It’s Time to Take Commission Out the Closet!

Future-Of-Agents-Commission

I have wanted to write this article for a while!  It’s a topic few agents want to discuss with clients but it’s a discussion that every seller and his agent should have. By doing so everyone will be better off and it will raise professional standards of practice and I believe this discussion will be in the interests of professional agents.

South Africans clearly prefer to use estate agents as a proven and effective way to sell their property.  Paying a commission for such real estate services is widely accepted.  Alternative structures that offer sellers a ‘DIY option’ come and go.  In fact the only consistent thing about fee based alternatives to commission is that they fail to meet most sellers’ needs, result in a lot of frustration and usually an agent has to step in and get the house sold in any event!  If the ‘sell yourself’ options were good idea in practice, as opposed to theory, at least some of them would have survived the usual fanfare launch and made a national impact in the 28 years I have been in property and none have!

So based on the logical assumption then that South Africans are happy to pay commission based fees to get their house sold, the real issue I want to ‘drag out the closet’ is what an appropriate commission would be and how it should be determined.

Normally commission is determined in a mandate prior to the sale or failing that in the sales agreement negotiated between buyer and seller by the agent.  Occasionally a seller will structure a fixed amount as a commission but this is unusual.

Fee based companies love to tell sellers how much money they will theoretically save by quoting a fee against a fictitiously high sales commission percentage that is not anything like the real national average.  Here’s a problem; I am not aware of any reliable source for national sales commission averages and I doubt one can be accurately determined but having contacted a few of the biggest conveyancers for an opinion, sales commission generally ranges from 4.5% to 7.5% plus vat.  Those in the know claim that commissions in Gauteng are usually at the higher end of this range than Cape Town but I don’t have anything but opinion to support this.

Clearly this is a broad range.  So what constitutes a reasonable sales commission and who determines it.  The short answer is the seller and the agent need to negotiate what the fee should be.  Of course real estate company’s will have their own commission policies that agents need to comply with.  A long time ago, when I started in property, we had a tariff that was “recommended” by the Institute of Estate Agents and it was a % that was ‘cast in stone’ but the days of such tariffs are long gone as they were anti-competitive.  However this is still the historical basis for the fee that is charged today.

Real estate companies have their own contracts, used by the agent to conclude an agreement between seller and buyer.  It is common for the real estate company to pre-print a commission rate in the commission clause as well as in the original mandate agreement.  The clause in the mandate (or instruction) should be taken seriously by the seller.  Some seller’s think that the mandate commission will automatically be renegotiated when the sales agreement is concluded but it is not that simple.  It is thus very important that the seller understands that the agreed mandated commission rate is what he should be expecting to pay regardless of the offer price that is finally negotiated between buyer and seller by the agent. 

If it is the seller’s intention to reserve the right to adjust commission based on the offer the agent obtains, then this option should be clear in the mandate.  I would however hasten to add that while a good agent is there to get the best price for the seller, the agent can only perform within the realities of the market place and should be held accountable for the marketing and negotiation but not be held totally accountable for the offers obtained. This is common but not logical!

I am not getting into a debate on commissions that are lower or higher than the range of 4.5% to 7.5% that makes up the vast majority of sales by agents.  But I want to make some points about what justifies a higher or lower commission within this broad band and what would constitute a logical basis for negotiation between an agent and seller.
  

  1. What marketing is being offered?
    A seller should get full details of this in writing from the agent or their manager.  It’s appropriate to remember that a primary function of the agent is to offer a marketing plan that is going to increase exposure of the seller’s property and doing this properly can be a costly undertaking.  Is your property going to be featured in all the major property portals where most buyers look for property or just on mywebsitenobodycanfind.com 
     
  2. Value Enhancement Features
    What services are being offered to enhance the perceived value of the property? A lot of marketing is not about increasing exposure, some serve primarily to enhance the buyer’s perception of value, assisting in decision making and protecting the seller’s price.  Floorplans, Virtual Tours and Professional Photography are an excellent example of these important and valuable services.
     
  3. Professional Agency Relationships
    Is the agent affiliated to an agency that has strong experienced management support?  Does the agent have a strong relationship with a major firm of attorneys and or accountants that are available to give professional advice during negotiations with incurring additional fees?  Many transactions have intricate issues to be considered and it is critical to avoid potential problems.  If the agent has the right advice during the negotiation of the contract (which that could be required at a moment’s notice) this is very valuable consideration a seller should consider.
     
  4. What is the agent’s vital statistics?
    You should know from the agent;
    (a) how many sales have they had in your area and if possible try get this as a market share
    (b) what was the average difference between the agent’s asking price and selling price of those properties (c) what is the average time the agent takes to sell a property, compared to the area average
    These figures will not only show you the agent’s track record but if they are over pricing to get a mandate!
      

I would suggest that based on 1 to 4 above you are able to rate your agent in each out of ten and use this as a logical guide in order to not make the right decision about choosing an agent as well as an appropriate commission fee.  Agents are not all the same and agencies are not all the same and there is no logical reason that commissions should be either.

If agent A clearly has all the bells and whistles to impress you with the marketing and value added marketing products and services, and they have the back up of effective management and professional services and a substantiated track record, it makes sense to be happy to pay commission at the higher end of the band.  Of course the degree to which you are less impressed would be the basis to negotiate a lower fee without anyone feeling aggrieved.     

It is common that the basis for a seller to choose an agent is an existing personal relationship.  While I totally respect that this is a fair reason to choose an agent it is not a logical reason to pay top commission.  If choosing an agent is being done on an emotional basis I would suggest a little more rational decision making – after all it is the sale of what is probably your most valuable asset.

When choosing the best available agent who is after all working totally on risk you should not demotivate efforts by snapping the proverbial carrot in half by negotiating too hard for a low end fee based on what may be offered by a LOA (Low Overhead Agent) who survives in the area because they don’t invest properly in the marketing of your property and have inadequate infrastructural support. These agencies encourage a perception that all estate agents are same it’s just that they are cheaper! What you put in your pocket will be based on the ability of a skilled agent who knows how to manage the marketing process effectively because they have all the required resources at their disposal to do so.

In conclusion I feel I have to comment on newer agents who will feel this article is to their detriment.  I have often seen tremendous sales by new agents because of their enthusiasm.  If a newer agent impresses a seller and the management support is evident, I would never dissuade a seller from choosing that agent but I might suggest a discount to the commission.  Today the office infrastructure behind the agent needs to be very substantial and by this I don’t imply a brand name alone, but the actual management of that office and that agent.  If you are impressed with a newer agent ask them to tell you about the team that stands behind them.  Their response should help you make a good decision about the agent and the commission.      

Andre de Villiers
 

Andre de Villiers has a BA from (Rhodes) and has been an estate agent and broker in Cape Town since 1984.
He currently owns three offices in the Southern Suburbs, Constantiaberg and False Bay areas operating under the Chas Everitt International brand.  Andre can be contacted by email on andre@everitt.co.za

This article may be republished as long as appropriate acknowledgment is given to the original source on Andre’s blog www.Devler.co.za  
Follow Andre on Twitter: @AndredeVilliers
or Facebook: www.facebook.com/AndredeVilliers.CEI

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