Should Brokers Charge By The Hour?

Peter G. Miller
OurBroker®

Most people know to the penny what their income will be this week and this month, but that's rarely true with those who work in real estate, a financial reality which raises two questions: What is it that brokers really earn and would brokers be better off if realty services were billed by the hour?

According to the National Association of Realtors, the median gross income from brokers was $63,100 in 1998 while salespeople earned $30,300. Interestingly enough, those who use a computer typically earned $22,600 more than those who have not yet joined the electronic era.

The provocative element here is not any specific number, rather it is the term "gross" as in "not the final figure after all costs."

The "gross" is an intriguing number and no doubt captivating to CPAs and tax attorneys. But the gross is not what you take home, and it's not what's in your checking account.

Broker incomes are typically related to home prices, and home prices have been rising above the rate of inflation, thus broker incomes have risen over time. But brokers do not exist in a financial vacuum. While brokerage fees have risen, other costs have also gone up -- and often at rates far greater than inflation.

The result is that relative to other professions, and relative to other costs, many brokers have lost spending power -- real wealth.

There is a need to keep an eye on the bottom line, the land of the "net" where real money can be found. And one way to account for both income and costs is to consider the value of brokerage services on an hourly basis.

I have little doubt that broker incomes would increase with hourly fees, a notion which at first may seem unrealistic when one considers that most brokers are paid on a commission basis.

But while hefty commission checks look good, commissions are based on performance and not all brokerage efforts work out. The listed home that doesn't sell, the unproductive ad, the presentation that doesn't produce a listing, the time spent with back-office work, the hours spent responding to e-mail from people who neither list nor buy, and the buyers who decide to purchase somewhere else all eat into a broker's professional time and thus the broker's ability to earn a living.

It's also true that fees are routinely split between listing brokers and selling brokers, and between seller reps and buyer brokers. There are also splits between brokers and the salespeople who work under their authority. The result is that big commissions produce much satisfaction but often far fewer dollars than one might expect.

With hourly fees you can bet that appointments would be kept and that a broker's time would not be wasted. In effect, brokers would become more efficient -- the goal sought by online entrepreneurs and consumer groups. Equally important, brokerage would begin to develop the type of accounting which more fully reflects the costs of being in business.

I suspect many brokers (and consumers) would be stunned if they began to consider the hours required to make a transaction work. I also think that a full accounting of real costs -- rent, legal fees, the time required to list a home, ad budgets, staff, MLS fees, online costs, transportation, and other expenses -- would be very enlightening.

There is a substantial difference between the dollars handled by brokers and the actual cash they retain at the end of a deal. It's entirely possible for a brokerage to sell properties worth $1 million and have a "company dollar" of less than $10,000 -- that's the money available after paying salespeople which can be used for advertising, rent, legal fees, taxes, etc. It's somewhere in the company dollar that profits, if any, can be found.

Brokers may well prefer to keep the current commission system because it has a high level of public acceptance. That's fine, but at the same time does not prevent an internal hourly billing system to see how time is really spent or what it actually costs to complete a transaction.

The bottom line is that there is a bottom line. Looking at gross commissions and failing to value time only assures that brokers will make less money than they should. As lawyers, accountants, and other professionals have shown, time is money -- especially when you bill for it.

Question Of The Week

Q We have bought a home with 10 percent down for $100,000. However, the appraisal says the property is worth $120,000. Will we still have to pay private mortgage insurance (PMI)?

A Yes.

It may seem as though you have more than 20 percent equity -- there is 10 percent of $100,000 plus $20,000 above the purchase price -- a total of $30,000.

But lenders see the matter somewhat differently.

They want to provide money with as little risk as possible. For this reason they will only lend money on the basis of the sale price or the appraised value -- whichever is less. rom the lender's viewpoint, you have 90 percent financing and thus require PMI.

Weekly Resource

How long will you live? Part of the answer is in the genes, and part in our daily lives. The Life Expectancy Calculator can help you estimate such things.

Published: August 17, 1999

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Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .