Are Real Estate Agents Overpaid?

Do real estate agents really make that much out of property sales? And is it worth the cost?

The general feeling when it comes to pay rates is that real estate agents tend to earn a lot, and particularly so in the form of bonuses and commissions. No one expected their salaries to be exorbitant, but there seems to be a consensus when it comes to their commission structure.

Do real estate agents really make that much out of property sales? And is it worth the cost?

How does real estate agents’ pay scale compare?

The comparative cost of hiring a real estate agent to sell a property could be seen against the salaries and bonuses drawn in some of the other professions. A journalist, for instance, is paid around $52,000 per year on an average as of 2018, with around $15,000 paid in bonuses, while a lawyer is said to be paid around $70,000 with a bonus of around $20,000 per year.

Real estate agents, on the other hand, draw a median salary of around $49,000 per year, and the commission that they draw on sale could range between 1.7% and 3% of the total sale value. This could amount to anywhere between $8,000 and $15,000 on an average.

While the rewards for other professions like journalists or lawyers may be on the higher side, it could be argued that real estate agents are lucky enough to receive a chunk of their pay in the form of commissions and bonuses. This argument makes real estate agents look on top of the pay scale as against other professionals. However, while this may seem to be the case on the surface, it must be acknowledged that the commission-based sales model comes with its own risks, which in the worst-case scenario has the potential for all of their hard work to result in no money if a property does not sell.

The effort behind the scenes

This pay structure should be seen in the light of the actual work done and the time-frame involved. For instance, real estate agents have to do their homework, prepare for their sale and arrange for and attend a few open house inspections before the actual sale happens. Then, there is all the paperwork to be executed, along with a host of other responsibilities such as valuation and following up homeowners who view the property.

However, the actual work starts much earlier. A real estate agent has to network extensively with homeowners to maintain relationships, which could well take a year or two before a home sale actually fructifies.

Hence, the job profile of a real estate agent is seen more as that of a self-employed person who is self-motivated by his or her prospects of landing a commission when a sale is executed. Further, the commission itself is paid to the agency and not to the agent, where the real estate agent could expect to take 25% to 30% of the commission paid.

It is the expectation of a sale, after all the preparation work over many months, which makes the industry work hard for its money. For instance, you may not expect a journalist or a lawyer to put so much of an effort into preparation and networking, working on a client for months and even years together before they actually start seeing returns for their efforts.

This timeframe that goes between preparation and delivery, their licensing requirements, and the way the commission itself gets divided between the agent and the agency, along with other responsibilities that virtually go unpaid for in terms of hourly work and their corresponding rewards, makes the commissions worthwhile in terms of motivating factors for agents to increase the value of their clients’ properties.

Is the commission-based structure worth the cost?

Commissions paid on properties generally hover around the 1% to 5% mark of the total property sale value across Australian cities. For instance, Sydney’s average real estate commission rate is 1.84%, while Hobart is relatively higher, at 2.94%.

As a general rule, metropolitan cities feature a lower rate of commission than rural cities and towns, since larger cities have a high transaction volume along with high levels of competition, making it commercially viable as well as necessary for real estate agencies to charge a lower rate of commission. There can also be a disparity between the value of the property market and the commissions offered, with areas that boast higher property prices resulting in lower commission rates, while lower property prices encourage higher commission rates, with the aim to keep agents incentivized regardless of their market.

Despite the general opinion on how much real estate agents get paid, the fact remains that they add tremendous value to homeowners by maximising their property prices.