Real estate is massively inefficient

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 9000 active salespeople together with over 1500 support people in over 1000 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 eight properties in the whole of 2012. So in theory they could take four 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.

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 – 9300 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 9300 to around 1500.

But then the issue arises as to the commission payable; because if the same commissions were charged and the industry only needed 1500 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.

Former Realestate.co.nz chief executive Alistair Helm is the founder of Properazzi.