What are the two biggest misunderstandings about the real estate business?

I believe that one of the biggest misunderstandings about the real estate industry is how much agents make on the sale of a property. Most people believe that we make around 6% of the sales price. Nothing could be further from the truth.

First, a hypothetical 6% (commissions are negotiable) is generally split 50/50 between the listing broker and the selling broker (represeting the buyer). Of the 3% that’s left, each broker charges their agent to be affiliated with their company leaving the agent with around 2%. Of that, the agent has expenses such a board of Realtor dues, errors and omissions insurance, marketing, etc. leaving the agent with about 1%. Then, real estate agents are in the highest tax bracket in America (not only paying around 26% federal tax and a possible state tax up to 9%, but also self-employment tax of 15.3%) making their net commission after tax arount 0.5% (depending on what state they’re in).

So, on a $500,000 sale most people believe that an agent makes around $30,000 when, in reality, they net about $2,500 after expenses and taxes to feed their family, put their kids through school and keep a roof over their head. I think most Realtors would agree that this is probably the biggest misunderstanding about our profession.

The second biggest misunderstanding is how hard we work. It’s much harder and less lucrative than most people think. Because it’s a 100% commission job you can work with a client for a month or two and end-up with nothing. These misunderstandings about how much we make and how hard we work is why so many people get into real estate every year. They’re also the reasons why 85% of people who get into real estate today will be out of the business in three years.

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