Commission Conundrum

Commission Conundrum

A new kid on the real estate block says it only charges 1,95% commission on the sale of its clients’ homes, whereas the average industry commission is somewhere between 4,8% and 7,5%.

There exists a split between standard industry practice on the amount of commission real estate brands charge for selling their customers’ homes and those who leave it up to the individual agency to determine a suitable commission structure. For example, RE/MAX and Rawson Property Group each state that, as franchisors, they do not set commission.

Adrian Goslett, regional director and CEO at RE/MAX of Southern Africa, says that the agent negotiates the commission with the seller: “There is not a set commission. The agent’s experience and ability to get the home sold at the best price in the shortest time will usually dictate the commission and drive the negotiation at the time of taking the mandate.”

Bill Rawson, owner at Rawson Property Group, says that prescribing a commission to a franchisee goes against his business’s approach. “We give franchisees complete freedom in this matter,” he says. “I would like to mention that some of our most successful franchisees and agents regularly work on a 7,5% commission and also insist that if they are to handle the property it must be on a sole-mandate basis. On average in our group, the majority of sales are achieved on a 5% commission.”

Seeff chairman Samuel Seeff doesn’t mince his words, saying his business charges an “industry standard rate” of 7,5%. He notes, however, that there are exceptions, “generally only where the rate of commission is standing in the way of concluding a deal between a willing buyer and willing seller”. In such cases, “there will be a small leeway of about 2% to 3%”, he says, noting that commissions exclude VAT.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says commissions vary according to the location and price of the property. “Our company range is between 5% and 7,5%,” he says, noting that agents can’t make an autonomous decision to go below the company’s parameters. “In the very rare times this has happened, it has come out of the agent’s percentage.”

While some agencies are clear about their commission structure and others leave it up to the individual franchise, FNB provides advice to sellers on its website, stating that “as the seller, you are liable for the commission that is paid to the estate agent, which averages around 7% (excluding VAT) of your final selling price”.

The bank further advises that the estate agent’s commission can be negotiated and should be spelled out on the mandate. “Their fee will include advertising your property, finding a suitable buyer and acting on your behalf between the attorneys and buyer,” FNB says. “This amount is usually paid from the proceeds that are derived from the sale. You should consider the desired amount you want for your property and then speak to the estate agent about factoring their commission into this figure.”

In other words, FNB advises sellers to base the commission an agent will receive on the successful sale of their home on the amount of money they take home after the sale – the proceeds.

But consider this calculation from Neville Berkowitz: “Using home price research figures from Absa, the capital profit of an average medium-size home purchased in 2006 for R637 300 and sold in late 2014 for R1 194 200 would have been R556 900 for the average eight years of home ownership. The traditional estate agency charges commission of 7,5% plus VAT, or 8,55%, and on the sales price of R1 194 200 this amounts to R102 104 paid out in commission, or 18,3%”.

Berkowitz has more than 40 years’ property industry experience, including property economics, institutional advice and residential property development. He launched HomeBid, a low-commission real estate agency, in May and looks set to shake up the traditional real estate industry by charging sellers 1,95% commission on the sale of their home. “Using the Absa research example, the HomeBid process at 1,95% commission will only claim 4,2% of the homeowner’s capital profit,” he says.

This is significant, as sellers rarely calculate the commission paid to estate agencies in terms of the proceeds from the capital growth of the property.

But, while Berkowitz says no one can argue with the maths, Seeff says agents do not work on the basis of the potential profit that a seller stands to make. “Whether or not there is a profit, the agent would have to put in the same amount of work and the company would employ the same amount of time, resources and investment,” he says, noting that it is out of context to look at the commission in this way. “Existing agencies generally already offer all of the services that HomeBid refers to, including the use of property portals and other online and web-marketing tools as well as the traditional advertising and marketing media and tools.

“In addition, it needs to be borne in mind that the existing agency commission structure provides for aspects such as infrastructure, facilities and services, as well as agents who operate in various local markets where they have direct insight and experience and understand the local market dynamics; for example, how to price, and why some properties in the same complex will sell for different prices. All of this is vital to assisting sellers and buyers conclude successful transactions. Agencies also have extensive existing buyer databases, often with 100 000 to 250 000 potential buyers, with whom they are in regular contact.”

Geffen says that the average commission obtained by most agencies is 4,8%, excluding VAT. “Commission of 7,5% is not the national norm,” he says, noting that, on average, estate agents will work with a particular buyer or seller for about four months before they see a cent of return on their work. “When sellers mandate a traditional estate agency to sell their home, they appoint them to work at their own risk and to expose the property through a wide range of media, at the agency’s expense, in order to appeal to as wide an audience as possible, with the objective of obtaining the highest price and best terms for the seller.”

Says Rawson, “Sellers who begrudge paying commissions should take into account the long process that all agents have to work through in building a potential buyers’ list and understanding exactly what each of these buyers is looking for,” he says. “The seller should also realise that the agent, although possibly achieving a quick sale on his home, will almost certainly have others in which endless difficulty in achieving a sale is encountered. It should be mentioned that in 2007 there were 93 000 estate agents operating in South Africa. Today there are fewer than 30 000. The reasons for this are that, firstly, this is not an easy profession in which to succeed, and secondly, the barriers to entry have been raised higher than ever before as a result of agents having to attain very useful professional qualifications that go a long way to making them truly competent.”

Berkowitz insists that HomeBid will do as much work for sellers and buyers as traditional agencies and will take the vetting process even further by conducting a valuation on the home itself as well as the area. “Sellers will pay R1 750 for a valuation that they can then use and proceed to sell their home, or keep and take to another agency,” he says, noting that he settled on charging 1,95% because HomeBid pays its agents a fixed monthly salary and not commission. Our agents are mostly retired professionals who are already receiving a pension. This is just extra cash in their pocket and the commission on the home sale is therefore less important.” It remains to be seen whether HomeBid’s message is taken to heart by sellers. But the bigger players will need to demonstrate to sellers why any commission higher than 1,95% is justified.

Pam Golding Properties declined the invitation to comment.

 

PP-Jul-Aug-2015-Commision-Update-1-424x283

 

Steeple weighs in…

For the past two and half years, Steeple, another low-commission estate agency, which charges 1,5% for its services, has seen how sellers have increasingly opted to use its services over traditional agencies.

CEO David de Waal believes this is because sellers are becoming increasingly aware of the costs involved in hiring a real estate agent to market and show potential buyers around the property, as well as the advent of the internet and its power to reach millions of potential buyers.

“We have sellers from across the range, from retirees to the tech-savvy,” he says from his office in Salt Rock. He notes that the majority of properties on Steeple’s books are priced between R800 000 and R2m. “But we have homes from as low as R600 000 all the way up to R16m,” he adds.

De Waal says his company is able to charge a very low commission because of its online business model. “It’s far more efficient, and that’s exactly how we have been geared since we started,” he says, noting that all the key prerequisites for sellers are in place, such as marketing, the correct paperwork and the provision of a professional service. “We are as transparent as possible and don’t have any hooks or lock-ins such as sole mandates. You can choose your own conveyancer,” he says.

De Waal maintains that traditional estate agencies are “lying” about having a buyer database with cash purchasers and about their agents’ being trained sales negotiators. “The buyer database is no longer relevant as they use the internet portals too,” he says. “Besides, Private Property has an even bigger database than any agency would hope to have. Buyers know what they like and what they want, and will not pay for a home simply because it is in a sought-after area – although location does play a role.

“We listed a property in Woodstock, Cape Town, which generated significant interest and sold for more than the listing price. A week later we marketed another property in Woodstock which was not as nice as the previous one but was in a similar area. We mailed the listing to 50 people who had expressed interest in the previous property, but only two or three of them were interested enough to ask for a viewing.

“If the internet had developed earlier, everyone would be selling the way we do.”

 

Words: David A Steynberg

 

Leave a Comment

Start typing and press Enter to search