There has never been a better time to be a real estate agent

by Alistair Helm in


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If you start seeing more late model European cars parked outside open homes in the coming weeks – don’t be surprised. Simply put; in the past 20 years there has never been a better time to be a real estate agent.

It is the perfect alignment of the key drivers of the real estate industry. Sales volume are growing fast, prices are up and up, there’s little competition in the commission fees and its harder to break into the industry.

Since the peak of the property bubble in late 2007, sales volumes fell by 40% and then rose by 40%, prices fell 8% and the rebounded 23% whilst the number of agents literally halved but have barely grown since 2010.

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The industry structure was significantly altered in 2008 with the implementation of the Real Estate Agents Act. The new Act required a higher threshold for admission plus annual license renewal by individuals whereas prior to the new Act licenses for salespeople were held by offices on behalf of offices, allowing for a more flexible arrangements for people to move into and out of the industry. As the property market collapsed in the 2008 / 2009 agents left the industry as selling opportunities lessened. When the market started to recover in 2011 the traditional surge of new entrants to the industry did not eventuate as the barrier to entry had been raised by higher entrance requirements, an effective apprenticeship period and less educational establishments providing courses.

The current market

In the 12 months to September of this year the industry comprising just over 9,000 active residential agents, (as tracked by Realestate.co.nz) closed 80,539 sales with a combined value of $39.35 billion.

The value of the commission charged by the industry to their clients for their services in the past 12 months to the end of September totalled an eye popping $1,586,450,000 (inc GST). That total is within 5% of the all time record set in 2007, yet back then the industry had over 17,000 agents vying for the opportunity to sell property.

Viewing this data on the chart below ably demonstrates just how happy those in the real estate industry must be at this time.

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In the past 12 months the average agent has sold 9 properties and has generated an average commission total of $153,280 (exc GST) charged to their clients for their services. Of course the agent themselves will see a proportion of this commission dependent up on the arrangements with their office. However the fact is that this scale of sales commission has grown by more than 50% in just 2 years driven by the rise in volume of sales and rising prices.

The majority of this growth though as is so often commented is unique to Auckland and Christchurch so maybe the real winners will be European car dealerships in these key cities!

 


Real estate is massively inefficient

by Alistair Helm in


Picture courtesy of TVNZ Agent Anna

Picture courtesy of TVNZ Agent Anna

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 9,000 active salespeople together with over 1,500 support people in over 1,000 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 8 properties in the whole of 2012. So in theory they could take 4 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.

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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 – 9,300 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 9,300 to around 1,500.

But then the issue arises as to the commission payable; because if the same commissions were charged and the industry only needed 1,500 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!

Update

This article and full analysis was featured on TV3 News on Saturday 6th April - the reporter spoke to some buyers who recognised the value of having an assistance in selecting an agent and thereby helping agents become more efficient.


How much does a real estate agent earn?

by Alistair Helm in


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This question usually generates a variety of responses – “vast amounts of money based on the late model cars they drive!” or “must be easy money as anyone seems to be able to be an agent” to the more knowledgeable “it’s tough, those at the top earn fortunes, whilst the majority need to a second income”.

The fact is real estate in average is not the highest paying career, but you can make it become a very high paying career – its up to you. There are agents albeit a small number that earn in excess of $1m a year, many more earn over $100,000 however as with any industry the majority don’t!

Enough of the subjective assessment. I have undertaken a detailed analysis of the real estate industry in NZ during 2012 to come up with a series of insightful analyses of the industry. Using public information from the Real Estate Institute and generally available information from a number of websites as well as information gleaned from discussions with real estate agents I have come up with information on agent average earnings across the country.

In 2012 the industry was paid in commission fees by sellers over $1 billion (inc GST). The industry supported just over 9,300 active agents. That though did not result in each agent earning $100,000 – the income from commission does support quite a considerable infrastructure before it is divided up amongst the selling agents.

In 2012 the average income for an agent in NZ was $43,372.

Across the 19 regions of the country the average income though varied considerably – largely a function of average house prices. That is one of the first very strange matters regarding the industry. The % commission rate to sell a $200,000 house in Otago is pretty much the same as to sell a $800,000 property in Auckland and ostensibly the task is no more complex or challenging to sell these two properties yet one agent shares in a commission fee of $6,000 and the other shares in a fee of $20,000+

As a function of this, the top earning agents are naturally in the top prices areas of the country with interestingly Wellington taking out the top spot with an income of just under $94,000, compared to Auckland at $76,000. Part of the reason behind this is the fact that there actually less agents per property sale in Wellington.

Interesting to see the Taranaki grab the 3rd place spot at $58,000 ahead of Central Otago, which of course benefits from Queenstown prices to deliver an income of just under $52,000. The next 9 regions all have income above $40,000. The bottom 4 regions though struggle to deliver a reasonable income; all below $25,000 with the West Coast delivering the lowest income of just below $20,000 – barely a quarter of the income of Wellington agents.

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It is important to be aware before you judge these incomes against the median NZ salary of $42,000 that this is gross income. As self-employed contractors agents have to support their business before they can regard this as take home pay.

Costs include their REAA license, compulsory training, the necessary car and travel costs as well as marketing. Conservatively this is likely to be around $10,000 a year.

Making an adjustment for the tax offset of these costs the equivalent annual average salary of a real estate agent in NZ would be around $35,000 which is interestingly below the recently championed “living wage” of $38,000 (18.40 per hour).

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Where is the best place to be a real estate agent?

by Alistair Helm in


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If Wellington agents earn the top income in the country at over $90,000 then the answer is simple – go work in Wellington!

Not quite, the fact is that real estate is not a 9-to-5; Monday to Friday work for which you receive an identical monthly bank credit. Real estate is a self employment option and as with any sole trader business, the more you work the more you should be able to earn.

Whilst we all know this adage is logical but not always right, the fact is people in real estate tend to work longer hours than your average employee.

Taking extensive information from the real estate industry together with insight gained from my role in the industry over the past 6 years I have for 2012 tried to examine the workload of agents around the country to see who are the most productive, who work the longest hours and how do these factors effect the true hourly rate of real estate agents.

I have examined the workload on the basis of the number of sales managed by agents matched to the data for average days on the market. The number of new listings matched to time spent prospecting for business and finally the available inventory on the market during the year and the associated workload in supporting those clients. Add the usual self- management time and office time and I have come up with a total hours per agent per region.

Here are the findings.

The average annual workload of an agent in NZ is 2,033 hours. This compares to a traditional employee working 9 to 5, 5 days a week with holidays and stat days working 1,840 hours.

Agents work 5% longer in a year than most employees.

This drags down their average hourly income for agents to $22.14

Across the regions the scale of the workload is incredible. The most industrious agents are in the Central North Island they on average work 2,775 hours per year. At the other extreme the agents in Nelson seem to have it made; appearing to work a total of just 1,420 hours.

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This measure of workload is only really meaningful when evaluated as an effective hourly rate given the diversity of regional incomes as presented in the analysis of how much an agent in NZ earns.

The conclusion is that the best place to work in real estate in NZ would by this measure of effective hourly rate appear to be in Auckland where agents work an average of 1,557 hours per year for an effective hourly income of $48.88.

Closely following on the heels of Auckland is Wellington and Nelson. Eight of the 19 regions have an effective rate in excess of $25 per hour, or put another way, the majority of regions have an effective income at an hourly rate below $25 per hour.

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Alarming is probably the fact that 5 regions have an effective hourly rate below the minimum wage of $12 an hour with agents in the Wairarapa working an average of 2,314 hours per year for an effective hourly rate of $9.36.

Again as mentioned in prior analysis these incomes are gross and have to support business costs, which have been estimated at around $10,000 per annum.