Are You Forcing Your Agent to Work for Less than Minimum Wage?

There are four main business models for the agents who might help with your apartment search in Chicago.

1. Paid by the landlord, work out of the landlord's office. (The "in-house agent" model)
2. Paid by landlord, live in the building doing maintenance and leasing. (The "building superintendent" model)
3. Paid by a third party leasing agency. ("Apartment locator" services)
4. Paid by a third party real estate sales brokerage. ("Realtor" services)

Today we'll be focusing on models #3 and 4 above, but it's worth remembering that all but the "building superintendent" model are paid entirely on commission. If the agent doesn't close the deal with you they get paid nothing at all. Some renters think that they will have to pay a ton of cash to work with an agent. In Chicago this is not true - the landlord pays the agent in Chicago no matter which side they represent. Other renters think that their agent will walk away from the work with the entirety of the first month's rent. This is also not true.

The reality of a Chicago rental agent's income is pretty bleak. Today we're going to figure out how many apartments you can see with one agent before you're pushing their income below Chicago's minimum wage of $10.50 an hour, or $21,000 a year.

Now we're not going to focus on what it means to be earning minimum wage in Chicago when compared to the real cost of living. We're also not going to dwell (much) on the fact that good agents are skilled laborers who should be earning more than minimum wage. We're just considering how much of your agent's time you can take before they'd have been better off working at McDonald's.

Basis 1: Time available

Agents cannot spend all of their time in direct contact with tenants. Time must be spent doing other career building things like price comparisons, office meetings, mentoring, and company-mandated community service activities. While dedicated agents will put in well over 40 hours a week, these sorts of activities do still cut into the available time to spend working with clients. Let's figure that even the most dedicated rental agent has about 35 hours a week for face-to-face time with tenants.

Basis 2: Landlord's Payout

Let's assume for the sake of nice even numbers that you rent a $1000 apartment. You work with an agent who is sponsored by "Friendly Apartment Dudes." The landlord pays Friendly Apartment Dudes 1 month's rent for every year long lease. So the Dudes get $1000 - the first month's rent for your $1000 apartment.

Deduction 1: The Split

Friendly Apartment Dudes must split this $1000 between all involved parties.

If no other agency is involved, they give part of that rent to the agent and keep the rest. For an agent starting out at a locator service, they can expect to get 25-30%. It may go up to 45% or so if they last for over a year. However, locator services usually have closing departments and marketing to handle everything except the showings, meaning that the agent can get back in the field much faster than a full-fledged Realtor.

Breakdown at 27.5% agent split:
Your agent gets about $275 and Friendly Apartment Dudes keeps $725.

Now let's suppose that instead of working directly with an agent at Friendly Apartment Dudes, you work with a Realtor at Ouver, Unter & Dunn. The Realtor looks in the MLS and sees an apartment listed by another agent at Happy Homes, LLC. You rent it and the landlord pays Happy Homes the $1000. Now the money has to get split four ways.

A Realtor's split with their brokerage will be much more robust than the newbie leasing agent. Depending on the brokerage they'll usually keep anywhere from 50-100% of their commission. However, in exchange they're expected to do a lot more work. They might have to draw up their own leases, coordinate the signings, and handle all of their own marketing including printing brochures and flyers and buying online ads.

Happy Homes LLC is responsible for dividing up the $1000. You would think that they'd split it evenly between themselves and Ouver Unter, but they usually don't. In a more realistic scenario Happy Homes would keep 65% and give Ouver Unter 35%.

Let's see how this math works out:

Breakdown at 65% agent split:
Happy Homes gets $650: Their agent gets $425, Happy Homes keeps $225.
Ouver Unter & Dunn gets $350: Your agent gets $225, OUD keeps $125.

New agents may be required to split their commission even further to share it with a senior agent who is serving as a mentor.

Deduction 2: The Car and other Niceties.

So, the agent who shows you apartments gets about $225-275 for their work if you rent a $1000 apartment through them. However, from that they must deduct their work expenses, which are all paid out of pocket. Let's start with the largest expense for most Chicago agents - the car.

Rental agents in Chicago are expected to drive tenants from location to location. A 2014 survey by Bankrate puts the cost of owning a car in Illinois at about $2000 a year, including gas, or $38 per week. However, for an agent that's driving around all day the cost could be considerably higher. The wear and tear goes up. Insurance costs are higher if you're driving customers around. Even if you exclude maintenance there's still parking meters, parking tickets, extra gas and the weekly car wash & detailing required to keep your car looking nice.

If your agent had to park four times and fill up their tank once over the course of showing you around they've spent about $40 of their commission on you, bringing their take home down to between $185 and $235. If they've got snacks in their car or take you out for coffee during the tour, knock another few bucks off.

Deduction 3: Licensure & Administration

Agents have other out of pocket expenses as well. There's the cost of a real estate license ($75-$150 every two years) and, for Realtors, the cost for membership in the local Realtor association ($1000 per year). There's errors & omissions insurance. There's continuing education classes. Some brokerages will charge fees for things like keys, desk use, phone use and photocopier use. Some agents will keep a second cell phone for business use.

Plus, agents are independent contractors which means that they must pay for things like health insurance and retirement out of pocket. The amount that this would take out of their earned commission varies depending on how much work the agent gets. We'll call it $10 for now, meaning their net earnings from your $1000 rental is between $175 and $225.

Deduction 4: Failure

Remember how we said that an agent is only paid if they close the deal? Well the success rate is not fantastic, even for the best agents in the industry. Best case scenario for an average agent is that they will only close a deal for between 1 and 5% of the leads that they get.

Now, a "lead" is not necessarily a showing tour. A lead could be someone who emails them in response to a Craigslist ad. But even replying to that Craigslist ad takes time, which is not repaid unless the lead then follows through and signs a lease. This means that if you're the one person who does close a deal, the income they get from you must offset all of their failures.

This leads us to a basic calculation.

Math Time

We know that someone working 40 hours a week at Chicago's current minimum wage rate of $10.50 an hour earns $420 per week. Our agent has 35 hours to spend working with clients to match that $420 a week.

Let's figure that an agent gets to take home $200 per $1000 rental, a number that falls in the middle of our end result after Deduction 3 above. To get to $420 a week they would need to close 2.1 deals a week. We'll figure a generous lead to lease conversion rate of 5% for this agent, meaning they would need to touch just over 40 renters in a week in order to close those 2.1 deals. If every renter wanted to actually see an apartment, they'd be able to spend 52.5 minutes with each client to earn minimum wage.

Of course some of those failed deals won't be showing tours - they'll be 5-10 minute emails. Let's say that half of the failures are this sort of quick touch and go communication. That means 2-3 hours of the 35 hour week are spent on emails, leaving 32 hours for the remaining 20 clients, or 96 minutes each.

An agent at a locator service will probably spend half an hour on administrative stuff - finding out what you want, getting your data input to the system, pulling keys, etc. This leaves 66 minutes for showings, which I can tell you from experience will allow you to see two or three apartments if they're close together before the potential income drops below minimum wage.

An agent working for a real estate brokerage will have to spend more time on administrative stuff, as they will need to negotiate the lease and submit your background checks. They will have about 36 minutes for showings, meaning they can take you to one or two apartments.

Now, not everyone is looking for a $1000 apartment. If we look at the results from the Craigslist rent rate survey that we conducted last summer, we see that $1000 will only get you at best a 1 bedroom on the outskirts of the city or a studio a little further in. If you double your budget to $2000, the agent's take home will also double and the time they can spend with you also doubles. However, this still brings the number of listings they can show you up to six at most for an apartment locator and four for a Realtor.

Most renters will see this and think, "Ok, not bad, I can find an apartment in 4-6 tries." Let's hold that thought for a moment and reach back in our blog archives, way way back, to the second post we ever published in July of 2015. Specifically, the 2nd section from the bottom entitled "The End Result: Renters are Exhausting Themselves." You see that bit where I mention that some renters are viewing 20 apartments before they sign? Those folks are making their agents earn about $2.50 an hour. I know that some agents are not terribly good at what they do. But in Chicago nobody deserves to work for $2.50 an hour.

The Link Between Rent Control and Commission

There's a lot of criticism of the Chicago rental industry. Some talk about unlicensed agents, sleazy agents, careless agents, agents who enter without calling first. Others are appalled at the 90% first year failure rate of real estate agents. There are people who wonder why so few Chicago Realtors work with tenants, or why agents working for locator services are so reluctant to show MLS listings.

If you look at the numbers the cause for all of these problems becomes very clear: you get what you pay for, and Chicago renters have paid nothing at all for far too long. It's illogical to think that someone who is entrusted with driving you around and finding your housing could be earning the same as someone who shoves chicken nuggets into a box, but the commission-based pay structure for rental agency has created just such a scenario.

Some brokerages in the city have started implementing a minimum fee that all clients must pay to work with an agent. While this might raise the hackles of renters who have grown accustomed to apartment locators working for "free", it's actually a development that's long overdue.

Tenant-paid apartment brokers are the norm in Boston, New York, San Francisco and even Seattle, all cities that had or still have government mandated rent control. The artificially lowered rents in cities with rent control make commission based pay less feasible for rental agents. Rent control may have fallen out of fashion, but the business models that grew up around it in these cities have remained unchanged.

Chicago in contrast has never had rent control. However, rampant gentrification of working class neighborhoods has given rise to a movement to eliminate Illinois laws that prohibit rent control statewide. If this movement is successful it could spell the beginning of the end for "free" apartment locator services in Chicago. While this would mean more up front costs for renters, it could also mean a more reasonable income for the few good agents who survive the inevitable upheaval.

What do you think? Should rental agents earn more than minimum wage? Would you be willing to pay out of pocket to make sure they earn what they're really worth? If rent control meant that renters had to pay brokers a fee to view apartments, how would it affect your view on the matter? Let us know in the comments and we'll see you next week.