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Real estate is massively inefficient

The analysis I recently undertook to ascertain the average earnings of real estate agents certainly provoked some interesting response when published in the NZ Herald.

Clearly the quoted contributors to the article did not have to hand an accurate sense of what an average agent earned in Auckland or any other part of the country. There only comment was that “Auckland agents would be on higher (earnings)” or “if agents were not making enough .. they would move”.

You would have thought that an industry employing over 9000 active salespeople together with over 1500 support people in over 1000 offices across the country accounting for a gross sales value of services in excess of $1 billion would know how much people earn on average.

The fact is the real estate industry does not analyse this kind of data. It does not care about this data or worry as to the efficiency of the industry at large or the many thousands of agents within the industry.

An industry that pays an average of just over $43,000 a year to its front line representatives for what is a serious and complex process involving hundreds of thousands, if not millions of dollars I judge should be concerned.

The fact is the real estate industry is massively inefficient. There are just too many agents tripping over each other, fighting one another, stabbing each other in the back to get a listing and from there to conclude a sale and ultimately earn a commission.

That commission is very alluring – the median house price in NZ last month was $382,000; the average commission charged by real estate companies to sell a house of this value is around $16,000 + Gst. The listings agent will receive on average between 50% and 60% of the commission charged to the vendor – that’s around $9,000. So if you could list and sell just one property a month then you could earn $100,000+ per annum!

Just one property a month. That would seem to a lot of people a simple task, 22 working days to find a property and sell it. The fact is that on average each agent in NZ sold only eight properties in the whole of 2012. So in theory they could take four months off and sell a single property a month for 8 months and earn $72,000.

How can this be – the numbers don’t seem right!

The numbers are right, but only make sense when you look into the workload of an average real estate agent. I have spoken to quite a few agents to ascertain the time component of their work and what I have found did not surprise me, but may come as a surprise to many.

Just shy of two thirds of the working time of real estate agents (64%) is spent prospecting for new work. The productive time spent on behalf of their clients in facilitating the sale of a house represents less than 25% of their working week. Yet their income from vendors supports their full working week.

This is where the inefficiency shows itself – 9300 agents spending nearly two thirds of their working week prospecting for future work. A massive 230,000 hours of working time each week spent by the industry to list just 2,300 properties. That means that the industry collectively spends 100 hours a week prospecting for every listing.

The bizarre thing is that a single listing that collectively the industry spent 100 hours chasing was going to happen anyway. That vendor wanted to put their house on the market. The industry just fought tooth-and-nail to get that listing, or at least one agent beat the others to it.

There has to be a better solution. Technology should be able to play a better part in the process. Vendors want to sell, they want the best agent that knows the market for their type of property in their area – there must be a better way of evaluating agents and allowing them to pitch their proposal. Agents must want to be more efficient.

However a more efficient real estate industry would be a massively smaller industry.

If a more efficient process could be implemented to allow a vendor to choose an agent, it is likely that the amount of time each agent spent on average securing a new client per week could drop from the current 25 hours to around 8 hours. This would then free up time to provide more service to more clients, each agent then handling far more clients. A result of this would likely be a reduction of the number of real estate agents from the current 9300 to around 1500.

But then the issue arises as to the commission payable; because if the same commissions were charged and the industry only needed 1500 agents then they would earn on average over $250,000 a year.

This is where the hypothesis falls down because the real estate industry does not want to change. The industry, for that read the real estate companies; want the inefficiency, they want to have agents fighting each other for listings and earning an average earnings of $43,000 a year. The industry protects the model and the consumer pays - heavily.

Former chief executive Alistair Helm is the founder of Properazzi.

Comments and questions

Wow, I couldn't have said it any better - there are many agents who say they they are doing well yet in reality they aren't. They think being busy achieving jack sh*t is ok...

So you want a regulated closed shop do you, Mr Helm?
With respect, sir, go jump.

Not forgetting they are also self employed.The new quango Govt Dept, REAA watches over the commission salespeople,for- ever threatening them with dire consequences,should they slip up on any facet of the industry.The ironical part is the watchers ,who have never been in the industry are on paid income ,with all the benefits of Government dept employment.The industry is almost a mirror image of Parliaments snake pit.Of course the whole change was prompted by some guy called Cosgrove ,who he himself lost his electoral seat at the 2011 election,not a good result for a person who got changes to the industry,in some cases a lot worse,than before.

Most Real Estate companies live on the bread line ,with a few exceptions,in Northern NZ. Staff employed by the REAA earn a lot more than the much maligned commission salespeople.The quango tail sucks off the commission sales people to justify their inflated pay packets,working in a top heavy public service office.

I was a agent for more than 25 years and was one of the few licensees who supported Clayton and his proposals for changes to the Real Estate Agents Act, most of which became law in 2008.

Off the top of my head, I can't think of any law changes that would add support to Anonymous' viewpoint that ".... got changes to the industry, in some cases a lot worse, than before".

I would love the writer to enlighten me on examples, please.

Personally, I don't think the law changes went quite far enough. I would have liked to seen changes to the way salespeople were remunerated - i.e., get rid of commission only and replace it with a minimum wage and maybe a performance bonus or reward.

Only when this commission payment is addressed and, in my humble opinion, eradicated will the real estate industry gain the true respect It deserves and can move forward to become a true profession.

The commission structure is in place mainly for the benefit of the licencee, even though most will deny it.

The same income success can be achieved for the industry's best salespeople with a well thought out law change along the lines as I suggest above.

The other change I wanted to see was recognition for a true buyer's agent - i.e., one who only works for the buyer.

This is another subject all together so I will leave it for another day.

I agree with Alistar Helm's general comments in regards to our real estate industry.

Was wondering why you are not still in real estate. Seems you couldn't cut the mustard with the new punitive regulations. How the hell does a commission salesperson know if a house is 100% perfect. There is no industry or profession in NZ that has to validate a product to such an extreme. Seems it was people like you who helped destroy the industry as it slips further and further into chaos.

I am proud of the fact that behind the scene I did all I could to change the industry and take some satisfaction that much of what I saw was needed in the industry was implemented into the Act.

A minority like yourself may see it as destroying the industry, so many professional groups I talk to have a very positive outlook on the changes.

Of course changes to the Act and subsequent law changes affecting real estate agents have been made by REAA not by members of REINZ although they have a part and contribution to make.

Anonymous, other than making assumptions you know nothing about and crticising me you still haven't answered my question and identified what are the issues in the new Act that has help destroy the industry and given any examples of support that the industry is slipping into further chaos.

I would prefer to address and debate the issues rather than attack a persons character.

Why am I not in real estate now? After over 25 years in commercial real estate, during which time I also owned commercial and residential investments properties, a import business, a auction business and a retail business plus achieving all I wanted to do in connection to real state, I felt at my age it was time to let the younger generation with fresh ideas have their day in the sun and I move on to complete my other dreams I aspire to before I depart this world.

Anonymous, I do not hide behind such a name, nor do I drive looking through the rear vision mirror.

I certainly do not put prunes on my All Bran in the morning and embrace change rather than wish and dream of the past.

I believe the real estate industry has attained far more respect from the public and other professionals and REINZ is a stronger and more member focussed organisation pro the 2008 Act.

Agents know that when they get the listing, they get the sale and the commission. In the current market of low housing stock for sale its that simple.

Another idea would be for BDM agents to get the listings then hand over to other agents to oversee the open homes and the general sale process, ensuring all the finer detail is looked at and ensuring the vendor is receiving top-notch service.

Anyone with some common sense and the ability to use the internet to get the relevant market information would sell the house themselves. It is not difficult ( yes you need a lawyer at the end of the process but that is going to happen anyway).
Maybe these agents should look at the overseas idea of being a "buyers" agent. I don't know how much demand there would be NZ for it. But if they are struggling then they have to innovate like any other business.

Rubbish. Most people are hopeless negotiators, and it's negotiation 101 to have the other principal negotiating with your own agent if possible.

Have you wondered why only it's only the people in the poorer suburbs who sell their own houses? You will rarely if ever see a vendor-run marketing campaign in areas where there is a higher concentration of smart people live (yes, I'm using wealth as a proxy for intelligence, so you can get on your high horse now).

It's typical of stupid people to focus on the known 3% cost of the agent, rather than the huge potential (but unknown) benefit of a professional negotiatior.

And when did Epsom become a 'poorer area'? And the agent fees are not just 3%, 4% or 5%, they are also $10k plus for advertising.

People are too emotionally attached and buyers hate attending open homes run by owners. I take from your comments this is something you have done successfully, or just an armchair contributor?

Yes, I have done it successfully. It wasn't hard. (A real estate told me later I got the best going in the market at the time).
I'm not saying it is for everyone. I'm saying that for someone with a bit of business savvy, it can be done.
My experience on the buying side (twice) forced me to try because estate agents were hopeless when I looked at what they did for the vendor.

I think you're thinking of this completely from the seller's viewpoint. I think the barriers to this not happening more are largely buyer perception. People like to buy houses through agents (I would guess partly due to a brand awareness and, as anon says, not wanting to be directly involved in negotiations).

Yes, in theory it is that easy, but the people selling themselves tend to be dreamers. I laugh at almost every private sale listing on Trade Me in my home town of Dunedin as the price expectations are nearly always way too high (usually by as much as 20-30%!). The same properties always end up listed through an agent at a much lower price.

The fundamental problem with the NZ RE industry is the unwillingness of agents to share fees. This drives the behaviour of agents to focus on capturing new listings; properties effectively sell themselves. It also causes serious conflicts of interest; owners' agents are so keen to achieve a sale, even at the owners' expense, that they frequently forsake their fiduciary obligation by at times leading buyers to believe that they are actually working for them. The commission structure of the industry is in serious need of an overhaul. Legislate it.

For someone who used to be employed by you certainly seem very anti agents. Perhaps that's why they let you go. You forget that consumers have a choice to sell privately. So what is your problem??

On your average sale example you missed out the lions share of any deal goes to the agency to cover costs.

So where you say the listing agent would get $9,000. You are wrong. It is more likely that the agents will be sharing 45% of the deal between them, so that $16,000 would get cut down to $4,320 for the listing agent. times that by a very ambitious 1 sale a month and you get $51,840. Chances are some properties won't sell and with a 70% strike rate that income is comming down to $36,288.

Hands up those who want to take on the risk of being an agent ???

Agents are being regulated more and more. These regulations come in the form of barriers to entry, and compliance costs.
That coupled with low incomes and the number of agents has already been dropping consistently since 2007.
We talk about this in our office all the time, and perhaps what the industry needs is to become salaried with bonuses where the agency actually manages the staff and financially can't afford a bums on seats approach. Also then Agents won't be out in the cold without benefits like kiwisaver, actual scheduled holidays etc... that the standard employee takes for granted.

It's almost like a pyramid scheme, with the agency at the top still getting paid regardless of how little the agents earn or how tied up in regulation they are. Every person I ever met who sold Amway was a desperate loser, awed by lifestyles of the MLM Rich and Famous - and there's definitely a hint of this in real estate. You have to wonder, if the agencies don't even provide continuity of income to their employees, then what are they actually bringing to the party?

Helm talks about the inefficient agents, then plugs his method of selling.

What a one-eyed, self-serving, example of using media cheaply.

What is Helm trying to achieve with his comments?

I would suggest that perhaps he now has plenty of time on his hands, now that the real estate industry does not employ him.

This commentary is so flawed it defies belief that the NBR would allow this chump to be associated with them.

Helm is so off the mark with this analysis- he needs to either go out selling, own an agency for him to have any real idea about what goes on or go and annoy another profession.

Two things I noticed from agents that were against change, highly critical of proposed changes or wanting to to keep the status quo were that they intended to attack the person rather than the subject and they liked to hide behind anonymity.

I would suggest if readers disagree with Alistar's remark then share with us your figures and source of information so we can make an informed decisions and decide on whose we would place more credibility on.

There are way cheaper alternatives. We have sold houses recently on Trademe, and it really is a piece of cake. There are more buyers than homes for sale so there is a queue of buyers, especially in Auckland. Also with the likes of Trademe you have control over the decsriptions, photos, etc. For a few hundred dollars you can always split what the commission could have been if an agent were involved to close a deal. I suspect real estate agents will become a thing of the past before long. The only additional party was the lawyer, around $1000.

Wow - you saved a few thousand on the commission and hocked your biggest asset without any meaningful experience...

Sorry, who is the smart one?

This is a very easy comment to make, but where is the factual evidence to back it up? Can you say you made it without an interest in your point - i.e., that you are in the real estate agent industry.

It seems to me, in Auckland, that the vast majority of houses are sold by agents through an auction. The auction process, by definition, gets the second-highest price for the house ... it's in theory $1 more than the second-highest bidder would pay. It's only by luck the highest price the winning bidder would pay. So by theory most agents take the easy way out (auction) and don't get the best price for their client's house.

He is happy with the price he got and he didn't have to pay someone to get that price either? What is wrong with that?

Got top dollar each time. Only invited around callers who were cash buyers. Longest time to sell was five days. Shortest was two days. Buyers love private sellers as they can negotiate without the pressure and silliness of an auction. Saved the $30k, plus the $10k plus for advertising (why must sellers pay for this?) that the agents wanted. Agents have no skin in the game.

#14 Richard, you may have saved a few thousand on agency fees and marketing but I suspect you may have lost out on sale price.

Certainly a renumeration could be the plan in increasing a better income for the industry. But the vendor who pays a commission is also paying for the vendors who have unrealistic expectations/over priced houses that will never sell. If you can guarantee that every house you list would sell then the fee for sale would drop and I believe the salesperson would have a more consistent take-home pay.
The consumer is their own worst enemy. They support being fooled by the bullies/superstars of the industry when the good salespeople who bring in an average income are the best for the job and deserve the better pay. Perception is the reality, but it's not an efficient future! The offices also endorse a prehistoric pyramid scheme that usually only feeds the boss, the administration staff and the 900lb gorilla!

It used to be that any property was listed with three or more agencies. Then agents had to work to get the best deal for the seller. The agent paid for advertising! Nowadays, as noted above, all of the effort goes into getting the listing - a sole agency listing - after which the sale is effectively guaranteed.

Let us have the return to a truly competitive market. It would be better for sellers, offer a better service to buyers and should also weed out the less effective selling agents.

The commission structure outlined by the writer is incorrect.
On a fee of $10,000, 8% goes to the franchisor ($800), 2% to the franchsee for admin purposes ($200), 27.5% to the selling agent ($2750) 27.5% to the listing agent ($2750) - not always the same as the selling agent - and $3500 to the agency, which has to pay rent, wages to admin, power, etc. So many agencies earn less than their salespeople and, yes, there are far too many salespeople in the business. But many of them are not a main bread winner so have no "need" for income and are able to survive on a small income of $30,000 a year.

Solution, private sale on Trade Me.
Just sold my house today after eight days on the market, with two open homes, and saved $15,000 in commission.

How do you know you 'saved' anything by selling it yourself.
I bought a unit privately offered for sale, and when we reached an agreed price I asked for a further reduction because of the mutual 'saving' availability on the seller not having to forgo a commission.

By the way, Helm, re rule of thumb - half of any commission goes to the agency, with the selling and listing licencees squabbling over the balance.

Best part of this article is the anonymous comments. Methinks the agents doth protest too much.

I am complete agreement with the above-mentioned facts put forth in the article. The hard work and research done for this blog is really appreciable.