National franchise group, Only Realty, which boasts 24 offices throughout the country, has scrapped commission-based selling in favour of a fixed R50,000 all-inclusive services fee.
The group’s MD and franchisor, Grant Smee, says five years ago a product like this may have been viewed with suspicion by the public, but that with the arrival of low-commission and hybrid players into the sales market, it has paved the way for an established brand to change its sales model.
We sat down with Smee recently on HomeTimes Facebook Live to introduce and discuss the new product.
Read the full interview transcript below
Good afternoon everyone, and welcome to HomeTimes’ Live interview with Grant Smee. He is the MD and franchisor of Only Realty which is a national real estate group. Its genesis was about nine years ago, Grant? You started as Only Rentals and about the last year you’ve started going into sales too, is that correct?
That’s right. So we started nine years ago as a specialist rental agency, and in March 2016 we converted to a rental specialist but moving for the sales market.
Okay. And right now, you haven’t been in the sales market for such a long time and already you are looking to disrupt, if I can use a better word, but disrupt the sales market again in terms of a service fee?
Yes, so we essentially looked at the sales market and said: how do we differentiate ourselves, what can we do differently to what everyone else is doing? We are underpinned by rentals, we’re very strong in rentals, but the sales market is a natural move for us to go into. So we were looking at the commissions out there, and just from our point of view the [percentage-based commission] offering doesn’t make sense. So we thought how can we make it better, what can we do to make it better for the sellers and the buyers and make sense for ourselves as a specialist rental agency coming into [the sales] market? So that’s where we came up with the R50,000 professional fee as an offering no matter what the value of your property. Obviously at the R1m mark you’re sitting at the 5% [sellers’ commission] mark, so we’re offering a percentage basis for anything below R1m. We don’t want to alienate that segment of the market. But really, our core focus is on properties that are valued from R1,2m to R2,5m – that’s the space we are really focused on.
Within that market up to R2,5m you’ve also got a couple of low-commission and hybrid agencies that are probably competing for a similar market. Tell me, is this in response to that, or is this [R50,000 flat fee] in direct competition? What do you guys hope to achieve by fixing your commission upwards of R1m?
I think we are positioning ourselves not to compete against the low-commission agencies. We don’t want to offer a diluted product; we want to offer a professional service, a full professional service for a fee. So that core selling process of valuations, viewings, negotiation, offer to purchase, and finishing the process with transfer and registration. We want to offer that full service, so we’re really not competing on price, I don’t think. [On] the whole commission thing, to pay R200,000 to an agent to sell a R4m place and R100,000 to sell a R2m place, that differentiation doesn’t make sense to me. The work and the effort isn’t double, so we’re trying to address that disparity in commission-based selling, rather than focus on the low cost at say R100,000.
Okay, so what happens now? You’ve obviously changed tact. And you’ve got, how many franchisees currently are part of the Only Realty group?
We’ve got 24 franchisees.
24. So what has their reaction been to this? Because I am guessing this didn’t go down so politely? It was a bit of a negotiation surely?
Well, it actually surprised me a lot. We were prepared to state our case as the head office and a team. We had several meetings ahead of this, discussing it and thrashing out the pros and cons of our offering. But then when we approached our franchisees it was actually really, really positive across the board. For two reasons: It has never really been our core focus; we’re not taking [away] anything that they’ve been getting anyway. We are in a space where it’s a new product offering for our franchisees. They are getting intensive sales training across the board at the moment, have been for the last while. So we are coming into a space where we are not taking anything away, in fact what we are doing is we are giving them a competitive edge to go into the new market. So I think that’s what’s exciting them.
When you start talking upwards of about R2,5m, specifically when you hit about R2,5m, R50,000 compared to what you’d be getting if you were earning the 5% to 8% from a traditional estate agency specifically. Is this again another competitive advantage that you’re trying to give your franchisees when they compete for that market too? Because as you know, there are a lot of big franchise players out there that are competing in that same space.
You know our core market is the average home, average people, average area. Once you start going R2,5m-plus, R5m, R10m, maybe our offering and our core offering isn’t for that segment of the market, the really specialist exclusive market. So we’re not going in against the big players in that exclusive market. I think what we’re offering is again to the average South African, who’s selling their home and doesn’t want anything exceptional except a professional service. A professional valuation, and the processes, them being looked after and taken care of. That’s the market we’re going for.
But obviously you wouldn’t turn away business above R2,5m?
No of course [not], it would be silly to turn away business.
Just tell me about what exactly can you get for that R50,000? Because I think there’s a lot of misconception about when you start to reduce commission, or [the professional] fee, you start to dilute the service.
Yes, exactly. So from our point of view, what we’re doing is offering the full core service that an estate agent should offer. So that is going to be your valuations, your photographs, your listings for advertising, your viewings, negotiations, meeting with multiple buyers, hopefully, and agreeing to your ultimate offer to purchase and then handing over to the conveyancing attorney. So that full core service. We’re not looking to offer show days; I think show days are more of a marketing tool for agencies these days than a real way to sell a property. So our viewings will be by appointment, at the convenience of the owner. So you might say it’s a bit more of a convenience service rather than invasive in terms of the time on weekends and so on.
And this is quite unique now because this is the first national franchise group to do this (fix its fee), isn’t it?
Yes I think this is what excites us most. There are other fixed-commission agencies out there; we’re the first guys that can do it on a national basis.
Okay, so when people are looking for a more affordable service it makes perfect sense for them to give your guys a call?
Yes a more affordable option without the dilution of the service, obviously.
Grant, just coming back to the service, the whole idea behind this is very noble, and it’s idealistic. I understand why you’re doing it, but at the same time it’s also a financial game isn’t it? So you need to either decide whether you’re playing for volume, or playing for number in terms of value.
Exactly, and you know our position is – maybe it’s our rental background – but rentals is all about volume. And we are translating that volume game into the sales book. We don’t need to do one sale a month to make R200,000. I’d rather do 10 sales a month at R50,000. This again benefits buyer, seller, but obviously our business in the same way. Where we are now getting volume through the door. So yes, it’s a business decision, and it’s not idealistic or anything else, but it is sort of a three-way benefit for everybody.
Do you think that the market in South Africa is ready for something like this? Because we’ve had a couple of players coming into the market over the past few years which have actually drawn attention to the commission argument. I don’t think before even five years ago people where as openly concerned or even interested in that aspect of the business.
Definitely, those low-commission and hybrid agencies have definitely opened the door for something like this. I think five years ago something like this would have been approached with suspicion. Whereas now these guys have come in and they are definitely doing good things, but they’ve opened the door for agencies like us to say, look it makes a lot more sense for us, for our business and our clients, to be at a fixed commission.
Because at the end of the day it’s going to also come down to keeping your business afloat. So if you’ve got, and I looked at your site yesterday, and I saw you had about 81 properties valued at more than R2,5m. And if you had to sell all of those properties, assuming they are all R2,5m, at 5% commission, that’s R10m. Now if you’re doing all 81 at R50,000 fee, you’re making about R4m – less than half. Do you think that listing is one thing, but selling is a completely different aspect?
You know, listing, you can list at any value, what the seller wants to achieve in their pocket. But what we’re really looking to do is approach it from a point of view of success. We don’t want a commission to pay for the failure of selling other properties and the success has paid for that. So we’re looking at our conversion rate being much higher than the traditional agency out there charging commission. So going in at the right valuations, making sure you’re at the right levels, and then converting those. So that’s going to be our game [plan]. We’re only going to make money by converting, off having far more successful conversions than the traditional agency.
And when it comes to actually setting a listing price, that negotiation between a seller and an agent, based on comparative market analysis as well as what the seller actually wants in their pocket at the end of the day. When you start talking of a R50,000 fixed fee, does that make the negotiation easier, and therefore the listing a lot more palatable to put onto a portal because you’re getting potentially a lot more eyeballs because you’re not having to inflate, or the seller is not having to inflate what they want, because of the agent’s commission?
Yes I think you’ve mentioned something that is an issue. That a lot of sellers do inflate their prices before they even meet the agent because they know the agent is coming in 5%, 6%, 7.5%, so they’ve already inflated their price ahead, to achieve the value they want. So coming in at R50,000 does two things: It allows them to take a little bit of pressure off the price, but it also allows them to negotiate a slightly lower price with the buyers. The buyer feels like they got the deal, the seller feels like they got a good deal and obviously the agency has.
And in this time, the Gauteng market isn’t moving very fast, Cape Town is still breathing good life, but the rest of the country, by and large, is pretty flat. Properties are also not flying off the shelves, but they are also far more accessible now to the average buyer because the market is not moving as quickly as it was. So does this just again give a seller another advantage, just in terms of paying a lot less? I mean they still have to pay their clearance certificates and registration, so this gives them some extra money in their pocket to take care of the other costs involved in the property transaction.
I think despite the economic environment people still need to sell, people still want to buy, or are willing to buy. Yes, the volumes are a lot lower than in an up market, but there is still a need for people to sell and buy. And leaving some meat on the table, a bigger portion, for people to use towards transfer duties and other fees is certainly a big advantage, definitely.
You mentioned to me yesterday when we did our pre-interview, besides the fact that you are saving the seller quite a considerable amount, what would be upwards of R100,000 when you’re going beyond a certain level, the other thing that you mentioned was that this product suits itself quite perfectly to an investor. Why is that?
So an investor is always looking at a few things: His return on investment on a cash flow basis. But also, the guys who are looking at capital flips, when they are flipping properties. It builds immediately into their numbers when they are going in to buy a property. Because instead of paying 5% on the end value, only paying R50,000 fixed fee, I know that my property margins are on the higher end when I’m going in to flip. So it makes the flipping opportunity for people a lot bigger, they’re getting a bit more meat in there. But it also allows them to offer the seller a little bit more than they would have been able to because of that [fixed fee] position. So again, it’s a three-way win in terms of capital flips. In terms of a residential buy-to-let landlord, sometimes they might not be willing to sell because they are not willing to incur the big cost and this (fixed R50,000 fee) might make it more attractive for them to extract capital and reinvest elsewhere, having a much lower commission amount that they need to pay.
I guess at the end of the day it’s going to come down to the rands and cents isn’t it? Because what you can save in someone’s pocket is what they are going to go for at the end of the day. So is this available only to your sole, or exclusive mandates? Or is this available to people in the open mandates environment too?
I think initially what we’re going to be doing is going into the market on an open mandate basis. We shouldn’t be scared to compete, we are confident in the service we’re offering, we are confident in the product structure, and we shouldn’t be afraid that other agencies may sell the property while we’re working on it. Where we are going to differentiate ourselves largely outside of the fixed commission is being very specific on the valuations. Making sure that our valuations are 100% accurate. You know, the over-inflation of a valuation to get a mandate is a bit counterintuitive for us. So our guys are trained on the valuations, on trying to assure that we are getting as close to realistic market value as possible to move that property. Obviously we are basing it on volume. Getting the volume of stock is important, but also the success of those listings is important for us. Our success rate needs to be higher to make this a really viable product.
When you talk about valuations, I mean I would imagine that every agent out there would say the same thing. They do something exactly the same. They check the market, they use their own intuitive knowledge of what happens on one side of the street versus on the other side, because that’s how property works. So why would you have a competitive advantage in terms of the valuation over your immediate competitors?
So again, our immediate competitors, talking about the commission-based guys, they have to build in a margin in order to account for the commission. Whereas our owners initially can and we can when we do that valuation, move a bit of value because our commissions are a lot lower and because that affects the market value. The other thing is, what people say and what people do is also different. And I think that’s an important acknowledgement in any service industry – what you say and what you do can sometimes be different. People need to understand what is the motivation behind why you’re giving X,Y, Z information. So you know, at a R50,000 fixed fee we need to be successful, we need to be able to sell a property, we need to have a much higher success rate than what’s out there in the market at the moment. So it is in our best interest to make sure that our valuations are as accurate to market as possible.
And when would this R50,000 change hands? Would this be prior to taking on the listing or would this be on successful sale only?
Successful sale only.
So it’s a complete risk for you.
Yip, so we take on all the risk at a fixed commission.
One last question. Your existing mandates that you’ve got, what happens to these mandates now? Are you going to let them run their course or are you going to go back and I guess give your franchisees the opportunity to say this is on the table now, would you like to take this opportunity? How would that work?
G: So we leave a lot in the hands of our franchisees; we work closely with them. We do advise them, but we are going to leave those mandates in their hands for them to make those decisions. You know, by and large, I would imagine that they would, because there’s been such a largely positive response to the R50,000 fixed commission, a lot of them will convert those over to R50,000 fixed commission. But again, we will work closely with our franchisees on the existing stock to make sure that the client is taken care of in the best way possible.