First, why would you want to be a broker and not just be an agent? Shockingly, it’s all about the money. Real estate brokers make than agents. Remember that agents “eat what they kill” and nothing else. That is, if there are 23 agents in the office selling, each individual agent only gets paid a commission – if they sell a $500,000 home and the commission “pot” was 5%, that’s $25,000 to split. The selling brokerage might have gotten $12,500 – but the agent herself keeps say, $8,000 of that amount. The brokerage keeps the remaining $4,500 which covers office, legal, and other overhead costs associated with the deal.
The individual agents in the office just made the $8,000 – but the people who own the brokerage part of the business (think of it as the casino’s “house”), participate in the winnings of ALL of the agents under their shingle.
In some tiny towns far away from The Big City, the local high school rules the roost. Think: Texas football. High school stadiums fill up with 20,000 or more fans. In that small town, it’s likely that you really DON’T in fact need college to go be a player in real estate sales – if you were homecoming queen or class president and just “know everyone”, it’s likely you’ll have an entrée to sell whatever you want to sell. The problem: The numbers are small.
In that tiny town, it’s likely that you can buy an amazing home for $250,000 and the average home sells for $150,000. Let’s do some math:
If you can sell a home a month (which is a pretty fast clip), and that gets you 12 x $150,000 = $1.8 million in sales… you don’t make that much. In the old days, residential realtors took 6% commission on sales. That is, roughly 3% for the listing agent (the one who offered the home for sale in the first place) and roughly 3% for the buyer’s agent (the one who brought the buyer who eventually closed on the deal).
In either case, it’s likely that you work for a local real estate firm. Think: Century 21 or ReMax or a group like that. In those cases, somebody else owns the firm and pays royalties to Century 21 or ReMax or whoever in return for their advertising and other administrative tools they offer the firm. The point is that there are costs to managing things so you as the agent don’t get to keep 100% of your 3%.
For newer agents, you likely keep more like half. And you can imagine the change in leverage that happens over time. In the beginning, you have no power. You’re just happy to wear that yellow Century 21 jacket and “look like a realtor.” But over time, you get to be known, respected, sought-after – and you want a higher split. Maybe 60%? 70%? 80%?
And if they say “no” you can go to a rival firm or you can go start your own. But let’s do the math on the 50%er newer agent:
You’ve sold $1.8 million of property in a given year, a great year for you. In total, the real estate commissions were 6% (and in practice, with the internet as a viable competitor, commissions have come down and are likely to continue to come down over time but let’s round up for now because we’re just trying to illustrate a point). So that’s .06 x 1,800,000 = $108,000.
And you keep half.
So... you’ve just put up a monster year in Podunk City, USA. And you’ve made a whopping $54,000. Not awful. WAY better than the $20,000 you’d make flipping burgers. But for a home run year, it’s just not that great.
But that’s Podunk City where you barely need a college degree to be a player as an agent in real estate.
Now let’s go to Silicon Valley, California. (And we could just as easily do Manhattan or Chicago or Dallas or any other major city in a hot market era.)
A top realtor in Silicon Valley can also sell a dozen homes a year. But the clientele is radically different from Podunk City. The buyers are internet moguls who are 30 years old and 2/3 of whom graduated the engineering department at Stanford University (the heart of Silicon Valley). The clients come from being early employees of Facebook and Zynga and Google and Twitter and have an elitism about them that is death to an agent who hasn’t graduated Stanford and ideally played on the golf team. In having gone to Stanford, the agent will speak the same language, more or less, as the clients and have war stories from college, the dorms, the football games, Econ 101, and so on that just bonds them. If you only graduated high school, you are qualified to serve these people coffee and burgers and not much else – certainly not to advise them on a home or office purchase or lease.
And the numbers are vastly different. A decent home in Palo Alto or Atherton or Woodside or Los Altos Hills sells for $5 million and there are tons of homes that sell for well above $10 million.
So let’s do the same math against Podunk City. You have a great year, sell a dozen homes for an average of $5 million each for a total gross of 12 x $5 million or $60 million in sales. Commissions are less – let’s say they are 5% - in part because Silicon Valley buyers are savvy internet people in general but also because the numbers are SO large that buyers get essentially a “volume discount.”
But even on a 5% commission base where you keep 2 ½% on $60 million of sales, it means that whereas the Podunk City you kept $54,000, the Stanford graduating Silicon Valley you keeps $1.5 million. That amount is almost more in commission than the entire gross sales of all dozen homes in Podunk City.
Yes, things cost more in California than Podunk City – but not THAT much more. Cars cost the same. So does milk. And wine. And books. And computers. And so on…