very common split is 70/30. I will use that for the example. Going back to the $6,000, $4,200 would go to the agent and $1,800 would go to the company. On a split the chargebacks would be less. The $400 management fee, and the office expense would be eliminated. So on a split chargebacks might only be $450 to $500 per month. That would come out of the $4,200 leaving the agent $3,700.

From the remaining commission, like any business there are other expenses and taxes. Because you are self-employed you pay the entire social security tax instead of just the employee part. That currently is about 13%, and then there are federal and state income taxes. The amount depends upon your particular bracket. You can be sure that between 1/3 and 1/2 of your income will go to tax. Let's be conservative and use 1/3. On the 100% plan that would reduce the $4,800 to $3,200. On the split plan that would reduce the $3,700 to $2,467. Then there are the other costs of doing business, from phones, to cars, to computers, to supplies, plus salaries if you have help in your business. It is easy to see that the $12,000 that the seller paid in commission is greatly reduced by the time it gets to the real estate agent to pay for his own personal mortgage and food. It is also easy to see that any agent needs to sell more than one house a month in order to exist.

Now lets look at some other realities. In most professions, after you get hired, you get paid either weekly, every two weeks or twice a month. The employer may hold one pay period back before you start receiving money. It is reasonable to assume that you will receive money after one month of work. During that month you have your normal living expenses to take care of. In real estate you do not receive a paycheck at a set time. Instead you get paid after the transaction closes. In a normal time frame from the time you start working with a client to the closing averages 3 months. So you will work for three months with no pay, and still have 3 months of living expenses to take care of. If you are just starting out, you will also have the expense of getting started, business cards, advertising, letterhead, license fees and dues, among other things. Start-up costs can run several thousand dollars. Add the start-up costs to your 3 months of living expenses to get the total amount you may need to get started in real estate. In many families there is another working member in the household, which may cover those living expenses. But the start-up costs are still there, as well as the fees you accumulate while you wait for that first closing, hopefully in three months.

I personally want to add agents to my team and to train them. If I add a licensed agent to my team Re/Max will add $150 to my chargebacks because they will now have another agent taking up space at the office and who may ask questions. I will pass on that $150 charge to the agent plus $100 for the use of my office and my assistants. So the new agent would have that monthly $250 expense. I will offer them a 70/30 split on all commissions. The 30% is where I would make the profit for all the training and knowledge that I would give them. The cost to a new agent would only be the $600 per month, which still involves a bit of money to get started in the business. Hopefully they would have a closing by the end of the third month and could put some money in their pockets.

This is a breakdown of where the money goes after closing. But first we must get to a closing! The real key to success of any agent is their client base. Some people come to agents by referral and that is the best kind. The client referred to us already has a level of trust that we will do a good job for them. Most referrals remain loyal to the original agent. The more common method of finding clients, especially when you first start out in the business is the walk-in, the person that walks into a real estate company and starts asking for help. This is where floor time comes in. All the hours that the real estate company is open is divided into segments. These segments are assigned to agents. Anyone walking in during your floor time is your client. If that person sticks with you until closing, you get paid. If for any reason that person goes elsewhere then you don't get paid. If a buyer goes on their own to an open house and winds up buying, then someone else gets paid. If you list a house, but for whatever reason it does not sell, and then someone else lists the house and it does sell, then once again you don't get paid, someone else does. It does not take long for any new agent to realize that client loyalty is one of the most important aspects of real estate to the agent. An agent tries to keep clients loyal by giving outstanding service and giving their clients undivided attention. And still sometimes that is not enough. After all the bottom line to all sellers and buyers is the same as for the agent, money. The seller wants to net as much as they can for their home, and the buyer wants to buy for the least amount that the seller will accept. The seller will sometimes try to net more money by either pricing the house higher or trying to negotiate their biggest expense, the commission, to a lower amount. I am a firm believer that you do get what you pay for and a lower commission will get you lower quality service. Commissions are always negotiable, but it is only fair to pay an agent for what they actually do.

I hope this has helped you understand the many facets of real estate and money. If you have further questions, please contact me direcly. Thank you.