Real Estate Commission Craziness – What value can an agent bring to be paid $500K on one sale?

Five business people gesture excitement together

No I’m not talking about $500,000 as a home’s sale price.  I’m talking about $500,000 in commissions that would be paid to a real estate agent.

The Puget Sound Business Journal had a post about a new house in Mercer Island going up for sale for $28.8 million dollars.  I pulled the listing up and sure enough….$28.8 million dollar home.  It’s obviously a beyond gorgeous house.  What caught my attention and is the topic of this post is that it’s set to pay the buyer’s agent 2%.  Let’s just say the house sold for it’s listed price.  2% of $28.8 million is $576,000!! Great!

Granted, I’ve never sold a house in the $20+ million range before, but legally there isn’t any difference between a $20 million dollar home and a $1 million dollar home which I have sold before.  So… as a buyer’s agent, what responsibilities do I have for my client?  Find and show homes that fit their needs and wants, help put the offer together, research market pricing, negotiate the offer, inspection, help with loan (maybe), title verification, verification of everything (permits, dock, waterfront related concerns, etc.).  Great!

Currently there are only 12 properties listed that are $10 million or more in price.  Let’s say we look at 1 per day and each showing takes the entire day (both extremely conservative figures).  Pricing research and drafting the paperwork, 1 day.  Delivering offer and subsequent counter offers, 1 day combined for all offer/counteroffers.  Inspection, 1 day (probably literally).  Review inspection report and discuss with client, 3 days.  Verifying everything about the property like title, permits, etc., 7 days (sometimes it takes a few days to hear back from city officials). Loan follow-up and miscellaneous stuff, 7 days (trips back to the house, calling, emailing lender, escrow, etc.).   So, very conservatively, we have about 32 days of work at most.   Great!

Okay…this is how ridiculous our industry’s practices are on commissions.  Let’s say I was able to negotiate the price down to $25 million and my 2% commission is now *only* $500K.  32 days of work pays $500,000.  That is $15,625 per day.  I showed one house in one day and it was the equivalent of $15,625.  I walked around with the inspector for an entire day and made $15,625 while the inspector (who was doing all the work) likely made around $2500.00 (assuming a gigantic house). I spent a week calling and emailing city officials to gather info and made $109,375 that week.  On what planet does this make sense and is right?!?!

Let’s look at it another way here.  For the same $500K commission that I would make, I could hire 5 full-time staff at $75,000 annual salary and have them work the entire year on this file.  1 person would handle the inspector.  1 person would handle the lender.  1 person would handle the city officials.  1 person would shuttle the buyer to the house. 1 person would handle following up with escrow.  I would be left with nothing to do basically.  I could make them work for an entire year and I’d still pocket $125,000.  How does this make any sense?

I could hire another agent and pay them $100K to handle this transaction for me (I’m sure I’d have agents lining up for the job) and still pocket $400K to do nothing since my hired help is doing everything.

I’d like someone to try to convince me that an agent can provide enough value and service to their buyer to justify a $500K payday.  Remember buyers, … you are forking out that $500K to your agent. Did your agent really bring $500K of value to the table? I can’t picture a scenario where the answer to that question is a yes.