At the end of July, the National Association of Realtors (NAR) had nearly 1.6 million members, which works out to about 2.4 Realtors for every home actively for sale. A report from the Consumer Federation of America (CFA) notes the surfeit of agents is costing the industry, harming consumers, and reinforcing high commission rates.
Lenient licensing requirements and high real estate agent turnover mean many of these agents are inexperienced and underqualified. Of those who are competent, even fewer have the knowledge and experience to serve real estate investors.
Demand for homes surged during the pandemic, which made real estate look like an attractive career opportunity. Layoffs in other industries left job seekers looking for new career options, and many of these people needed more flexible work arrangements.
And the path to getting a real estate license is quick and easy in most states relative to other professions. According to the National Association of Realtors, more than 156,000 people became real estate agents in 2020 and 2021, a 60% increase from the prior two years.
Of course, many of those real estate agents won’t last in the field. “Being successful in real estate is a hustle, and most people drop out after two years because of how difficult it can be to build a sustainable business,” says Kristina Morales, a Realtor with over 20 years of experience in multiple markets. “This alone naturally reduces the number of Realtors, but they are quickly replaced with new ones since the barrier to entry is so low.”
The NAR views the turnover as a healthy consequence of competition. But while the industry may naturally spit out the real estate agents who aren’t cut out for the job, it doesn’t necessarily happen before these agents have provided homebuyers with guidance on what may be the most significant purchase of their lives.
The Draw of the Real Estate Profession
Reality TV shows make the real estate industry look glamorous, says Martha Gaffney, a licensed real estate broker and strategic real estate advisor at Real Estate Bees. “Even before reality TV shows, many came into the business looking for a quick buck,” she adds.
After all, buyers and sellers agents each receive 2.5% to 3% commission in most areas, and the median sale price for a home in the U.S. is $416,100, according to the Federal Reserve. That said, many agents don’t realize how much effort they’ll need to put in to get clients or that they’ll pay about half their earnings to their brokerage firm.
So, how do you become a real estate agent in the first place? In many states, you only need to complete a few weeks of coursework and pass a multiple-choice test. The cost for online training can be less than $100.
For example, in Massachusetts, becoming a real estate agent only requires 40 hours of education and passing a licensure exam. In the same state, you need 1,000 hours of training to become a licensed barber. To be a certified general appraiser, you need at least 300 hours of education plus 3,000 hours of experience. You also need a bachelor’s degree.
“I definitely think the requirements for becoming a real estate agent are too loose,” says Morales. “These loose requirements saturate the market with Realtors, and that saturation dilutes the Realtor’s value.”
A 2015 report from the NAR drew the same conclusion, saying: “The real estate industry is saddled with a large number of part-time, untrained, unethical, and/or incompetent agents. This knowledge gap threatens the credibility of the industry.”
Of course, there are benefits to the current path to licensure. “I’ve seen many instances where the low barrier of entry has allowed someone to enter and create a very successful career for themselves, where other opportunities would typically not be available,” says Andrew McGranaghan, chief development officer at Wallace Real Estate, the largest independent brokerage in East Tennessee. “It’s the American dream, where hard work and dedication can lead to a very successful business, where a college degree isn’t necessary.”
Tightening requirements could create unnecessary roadblocks for marginalized communities and further decrease their representation in the industry, Business Insider reports. But on the flip side, there are problems with keeping real estate licensure easily accessible.
“The low barrier of entry attracts many who choose to dabble in real estate rather than make a career of it,” says McGranaghan. “They hold their license for personal use or as a part-time side job and never fully commit to learning and studying the craft.” There’s a delicate balance to be achieved when considering stricter licensing requirements, McGranaghan notes.
High Turnover in the Industry
“Turnover is very high in real estate. It’s estimated that 87% of Realtors leave the business within their first five years,” says McGranaghan. That creates challenges for brokerages that want to invest time and money in training their agents. As a result, he says, “200-agent offices with one broker are becoming more of the norm.”
Wallace Real Estate aims to beat the trend by focusing on training and supporting new agents. But it’s up to the consumer to seek out brokerages with that ethos.
Morales says homebuyers and investors shouldn’t necessarily avoid working with new agents, but they should request that the agent partner with a more experienced team member. However, not all homebuyers have the knowledge or experience to recognize that working with a new agent could be a problem.
“The risk of working with an inexperienced agent is that a consumer may leave money on the table—whether that is from paying too much for a home or not receiving the property value for the home you sell,” says Morales. “In addition, there is litigation risk if an agent does not know how to properly structure a deal or provide the required disclosures/documentation.”
For the NAR and for many brokerages, turnover and the continued overabundance of agents may mean more profit since agents who want to use the “Realtor” designation must pay membership dues to the NAR, and new agents often bring new clients, which leads to extra commission for the brokerage. However, Gaffney says, “The turnover just doesn’t help the consumer.”
In other industries, competition might drive players to lower their prices to stay in business. But commissions for real estate are generally fixed, with the agent’s level of experience and effort having no bearing on what they are paid.
High turnover only means a glut of inexperienced agents who may not provide the best guidance. And the lack of sufficient business per agent requires agents to charge high commission rates relative to some other countries, the CFA notes.
Are Changes to the Industry Needed?
Potential solutions to the problem include stricter education requirements, a comprehensive supervisory period to give real estate agents real-world experience before licensure, and a change to the commission structure. But McGranaghan believes it’s up to the consumer to research brokerages and vet agents.
Gaffney says that reduced commissions for inexperienced agents may help agents view real estate as a “long-haul career.” But Morales disagrees, saying, “They should be entitled to the same pay, as they are likely working just as hard to get a deal.” Additionally, some real estate agents who are new to the industry are just as successful and knowledgeable as those who have been doing the job for years.
Still, each expert agrees that more robust education requirements could help the industry and consumers. Morales says she works to reverse customers’ perceptions about real estate agents because the level of education they require doesn’t garner respect. But, maintaining access to the career path for ambitious self-starters also should be considered.
Additional requirements to maintain real estate licensure might also increase the number of qualified agents. “States should have in place a requirement that Realtors must do a certain number of transactions in order to maintain/renew their licenses,” Morales suggests.
How to Find an Investor-Friendly Agent
The oversupply of inexperienced real estate agents creates challenges for investors trying to find an investor-friendly agent. Gaffney says relying on referrals from your network can be a great start. Investors can also use the BiggerPockets Agent Match tool to find what they need.
When interviewing agents, Morales says to ask about:
- Experience: Ask the agent if they currently work with investors and how many transactions they do per year. If that number is low, ask if they have a mentor or are willing to team up with a more experienced agent. Morales also says to ask, “How well do you know the area that I am looking to purchase in?”
- Availability: If you need the flexibility to see properties on nights and weekends, ensure the real estate agent is available.
- Relationships: Ask if the real estate agent has preferred contractors for renovations or repairs, and whether they work with an investor-friendly lender, title company, and home inspector.
- Willingness: Since you may write low offers unlikely to be accepted in the current environment, assess the real estate agent’s willingness to put time into finding the right property. Morales says to ask, “Are you willing to write 50 offers before one gets accepted?”
The Bottom Line
We don’t need 2.4 Realtors for every home on the market, and the glut of agents creates problems for everyone involved. New agents often don’t earn enough to make ends meet, while experienced agents lose commission, and the industry takes a reputational beating.
Homebuyers and investors must work to vet real estate agents, and those who aren’t aware of the wide knowledge gap between new and seasoned agents may be led astray by bad advice, causing them to lose money or even face legal repercussions. Changes to licensing requirements may be in order, but in the meantime, individual investors need to work hard to screen for the best agents.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.