Should a real estate agent be paid $1.5m a year?

This week Barfoot & Thompson, in celebrating the achievements of its Top 25 salespeople, detailed that its top three agents collectively sold a total of more than 300 homes in the past year.

At an average sale price of $721,000 on these sales generated a total transaction value of over $200 million.

Now to my mind it is not important to know who these people are. They are undoubtedly successful and certainly valuable to Barfoot & Thompson as they accounted for 3% of the total transaction value of Auckland's largest real estate company last year. Three people from a total of over 2000 who are self employed contractors operating under the licence of Barfoot & Thompson.

Doing a simple calculation based on the commission rates of the company, and knowing a little of the commission split between the individual agent and the company, leads me to believe that each of the three top agents earned around $1.5 million each last year.

Now I will accept that these agents do employ assistants to help with the work load; after all 100 property sales a year equates to two sales a week and that is far above the average for the industry at large, at just 8 sales in a year. So let’s allow $150,000 of costs for assistants – that still means that these agents are earning around $1,350,000 a year.

That earning power puts them well inside the top 20 pay of CEO’s in NZ as referenced from the 2011 NZ Herald CEO Pay Survey.

• Earnings of $1,350,000 a year is the same as that earned by Simon MacKenzie  the CEO of Vector, a leading infrastructure company managing electricity, gas and fibre optic networks with over 500,000 domestic and commercial customers, it manages over $5.5bn of assets delivering an operating cashflow of $390 million.
   
• Earnings of $1,350,000 a year is over $100,000 more than Don Braid the MD of Mainfreight a NZ based global logistics company with sales of over $1.8 billion  employing 5,000 people. In that financial year the company made $26m in profits.
   
• Earnings of $1,350,000 a year is over $350,000 more than Russel Creedy the CEO of Restaurant Brands operating 177 stores with 3,700 employees across NZ with sales of over $300 million. In that financial year the company made $26 million  in profits.

Running a complex multi-million / multi-billion dollar business across NZ and the globe is a challenging and demanding role with the responsibility for thousands of employees, customers and suppliers not to say the accountability to a board and shareholders. Top CEO’s are paid for performance and the demands of the job. They are in demand and have global value.

Selling houses is not, let us be honest that demanding. You have a handful of customers at any one time, you have virtually no suppliers or employees. You don’t have shareholders or a board of directors to report to. Bizarrely the people who monitor your performance share in your success and yet they do not directly contribute to that success, save only for the real estate license that a salesperson at Barfoot & Thompson operates under.

I do not blame these top agents for earning $1,500,000 a year, that is just the fact of the industry. Further I do not lay blame at the feet of Barfoot & Thompson, the same situation exists for a handful of top agents at Harcourts, Ray White, Bayleys and others, each earning well in excess of $1 million a year. It is just the way the industry is structured, as self-employed individual agents are incentivised through commissions. The structure of the real estate industry creates this situation.

I think the real estate industry is inefficient, I think it is in need of change. Selling a house is not a unique skill, nor a highly demanding skill. I am convinced that all of the 100 odd houses sold individually by these agents in the past year could just as well have been sold by any other agent. It is just that these agents have created a "marketplace" that they control, not though any illegal means, simply the structure of the industry allows them to be so effective and dominant.

The core fact is that these top three agents do not have unique skills that allow them to earn in 7 days what the average agent earns in a year! There is something wrong with this industry when these disparities exist and the consumers of the services of this industry are being stung with this cost structure.