A real estate agency is a company that offers its clients services related to the sale, purchase, and rental of various properties. The company receives a commission from the seller of the property (less often from the buyer). Typically, the agency is independent of the property owner or developer and works with several clients.

Contents:

  1. Historical context
  2. Business models of real estate agencies
  3. Regulation of real estate agencies
  4. Real Estate Commission Rates
  5. Alternative commission models
  6. Industry trends
  7. Future directions

To get the highest profit, some agencies invest in the primary market. Their income is a percentage of the transaction.

Historical context

In the past, the demand for real estate agents arose from the need for knowledge about leasing or selling real estate. Since the industry has been shaped by professional standards and licensing laws, these agencies' functions and organizational structures have evolved over time. Real estate agents, the professionals within these agencies, are now recognized as vital intermediaries in property transactions. 

Functions and services

Agencies can provide different sets of services: from particular individual services to full support for their clients.

The following services fall within the real estate agency’s scope of interest:

  • Selling, buying, and renting real estate.
  • Searching for buyers and sellers.
  • Check the property.
  • Market analysis. 
  • Legal support of deals.
  • Any type of legal registration of transactions in the state and other authorities.
  • Advising on deals.
  • Formalizing changes made to the property.
  • Assistance to the customers in obtaining a loan.

It is not uncommon for real estate agencies to specialise solely on certain market segments, such as rental flats or the sale of offices.

The employees of these companies often consider it an additional advantage to have a large database of properties in their arsenal.

Business models of real estate agencies

Real estate agencies can vary greatly in their size, structure, and operational models. They can range from small, independent firms to large, corporate brokerages with multiple offices and hundreds of agents.

Independent Firms vs. Corporate Brokerages:

  • Small, independent real estate agencies are typically owned and operated locally, often by a single broker or a small team. They tend to have a more personalized, hands-on approach with clients. 
  • Large, corporate real estate brokerages are often national or regional chains with a standardized brand and operational model. They can offer more resources and a broader reach, but may feel less personal to clients.

Discount or flat-fee real estate agencies offer reduced commission rates or a fixed service fee, rather than the traditional percentage-based commission.

This model aims to provide more affordable real estate services but may come with limited agent support or reduced marketing efforts compared to full-service agencies.

A real estate buyer holds euro bills and a model of the house

Regulation of real estate agencies

The real estate industry is heavily regulated, and real estate agents must meet specific licensing requirements in order to practice. The licensing process and requirements can vary significantly depending on the jurisdiction.

In the United States, for example, real estate agents must obtain a license from the state in which they plan to operate. The licensing process typically involves completing pre-licensing education courses, passing a state exam, and sometimes meeting additional requirements such as having a certain amount of experience or completing a background check.

The specific education and exam requirements can differ from state to state. Some states may also have additional speciality licenses for certain types of real estate transactions, such as commercial real estate or property management.

In addition to state licensing requirements, real estate agents and agencies must also adhere to strict ethical codes and professional standards set by industry associations and regulatory bodies.

In the US, the National Association of Realtors (NAR) is the largest trade association for real estate professionals. The NAR has a comprehensive Code of Ethics that all its members must agree to uphold. This code covers areas such as:

  • Duties to clients and customers
  • Avoidance of conflicts of interest
  • Fair housing and anti-discrimination practices
  • Truthfulness in statements and advertising
  • Protection of client confidentiality
  • Transparency in real estate transactions

Similar professional standards and ethical guidelines are established by real estate associations in other countries as well. Failure to comply with these codes can result in disciplinary action, including the suspension or revocation of an agent's license.

Real Estate Commission Rates

The primary way real estate agencies generate revenue is through commissions earned on successful property transactions. Commission rates are typically structured as a percentage of the total sale price of the property.

The most common commission rate is 5–6% of the sale price, which is then split between the listing agent (the agent representing the seller) and the buyer's agent. However, commission rates can vary depending on several factors:

  • Property type: commissions may be higher for more valuable properties, such as luxury homes or commercial real estate, compared to standard residential properties.
  • Location: rates tend to be higher in hot markets with limited inventory and strong demand.
  • Agent experience: more experienced, top-performing agents may charge higher commission rates than newer or less established agents.
  • Negotiation: sellers can sometimes negotiate lower commission rates, especially if they have a strong bargaining position or are working with a discount brokerage.

Alternative commission models

While the percentage-based commission is the industry standard, some real estate agencies and agents use alternative compensation structures:

  • Flat fee: a fixed, non-negotiable fee charged for the agent's services, regardless of the sale price.
  • Tiered commission: a sliding scale where the commission rate decreases as the sale price increases.
  • Retainer + lower commission: the client pays an upfront retainer fee, then a reduced commission on the sale.

The choice of commission model can impact the overall cost of the real estate transaction for the client.

The technological boom has transformed the real estate agency model. 

Real estate agencies are rapidly incorporating emerging technologies like AI, big data analytics, virtual/augmented reality, and the Internet of Things to streamline operations and enhance the client experience.

Companies that use algorithms to make instant cash offers on homes (iBuyers) and financial technology firms offering mortgages and other real estate-related services are disrupting traditional agency models.

The rise of remote and hybrid work arrangements has also impacted demand for certain types of residential and commercial real estate, requiring agencies to adjust their strategies.

Future directions

A comprehensive market analysis is crucial for real estate agencies to make informed decisions. Comparative Market Analysis (CMA) is a commonly used tool that estimates a property's value by evaluating similar ones that have recently sold in the same area. 

The real estate agency and brokerage market has experienced steady growth in recent years. 

In the United States, the real estate services industry generated over $300 billion in revenue in 2022. The number of real estate agent and broker jobs is expected to grow by 5% from 2021 to 2031, faster than the average for all occupations.

The global real estate agency and brokerage market size is expected to reach $1917.99 billion by 2028, growing at a rate of 6.2%.

a real estate agent presents a contract of sale to a client