SA’s estate agents earn their ‘high’ commission

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.

Showing 10 comments
  • Don

    Excellent article – It’s the ignorant that believe agents should earn less commission, when in fact the man in the street has little to know real idea of what a top agent does.

  • Mike Sutcliffe

    In the UK agents work for a salary of 2000 pounds per month and a small commission after so many units sold, I do not think that system will work in SA

    • Averil

      In the UK buyers collect the key from an agent in an office and go and view the home themselves…

      Imagine if that was the case here with our crime rate ….

      Nuff said

  • Chantal

    I also believe they get a basic salary in the UK.

  • James Otter

    The commission is negotiable. The time to negotiate is when you take the mandate. This is when you can justify and establish the commission. The basis of this negotiation is your reputation, your track record and what your competition is charging and how successful the competition is. If the competition is successful and charges a much lower commission than you, you may have to match or shade the competitor’s rate or forego the mandate. You need to have a bottom line, a rate below which is unacceptable to you. If you can’t agree what the commission is then there is no mandate.

    When an offer is received the negotiation for the sale is an issue between the buyer and the seller. If the seller wants to re-open negotiations for the commission at this stage you can refuse, then the sale can’t proceed and the seller runs the risk of losing the sale. The seller’s loss will be far greater than yours so you should hold out in the expectation that the seller will proceed with the transaction and pay the agreed commission. The odds are that the seller will accept to avoid losing the sale.

    In a case where the seller and the buyer cannot agree on a price and you, the agent, offer to reduce the commission to facilitate the sale, this is a weak negotiating tactic because the seller and the buyer may still not agree and you will have shown the seller you are prepared to cut commission, which he can use in the event of a future transaction with another buyer, regardless of the mandated commission.

  • Mario

    Keep in mind that the sellers have inbedded risk at point of going to the market – years of maintenance, low or no market growth and location risk. Thus it is not true that only the agent have risk. The seller runs significant risk of losing growth on their main asset, mostly due to commission!
    How do you justify earning R250 000 commission for selling a R5 million property, as to R100 000 for selling a R2 million property (both 5% commission)? What “more” do agents do, or “extra” skills do they use between these price classes to justify the extra R150k commission?
    I believe that the “database” argument is a farce, otherwise all the advertising would not be needed, just market internally to your database? Surely you will pick up buyers if this is years old.
    Also, barriers to entry to become an agent are low – it takes one or two exams – not a three year degree. The fact that the SA industry is so regulated is due to so many fly-by-night agents.
    Happy to pay for the service, but it must be equitable – i.e. if the agents don’t sell the property, they must compensate the seller as they lost time and run the risk of the property becoming stale. If the property doesn’t sell, the agent simply walks away, blaming the “market”. Thus not due to their skills / lack of, which carries a 5% -7% commission tag!

  • Monde

    How does a seller expect an agent to compensate them for not having been able to sell the property when the agent has already spent so much on the marketing of your property already?
    Agents deal with abuse in the industry from both sellers and buyers, they get undermined for their skill, and that isn’t something even the commission equates to.

    The expertise
    Airtime & data
    Legal and professional advice

    These are the agent’s expenses before the actual sale of the property happens.

    The general issue about sellers is that they refuse to take agents professional advice, and the issue is usually around pricing the property. I’ve seen many sellers who end up accepting lower offers out of desperation because they were now frustrated that their property had been on the market for +-a year.

    Yes, the market is tough, but I think the sellers hold on so much to the fact that a property is a growing asset and that they should be making a lot of profit out it, forgetting that they had been enjoying the benefit of living in the property for years. The age of the property also plays a role in determining the value of the property, property undergoes wear and tear. The quality of properties vs the economic climate in the area e.g an old property whose structure was never upgraded in an upmarket area will obviously be at a disadvantage on the market. There is quite a lot but I feel that people only look at the cosmetic side of things and forget the reality.

  • Deon Meyer

    What additional value can an agent add to a property’s real value when marketing a property? None! Agents are the highest paid taxi drivers in SA. Buyers should wake up and start buying directly from sellers and do not tell me it is risky. The CPA is there for protection. I also cannot understand why a transferring attorneys fees should be based on the selling price as the administration process remains the same.

  • Moemedi

    Moemedi 4rm rustenburg. I sold my house here in rustenburg the agent and I made an agreement that commission shall be R50000 after pay out he must deposit it to me now he spent all of that on spree he doesnt hv anything to pay me back. My marriage is torn bcz of this guy pls help me pls

  • Tracy

    Whether a home sells for 1 mill or 5 mill, the same amount of work is done, so why must the 5 million home pay 5 times the commission? There’s a big difference between 50k commission and 250k. Has an agent done an extra R200k worth of work to sell the house? I think not …

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