There are no unusual profits involved in being a real estate agent
This question is from Daniel Kane of Atlanta.
“Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations. That is a significant feat in less than 20 years.”
“But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different, and perhaps more detrimental, especially when one considers the lifetime effects of large, forgone, upfront cash flows and the power of compounding interest. I would be pleased to hear your rejoinder on the points I’ve raised.”
Well, the purchase of a home is the largest financial transaction, for a significant percentage of the population, that they make. And… people… a lot of people need a lot of attention. And you can show a lot of houses before you sell one.
I would say this. If you look at our close to 50,000 agents now, I think they make a good living… or a decent living. But I would say that that people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they are dealing with.
So I don’t think that there are unusual profits involved in being a real estate agent. I don’t think there are unusual profits involved in the ownership. We like it because it’s fundamentally a good business.
But here we are, doing 3 percent of all the real estate transactions in the United States, and we’re making, maybe, $200 million a year… which… well, we won’t get into what the comparative efforts are in Wall Street to earn $200 million. But…
I think I have to tell them about Roy Tolles a little bit on this. Roy Tolles, for example… Charlie’s partner… many, many, many years ago, decided he was going to want to buy a house in San Marino. He’s going to have a number of kids.
So he sent his wonderful wife, Martha, out. And for six months, he had her look at houses in San Marino. And this was many years ago. And if they were priced at 150,000, she would offer (the sound in this part of the video is inaudible), or offer 75,000. And of course, the real estate agents were going crazy because they’re never going to get something listed at 150 sold at 75.
And then finally, when she found one that they both really liked, he had her offer something like 120 and the real estate was so happy to get a bid that was in the general area… of the offering price that he would work very hard on the seller to take that bid. Because he knew
what… he did not want six more months of Roy bidding at the lower prices. So you don’t sell them on the first trip.
Incidentally, I had Roy buy a house for me, sight unseen, because this was a guy that… knew human nature.
You don’t get rich… real estate agency… you know, the people earn their money, and they earn it in a perfectly respectable and honorable manner in terms of what they get paid. And as in every single industry there is, you know, there can be excesses or mistakes or that sort of thing.
But we will continue to buy more brokers. In fact, we’ll probably have another couple to announce before long.
And we will feel that if we get to where we’re doing 10 percent of the real estate brokerage business in the country and we’re making 6- or $700 million a year, pretax, we will not think that’s a crazy amount of money to make for enabling 10 percent of 5 million people to change their homes every year in the United States.
Well, the commissions in real estate may get unreasonable if you’re talking about $20 million houses. It seems a little ridiculous to pay a 5 percent commission on a $20 million transaction.
But do any of us really care if the kind of people who pay $20 million for a house have a slightly higher commission?
The ordinary commission is pretty well-earned.
Yeah. We have a number of brokerage firms. So the highest has their average transaction… in one section of the country… would be close to $600,000 a unit. But the… in terms of the sales price of the house. But the… in most of our real estate operations… the average price is more like $250,000 or something in that area. And you can show a lot of houses to make one $250,000 sale.
And of course, you split… the listing company and the selling company are usually two different companies. So it’s… it does not strike me as excessive.
And incidentally, it doesn’t strike the people in the industry that way either. It has not been particularly susceptible to online-type substitution or something of the sort. The real estate agent earns their commission in most cases.
But Charlie’s had more experience with $20 million houses. So he will comment on that area.
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