Thursday, February 24, 2011

Who's making the cake?

There's something like 1300ish REALTORS® in Victoria. Less than 1% of them are advertising "commission sharing" online, some are offering other discounts to get clients, and then there's a bunch of 'em (who make up a small percentage of the total) who wake up in the morning and climb out from under their cash-stuffed silk duvets.

In 2010, not a great year but not a bad one either in the big scheme of sales volume, $2,794,122,181 worth of real estate changed hands in the VREB MLS®. It's not easy to calculate total sales commissions on this number because we don't know the commission structures of each deal and we do know they would not have been uniform. I've seen 5% as average commission on individual deals before, but it's not accurate, for example:

Average home price: $600,000
Commission: $6,000 + $15,000 = $21,000 (6% on first $100K + 3% on >$100K)
5% = $30,000

So we won't assume that 5% of the two billion seven hundred ninety four million one hundred twenty two thousand one hundred and eighty one dollars went to REALTORS®.

I'm in a giving mood. Let's be generous to the industry today and guesstimate that the total commissions collected added up to just 2.5% of total sales volume (I wouldn't be surprised if it was closer to 3% in fact). That means there was very likely $83,823,665.43 in commissions for the region's 1300 collectors to divvy up for an average $64,479.74 pre-tax, pre-expenses income. The industry is an expensive one to participate in: you've got heavy desk fees at the big-boy brokerages, Lexus leases, Gucci watches, Armani suits, Jimmy Choo shoes and Luis Vuitton leather listing binders to pay for if you want to project success. I'd be surprised if the average REALTOR® didn't spend half that $65,000ish on expenses related to securing their real estate riches dreams.

Makes you wonder why anyone would spend the $10,000+ to study up, buy insurance and have a 6-month expenses float to break into the business doesn't it? (Probably why a great many would-be agent goes into it part-time).

Real estate trading services is, despite the fact the industry has been colluding on commissions charging what the market will bear, a very competitive business. It's a dog eat dog world out there and we all know there's some big dogs in this little town. The VREB showers recognition on the big dogs each year and sales managers in the brokerages try to motivate as many of their little dogs into the big dog pit as possible.

You've seen the recognition program, the MLS® Gold, Silver and Bronze Awards, I'm sure. Every agent ever to win one is sure to plaster it across their cross-armed-leaning-up-against-the-wall-coolly, hipster vinyl photo on the back of the #14 bus to remind you they're far superior to their peers--"Use me, more people do!"

So what are the thresholds? Well, they change from year to year. It's not about hitting a firm dollar target, it's about measuring sales volumes against the performance of the group. They do it in percentage brackets. Magically, the 2010 brackets appear for us here:
Final Gold Threshold: $6,075,500 (top 10%)
Final Silver Threshold: $4,079,500 (top 20%)
Final Bronze Threshold: $2,827,625 (top 30%)
What do these numbers mean in terms of commissions collected? Again, it's tough to say with absolute certainty, but here's the best guess:
Gold: $200,000 +
Silver: $140,000 +
Bronze: $100,000 +
These numbers were calculated assuming standard commission rates of 6% on first $100,000 and 3% on > $100,000. The majority of the deals aren't double ended, and sales revenue is credited based on commission-able earnings meaning if the average home sells for $600,000 generating $21,000 in commission split equally ($10,500) then each REALTOR® is credited with $300,000 in sales revenue towards the MLS® Awards.

A REALTOR® has to get in on about 9.5 average-priced SFH deals per year to be a bronze winner. I'm going to stop there because the deals done are too diverse to make an even remotely accurate average assessment of deal volume. But I'll leave you with this thought: It's highly likely the taxable income of a bronze winner is somewhere between 60% and 70% of the estimated commissions collected. This means that its likely the top 30% of Victoria's REALTORS® get in on enough deals to earn what I calculated as the "average" above.

There's an old adage in the sales world: 20% of the players take home 80% of the cake. It appears this may be true in the local real estate market.

32 comments:

DavidL said...

Great post, HHV!

wally said...

I'm just glad their cake-colluding monopoly is finally being broken up. Great post.

a simple man said...

Less cake and seemingly more realtors joining the clan all the time.

How could there possibly be 1300 realtors in Victoria - that is unreal. Talk about saturated and overserviced.

Note to self - do not become a realtor.

There will be some lean time ahead for many of these people.

HouseHuntVictoria said...

A simple man,

The barriers to getting your license are low.

Let's say you want to buy a house. Take the course ($1,000), pay for 2 years worth of insurance ($1500), park your license at a discount brokerage ($2000ish for 24 months) then only buying your own home could net you over $5,000.

I don't advocate people do this, it's a lot of lost opportunity cost for a bunch of work etc, but it's likely been done by others.

Say you only write deals for friends and family taking up a bit of time on the evenings and weekends, just for two years, you can make a decent side income to your full time job.

I bet you less than 70% of licensed REALTORS® in Victoria can claim they do it full time and it's their only source of income.

I think those who do it full time make a significant amount of money, especially if they focus on buy side deals, and I know a few agents who've generate their income over the past few years only doing buy side deals.

jesse said...

This definitely is a good post. Professional organization indeed!

But if you have an overpriced house you have to move, who are you going to go with: the bronze, silver, or gold? Just asking...

Marko said...

How much does a GP in Victoria make again?

;)

HouseHuntVictoria said...

Jesse,

I remember my dad walking onto a car lot to by a car when I was a kid. He asked around until he found the guy who'd sold the least amount of cars that month.

When he was done he explained to me that the hungriest salesperson usually gives you the best service and busts his tail to get you the best deal.

Cliche I know. But that said I wouldn't use an award winning agent to buy a place just because they've won some recognition from their own organization. I'd use the guy offering me the most of my cash back.

If I had a property to sell, I'd probably go the flat-fee MLS route.

Waiting said...

What's up with this sale??
3941 Telegraph Bay Rd $735,000 MLS#: 289023
Showing up as pending today at $844,900.

Reilly said...

Your post reminded how i have probably given over six figures to realtors to buy all there shiny flashy things you mentioned.. doh! Test of the early 2009 lows coming soon.. to a theater near you.

omc said...

Hmm Are you suggesting the level of responsibility and training is similar for a GP and a realtor Marko? 10 years of pst secondary doesn't equal 2 weeks in my books.

The average GP income, before an average of 40% office over head is about $160k. Don't bother with that BS stat that says it is more; it is a gov't bargaining tool they tried. The gov't tried to negotiate a few years back with a hypothetically possible average income.

omc said...

I saw that one waiting. It has to be a typo; it is on a fairly busy road.

Just Jack said...

Well the rich aren't getting any richer. At least not in percentages.

A recent sale of $1,050,000 home on Gordon Point Drive represents only an increase of 20 percent from its previous purchase in March, 2005. In comparison to the marketplace increase of 52 percent during the same time periods.

Price compression as the money leaves the high end real estate market in Greater Victoria.

AND

The price differential between Fernwood and Sooke is massive. Nice opportunity for the retirement market to sell in Fernwood and move to Sooke and buy a similar home and pocket $250,000 or $300,000.

thisbeautifullife said...

I used to work for 'Talk to Dino' years ago, and I'll tell you how he used to buy his 'flashy' things ... fake, from Thailand ; ) True story. Oh the things I could tell the VREB about his business practices.

I also used to work for Michelle Holmes of Holmes Realty (I actually left Dino to work for her) ... now she was at the complete opposite end of that spectrum ... a true class act in all forms of her business.

thisbeautifullife said...

I used to work for 'Talk to Dino' years ago, and I'll tell you how he used to buy his 'flashy' things ... fake, from Thailand ; ) True story. Oh the things I could tell the VREB about his business practices.

I also used to work for Michelle Holmes of Holmes Realty (I actually left Dino to work for her) ... now she was at the complete opposite end of that spectrum ... a true class act in all forms of her business.

Marko said...
This comment has been removed by the author.
Marko said...

"Hmm Are you suggesting the level of responsibility and training is similar for a GP and a realtor Marko? 10 years of pst secondary doesn't equal 2 weeks in my books."

I was just trying to put things into perspective, $100,000/year is a serious amount of money that not many professionals are able to attain. GPs earn around that give or take.

thisbeautifullife,

I don't really understand your point? Did one Realtor make more money than the other or just different tastes?

thisbeautifullife said...

Marko - my point was based on what was said about realtors buying 'flashy' things in order to attempt to impress or appear successful. I worked for two different successful realtors (Gold-Award/high sales volume), one was 'flashy' with cheap knock-offs touted as being the real thing ... the other was successful and didn't find the need to be 'flashy' because she was, instead, classy. I found it interesting that despite both being successful, one accomplished so with morals, the other did not. It was funny how their 'flash' or lack thereof, mimicked the type of success they had.

Atlanta said...

Just Jack: Victoria downtown annual precipitation is 605 mm per annum. Sooke is 1492 (Fourteen Hundred! and 92!)

You'd pretty much have to abandon scientific method and have a thing for moulds and fungi to suggest that houses in the two locations can be compared.

Amp said...
This comment has been removed by the author.
Reilly said...

@Atlanta

That just means the raindrops are bigger in Sooke.. mould spores aren't picky. Besides, you can go surfing out there when it's raining.

a simple man said...

GPs in this city are pretty much guaranteed a reliable income, and more income if they are motivated by money or compassion to help more.

Realtors, no guarantees. That is the nature of salespeople. The monopoly aspect has been troubling, but it looks like that is being rightfully disassembled.

A friend of ours is going through the real estate course right now for Victoria - all I can think is why?

Just Jack said...

At the opposite extreme to the Mcmansions is the starter or exit homes. Those little 1300 square feet ranchers in sleepy town communities like Sidney.


So whats up with them.

This week such a rancher sold in Sidney for $376K. The property was bought previously in 2003 for $194K. That's an increase of 93 percent, in eight years, over the previous sale price. But how did this home compare (sorry Atlanta) with the mainstream housing market. During the same time period the median price of housing increased 115 percent.

So, are we seeing price compression in the retirement market as well as in Mcmansions?
Are market prices contracting from the outer districts into the city core? Is the low sales volume making the market shallow and dysfunctional? Are there more foreclosures advertised today, than at any time during the last decade?

Are the days-on-market increasing to the last month of a typical real estate three month contract? Are agents under pressure to sell or lose the contract? And how's the world's economy doing?

Was 2008 only a precursor of 2011? Was 2008 only rocking the coke machine? Will the coke machine fall over this time, making this the mother-of-all-corrections. Will Bear Mountain workers throw away their steel toed sneakers for Garth style cowboy boots?

Will Cameron Muir be the statue or the pigeon in the next few months?

Leo S said...

Was 2008 only a precursor of 2011? Was 2008 only rocking the coke machine? Will the coke machine fall over this time, making this the mother-of-all-corrections. Will Bear Mountain workers throw away their steel toed sneakers for Garth style cowboy boots?

Someone's been watching too much Fox News. "Is Obama a muslim terrorist?" Hey, it's just a question..

Just Jack said...

I think a good amount of these anomalies that are happening daily are just bad decisions that people made in the past. Overpaying for properties without ever doing a proper analysis. Perhaps putting too much trust in their real estate agent.

Such as today's sale on the Gorge for $595,000. Back in October 2006 the property was purchased for $612,000. Maybe the original buyers just wanted to get into the Victoria market, maybe build on the lot when they retired? With the hyped up market back in 2006, I can understand why people over bought thinking that prices always go up and cover any mistakes that they made.

Now, we are in a new market. One where the mistakes of the past come out to haunt over zealous past buyers.

As I said before, if you string enough of these anomalies together, you form a market.
Right now, most of the urban core seems stable, but these anomalies are just at the fringe of the "better" locations and they show a big drop in prices is coming.

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Unknown said...

$10,000 to make a good income... let's see how much do University degrees cost? I'd say not a bad investment!

Unknown said...

$10,000 to make a good income... let's see how much do University degrees cost? I'd say not a bad investment!

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