(Updated May 2019)
If you’ve ever thought of selling your beautiful home in Kohimarama, Glendowie, St Heliers, Orakei, Mission Bay or Remuera on your own, it is probably because you felt a real estate agent’s fees are really expensive.
After you sold your house with a real estate salesperson (commonly called an ‘agent’), you probably felt for a second that those fees were not worth it. Why?
Because it may seem like an agent only turns up at your house for half an hour each day of the weekend and at the end of 4 weeks (if you are lucky in this market) is paid a huge cheque for merely opening the door and taking calls from buyers in the meantime.
But is that really true? Are real estate agents ‘raking it in’?
The short answer is this: your real estate agent works hard for his/her money and not everything you pay in commissions goes directly to him/her.
I just thought it would be great for ‘outsiders’ to have a look ‘behind the scenes’ on the ‘high commissions’ that real estate agents earn. And you can decide for yourself if they are worth it. And learn the one key metric that I think you should really focus on when picking a real estate agent to sell your home in Remuera, Kohimarama, Glendowie, St Heliers, Orakei, Mission Bay or Remuera.
Breaking Down Real Estate Commissions Through An Example
Let’s assume you are paying a commission of $10,000 + GST, which works out to $11,500. The GST portion obviously goes to the government. Then sometimes there may be marketing refunds that need to come off the top as well as franchise fees to the agency (if it’s a franchise).
If the property was sold by another agency or agent (i.e. a buyer was introduced by another agent), then 30-50% of the commission is taken away (depending on the method of sale). This is known as the commission due to the ‘selling agent‘. (This also explains why certain methods of sale can be preferred over others in certain real estate agencies because the commission splits are more favourable towards the listing agents for those methods of sale.)
Next, the listing agency (i.e. the branch) takes about 30-50% of the commission depending on what the agreed split is with that individual agent. And for this, the listing agency pays for rental of premises, salaries of support staff, back-end support that keeps the operations running smoothly, marketing etc. That’s a lot of overheads that need to be covered!
This means, in the worst case scenario (assuming no marketing refunds or franchise fees for now), out of the $11,500 you paid, the listing agent only gets a meagre $2875 (inclusive of GST) but in the best case scenario, the agent can gets $9,200 (assuming a 20%-80% split for high performers with the listing agency). That’s of course excluding the GST and income tax that still needs to be paid.
What Do Those Real Estate Commissions Cover?
Yes, I get it. Even if the money you spent does not go entirely to the real estate agent, it’s still money that you would’ve liked to keep in your pocket. Who doesn’t?
But here’s a deeper look as to what likely leads to the ‘high’ commissions.
(1) Time and money spent prospecting
(2) Time and money spent preparing for the actual listing.
(3) Time and money spent conducting the actual listing open homes and private viewings (this is where most people see and think that’s what agents only do) and negotiating with potential buyers etc without any guarantee of it selling.
(4) Expenses incurred by the real estate agent
(1) Time and money spent prospecting
Many people do not realise that agents have to spend a lot of time and money marketing to many potential leads (in print and online), conducting appraisals and speaking to potential vendors, without any guarantee of a listing.
There is a lot of inherent risk and uncertainty in this process and a lot of time involved in building a relationship with a vendor.
Some listings that real estate agents get are through constant contact with a vendor over a decade – with no guarantee of any listing. Therefore this high lead acquisition cost in this industry is therefore compensated by the ‘higher’ (assuming you feel that the price for those services should only be calculated on an ‘hourly’ basis rather than by results) commission paid on each transaction by all vendors.
Doctors, for example, spend comparatively less time on lead acquisition – by the industry’s nature, they rarely need (if ever) to talk to many prospective patients before signing them up for his/her services. Doctors are generally paid for their consultation time – regardless of whether they conduct any treatment on you at all. (And yes, I absolutely get that doctors spend lots of time and money training. I’m just providing an example to highlight the difference in lead acquisition.)
(2) Time and money spent preparing for the actual listing
There is a lot of ‘behind the scenes’ work involved in marketing a property aside from just attending open homes.
This includes liaising with tradespersons / photographers, coordinating marketing campaigns (designing ad copy, brochures, newsletter), preparing legal paperwork etc which happens behind the scenes before the listing goes ‘live’. And that’s just a standard offering from any real estate agent.
You can bet that much more work goes into our marketing of your property. From the optimisation and targeting of the ads to the maintenance of this website and social media channels designed to maximise exposure of your property, all these take up a lot of time on my end.
I constantly monitor the advertising costs and fine-tune the ad copy or targeting when I feel that the ads should be performing better. It’s your precious advertising money I am spending after all, so it deserves my attention.
(3) Time and money spent conducting the actual listing
On top of the open homes every weekend, agents often have to conduct private viewings with buyers on multiple occasions so that the buyers can see the house in the evening or with their family members.
In this market, where houses are taking slightly longer to sell, it also means a longer sales campaign and less turnover – in what other industry do you see a professional work week after week with no guarantee of any payment during that period?
Good real estate agents also have to call back all the buyers that came through the open homes (we do not outsource this to others because nobody should know the listing better than us), respond to email enquiries or follow up on possible interest, prepare the vendor report so that you are aware of what is going on and attend the vendor meetings.
Agents also do not just show a buyer a house. Great agents always try to sell the house to a buyer. Showing and selling are very different concepts. For example, buyers might sometimes be easily deterred by small problems in a house that arise from building inspection so it takes a good real estate agent to spend time assuaging the buyer’s concerns and explain how some things can be easily fixed. Or legal expertise to guide the buyer through certain legal issues or work with the seller’s lawyers to resolve them to the satisfaction of the buyers.
Furthermore, deals fall apart all the time, which again is time wasted. Just because you have been through a smooth transaction (lucky you!) doesn’t mean that every other transaction is like that. Again, the agent doesn’t get paid a single cent in such cases, especially if houses fail to sell. There are a fair number of vendors out there who are interested in ‘testing the market’ and will not hesitate to yank their house off the market if their ideal price fails to materialise. In such a case, the agent gets paid nothing.
(4) Expenses incurred by real estate agents
All overheads are personally paid for by the individual real estate agents. Petrol, advertising spend like billboards, open home signs/flags, marketing material, client food and even the champagne that goes along with a successful sale. Sure, these are tax deductible but they have a direct nexus to the business.
In short, there is a lot of risk in this business for each individual agent and no steady pay cheque to look forward to. However, employees on paid salaries do not generally face any of such risks. Sure, they face retrenchment, but that’s par the course. Most people do not look over their shoulder on a constant basis. The old adage in business therefore stands – the higher the risk, the higher the reward.
Alternative Fee Structures By Other Real Estate Agencies?
There are several alternatives to a commission based structure – for e.g. fixed price services, hourly rates etc – operating in the Auckland market.
But none has, in my view, satisfactorily aligned the vendor’s need to extract the highest possible price from a sale with the agent’s incentive (as a rational economic actor) to earn the most money.
If the industry were to charge by hourly rates, I doubt any vendor would be too pleased about paying the agent by the hour without any guarantee of success (i.e. finding a buyer). In such an instance, the agent may likely drag out the transaction to your detriment, and there’s also no guarantee of a great price or even a sale.
The fixed-price model vs full-service model
One model that has recently popped up is a fixed price service where these providers charge a fixed price for any real estate transaction regardless of the sale price. You would have seen those advertising a ‘fixed price’ (regardless of the final sale price) and how you can save money compared to ‘traditional real estate models’.
In such cases, marketing money is paid upfront to cover the marketing and the rest is paid upon the sale. That does seem like a good deal on first glance.
But if you look deeper, the problem is that the incentives of the agent and the owner are not aligned.
This is because regardless of what price the property sells at and regardless of how long the agent works for the listing, the agent receives the same amount in remuneration. There is absolutely no incentive for the agent to push the buyer for a higher price. Would you blame them if you were in their shoes as a rational economic actor?
The only thing you are relying on, as a vendor, is the agent’s own professional pride (and don’t get me wrong – I absolutely think that there are many such agents around) to achieve the best price for you.
And to make up for the fixed remuneration, what is necessary is the volume to support it.
Selling real estate successfully about attracting buyers and agents with buyers; and it may take time. Consider this question: is a full-service agent or a discount broker more likely to do a bigger, better, LONGER job to sell your home? A full-service agent can risk MORE and upfront marketing/ads cost and find more “eyeballs” and possibly competitive offers to drive prices up. Discount brokers, by virtue of the business model, need to take what works/enough and crank out sales.
Selling real estate has many moving parts, is largely a relationship business and as such can’t be easily done properly by a factory-line approach.
More importantly, real estate is a physically and mentally demanding job. Real estate agents required to sell many houses a month would simply not be operating at the top of their game for every listing. This risks having a negative effect on your final sale price. Individual agents just do not have the time to manage that many listings effectively unless they are working in a team.
Full service agents therefore will crank out higher net profit and is in the game for as long as it takes for your success. In short, we push FOR YOUR success ONE AT A TIME. The volume is not critical to us, as it is to discount brokers.
DIY culture in New Zealand
Please don’t understand me wrongly. I think there’s absolutely a place for private sellers or cheaper real estate agencies, just like there’s a place for DIYers in painting or for you to hire cheap labour to do it etc.
Would you cut your own hair or service your own car? Most of us would not. Sure you can paint your own house, but after factoring the cost of supplies, time taken to prepare and do the actual work etc, have you really saved much and is the outcome as good as someone who does this on a daily basis and does this consistently well?
What Should You Really Focus On When Choosing Your Real Estate Agent To Sell Your Home?
One word: Value.
Focusing on the value that a real estate agent can bring, rather than just the commission, will likely be a more profitable exercise for you. And not all agents are the same.
As the market flattens, so too does the business for the average real estate agent. In a buyers’ market, clearance rates can be low. Real estate agents have to work harder and smarter because houses simply do not sell themselves. It’s not a matter of just putting up a sign and praying that it sells.
Marketing can therefore make or break your listing. A well-presented house in the popular suburbs of Kohimarama, Orakei, St Heliers, Mission Bay or Remuera can generally sell with the right marketing to the right buyers.
Some agents will have invested heavily in marketing tools fit for purposes in 2019 (for e.g. email drip systems, social media marketing), personal websites that are search-engine optimised, email databases and other ways to target buyers over and above the standard offerings. Many would not (or do not), relying on the traditional mediums of marketing such as Property Press or outsource marketing of your home to third parties who do the same to thousands of other homes. Will your house stand out?
Remember that marketing is not a cost. It is an investment. You can’t sell a secret, no matter how perfect your home is.
If the marketing brings in just an additional buyer for the campaign, even if that buyer cannot afford the property, the perceived buyers’ competition will likely lead to a very positive outcome for you as the vendor. This can be manifested in the ultimate sale price or the mere fact that the sale has gone through in the desired time frame.
One last thing about real estate commissions
One last thing to note is that commissions are often negotiable, and you will find that most agencies settle around the same level. You should therefore look to get the ‘best bang for your buck’ – find an agent that can truly bring your marketing to the next level and help you negotiate from a position of strength. That commission you paid will likely be far less compared to the additional value which that real estate agent generated.
Learn How To Choose The Best Agent
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