Sellers looking to maximise their profit on a sale often view their real estate agent’s commission as an ideal place to cut costs.
If you only pay 50% of the standard commission, your agent can only afford to give you 50% of the standard service. It’s true for traditional agencies, and even more so for the newer, low-cost, limited service agencies arriving on the scene, says Clarke.This is according to Tony Clarke, Managing Director of the Rawson Property Group, who says this can actually be detrimental to the success of a sale.
“Apart from a few unusual cases, South African estate agents work purely on a commission basis,” he says.
“That means they have two main ways to maximise their own income: sell fast, or sell high. As a seller, it’s obviously in your best interest for them to do the latter, but by lowering their commission, you’re lowering their incentive to do so.”
Clarke says there are significant costs involved in selling a property.
“Major real estate agencies in South Africa can spend more than 30% of their total income on marketing and advertising, and that’s excluding the time and other costs to run a successful agency,” he says.
“All of this comes out of the agency’s own pocket, and the longer a sale takes, the higher those costs become.”
Because of this, Clarke says you risk two things happening when you choose to negotiate a particularly low commission.
Firstly, the agent has to cut advertising costs, which means less exposure for your property and fewer potential buyers.
Secondly, they’ll attempt to sell quickly in order to further minimise their expenditure and risk, which means you’ll likely be encouraged to accept a lower offer than you otherwise might have.
“It’s quite simple. If you only pay 50% of the standard commission, your agent can only afford to give you 50% of the standard service. It’s true for traditional agencies, and even more so for the newer, low-cost, limited service agencies arriving on the scene,” he says.
When it comes to limited service agencies, Clarke warns sellers to be exceptionally wary.
“We have had a lot of occasions where sellers approach our Rawson agents after many unsuccessful months of trying to sell on one of these low-cost platforms,” he says.
“There have been huge developments in the real estate industry in the last decade, with compulsory examinations brought in to ensure that all legally practicing agents are highly-trained, competent professionals," says Clarke.“You really need exceptional business skills, a good understanding of the legalities involved in property transactions, and a lot of time and energy if you’re going to make a limited service sale work. If that doesn’t sound like you, do yourself and your wallet a favour and choose a traditional, full-service agency.”
Clarke says he has noticed that low-cost real estate agencies are particularly popular with people from overseas, who may be used to far lower commissions than South Africa’s typical 5% to 7.5% range.
He says, however, that South African agents provide a far more comprehensive service than their international counterparts, especially when it comes to advertising.
There are, admittedly, many South Africans who might disagree with this sentiment, but Clarke urges people not to paint modern agents with the same brush as those in the past.
“There have been huge developments in the real estate industry in the last decade, with compulsory examinations brought in to ensure that all legally practicing agents are highly-trained, competent professionals. Companies, like the Rawson Property Group, for example, also provide ongoing training to ensure agents are top notch.”
With commissions playing such a huge role in service delivery, however, you may be wondering why they remain negotiable. According to Clarke, this is partially because of the vast differences in listing prices between properties, and partially to give agents a competitive edge.
“Usually, the lower your listing price, the higher the commission percentage has to be in order for the agent to cover their costs and still make some profit,” he says.
“Top-end properties, on the other hand, will pay lower percentages, or even a negotiated fixed fee, since the cost of the sale does not increase in direct proportion to the cost of the property.”
When it comes to using commission as a bargaining chip, Clarke says agents may well accept a lower commission in return for a sole mandate.
“A slightly lower rate can still be worthwhile on a sole mandate, but be very wary of a commission that sounds too good to be true,” he says.
To get the best from your agent, Clarke recommends being as transparent as possible.
“Talk to them about exactly what they plan to do to earn the commission you’ll be paying, and explain your own financial and scheduling expectations for the sale,” he says.
“Just remember, at the end of the day, you get what you pay for, and an unrealistically low commission could cost you far more in the long run.”
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