I’ve spent the past four years of my life explaining Redfin. If you read this blog, you already know that we’re a real estate broker focused on customer service instead of sales, one that uses technology to make every step of the process totally transparent.
By my own count, I’ve said this nearly 10,000 times, to all sorts of people: a priest, a construction-site sign-flipper, several hairdressers, a 12-year-old, the inventor of pediatric vitamin-D supplements, an NBA point guard, a used-car salesman. And yet I’ve only gotten two reactions. One is: “Don’t you just hate real estate agents?” To which I say: “WE ARE REAL ESTATE AGENTS.”
The other is: “What kind of real estate agent would work for you?”
Well, for starters there are agents who need to feel part of something bigger than themselves, who want to change the whole real estate game in consumers’ favor. Most agents like focusing on service, not sales. They love doing deals rather than prospecting for clients. They feel good about being paid to do the right thing. They love working on teams. They want to develop new skills and advance their careers.
Forget the Marketing Hoo-Ha… What About the Money?
To which everyone says: “Yeah. Whatever. What about the money?” Well, let’s talk about the money. By our calculation, Redfin agents are in the 90th percentile of agent pay.
Using data available to any broker, we measured the gross commissions earned by each agent who completed a deal in King County, Washington between May 12, 2009 and May 11, 2010. Whenever commission data were unavailable for a transaction, we assumed that the commission was 3% for the buyer’s agent and 3% for the seller’s agent, an assumption that tends to over-estimate traditional agents’ pay.
And still, the annual gross commission for agents at the 50th percentile of pay was $29,820. Agents at the 75th percentile got $75,018. You don’t crack $100,000 until the 82nd percentile. If you group agents by the gross commissions they earned last year, you find that 1,817 agents earned between $25,001 – $50,000 in gross commissions, whereas only 83 traditional agents were in the $150,001 – $175,000 bracket, which is roughly equivalent to what we paid a Redfin agent:
This graph of different gross-commission brackets and the number of agents in those brackets is known in certain mathematical circles as an Arpat Distribution. It reveals a stark reality. First, that there are just too many agents: 5,624 agents completed a transaction in King County last year, which doesn’t even count the thousands of actively licensed agents who closed no deals whatsoever; in April, the county recorded 1,944 home sales, barely one for every three agents. In distressed markets like Phoenix, Las Vegas, Florida and many parts of California, the ratios are typically much worse.
Second, the difference between the haves and the have-nots is greater than in any other industry; a few highly visible agents earn enough money to live on the lake, engendering occasional popular resentment. Most of the rest endure a gentle form of unemployment. And what most consumers don’t consider are the annual expenses any decent agent has to bear:
Brokerage fees: $10,000
New agents pay as much as half their gross commissions to their broker. The top dogs pay a fixed amount, in what is known as a desk fee. It is possible to pay less, but the great majority of successful agents pay $15,000 or even $20,000 per year to their broker. $10,000 is a conservative number.
Health insurance: $10,500
Some agents who sell real estate on the side get health insurance through their partners or another job. But the bread-winners have to buy their own insurance, for themselves and their families. Redfin is on a group plan that costs less per member than an individual plan, and still we pay $10,500 per employee.
The rule of thumb is that a successful agent invests 20% of gross commissions into marketing himself and his listings. For an agent earning $100,000+ per year in gross commissions, $10,000 is certainly a conservative number.
Social Security & Medicare Taxes: $6,500
Redfin pays the employer’s share of our agents’ Social Security and Medicare taxes, whereas a traditional agent has to pay the entire amount. How much does Redfin pay? 7.65% of the first $106,800 in pay, then 1.45% of the amount in excess of $106,800. Our average contribution to a Redfin agent’s pay is more than $8,000. $6,500 is a conservative assumption.
Most agents report $8,000 per year in transportation expenses to the IRS. $300 per month – five tanks of gas — is a conservative estimate of the true cost.
Cell service: $1,200
Agents spend their lives on BlackBerry, emailing or calling ten hours a day. $100 a month in fees is conservative. Redfin pays more than $200 per agent, or $2,400 per year, though this includes a cellular modem for connecting a laptop to the Internet from anywhere.
Equipment: PC, mobile device, printer: $1,000
Every few years, an agent gets a new computer or mobile device. To start out you need a printer. $1,000 per year seems fair.
Dues, education: $783
Agents pay a fee to the local Multiple Listing Service, to the state that licenses them, to training institutes for continuing education.
IT, accounting, software: $1,000
The top dogs have an assistant or transaction coordinator but most folks need help fixing their computer or figuring out their taxes at the end of the year. Agents working as independent contractors and filing tax form 1099 at the end of the year usually hire an accountant. Some pay for Top Producer or other lead-tracking systems.
All told, any reasonably successful agent is shelling out $44,583 per year in commissions splits and costs. The number could easily be higher.
|Type of Expense||Traditional Agent, Annual Costs||Redfin Agent, Annual Costs|
|Brokerage fee||$10,000||Not applicable|
|Health insurance||$10,500||Paid for|
|Social Security, Medicare Taxes||$6,500||Paid for|
|Cell service||$1,200||Paid for|
Now let’s compare that to the pay of a Redfin agent. For the agents representing our clients, Redfin handles all expenses. Each agent gets a support staff to schedule home tours and coordinate closing documents; each also gets health benefits and vacation as well as the best online tools in the industry.
How Redfin Pays Its Agents
We don’t pay our agents a commission, but do offer a bonus based on client satisfaction. To calculate the bonus, we survey clients about the likelihood of their recommending our service. Paying based on the survey response, and then publishing that response, has an overwhelming effect on agent behavior, most of it very good.
In King County, Redfin has had five agents handling deals for us over the same time period that we considered when analyzing traditional agents gross commissions: May 2009 to May 2010. All of them lead a team. The average pay of those agents has been $113,266, or the equivalent of $157,849 if you include the value of our benefits.
Agents in more expensive markets tend to earn more; agents in less expensive markets tend to earn less. Even within a market, agents may earn less over time: the team has worked very hard over the past year, so less frantic years may result in lower pay. Some may be promoted to manage larger areas as we grow, earning more. But the basic conclusion seems indisputable: Redfin agents perform very well, and Redfin pays those agents very well.
Redfin Pay: The 90th Percentile
Comparing Redfin pay to what a traditional agent earns once you subtract costs from gross commissions, you find that Redfin agents place in the 90th percentile. If you only compare Redfin to agents earning $25,000 or more in gross commissions – to avoid comparisons to part-timers — Redfin agents are still in the 83rd percentile. In fact, in the graph displayed above, we excluded everyone earning less than $25,000.
So the answer to the question about what kind of agent would work at Redfin is simple: an agent who likes putting customers first, not commissions. An agent who cares about a project larger than herself. An agent who wants a career that can grow to include new skills, technologies and management responsibility. And yes, one who makes more money than the vast majority of her peers.
The Bottom Line Is Not Just the Bottom Line
Our goal is to be the best career choice in the real estate industry, so we can hire the best agents. For some, the 90th or the 83rd percentile will be their income limit; for others it will be lower. We will always pay well enough to hire the best people, but for the best people, money is never enough: what Redfin also offers is a way to expand the circle of people our folks influence and the fulfillment they take from their work.
(Many thanks to Dave Billings, Arthur Patterson, Adam Wiener and Scott Nagel for pitching in on this post. We tried to be conservative and fair, but if some of our assumptions are wrong, please let us know)