I was closing a speaking presentation recently and found myself in a firestorm at the first break. It all started with an innocent question. The question was, "What should we pay a buyers' agent?" I proceeded to answer the question and then add that I think most agents have a tendency to pay their buyers' agents too much because they don't know the profit numbers in their business. At the break I had two buyers' agents of a prominent agent in the community find me and try to "set me straight."

The interesting thing was they never listened to the logical response I gave them. They were more focused on themselves rather than on the truth or their bosses' well-being. My position on buyers' agents is if the lead agent can't make a reasonable profit, why bother?

You need to determine what a reasonable profit is to you. For me it was a minimum of $1,500.00 profit per transaction.

Let me take you through the process I used to determine profit:

First, you need to know what it will cost you to do a transaction. Take your total expenses for the calendar year. Then divide your total amount for expenses by the number of transactions you did. It should include everything such as car, phone, staff, marketing, and advertising expenses. To be accurate don't neglect any of your expenses. Let's say it costs you $50,000.00 in expenses for last year and you did 30 transactions, which equals $1,666.00 per transaction.

Second, you need to understand your value per hour. Take the total commission dollars earned and divide them by the hours you worked. For example, you worked ten hours a day, five days per week for fifty weeks. 10 hrs per day x 5 days per week x 50 weeks = 2,500 total hours. Total commission earned was $120,000.00 by 2,500 hours = $48.00 per hour.

Third, you need to factor in how many hours you have to invest on average to close a transaction. The actual time you need to invest from the time the offer is presented and accepted until the transaction is closed. Multiply the number of hours you invest in a transaction by your hourly rate and you will arrive at the cost of your time to close a deal. Example, five hours invested at $48.00 per hours, 5 x $48.00 = $240.00.

Fourth, add your cost per transaction to your personal hourly labor cost. That will truly tell you what it costs you to do a deal for a buyer's agent. For our example it was $1,666.00 per transaction + $240.00 time cost per transaction = $1,906.00. That is what it costs you to do a transaction in real estate. What a staggering number!

This is what those buyers' agents didn't want to look at. They were only looking at what the gross revenue was that they brought to the table. It isn't realistic to look at gross revenue since it doesn't look at the total expenses and costs to close the transaction. Gross revenue is great for plaques, but unfortunately plaques don't pay the mortgage.

Here is the truth; we see many buyers' agents getting paid 50-60% of what they bring in. If you really analyze the numbers, the average commission check would need to be in excess of $7,000.00 to make a reasonable profit, in our model, to come close to making sense for the lead agent.

This is because the agent's average commission check was $4,000.00. He sold $4,000,000.00 worth of real estate to earn $120,000.00. If that agent had a buyer's agent at a 50% split he would only generate $94.00 of net profit. Hardly worth taking the risk of entering into a real estate sales transaction.

Agents need to understand their business and the specific costs to run them. As business people we need to turn a profit. We also need to reduce our egos and look at the profit. Being on the stage receiving production awards at the end of the year has no value unless we were profitable in getting there.

Check your pay and profit structure for your buyers' agents. Make sure they are the profit center that you think they are. You may be surprised by the results. Make sure that you are the one netting the most dollars since you are the one taking the risk in your business.

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Published: August 23, 1999

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Dirk Zeller is a sought out speaker, celebrated author and CEO of Real Estate Champions. His company trains more than 350,000 Agents worldwide each year through live events, online training, self-study programs, and newsletters. The Real Estate community has embraced and praised his six best-selling books; Your First Year in Real Estate, Success as a Real Estate Agent for Dummies®, The Champion Real Estate Agent, The Champion Real Estate Team, Telephone Sales for Dummies®, Successful Time Management for Dummies®, and over 300 articles in print. To learn more regarding this article, please visit www.realestatechampions.com.