Here’s why estate agents can’t afford to serve the affordable market
In the past two to three years a number of new estate agencies, boasting low-commission or fixed-fee offerings, have threatened to disrupt the established South African estate agency model. Traditional agencies, such as Seeff, Pam Golding Properties, Lew Geffen Sotheby’s International Realty and RE/MAX (to name a few), operate on a commission structure of anything between 5% and 7.5% of a home’s sale price, with Lew Geffen – chairman of Lew Geffen Sotheby’s International Realty – stating that on average agents negotiate 4.8% (VAT excl). This means that sellers “pay” anything from between R48,000 (R54,720 VAT incl) to R75,000 (R85,500 VAT incl) on a R1m sales price.
Low-commission estate agencies, such as Steeple (1.7% +VAT), HomeBid (1.95% +VAT), and Property Fox (1.5% VAT excl) ask for commissions of between 1.5% to 1.95% of the home’s sold price. On R1m, this works out to between R15,000 to R19,500 (with VAT included it adds up to R17,100 to R22,230). Obviously, this is a massive saving to a seller who has to pay for a range of clearance certificates, as well as new home transaction costs such as transfer and attorney fees. Fixed-fee estate agent, LeadHome, charges sellers R29,995 plus VAT (or R34,194.30) regardless of whether a home sells for R1m or R20m. At R1m, this fixed-fee option still works our cheaper than “traditional” agencies’ 5% to 7% commissions but not the low-commission operators.
Low-commission and fixed-fee agencies head to head
|Agency||Commission||Minimum amount||Special features||Sales record since inception|
|Steeple||1.7% commission||R31,920 (VAT incl)||100 homes since 2012 (2 homes per month)|
|HomeBid||1.95% commission||R19,950 (VAT incl)||150 homes since April 2015 (7.8 homes per month)|
|Property Fox||1.5% commission||R35,000 (VAT excl)||Pay R25,000 upfront (VAT excl). Not VAT registered until early 2017||31 homes since May 2016 (4.4 homes per month)|
|LeadHome||N/A||R34,194.30 (fixed fee)||Operating for more than 12 months with no sale numbers shared|
|Traditional agency||4.8% commission on average||N/A|
So where does the traditional estate agent’s 5% commission end up “costing” a seller less than the low-commission and fixed-fee players?
Anything and everything less than R349,999 which, at 5%, equals R19,949.94 (VAT incl), and means a seller will pay less than the minimum of every low-commission estate agency currently operating in the market.
To put this into context, more than 70% of the home sales market is priced below R1m, while almost half of homes sold are priced below R500,000, according to sales registered in 2015.
The problem for traditional estate agent models, though, is that even if they can sell a home priced below R349,999, asking 5% will see the agent having to split R17,499.95 (R18,374.94 when VAT is included) between their principal, franchisor (if the agency is not independent) and may see the agent only pocketing 50% to 60% of the commission (R9,187.47 to R11,024.96). The other predicament for a traditional agent is that they only work for commission and will generally receive their payment three months after the offer to purchase has been signed and the bond approved – and this is even if no hiccups are encountered. An agent operating in this price band will have to rely on quantity of sales per month to ensure they can earn a decent living. If they can’t sign mandates and move stock quickly, they will simply have to focus on higher-priced properties.
The low-commission and fixed-fee players, too, have priced themselves out of the affordable market where a seller will have to pay a minimum of R20,000 (or if they take advantage of Property Fox’s current festive deal of paying R15,000 upfront), meaning they will pay 4.2% to 5.7% of their sales price in estate agent costs alone.
While home price inflation in the sub-R500,000 market has been the star performer across all price bands this year, notching 6% year-on-year growth in Q3 2016, it’s no secret that the sub-R500,000 market is also probably the most price sensitive of them all. An owner in this price category will more than likely not have the upfront cash for Property Fox’s festive deal of R15,000 (R25,000 in normal course of business) to sell their home, just as much as they cannot afford to pay as estate agent R17,499.95 (if they can find an agent willing to work for this amount of money and being happy to only pocket 50% to 60% of it three months later).
The issue here is that this home seller market is not able to be served adequately and professionally, resorting to informal sales, private listing or using unscrupulous “agents”. Even with low-commission players in this market, the sub-R500,000 market is not able to be fairly and professionally served.
The R250,000 to R500,000 marketplace represents around 17% of annual home sales in South Africa, and should increasingly become the preserve of low-commission estate agencies as traditional business models will charge upwards of 7% (VAT incl) to make it financially viable to service this market.
For buy-to-let investors in the sub-R500,000 market, paying commission to traditional estate agencies impacts poorly on their returns on investment – even with low-commission and fixed-fee agencies. Their first prize is to sell the investment themselves.
Disruption is commonplace in many industries today as the internet cuts a swathe through traditional business models and allows lower-cost services their place in the sun. Airbnb, Uber, Amazon and many other household names are decimating traditional business models.
The traditional estate agency needs to innovate, find better and more cost-effective ways to service this market to ensure its not next on the disruption chopping block.