The Cost of Doing Biz: Real Estate Agent Shakeout Coming

If you’re thinking of becoming a real estate agent because you love architecture, find it fascinating, have always enjoyed looking at property, or better yet…think you’re gonna cash in…THINK AGAIN.  As The Real Deal points out the upfront costs for agents are rising…significantly!

Residential real estate companies, claiming that it’s harder than ever to eke out a profit, are increasingly hitting their own agents with additional fees and expenses.

The most dramatic move recently was the Corcoran Group’s introduction of a $1,500 annual marketing fee, to come out of each agent’s commission. Corcoran also decreased agent commissions by raising the threshold for higher splits to $160,000 in gross commissions, up from $140,000 previously.

Similarly, Bond New York is planning on raising the bar on commission splits this year, which means less money in agents’ pockets.

"As rents get more expensive, costs of business become more expensive, and the scales that determine where a commission split increases get raised accordingly," said Bruno Ricciotti, a principal at Bond.

Although I’m sure the costs of doing business have increased for all the big players in the real estate industry, this has been a trend since I began selling real estate 15 years ago.  I have worked with 3 different companies and every single one of them has "hit its agents up" in the name of "rising costs" at various times throughout my tenure. I have also watched some of these companies "tighten the belts" of their agents only to see many defect to other companies hoping that the grass is greener.  Such defections by top agents often acts as a catalyst for the company to revisit and even change their recently instituted policies.  My point:  the profession like any other is dynamic. 

Over the past ten years many of the large companies have been in a hiring frenzy in an expansion effort like none other in Manhattan real estate history.  Now, as the entire industry has been simultaneously flooded with agents and inventory continues to constrict, the numbers just aren’t as sexy as they once were for these firms.  Of course the quickest way to effect the companies bottom line is to essentially "tax" (various fees) the "population" (the agents).  It’s the American way.

Neil Binder, principal and co-founder of Bellmarc Realty, is critical of the expenses firms are charging salespeople. In The Real Deal’s Q & A this month, he said, "This has become backdoor income for a lot of companies, but I am not in favor of it, and it is not in our plans to do it. Some charge a computer fee of $1,500 a year and $1,000 a year for errors and omissions [insurance]. Those are names given to those expenses; they are just mechanisms to get additional money for the company, in my opinion."

On top of these new fees, there are increased membership dues to organizations like the Real Estate Board of New York, which recently made it mandatory for an agent to join if the agent’s firm was a member of REBNY. And there could be new fees for the REBNY Web-based listing portal that is being floated.

At all real estate companies, salespeople are responsible for paying a slew of different fees before — and while — seeing a return on their investment.

Expenditures vary from company to company, but all traditional companies need their agents, at a minimum, to cover the cost of maintaining a desk, which can run upwards of $50,000 a year, said Barak Realty founder Barak Dunayer. Based on desk costs at Warburg Realty, agents there are expected to bring in at least $120,000 in gross commissions a year, according to president Frederick Peters.

To get started, prospective agents have to run the gamut of fees and charges. They have to pay $350 to $400 for a 45-hour, state-approved real estate course and a $15 entrance examination fee to get their license. Agents then pay a $50 fee to the Department of State, which licenses real estate agents and brokers, every two years.

At companies that belong to REBNY — namely, most companies — agents have an annual membership fee starting at $190. If the company is a member of the Manhattan Association of Realtors — there are only 35 of them — agents incur $350 board dues.

I must say that most of these fees are insignificant to the top producing agents who enjoy the largest company marketing budgets and the highest commission splits and most of whom spend a significant amount of their own money to stay ahead of the pack (that’s precisely why they are top agents).  For instance, I budget an additional 20% of my net commissions to marketing above and beyond that which is provided by my company.  But for those who are new to the industry and may not close a transaction for 6-12 months, this spells T-R-O-U-B-L-E.  Hello to the 100% commission split firm:

For agents who work at 100 percent commission split firms, the up-front charges are even higher, because all administration and operation costs are on the agents.

At Rutenberg, in addition to the REBNY and Manhattan MLS fees, agents pay the company a $99 monthly fee, as well as a $1,000 or $2,000 transaction fee depending on sale price, Braddock said. Agents get a telephone number that forwards to their cellular or home phone, Rutenberg profile page and e-mail address. They have access to a company manager and use of a company office with a desk, fax machine and phone, but they don’t get free business cards or a permanent workstation.

Following a similar corporate model, Pari Passu Realty charges a fixed $299 monthly fee but no transaction charge. Add $176 to the fixed fee, and the agent can get five New York Times advertisements, said Larry Link, the company’s managing director. Agents pay a $200 administrative fee to be set up in the company system. "Our model works by providing all of the services for a fixed fee with no transaction fees," Link said.

It will be very interesting to see if and how this business model takes hold in Manhattan.  I suspect that if these companies start to attract top producers (not likely…yet), the "big player firms" will have to restructure their business model to stay competitive.

What’s it all mean?  The real estate industry is changing and fast.  It’s exciting to think that the industry as we all currently know it will likely be entirely different within 5 years.  As the market quiets down (and it will), information becomes more transparent, and companies increase agent costs, I suspect that the average income for a Manhattan real estate agent (and their brokers) will decrease significantly making it less attractive to enter the profession.  Can you say shake out?

I still believe that the industry is moving more towards the reality of  the "consultant type" real estate professional.  The good news for the consumer is that this agent will have to provide a level of service that will be beyond exemplary if they hope to stay profitable.  Until then…sit back and enjoy the ride.