How the Real Estate Industry Works

As the real estate market heats up and commission checks continue to grow, people often wonder how the real estate industry works. This curiosity may stem from interest in a career move or surprise over the size of the commission checks in Silicon Valley—either way, many are surprised by the number of different models employed by brokerages and the varying approaches taken by agents actively working in the industry.

Getting Started in Real Estate 

Generally, the minimum standards imposed by the Bureau of Real Estate (BRE) are relatively low and a high school diploma is not officially required. The applicant for a salesperson license must be 18 years old, have successfully completed three classes, and pass a background check. An applicant for a broker license must complete five additional classes and have at least two years of full-time real estate experience. Additionally, all applicants must pass a fairly easy test administered by the BRE.

Once the applicant gets a salesperson license, the applicant will need to join a brokerage. Brokerages generally fall into one of many different categories. For example, there are large brokerages that operate franchises all around the country, regional brokerages that operate throughout the Peninsula, and small brokerages that focus on a tight geographic area. Brokerages offer different levels of training and supervision, ranging from minimal to comprehensive one-on-one mentoring or intensive structured programs. Generally, agents are independent contractors who effectively operate their own businesses under the umbrella of the affiliated brokerage. Unlike most industries, brokerages generally face little or no cost to bringing an agent onboard. In fact, many offices charge a monthly fee to agents who want to market themselves as “affiliated” with that office, so a brokerage actually makes a small amount of money even if an agent never completes a transaction. The monthly fees often cover things such as desk rent, professional liability insurance, computers, and websites. These fees run from almost nothing to almost $2,000 per month. Thus, some agencies are very liberal about giving people a chance with the hope that they may sell some homes or learn on the job. Generally, the offices with the higher monthly fees pay higher portions of the gross commission to the agent so they tend to attract more experienced, higher-producing agents, whereas part-time agents tend to favor offices with lower fees.

Commission Splits 

When sellers list a home with a real estate agent, they agree to pay the listing broker a commission, which is not fixed by law or custom and should be negotiated based on the experience, track record, committed advertising spending, and expertise of the agent. The listing brokerage generally puts the home on the Multiple Listing Service and agrees to share with another broker a percentage of the commission if they represent the buyer. Oftentimes, the commission is split evenly between the two agents, but this also varies.

Once a sale is made, both agents will usually split their piece of the commission with the offices at which they work. The agent usually keeps 70 to 90 percent of the commission, but some offices start newer agents as low as 50 percent. Additionally, some national brokerages charge the agents a franchise fee (e.g., an additional six percent), which may be waived on rare occasions.

Independent Agents 

Most brokerages treat their agents as independent contractors and, as such, each agent enjoys a lot of autonomy. While this flexibility certainly has benefits, it also results in considerable differences between agents, even within the same office. The same can be said for the differences in the experience, knowledge, and commitment of the agents. Some agents hold full-time jobs while doing real estate on the side, whereas others view real estate sales as a career.

Salaried Agents 

Some brokerages, such as DeLeon Realty, have switched to hiring agents who are actually salaried employees, rather than commissioned independent contractors who are compensated solely based on how many properties they sell and how much clients pay for their properties. Some clients like this structure because it more closely aligns incentives, which builds trust, in contrast to a traditional model where an agent makes more if the buyer pays more. The salaried specialist model costs the brokerages more money as they have to invest much more in the agents. As a result, these brokerages have to be far more selective as to which agents they hire. Generally, these brokerages pay for all marketing expenses, which often results in a higher level of marketing and economies of scale.

Advertising Costs 

Independent contractor agents generally participate in preparing the home for listing and often pay for all advertising costs. However, the scope of this participation and the extent of the marketing vary from agent to agent. When interviewing an agent, clients should ask for a marketing schedule to be included as an addendum to the listing agreement and samples of the type of newspaper ads, brochures, video tours, photography, and staging consultation they can expect if they list with that agent. Also, all fees should be spelled out in advance.

Third-Party Support for Agents 

One of the biggest challenges for clients trying to select an agent is sifting through the materials provided by the various people that they interview. A quick visit to any real estate trade show reveals a plethora of options to help agents convey a polished professional appearance. Although this canned, third-party material makes life easy for agents, it makes it difficult for clients to discern much about the agent’s personal knowledge or point of view. For example, rather than create their own website material, many agents subscribe to services such as PropertyMinder and Obeo to provide templated websites. Similar services are provided for newsletters and marketing flyers. Unfortunately, some clients don’t realize that the material they are reading is not the work product of the agent who is providing it.

Real estate is a very rewarding career and sales often result in long-term friendships. Whether choosing a brokerage to work at or an individual agent to work with, the decision is very important. The time invested in interviewing many options and asking a lot of questions could pay long-term dividends.