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Will low-commission agencies live to see the housing market strengthen?

dark horse against the establishment resize

Based on the FNB Property Barometer it is believed that 2017 will be the third consecutive year of slowing average annual house price growth, and the second consecutive year of house price decline in consumer inflation-adjusted real terms.

“For the period January to July 2017, the average year-on-year growth rate in the FNB House Price Index was 2.8%,” says John Loos, property sector strategist at FNB. “This is significantly slower than the 5% recorded for 2016, and well down on the post-2008/9 recession high of 7.2%. In real terms (CPI inflation-adjusted), the average year-on-year rate of decline was -2.9% for the period January to June 2016, a weakening from the -1.2% average rate of decline for 2016 as a whole.”

Price growth correction is necessary considering the fact that South Africa is at an almost zero growth economy. In fact, John Loos believes that house prices will have to decline significantly to reflect the longer term economic weakness.

“One possible stimulus is the onset of SA Reserve Bank interest rate cutting, a 25 basis point repo rate cut having taken place in July. We don’t believe that one lone cut is sufficient to move the housing market significantly,” says Loos. “But should this be the start of a series of cuts, it is conceivable that house price growth in 2018 could be mildly stronger than the 2017 year-to-date average year-on-year price growth rate of 2.8%.”

When the going gets tough…

Tough guy

Established national agency group heads such as Samuel Seeff (chairman of the Seeff Property Group) and Berry Everitt (CEO of the Chas Everitt International property group) believe that the scenario briefly described here has set the stage for a wave of entrepreneurs and property or tech professionals to enter the industry and offer desperate South Africans, wanting to save every penny they can, gimmicks and cost-saving payment structures.

“Often styled as disruptors, real estate operators ranging from low commission to fixed fee or a combination are all aimed at enabling a DIY or For Sale By Owner solution (FSBO) of sorts,” explains Seeff. “Sellers must be wary of these gimmicks though. There might be the odd sale, but they are rare and insignificant in the market.”

Everitt agrees with Seeff, saying that these operators, offering to sell homes for a low, fixed price or a discounted commission using technology instead of personal agent-to-buyer/seller connection, are not disruptors and are actually just peddling old, unsuccessful concepts dressed up in new digital clothes.


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“The only thing that is really new this time around is that these agencies have gone digital and are using technology to target their potential clients, to create the impression that they can provide national and international exposure for their clients’ properties and, unfortunately, to keep their clients at arm’s length when things don’t work out,” adds Everitt. “What they are not doing is creating real industry disruption in the sense that the taxi, hotel, travel, banking and other industries have been disrupted by the use of technology in recent years. To disrupt an industry, one must use technology to do things completely differently, or to significantly improve on what has gone before – to make the same services more accessible or cheaper, for example, or to deliver faster or better results.”

“No arguments, we’re not disruptors, we’re only better”

Better than the crowd

Grant Smee, MD and franchisor of Only Realty, which recently adapted a fixed professional fee of R50,000 on the sale of all homes priced R1m and higher, agrees that they are not industry disruptors.

Smee, who admits to struggling to justify the very nature of percentage-based commission – “Why should someone with a R3m home pay more just because their home is worth more? The same amount of work goes into that sale” – believes that a fixed professional fee for a successful sale makes more sense for both the estate agent and the consumer.

“Isn’t it time for an estate agent, soon to be called a property practitioner, to be paid a professional fee for the service provided?” argues Smee, adding that the fixed-fee or low-commission agencies are simply more efficient businesses than those currently in existence.


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“We are in the Information Age; a time where businesses can be structured around technology to remove inefficiencies of the past, making businesses more agile and efficient, enabling them to take advantage of economies of scale by dealing with higher volumes of transactions, and offer a more cost-effective but equivalent product to the market,” he adds. “Agents can no longer justify commissions of 5% to 8% on homes that are valued correctly for the current market. The game for estate agents should be a greater success rate rather than successes paying for failures.”

Neville Berkowitz, industry veteran of 44 years and founder of HomeBid, a low-commission agency, says that he is not concerned about the claims and comments from traditional agencies, and would rather advise them to find ways to adapt to the changing times, or risk losing their “lunch money”. “I have never been as certain of my success as I am about HomeBid. Our only real competitor is the consumer’s unawareness of our offering.”

According to Berkowitz the traditional commission means that agent and agency heads are grossly overpaid – at the cost of ordinary South Africans buying and selling their homes using these services. “At the moment we are selling around 50 homes a month while we are in first gear. That translates into a saving of R65,000 per R1m home sold for 50 South Africans every month. Definitely not chump change!”

The network and marketing clout

Large network

Seeff argues, however, that unless an agent has a competitive level of access to buyers, the seller’s time is being wasted. “It does not help a seller to think they can save on commission when their property is not going to catch the attention of potential buyers. Buyers go where they can find access to a whole host of listings,” says Seeff.

Everitt sits at the same fire, saying that discount or flat-fee agencies are not able to provide a better service, or to get a better result for the seller, no matter how much technology they have. He justifies the traditional commission structure based on what it takes to sell a home and achieve good results for the seller.

“It takes training, experience and access to excellent advertising and marketing resources for an agent to achieve a great result, which is for the property to be sold in the shortest possible time at the best possible price,” explains Everitt. “And the truth is that low-commission and flat-fee companies are just not able to put the same amount of money behind their agents as the best traditional agencies do, or spend the same amount on marketing. Indeed, many of the new online agencies don’t even have agents, but only offer to coach home sellers through the process as they do everything themselves.”

Everitt shares the limited buyers-gripe, saying that he questions these operators’ ability to access financially capable buyers. “Yes they may be using technology to lower their advertising costs, but so are the leading traditional agencies. The only difference is that we can spend more money on social media marketing campaigns and have better access to the major SA property portals and international online platforms where most buyers currently start their home searches.”

Smee, of Only Realty, says that trying to justify percentage-based commission by touting marketing costs and better access to buyers is invalid in his mind. According to Smee, the real reason for the percentage-based commission model is that an agent works on risk; he argues that this model means that a consumer whose home is sold by an agent essentially pays a portion for the work the agent did on every property the agent failed to sell. Smee feels that there is another commonly-used favourite cop-out agents use to minimise their risk: “Working on risk is the very reason agents will try and convince sellers that a sole mandate is better than an open mandate – the more control, the lower the risk. The reality is an open mandate with the right agency/agencies provides a seller with the certainty and exposure that the property will be sold and their best interests looked after.”

Tools or tricks?

tricks of the trade

Just as traditional agents warn sellers against the so-called gimmicks of low-cost or fixed-fee agencies, Smee says that there are some tools of the trade to lure sellers into sole mandates that are no longer as valid. One such trick is the buyers’ lists used by traditional agents to criticise the new wave of operators.

“A sole mandate shouldn’t secure access to that list,” explains Smee. “If the agent has a buyer suitable for your property the buyer will come, regardless of the mandate type.”

According to Smee buyers come via property portals anyway these days, essentially diminishing the validity and importance of large buyers’ lists. More to the point, use of portals to market homes has essentially decreased marketing costs that, in Smee’s mind, can be directly linked to the sale of a home.

“Traditional high-cost expenses such as newspapers, magazine and other print media are no longer selling homes; it is rather a marketing tool for the agents, their services and the agency.”


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So essentially, what Smee is saying is that your commission is probably footing the agency’s marketing bill, and that the home will sell as long as it is on the portals, which all commentators here have access to.

Crispin Inglis, CEO of PropertyFox, newest of the low-commission agencies and which charges 1.5% or a minimum of R35,000 to sell your home, believes that claims of gimmicks and tools are irrelevant, and what it comes down to is what the consumer (buyers and sellers) want and need. Inglis says that in the time since ProperyFox launched in April 2016, the biggest lesson they’ve learned is that South African sellers and buyers are itching for an alternative: “Selling a home is very expensive, even before you start paying heavy commissions to traditional agents.”

Inglis argues that what PropertyFox has done successfully is to create a concept or model that offers South African consumers the best of both worlds. Expert guidance and advice, a quick sale through marketing and exposure all without the heavy price tag of consistent agent involvement. A model, that he believes is working based on the growth achieved in little more than a year.

“We are only into our second year of business and we have already saved South Africans more than R10m in transactional fees. Not only in savings, but PropertyFox is selling homes faster than ever before,” he explains. “PropertyFox marries two important concepts lacking in the current model – quicker sales and lower prices. In our view, this model allows for a healthy transaction time.”

What do the numbers say?

Looking at the numbers

Seeff quotes a recent study that American research and analysis company, Collateral Analytics undertook in conjunction with San Diego University of Real Estate Professor Norman Miller, in his argument against low-cost or fixed-fee agencies.

“The study provides empirical evidence that FSBO (For Sale By Owner) and low-commission models aimed at saving the seller money, actually costs the seller at the end of the day,” he says.

The study looked at more than 200,000 FSBO sales and 1m multi-listing service (MLS) sales across America in 2016 and 2017. MLS is a service that enables agents representing sellers to provide information on their properties to agents representing buyers. In a South African context this could be likened to using agents with a buyers’ lists, strengthening Seeff’s point that this ingredient remains all-important in a property transaction.

According to Seeff the study found that FSBO listings sold for about 5.5% less than comparable sales through MLS. “FSBO listings also tended to sell for less than their automated valuations while MLS listings sold for more, enough to offset the commission,” adds Seeff.

Seeff’s biggest argument is that buyers will go to agencies where there are more listings as they need to browse to find the perfect property.

“HomeBid for example launched two years ago with a 2% commission offering, lowering it since to 1.95% when PropertyFox entered late last year with a 1.5% model. Both only have around 350 property listings compared to mid-sized agencies of around 6,000 to 12,000 listings, and top brands such as Seeff and Pam Golding at around 25,000 to 30,000, and a significant national footprint, reach and stature that these small operators simply cannot match.”

A plausible argument is that this is South Africa though, where we don’t have separate buyers’ agents as such and, as Smee already points out, most buyers are coming from the portals. In fact, says Cavan Sheahan, general manager at HomeBid, it could even be argued that South African buyers are voting with their fingers on the country’s top portals.

“Low-commission estate agencies like HomeBid are attracting 36.4% more property views on Property24 than the traditional estate agencies,” explains Sheahan. “According to Property24 the average estate agency office is attracting 48,500 views of homes on Property24 per month whereas HomeBid is attracting 66,100 views per month. Considering we only have some 350 homes for sale and the average traditional estate agency office has thousands of homes for sale, 36.4% more buyers are being driven to the better value of homes where the lower commissions enable more market-related prices.”

Smee argues that a property priced right for the current market will sell, independent of the type of mandate on the property or use of “trade tools” such as buyers’ lists that traditional agents are claiming as advantages over newer offerings in the industry. What’s more, says Smee, is that sellers using the offering of Only Realty will benefit from the full “agent experience” but at a much lower, fixed professional fee.

Inglis, CEO of PropertyFox, says that it really does come down to the numbers for most South Africans. “Our unique offering, the marriage of two important concepts (quicker sales and lower prices) means that we are saving South Africans up to 75% in transactional fees while still providing sellers instant access to over 15m potential buyers and all the support and guidance a seller might need,” he says. “To put it simply, PropertyFox hopes to never have 25,000 listings on its books as it would mean we aren’t selling homes fast enough!”

Sheahan, of HomeBid, adds that consumers must keep in mind the time it takes for capital growth of your property to cover the initial transfer cost and agent’s commission when you need to sell. “With house price growth currently running at only 2.8% per annum, according to FNB, it will take an average homeowner of a R1m home 4 years and 7 months to simply recover their initial home ownership costs of transfer fees and the average 7.5% estate agents commission typically charged when they sell their home,” he explains. This is where the rand and cents start becoming really important. Read more

It’s still a business, and it still needs profit

business person in the city

Eric Kevin Nefdt, real estate broker at Letsmoove Real Estate, says that the high commissions of 7.5% have become a thing of the past, even for most big-player nationals due to recent economic times.

Nefdt and his colleagues, who gave up the rights to operate a big, well-respected international franchise in the east of Pretoria, recently started independent agency Letsmoove. He believes that low-commission or fixed-fee models are just not feasible.

Letsmoove has differentiated itself in the market with its unique offering of virtual 3D showcases or tours using a Matterport camera for every home they list – an expensive service offering that arguably makes them one of the true market disruptors operating today; at least in terms of adaption to available technology.


Learn more about what Letsmoove is offering 


The team reveals that when they were in the conceptualisation stages of their business plan and discussing fee structures and models it became evident that fixed- or low-commission fees were just not feasible and would impact negatively on the service delivery to their clients.

“The marketing offering of low-commission or fixed-fee agencies simply does not match their counterparts asking a higher, percentage-based commission,” adds Nefdt. “I would even speculate that using an agency charging the lowest commission will leave a seller with an agency lacking resources and top-performing agents. My view is that the first prize is using an agent with the knowledge who is equipped to negotiate a fair price for both the buyer and the seller.”

Experts agree that we’ll see more interest rate cuts before the end of 2017 and into 2018, which, as predicted by John Loos, should be a stimulant for the housing market. We’ve heard both sides of this compelling argument, and regardless of the camp you find yourself in, the fact remains that time will tell. Traditional agencies have questioned the sustainability of low-commission and fixed-fee operators’ business models, and if interest rates do drop significantly enough to breathe new life into the real estate market and sway less-desperate sellers to use the bigger national brands over the “disruptors”, the long-established players have every right to their “we told you so” bragging rights. If, however, the new kids on the block are still standing when the market turns, we expect traditional agency principals to eat their hats or find alternative ways to earn their “lunch money”.

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ungerermariette@gmail.com

Mariette Steynberg is a qualified economist with a post-graduate diploma in financial planning. She has enjoyed working on holistic financial plans for clients in various stages of life, as well as a development economist assessing the socioeconomic impacts of new developments. When she is not working, Mariette enjoys parenting her quirky, delightful toddler girl. Cloth diapering, Eskimo kisses and the importance of reading to your child are all causes close to her heart. Mariette is passionate about financial education and hopes to use the experience she has gained to share knowledge with HomeTimes’ readership. Her goal is to provide information that is implementable by everyone.

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