The Math of Real Estate Sales . . .

by Greg Swann

Suburban Phoenix Real Estate Broker

I wrote this when I first got my real estate license, five-and-a-half years ago. I still get mail about it from freaked-out pre-licensing students.

The Math of Real Estate Sales…

I got my real estate license in May of 2001. It took a lot of time to study for it, a lot of work. I spent months agonizing about the license exam, particularly the math part of the test.

This turned out to be unnecessary for the test. And it has turned out to be much more than necessary for the real-life job of being a real estate agent.

Consider this math problem, which was one of dozens I tackled prior to taking the test:

Dave and Sandy buy a four-plex apartment building as an investment. The purchase price is $385,000, of which $78,000 is attributable to the land. For tax purposes, they take a straight-line depreciation on the building over 27-1/2 years. Of course, the property actually appreciates in value by four percent a year. Assuming they make no property-improvements, when they sell the property seven years later, what are the tax consequences?

I can do that problem. It’s just straight plug-and-chug calculator math. To actually come up with an answer would take a while, and I’d want to check my numbers three times — at least. But this is a doable problem, and people have to solve this kind of problem every day.

What’s ironic is this: After doing dozens of math problems this complex, this is the math problem I got on the Arizona State real estate license examination:

Starting at the northwest corner of Section 3, proceed in a southwesterly direction to the northeast corner of Section 8. From there proceed east 2 miles to the northeast corner of Section 10. Procced from there in a northwesterly direction to the point of origin. What is the total acreage of the parcel described?

That sounds complicated, but it’s actully very simple. What we have is half of Section 4 plus half of Section 3. There are 640 acres in a section, so the pink half of Section 4 is 320 acres. The blue half of Section 3 is also 320 acres. Add them both together and we get 640 acres.

People fail this test. Lots and lots of people fail this test. I don’t want to speak ill of my fellow real estate agents, but my advice to anyone buying or selling a house is this: Double-check the math.

But there is an area of mathematics where real estate salespeople are and must be math wizards. What is that area? Figuring out their commissions…

It’s a simple enough problem, right? The commission on the sale of a house is usually six percent. Everybody knows that.

But wait. There’s more. If the house was sold by someone other than the person who listed it for sale, the commission is split 50-50. So the salesperson gets three percent, right?

Not quite. To be a real estate salesperson in Arizona, you are obliged to align yourself with a real estate broker, a designation taking a different license. The only people who can receive commisions for real estate sales or leasing are the brokers. The brokers pay the salespeople, and if a salesperson so much as touches a dollar that did not emerge from his broker’s pocket, he could lose his license.

So what do you suppose the broker does between the time he receives the commission from the sale of the house and the time he passes it along to the salesperson? That’s right, he keeps some of it.

There are office fees, of course; gotta keep the rain out. And desk fees, unless you want to stand around like a flamingo. There are franchise fees so you can use that nifty logo. Fees for copies, faxes, phone calls. Fees for business cards and signage. Fees to tap into that pool of unassigned leads. Then there are transaction fees, errors and omissions insurance fees, recordation fees.

And it’s not just the broker. MLS wants their cut, too, along with the Board of Realtors in every town you set foot in.

And don’t forget the money spent out-of-pocket to sell the house: gas, entertainment costs, advertising.

The real estate agent is the last person in a long line of people getting fed on the sale of a house. The math involved in figuring his ultimate commission is half mystery, half myth. If he’s lucky, he’ll get as much as fifty percent of fifty percent of six percent of the sales price of the house. That comes down to one-and-one-half percent. That’s $1,500 on a hundred-thousand dollar house. It’s $600 on a forty-thousand dollar condominium.

Find the prospects. Establish rapport. Investigate their needs. Take them around to see six or sixteen properties. Finally settle on one and close. Spend three hours writing a nine page purchase contract. Submit the offer. Go over the counter-offer. Submit the counter-counter-offer. Hammer away until you make a deal. Hand-hold, hector and hustle documents around for six weeks. And when it’s all over, pick up a pay-check for $1,500. Or $600. Or nothing, if the deal falls through.

Now here is a math problem: How does anyone make a living at this?

Volume.

It’s true. What starts as fifty percent of fifty percent of six percent can turn into one hundred percent of ninety percent of six percent — if you sell your own listings and keep those fees and costs down. And the houses can sell for a lot more.

This is a true mathematical fact: Of every 100 new real estate licensees, 85 will be out of the business within a year.

But for every thousand real estates agents sweating over a $1,500 commission, there are one or two who live on the top of a mountain.

And this is the final math problem: How many mountaintop homes do you have to own to live on top of a mountain?

The answer: One.

I can count that high…