How much is too much commission?
New kid on the real estate block, HomeBid, says it only charges 1.95% commission on the sale of its clients’ homes, whereas the average is somewhere between 4.8% and 7.5%.
There exists a split between standard industry practice on the amount of commission real estate brands charge for selling their customers’ homes, and those who leave it up to the individual agency to determine a suitable commission structure.
RE/MAX and Rawson Properties each state that as a franchisor, there is no set commission, with Adrian Goslett, Regional Director and CEO at RE/MAX of Southern Africa, stating that “the agent negotiates the commission with the seller”.
“There is not a set commission,” he says. “The agent’s experience and ability to get the home sold at the best price in the shortest time will usually dictate the commission and drive the negotiation at the time of taking the mandate.”
Bill Rawson, owner at Rawson Properties, says that prescribing a commission to a franchisee goes against his business’s approach.
“We give franchisees complete freedom in this matter,” he says. “As an added comment, I would like to mention that some of our most successful franchisees and agents regularly work on a 7.5% commission and also insist that if they are to handle the property, it must be on a sole mandate basis. On average in our group, the majority of sales are achieved on a 5% commission.”
Seeff chairman, Samuel Seeff, doesn’t mince his words, saying his business charges an “industry standard rate” of 7.5%. He notes, however, that there are exceptions.
“Generally only where the rate of commission is standing in the way of concluding a deal between a willing buyer and willing seller. In such cases then, there will be a small leeway of around 2% to 3%,” he says, noting that commissions exclude VAT.
Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says commission variation depends on the location and price of the property. “Our company range is between 5% and 7.5%,” he says, noting that agents can’t make an autonomous decision to go below the company’s set parameters. “In the very rare times this has happened previously, it has come out of the agent’s percentage.”
While some agencies are clear about their commission structure, and others leave it up to the individual franchise, FNB provides advice to sellers on its website, stating that “as the seller, you are liable for the commission that is paid to the estate agent, which averages around 7% (excluding VAT) of your final selling price”.
The bank further advises that the estate agent’s commission can be negotiated and should be spelled out on the mandate.
“Their fee will include advertising your property, finding a suitable buyer and acting on your behalf between the attorneys and buyer,” FNB says. “This amount is usually paid from the proceeds that are derived from the sale. You should consider the desired amount you want for your property, and then speak to the estate agent about factoring their commission into this figure.”
In other words, FNB advises sellers to base the commission an agent will receive on the successful sale of their home on the amount of money they take home after the sale – or the proceeds.
Consider this calculation:
“Using home price research figures from ABSA, the capital profit of an average medium-sized home purchased in 2006 for R637,300 and sold in late 2014 for R1,194,200 would have been R556,900 for the average eight years of home ownership.
“The traditional estate agency charges commission of 7.5% plus VAT, or 8.55%, and on the sale price of R1,194,200 this amounts to R102,104 paid out in commission. Out of the owner’s capital profit of R556,900 the estate agency receives R102,104, or 18.3% of the capital profit for merely selling the home.”
This is a calculation by Neville Berkowitz, who has over 40 years of property industry experience, including property economics, institutional advising and being a residential property developer.
Berkowitz launched HomeBid, a low-commission real estate agency, in May and looks set to shake up the traditional real estate industry by charging sellers 1.95% commission on the sale of their home.
“Using the Absa research example, the HomeBid process at 1.95% commission will only claim 4.2% of the homeowner’s capital profit compared to 18.3% claimed by traditional estate agents,” he says. “HomeBid enables homeowners to bank an additional 14% of their capital profit.”
This is significant as sellers rarely calculate the commission paid to estate agencies using the proceeds from the capital growth of the property.
But while Berkowitz says no-one can “argue with the maths”, Seeff says agents do not work on the basis of the potential profit that a seller stands to make.
“Whether or not there is a profit, the agent would have to put in the same amount of work and the company would employ the same amount of time, resources and investment,” he says, noting that it is out of context to look at the commission in this way.
Geffen notes further that in South Africa “the average commission obtained by most agencies is 4.8%, excluding VAT”.
“Commission of 7.5% is not the national norm,” he says, noting that on average estate agents will work with a particular buyer or seller for around four months before they see a cent of return for their work. “When a seller mandates a traditional estate agency to sell their home, they appoint them to work at their own risk, to expose the property through a wide range of media, at the agency’s expense, in order to appeal to as wide an audience as possible, with the objective of obtaining the highest price and best terms for the seller.”
Berkowitz insists that HomeBid will do as much work for sellers and buyers as traditional agencies do, and will take the vetting process even further by the offering the seller the opportunity to instruct a registered professional valuer to undertake an unbiased and independent valuation on the home itself as well as assessing the area’s growth or decay.
“The seller will then pay R1,750 directly to the registered professional valuer for their valuation report which they can use to proceed to sell their home or keep and take to another agency,” he says, noting that if HomeBid sells the home then the R1,750 valuation fee is refunded to the seller by Homebid. It also goes a step further in ensuring that financially pre-approved buyers get a copy of the valuation report as well.
Berkowitz settled on charging 1,95% due to HomeBid paying its agents a fixed monthly salary and not commission. “Our agents are mostly retired professionals, such as bank managers who are already receiving a pension. This is just extra cash in their pocket and the commission on the home sale is therefore less important. The seller and the buyer score as they have proven professionals keeping down the commission and not inflating the price of the home.”
It remains to be seen if HomeBid’s message is taken to heart by sellers. But one thing is for sure: selling will never be the same again in South Africa and the bigger players will need to demonstrate to sellers exactly why anything more than 1.95% should be validated.
* Pam Golding Properties was approached, but declined to comment