As a software entrepreneur who set out to build a real estate website and ended up running a brokerage, I can now be that witness for how real estate really works. I’ve spent the past four years at broker-only meetings and accessing broker-only data feeds, competing against real estate agents and employing our own, but I still remember how it all looked to me as a first-time home-buyer only a few years ago.

And while my goal, Redfin’s goal, is to change the industry — we ardently believe most agents and brokers are good, but that the system in which we work is broken — what I’ve learned could help all the consumers who don’t want to change the industry at all, but who just want to make it work a little better for them. Here, at the outset of another home-buying season, are my top-ten tips:

1. Make sure your agent works for you
Real estate’s fundamental problem is that real estate agents are supposed to be agents in the classic sense, obliged like lawyers or trustees to act solely on your behalf. But most are hired and managed as salespeople, with powerful incentives to act on their own behalf.

A little hustle can help keep a deal together, but a home purchase is one instance where you really need an actual agent: to guide you through a process you don’t understand, using information you can’t access, in negotiations where you aren’t present, for the largest purchase you’ll ever make.

The problem is worst for buyers. In industry jargon, a buyer’s agent is “the selling agent,” because he’s the one doing the selling. As a buyer, you may think that agent is your representative, but the agent is paid by the seller.

Untangling these incentives is hard. Some hire attorneys, or Redfin. But many just decide to work with an agent they don’t completely trust, discounting the agent’s advice about what to buy and being evasive about how much they can pay.

I’ll always remember an early Redfin user who told me she used to play more mind games with her own agent than with the owner of the house she was buying. A Redfin agent just told me that on almost all his deals, the listing agent asks him how much his buyer will really pony up. It’s a commonplace among agents that “the real negotiation is with your own client.”

A better approach is to ask your agent directly: “I know the seller pays your commission, but can I count on you to put my interests first? Can you tell me about a time you did that?” It’s a conversation that a good agent will welcome; all of us work harder for open, informed customers.

2. Hire the agent, not the brokerage
To put a brand-name on his business card, an agent either pays an annual “desk fee” of around $15,000, or agrees to split his commissions with the brokerage. The agent is not an employee; he’s the brokerage’s true customer.

And most brokerages want all the paying “customers” they can get: any successful agent can work at almost any brokerage. We once interviewed an agent from a well-known brokerage who told us his secret to success was hypnotizing prospects over the phone. “See!” he said, “You’re mesmerized right now!”

During a video interview last month, an agent from a prominent brokerage tried to impress a young Redfin recruiter by stripping to the waist. Now of course most agents are very good, and every industry has a few dingbats, but what’s unusual about real estate is how little quality control there is, when people are initially hired, or afterwards once they’re out in the field.

A Redfin agent told me Tuesday that he didn’t realize how different Redfin was until he interviewed for the job, with four different people. Top producers are shocked when we ask them to leave for poor customer service.

The truth is that good agents are as likely to work for a big brokerage as one you’ve never heard of. Don’t choose an agent based on a big brokerage’s brand, even if it’s a great brand like Sotheby’s.

3. Don’t hire the listing agent just because he promises the highest price
Home-owners often hire the agent promising to sell their home at the highest price. The owner is flattered by the agent’s esteem for the house. And no agent likes to deliver the hard truth about the likely price a house will sell for, or the possibility that the owner should wait for better times.

In Seattle this past winter, listing agents encouraged our buyers’ agents to submit hopelessly low offers just to lower their own customers’ expectations. Such conversations are best had when first pricing the house, but most agents feel pressure to get a listing even at an unrealistic price because “listers last”: yard signs showcase the agent’s name and open houses draw more clients, building a “lasting” business.

In most markets these days, less than half of all listings sell. Focus on the agent’s sales history, not her sales promises.

4. Don’t get married on your first date
Nearly half of consumers hire the first agent they meet, often because she responded to their inquiry first. But eagerness isn’t expertise. I was on a panel last August with the CEO of a very large brokerage who said that two thirds of his agents hadn’t sold a single home all year.

The saying on agent turnover is “a third in, a third out, a third up.” For every experienced agent, one’s just starting and another’s giving up. You deserve better odds than one in three, especially now that the downturn is forcing even more folks out of the business.

Interview at least two agents, asking each to identify nearby homes he recently sold.

5. Don’t get married without saying “I do”
When awarding commissions, one agent is recognized as “procuring cause” for a purchase: he “causes” your purchase, and he “procures” you — the unfortunate term connotes “great care or effort,” often “by unscrupulous means,” usually for “prostitution” — by being on-hand when you first see the house, regardless of your intention to hire or fire him. If you don’t have an agent at all, the listing agent usually claims the extra commission.

Before Redfin, I hired an attorney to buy a home I had seen courtesy of the home-owner, only to have the listing agent insist that he represented me as well as the seller. He pocketed an extra $23,000 and sent me a dozen red roses when I moved in. Tour only with an agent you plan on hiring; if you want to stop working with him, say so directly; if asked to sign in at an open house, politely decline.

6. Negotiate the commission
The company I work for, Redfin, has become synonymous with lower commissions. It isn’t the most important change we’re bringing to the real estate industry, and I don’t think it’s what you should worry about first.

But the commission is a lot of money, usually tens of thousands of dollars. People who gleefully bargain with impoverished street vendors suddenly become apologetic, like they’ve used the wrong fork in front of the queen, when talking to agents about their fees.

After hearing your agent’s pitch, make your pitch to him: about how you’ll avoid Saturday-night calls, or tour open houses on your own. It makes a big difference to all of us when a customer tries to be a good partner.

Then, if you like, ask for a lower fee. Agents make much less than you think: the fat-cat agent is mostly a myth, which the industry perpetuates in the face of consumer resentment to keep agents paying their dues and desk fees. Agents spend a long time finding each customer, and need to make the most of every one.

But some agents will nonetheless reduce their fees 20% – 30%, worth nearly 1% of the home; this is what agents pay one another for referrals.

7. Search the MLS, and Craigslist
There are many good real estate sites. You probably aren’t using them. The most-trafficked sites are national, web-only brands, like Yahoo Real Estate. Unless the national site is a broker like Redfin, employing local real estate agents in each market it serves, it doesn’t have complete access to the local databases, known as Multiple Listing Services, that all agents use to list houses and record sales. Redfin has a vested interest in making this point, but no one else would ever dispute it.

Without local, direct access, the national sites get data second-hand, scraping broker websites, or go broker to broker asking for listing data; a 2008 study found that these sites have, at best, 60% – 70% of the homes for sale. Those sites have gotten better since then, but still aren’t perfect. And none have any reliable data on very recent sales, let alone pictures of the houses that recently sold, which you need to perform a comparative market analysis.

Search a broker’s site for MLS listings; search Craigslist for for-sale-by-owner listings.

8. Invest in the house, not marketing
There are two types of home-sellers, those seeking an agent who will “really sell the house” and those same people who are later frustrated that their agent “didn’t really do anything” to sell the house.

After years of experimenting with postcards and fliers, my list of what makes a difference is shorter: overwhelmingly, the house itself; then pricing, staging and professional photos.

Traffic to a listing declines four-fold after a week on market. An agent matters a lot, but almost entirely in preparing the property for a perfect debut. Invest in the house, and make it sparkle on day one. After that, all an agent can mostly do is wait, and reduce the price.

9. Err on the side of under-pricing
If you have to choose between over-pricing and under-pricing your home, under-price. When you under-price by $10,000 and the home isn’t bid up, you lose $10,000 at most. When you over-price by $10,000, you can lose much more: after a month the listing loses its luster, mortgage and staging costs pile up, and price-reductions signal buyers to ask for more reductions.

10. Agents aren’t obsolete
Take it from someone once intent on replacing real estate agents with software: even consumers claiming to hate agents still want their advice when picking neighborhoods, pricing homes or negotiating deals. The whole history of Redfin has been of a software company that one day realized its main competitive advantage was its agents, not its software. There are good agents out there, and they take enormous pride in their craft. Rather than hiring an agent you’ll resent, hold out for one you trust, and pay her a fair price. Hopefully at the end, you’ll both feel good.

The post Real Estate Confidential: What I Learned About How the Industry Really Works appeared first on Redfin Real Estate Blog.

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.

Marketing: $10,000
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.

Transportation: $3,600
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.

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)

The post “What Kind of Person Would Work as a Redfin Agent?” appeared first on Redfin Real Estate Blog.