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SA’s estate agents earn their ‘high’ commission

MAIN IMAGE: Niël Cronje, CEO of Keller Williams Realty Southern Africa and Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty.

The ‘high’ commission rate charged by SA’s traditional estate agents is a favoured marketing target for low cost set-fee agencies. Do they have a point if UK agents charge only 2%?

In a recent online debate on the Property Professional website mention was made that our estate agents “would not get away with those rates in other countries such as the UK where the rate is around 2% not 5 or 6%”.

In response others pointed out that property prices are on average much higher in the UK and the property market has a higher turnover rate than locally. Also, that South African estate agents are better qualified, having to meet more stringent qualification requirements, and on the whole deliver a more comprehensive service than their UK counterparts.

So, let’s look at how our agents and the service they offer compare to what sellers and buyers can expect in countries like the UK and the USA where on average lower commission rates are asked. Two property leaders from estate agencies with a local and international footprint share their input on the matter.

Compare apples with apples

Niël Cronje, CEO of Keller Williams Realty Southern Africa, says it is very difficult to compare only one aspect such as the agent’s commission because each country is different.

He explains that in Europe the average split between agent and principal is 25% / 75% whereby the principal carries the bulk of expenses. In the UK, most agents earn a basic salary and not necessarily commission. In the USA commission is usually split between the seller and buyer and each pays 2-3% each; therefore, a total average commission of 5-6% per transaction with the majority of transactions being on the multiple listing service (MLS). This means the commission is divided between several agents. Most property in Australia are sold on auction with the seller paying a fixed cost.

A general rule of thumb in the industry is that 20% of today’s estate agents sell 80% of all property. Let’s take a property of R1 million selling price with a 5% commission = R50 000. Usually the seller does not want to pay commission on this amount and that equates to R43 478 net. 50% of this amount is payable to the principal in the traditional model which leaves the agent with R21 739 pre-tax; R17 392 post tax on an average of 20% tax.

The average agent sells 7 houses per year: R17 392 x 7 = R121 744 per year … R10 145 per month. “For this reason, many agents change to other agencies that has moved away from the 50/50 commission split and focus on limiting their expenses.”

“Estate agents work on a contingency basis. Agents only get paid if they have a successful transaction. The seller has no up-front cost, no risk – an agent assumes all the cost and risk involved in getting a home sold. And an estate agent with influence, a wide network and industry knowledge will earn the commission he asks,” explains Cronje.

Why should real estate professionals have to defend their commission?

Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty, says it is a pity that as a result of new disruptors with impressive marketing budgets (replacing trained agents and resources) toppled with slick advertising campaigns, there is now constant attention around compressing commissions for real estate brokers.

She points out that Purple Bricks in the UK was one of the first disruptors and they vouched that this was the new dawn for real estate – the ground breaker for the “new model of real estate” internationally. However, their shares are plummeting daily with key stakeholders selling theirs and the Australian operation has just closed shop after only two and a half years.

South Africans don’t contest professional legal fees or those of financial advisors to this extent; they should be as savvy about their real estate professionals than to be coaxed into making broad-based decisions based on slick advertising campaigns, says Geffen.

“We are at a point where every week the real estate sector is having to justify the ROI for their professionalism, quality and service. Yet is this driven by proof or clever marketing?

“I believe a real estate broker remains a respected vocation which takes tremendous skill, learning and application of both. Long gone on the days where virtually anyone could become an estate agent after a short internship and easy exam, with most being stay at home moms knocking on doors to sell homes,” Geffen explains.

She continues that not only is the process to become an agent much more stringent, but the actual job is way more exacting which requires agents to not only be au fait with multiple legislations, but to also have more than a passing acquaintance with diverse fields including marketing, legal processes and finance.

A sale is also a lengthy process taking several months from start to finish, so good agents really earn their money.

Getting buyers and offers is easy, getting the right buyer to conclude a successful sale in the desired amount of time isn’t. There are so many factors that need to be taken into consideration. This is where a professional broker really does the work to earn their well justified commission.

Commission in the UK is based on completely different criteria. It always has been.

“As a profession we should always be upskilling and adding value and certainly not resting on our laurels. However, there is no proof yet that lowering commission is the answer, so the jury is still out and there is certainly no correlation between lower commissions and faster sales,” Geffen concludes.

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