Sales commission for an estate agent - the difficult topic
Category Seller Advice
Estate agents (sales agents) in South Africa do not earn a fixed income and work only for commission - i.e. they work "at their own risk" of not earning an income when they do not succeed in concluding a sale. The inherent risk in such an endeavour is obvious, as it means that they are constantly investing money and time into the marketing of property with NO surety of an income whatsoever.
There are a few exceptions to the above "rule" - e.g. estate agents selling development property may be paid a fixed monthly income to compensate especially for their loss of income due to being "taken away from" their field of interest or area where they have been selling / not being able to earn commission for an extended period as the development first needs to be marketed and "developed" before any sales can take place.
1. What is an estate agent's sales commission and when is this payable?
Commission is negotiable. The EAAB (Estate Agency Affairs Board) do not prescribe a fixed or specific amount as would be the case with attorneys for their time spend / services rendered in transferring the property.
The commission is earned when all suspensive conditions on the sales contract (Offer to Purchase/ OTP) have been met - i.e. when the buyer has e.g. obtained a bond or when the buyer has indeed managed to sell his/her house before a certain date which has been a "subject to condition" in his/her OTP to the seller.
The conveyancer (attorney who effects the transfer of the property into the name of the buyer) however acts as the gatekeeper and will only pay out the commission to the estate agent AFTER the registration of the property in the Deeds Office. The seller and the estate agent in effect will receive respectively the purchase price and the commission on the same day - after the attorney has reconciled the transfer account.
2. What is the difference between sales and rental commission?
Rental commission is normally paid monthly and is between 10 and 12 % + VAT of the monthly rental amount payable to the landlord by the tenant. There are also some estate agents who will work for a so-call placement fee - which is normally equal to the first month's rental income. The rental agent will in such a case only source and pre-qualify a tenant for the landlord - but would not be involved in the monthly management of the property (maintenance etc.) and the contractual relationship between the landlord and tenant (ensuring timeous rental payments / maintaining trust accounts / initiating legal action when needed etc.).
The percentage payable is linked to a variety of administrative services involved in the month to month management of the rental property and of the relationship between the tenant and the landlord. The rental agent in effect becomes a "property manager" for the landlord (owner of the property).
Sales commission is an once off fee - paid on registration of the property. The commission is earned by the estate agent whose marketing actions was the real cause for the property transaction'
3. What is the average or going rate for estate agent’s commission?
Normally sellers can expect to pay between 5% and 7,5% of the selling price + VAT on the commission (if the estate agency is a VAT vendor). The average commission rate during the boom phase in our property industry has been relatively higher than during the present down cycle in our industry.
The percentage commissions also vary between estate agencies and one would not expect to pay a standard percentage "across the board" - as the extend and or level of service a client can expect from an estate agent do in fact vary quite dramatically between the different estate agency models in the market. Estate agencies have different business models - which all have evolved into different marketing programs with different fixed costs attached to each of them.
The marketing programs of the so-called "discount" commission estate agencies (3 to 4%) will never equate with the extent of coverage offered by the estate agencies which operate between the 5 - 7,5% commission parameters. The easiest way to verify this is to Google the estate agents name + your area name + property for sale. Discount estate agencies normally struggle in buyer's markets - i.e. when inventory (property on the market) exceeds the supply of buyers. In these markets, some homes are not selling at all. This is where expertise and extra work pays off. Listings that sell at top price are typically those exposed to the most buyers, which are priced well, marketed well and introduced to as many of the buyers in the market as possible.
4. When selling property through an estate agent, what are some of the things a seller should know regarding commission?
Sellers need to insist on a properly constructed marketing plan for his property - that is when he contracts with the estate agent in terms of a sole mandate and at a certain commission percentage. An exact and comprehensive marketing plan will include such items as :
- when / where will the property be advertised in the electronical and printed media;
- an detailed outlay of exactly on what property portals will the property be hosted and what other tools are employed by the estate agent in his/her marketing efforts (social media / email campaigns / show houses / open houses for all other estate agents in the area etc...).
The less commission the seller would commit to, the less would be his/her property's reach (via property portals / printed media / marketing efforts via other estate agents contact networks etc.).
It is of the utmost importance that sellers should be aware of a variety of "agendas" which form part of the real estate industry and which will have a direct influence on the seller’s choice of estate agency and commission he/she will be contracting:
Agendas to be aware of :
1. the majority of all property sales (up to 70%) are effected within the circle of estate agents. By being not willing to pay more than 5% when 2 estate agencies are involved in a transaction means that the estate agencies will be paid less then 2,5% each for the transaction. By far the majority of estate agents in South Africa work on a 50/50 commission split with their company. This relays to a gross income of 1,25% for the estate agent - of which further intra-office commission splits could also be subtracted (e.g. other estate agents within his/her office provided the selling agent with information about the property). Estate agents can therefore end up with earning even less than 1% commission. This takes place in the worst property market of the last 3 decades market - contracting from 40 000 sales per month (2007) to 7 000 sales in 2011 - to be shared amongst 30 000 estate agents. To contract with the best possible agent is therefore much more important than trying to undercut sales commission.
2. sellers should ensure that the mandated estate agent will not exclude other estate agents from their property (mandate) - i.e. by offering other estate agents not a 50/50 split but an unequal split of the commission - i.e. 60/40 up to 80/20. Such a split will make it even less acceptable to other estate agents to introduce their buyers (who are in the present market the dominant party) to the property. Estate agents who offer less than 50% of the commission to other estate agents, effectively drives even more agents and their buyers away from the seller's property - as the buyers agent will in such a case be earning even less commission than in the scenario sketched above.
5. What to be aware of when an estate agent makes promises of a higher price and a lower commission?
Sellers should be very wary of estate agents who promises them a higher price based on hot air and a lower commission.
It is these listings that often show up 6 months later with reduced prices and a stale marketing plan. The amount of the price reductions, not surprisingly, tends to exceed the difference in commissions asked by the other estate agents who gave a lower valuation - but a market related price. In these scenarios, sellers often receive fewer services and ends up losing money on the sale as well. If you have to choose between agents who charges 1 or 2 percent less than another, think about how you would feel if you have to reduce your sales price after a few months with more than five percent to get the house sold.
Author: Benhard Wiese