Why A Real Estate Agent Will Never Get Rich Selling Cheap Homes

Selling Cheap Houses | @tierramallorca via unsplash

The year before I earned my real estate license, I worked at a summer camp… For one week! After six days of oppressive mid-summer heat, little kids arguing about anything and everything, and getting stung by a hive of bees (completely my fault), I took a couple of soft drinks from the employee fridge, hopped in my old Honda CRV and sped home.

The camp was located in a small town just north of Fitchburg, Massachusetts, the latter a former mill town that has seen better times. For the sake of this example, you can substitute Fitchburg with any depressed city in the United States. I actually have fond memories of Fitchburg. It had classic architecture and interesting people, plus it served as a nice gateway to Western Massachusetts and Southern Vermont and New Hampshire.

The Truth About Real Estate Brokerage

Let us pivot back to real estate. If you are just starting out in real estate sales, most of the gurus out there will tell you to “grind”, “hustle”, and “power through” any setback. If you do so, they say, you will find success. Wrong!

And when I say gurus, let me be clear: I am not bashing Tom Ferry, GaryVee or the minimum-wage employee at SetSchedule calling you from the West Coast. Also, I am not bashing mega-stars from Million Dollar Listing or Selling Sunset, because at the end of the day, people are interested in seeing how the .0001% live. I am going to explain why the mentality of hustle, hustle and hustle, is plain wrong. The belief that if you just work a bit harder, you will become a successful agent.

In other words, what I am calling out is the notion that anyone anywhere is ever going to find success selling cheap homes in places that have a low cost of living (LCOL) or very low cost of living (VLCOL). Let me explain why this is.

Why So Many Newly Minted Real Estate Agents are Destined for Failure

Say you are me, a new real estate agent thinking about moving out to Milltown, USA to strike it rich. There is little competition, you can rent a mostly rodent-free place for $500 a month and you can live off of Ramen noodles until you are rich. You are 22 years-old and will work with anyone who contacts you. And of course, you know how to hustle, whatever that is supposed to mean. So, you turn to three trusted friends for advice.

The Three Paths to Success in Real Estate

Uncle Harry retired from the real estate industry last century. He is old-school. He says, “Just keep cold calling. Send out mailers. Be pleasant. Pretty soon everyone in Milltown will be using you as their agent. You will be rich in no time.”

Joe Coolson is a successful agent in SoCal. His claim to fame is that he has 6,000 TikTok followers. You have been messaging him on Instagram and he finally responds. His advice is, “Advertise on Facebook, Instagram, record videos, post them everywhere. Hustle. Follow that dude GaryVee. You will be rich within a year and you can move out here to sell real estate with me!”

Elizabeth Rothschild Kennedy Rockefeller VII is a family friend. She is rich and has never worked a day in her life. However, through the mystical power of compound interest, she makes more money every day than you will make in a year. Elizabeth says, “Splurge a little, darling. Lease a lavish residence in Milltown. Join the Country Club as a caddy and socialize with the rich kin during Sunday Services. They will learn to trust you, and use you!

Who is right? Let’s think this through.

According to Realtor.com, the medium sale price of a home in Fitchburg Milltown is $244,000 In fact, the medium value for a home in the USA is between $260,000 and $325,000. Consequently, you are going to need to sell a lot of homes to get rich; but you already knew that.

How Much Does a Real Estate Agent Actually make on a Deal?

You have been in Milltown for 2 weeks. Your phone rings. An elderly woman, Blanche, at 123 Main Street found your name from your brokerage website (unlikely) and wants to sell her house. Great! So, you mosey on over to 123 Main Street and meet Blanche. The meeting goes well, and she agrees to let you sell her house. Success!

This is where it gets interesting, so pay close attention.

Let’s say you list her home for $260,000. A week later, Tim from Milltown Realty brings a buyer who makes an offer on the home. Skip ahead a bit, and the home sells for $250,000.

To keep it simple, let’s also say the total commission is 6% (Commission is always negotiable) gross sale price.

1) 250,000*.06 = $15,000. This is the total commission once the home closes. You think, “Here we go! I have struck it rich! How much is that new Tesla? Maybe I can reserve it with the down payment.” Not so fast.

2) However, $15,000 is the total commission, of which half goes to the buyer’s, or sale, agent. In this case Tim. But at least you get a nice note from Tim thanking you for a smooth transaction.

3) So, $15,000/2 = $7,500. Not bad. But, let’s break it down further.

4) Your brokerage needs their cut. They keep the lights on most of the time. They have expenses. Don’t forget, they have their own fees. And pretty soon your nice broker sounds more like Rick from Pawn Stars than the helpful boss that recruited you (See my note on why a 50/50 split is highway robbery). Low and behold, you are a new agent, so you get 50% of the deal you brought to the office. Fine, so $7,500/2 = $3,750.

5. Ohh, and your broker charges a 6% franchise fee off the top, of course! So, $7,500*.06 = $450. So, $3,750-$450 = $3,300.

5) Ok, so $3,300 for a couple Sundays you had to hang out at Blanche’s home. Uncle Harry might say, “That’s not so hard? I used to do that that all the time”

Hard, it is not. But it is time consuming and stressful, especially when Tim’s client threatens to walk because they are getting cold feet. Remember, as a real estate agent you only get paid when a deal closes. Every successful agent spends many hours each year working with clients who ultimately do not buy or sell a home with them.

How Much Work Does Selling a Home Take?

See, before you even made it out to Blanche’s house you had to do 10 hours of prospecting. In other words, Blanche was only able to find you online because you updated your brokerages website’s profile, worked on your SEO, etc. And then you had to spend 30 minutes getting ready to view Blanche’s house, an hour at her house making your pitch while she served you absolutely delicious Moroccan mint tea, and another 15 minutes to get home. Then you had to… Well, let me just list it all out.

Pre-Listing

  1. 10 hours of prospecting.
  2. 30 minutes getting ready to meet Blanche, and driving to her house at 123 Main Street.
  3. 1 hour at Blanche’s house.
  4. 15 minutes driving home from Blanche’s house.
  5. 2 hours Pulling comps (Comparing her home to others to try to figure out her home’s value) for Blanche’s house and putting them together in a presentation.
  6. 30 minutes getting ready and driving to Blanche’s house, for a second time
  7. 30 minutes at Blanche’s house explaining why you think 123 Main Street is worth 250k.
  8. 1 minute helping Blanche find the Moroccan Mint Tea bags from her Lazy Susan.
  9. 15 minutes to get home.
  10. 15 minutes on the phone with Blanche when she tells you she will work with you!
  11. 45 minutes sending and helping Blanche sign the listing paperwork over the internet (Thank the good lord for 21st century technology!).
  12. 30 minutes getting ready and driving to Blanche’s House for a third time to meet the photographer.
  13. 45 minutes at Blanche’s house exchanging pleasantries with the photographer and driving home.
  14. 3 hours creating marketing pieces and stuffing listing packets for the open house.
  15. 2 hours entering the listing into Multiple Listing Service (MLS) and completing the appropriate paperwork.

22.25 hours so far… I’ll speed this up a bit.

First weekend of open Houses

On Saturday

  1. 30 Minutes getting ready and driving to Blanche’s House.
  2. 2 Hours at the open house doing the job you love.
  3. 15 Minutes driving home from Blanche’s house.

On Sunday

  1. 30 Minutes getting ready and driving to Blanche’s House.
  2. 2 Hours at the open house doing the job you love, again.
  3. 15 Minutes driving home from Blanche’s house. 

27.75 hours so far…

The Week After the First Weekend of Open Houses

22. 15 Minutes every day “hustling” and “grinding”, following up with the people who stopped by at the open house last weekend, telling everyone you know to send their clients to this weekend’s open houses, yelling from the rooftop, nervously checking the MLS to see if other similarly prices homes are getting offers, becoming jealous that Bob, your coworker, is secretly talking to Blanche and is about to take over the listing that you have worked hard on etc.

29 hours so far…

Second weekend of open houses

On Saturday

  1. 30 Minutes getting ready and driving to Blanche’s House.
  2. 2 Hours at the open house doing the job you love, for a third time.
  3. 15 Minutes driving home from Blanche’s house.

On Sunday

  1. 30 Minutes getting ready and driving to Blanche’s House
  2. 2 Hours at the open house doing the job you love, for a fourth time.
  3. 15 Minutes driving home from Blanche’s house. 

34.5 hours so far…

An Offer is Accepted!

  1. 15 minutes receiving the offer from Tim from Milltown Realty and emailing it over to Blanche.
  2. 15 minutes on the phone with Blanche go over the offer.
  3. 1 hour arranging for Tim to drop off the check, uploading the offer to be e-signed, downloading the signed offer and completing the rest of the necessary backend tasks.
  4. 30 minutes getting ready for the home inspection, and driving over to Blanche’s house.
  5. 3 hours at the home inspection.
  6. 15 minutes to get home.
  7. 30 minutes meeting the radon technician at the home.
  8. 15 minutes driving back.
  9. 1 hour renegotiating any issue that came up at the home inspection.
  10. 30 Minutes getting ready and driving to Blanche’s house for the buyer’s first visit.
  11. 1 Hour at 123 Main Street making small talk with the buyers.
  12. 15 Minutes driving home from Blanche’s house.
  13. 30 Minutes getting ready and driving to Blanche’s house for the buyer’s second visit.
  14. 1 hour at 123 Main Street making small talk with the buyers, again.
  15. 15 minutes driving home from Blanche’s house.
  16. 30 Minutes getting ready and driving to Blanche’s house for the buyer’s third visit.
  17. 1 hour at 123 Main Street making small talk with the buyers, for a third time. In fact, many buyers ask for more visits to meet with contractors, take measurements, etc.
  18. 15 minutes driving home from Blanche’s house.
  19. 2 hours waiting for and meeting the fire department at the home for the final smoke inspection.
  20. 15 minutes driving home from Blanche’s house.

49 hours so far…

The Closing

  1. 30 minutes getting ready and driving to Blanche’s House for the final walkthrough.
  2. 30 minutes at Blanche’s home.
  3. 15 minutes to get home.
  4. 1 hour hearing that home closed, filling out necessary paperwork and closing out the listing in your MLS.
  5. 15 minutes over the phone thanking Blanche for a smooth transaction!

51.5 hours TOTAL. 

Why Some Deals Are a Waste of Time

Real Estate Agent Stress Gif

Who was right, Rockefeller, Coolson or your dear old Uncle Harry? In reality, none of them. Selling Blanche’s home is an exercise in futility. You made some money, but it probably would have been easier to get a seasonal job at Amazon than deal with the stress of selling 123 Main Street.

You might be thinking, hey, $3,300/51.5 hours is almost $65 an hour, that is good money. But keep this in mind. This hypothetical deal went very well. Most deals do not. Many times, you need to drive out to 123 Main Street to do far more showings, hold more open houses, etc. These activities take time, only further decreasing how much you make per hour. In reality, it may take 25, 50 or even 100 hours to produce a lead that actually ends up buying or selling a home with you. Of course, you also need to reinvest part of what you make into advertisements and other marketing strategies.

In reality, a very strong first year performance for a real estate agent would be selling 12 hours. If the average home sale price comes out to that of Blanche’s, $250,000, that would equal $39,600, pre-tax and before expenses.

An Analogy

Perhaps it will help you to look at this from a different perspective. Let’s use the example of the movie (and book) The Grapes of Wrath (1940). In the story, an impoverished family during the Dust Bowl drives out to California to look for work. At one point in the film, they cross a picket line to take a job on a farm, helping out with the harvest.

At first, they are given a fair wage, five cents for every box of fruit they pick. They save up some money and things are finally going well. But soon enough their boss comes by and informs them that the price has gone down to two-and-one-half cents a box, a starvation wage. Factoring in the money needed to buy tools and food at the boss’ store, the family spends far more than they bring in.

Why Real Estate Agents Fail

When I see people telling others to grind, hustle, and try harder to make it in real estate, the above scene is what comes to mind. In other words, by the time someone accounts for all of the time and energy spent on looking for a home to sell or a buyer to work with, they may as well apply for food stamps. It really is not possible to make good money selling cheap homes!

Real Estate Agent Success – How a Real Estate Agent Can Actually Make Money Selling Cheaper Homes

I just said you cannot make good money selling cheap homes, but you can make some money. In a LCOL or VLCOL areas, that may be exactly what you are looking for. If this is the case, ignore my commentary above. In reality, if you enter the profession with realistic expectations, you are already doing better than many newer agents.

Far too many prospective real estate agents think the industry is all sunshine and rainbows. It is not. The vast majority of real estate agents are self-employed. It is a field with a very low barrier to entry, and competition growing by the day. If you are looking for a stable paycheck, going into sales is a bad idea.

That being said, in many ways there is still a lot of money to be made in real estate. Day after day I see agents bring deals together that makes everyone tens of thousands of dollars. And of course, you get to help people buy their homes, a very fulfilling feeling.

I have created a free real estate agent salary calculator. It will help you determine how much you can reasonably expect to make in real estate. If you are serious about getting into real estate, then you should determine how realistic your goals are. If you have any questions, please do not hesitate to get in touch. And of course, the next time Joe Coolson tells you that if you are not making a million dollars a year, you are doing something wrong; tell him to take a hike.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments