How real estate commissions work, and how the property market affects it.
In previous decades, when the property market was booming, people became estate agents because they thought it was an easy way to earn money by selling property as a pastime.
This negatively impacted on the image of the real estate industry as service levels were low and homeowners saw an agent as someone who made a lot of money for minimal work, and because these types of agents were truly only interested in quick income.
However, once the recession hit, sales dropped and the property market became more difficult, most of the fly-by-night agents were filtered out leaving behind experienced and dedicated individuals who took up real estate brokerage as a career and had to work very hard in order to make a living out of selling property.
The real estate industry has come a long way from the local housewife selling homes in her spare time, to now being a professional career choice for many and stringent qualifications required ensure that a high standard is upheld.
The public still bears the scars of the previous generation of estate agents with the most often used statement being 'Agents earn so much money for doing nothing'. Thus we would like to shed some light on the earnings of an agent by helping you understand agents' commission structure and what and why you are paying, and to provide a fuller picture to this part of the property process.
Why are there estate agent commissions?
Being an estate agent is an occupation much like any other, you earn an income from working. By having completed the necessary studies and portfolio of evidence to gain their NQF4 qualification, estate agents are thereafter truly qualified professionals in their career field. The only difference is that most agents do not earn a salary and their earnings are commission based per sale they conclude, which now constitutes their livelihood.
When is an agent eligible to ask for commission?
Both the agent and the agency they are employed by must have a valid Fidelity Fund Certificate in order to be eligible for commission. This means that the agent is qualified to operate in the real estate industry and has the necessary insurance and security as a safeguard, which also serves as protection for their clients.
When is a commission effected?
An agent's commission comes into effect when they successfully match a buyer and a seller, i.e. when a sale is successful in terms of a written contract being signed and accepted. Therefore you only pay commission if they were successful at completing the sale which means ensuring that the finances are arranged and the transaction is registered at one of the 8 deeds offices across the country.
In some countries, agencies work on an hourly rate and not a percentage of commission, which can sound tempting, but in reality it can be a very costly exercise as you pay the hourly rate whether or not the agent manages to sell your home. Our system is much more secure as you are guaranteed results for the money you pay.
When is the commission paid?
The commission is only paid to the agent once ownership of the property has been officially transferred to the buyer. The transferring attorneys will handle this matter and after registration, they will pay the agent and at the same time, any monies left-over, will be transferred to the seller.
Who pays the commission?
Payment of the commission comes from the party which gave the agent the mandate to find or sell the home. In most cases it will be a seller who appoints an agent to sell their home. On very rare occasions, a buyer who is looking for a new home or investment, could instruct an agent to find them a specific home and then they are legally obliged to remunerate the estate agent. This arrangement is not cast in stone though, and the buyer and seller can come to their own contractual agreement as to who pays the commission.
Is there a quality control in terms of service delivery?
There is really only one way to check the quality of an agent's service – exclusive mandates. An exclusive mandate is concluded when the seller authorises one agency the privilege to market and sell their home. The security in this selling process is the 'mandate' part. The agent is legally mandated on paper to sell your home according to a pre-agreed upon set of deliverables to which they sign a commitment.
Should the agent not keep to their conditions as stipulated in the mandate, you have the right to cancel the agreement and either market the property yourself, or find an agent who is properly committed. An agent who works on open mandates is not in control of who is doing what, and you could end up with agents who are not committed at all due to the fact that one of the other agents might sell the property without their involvement and then there will be no commission payable with this sale.
Where do commission disputes come in?
There are certain dangers in working with more than one agent on a property and in the case of agents’ commissions, this risk is even more relevant. The rule of thumb is that the commission is earned by the agent whose efforts were the “effective cause” of the sale. As you can imagine, this can become a very problematic situation because two or more agents can claim that they introduced the buyer to a property and the case can end up in court or going to arbitration and being dragged out for months.
The other side of negotiating commissions
Estate agents have been encouraged over the years to rather negotiate on such disputed commissions and no-one disagrees the reasons for that. There is however another side to the argument that is not heard often enough.
Any agent, who at the start of the listing is willing to cut their commission, must be treated with caution. A professional agent knows how much work is involved and that they will do their utmost to market your home relentlessly and in the best possible manner until your optimal price is reached, and will also be working for 100% (if not more) of their commission percentage. Saving money on commission is very often a fallacy as a compromised commission often leads to a compromised commitment which will most likely result in a compromised price for your home.
One also has to keep in mind that again, this fee is an agent's livelihood. Similar to the fee you will pay to an attorney for services rendered. Imagine at the end of every month, having to negotiate your salary with your employer depending on how much work he thought you did the past month, and also what he thought you were worth. If an agent sells your property in 2 days instead of 2 months, should they be penalised for working smarter, harder and faster? Is the aim not to sell your property in the fastest possible time for the best possible price, and if an agent does exactly that, why are they not entitled to their payment for the promised services rendered?
Another argument which often arises is where a seller receives a lower offer, and thus feels they have to cut the agents commission. Remember that if the property sells at a lower price, the commission is automatically also lower. Thus both parties are negatively impacted, which is why an agent will always attempt to get you the best possible offer on your property.
What constitutes an agent's commission?
Qualification. Estate agents are qualified individuals who have either done an accredited course or have spent a full internship year to learn the trade. They bring skills and expertise into this industry that aren't just taught in the day-to-day business environment. Mandate negotiations, understanding of property law and contracts, and the qualification of potential buyers are just some of the many elements that form part of the package you're paying for. Above and beyond their qualifications, agents bring with them their experience in the real estate industry; knowledge of local, national and international market trends and an objective perspective which make their assistance in finding the right buyer or the perfect home almost invaluable.
Connectivity. Consider what you'd pay a corporation for their database of clients. 'Information is King' and estate agencies with established local and international networks and client databases, are goldmines in terms of offering you indirect access to one of their core business elements. Paying an agent a percentage commission is a small price for tapping into this prized source.
Marketing. Agents do a lot of running around to get your home looking right for the right people and each activity takes up time, effort and money – all commodities worth paying for. Here is a list of some of the many activities: photography, creation and printing of brochures, profiling at exhibitions, organisation and management of show days, buying and putting up for sale and on-show boards, screening of and communication with prospective buyers, driving to and from site, advertising in property magazines and newspapers, regular communication etc. Remember that even before you were looking to sell or buy, the agent was busy, day in and day out, canvassing your area with marketing material and door-to-door visits, essentially building up a relationship and information base with which to give you optimum service.
Support structures. When it comes to commission you may also want to think carefully about which estate agency you choose to work with. Your commission percentage does not only go towards the agent, but also towards the infrastructure supporting them. Look at elements like the quality of their marketing material, the sophistication of their brand, their local and global connectivity and their training facilities to see what you're paying for in an agent. Riaan van Deventer, Head of Real Estate of Engel & Völkers Southern Africa, one of the country's leading agencies, had this to add “I believe that an excellent infrastructure and a top quality agent go hand in hand. Worldwide connectivity and first class marketing tools mean little if your agent is not sufficiently qualified to put them to use, and similarly a top agent who is ready to offer the market red carpet treatment but who isn't given the tools or support is a sad loss to the industry.”
At the end of the day, if you're serious about selling your home, the best advice is to get someone who is just as serious about it as you are. There are agencies out there who adhere to global real estate standards and whose agents are true property sales advisors, worth every cent of their commission. The next time you decide to buy or sell, you should perhaps select the estate agent who will commit 100% of their effort to get the best price and therefore their commission percentage, rather than looking for someone who is willing to do the job for the least reward.
“Engel & Völkers guarantees excellent service at all times. We have an in-house training academy where all our sales advisors are trained on international standards to ensure they have the knowledge and experience to deal with even the most difficult of situations. Adding to this, is our in-house finance department who assists with obtaining bonds, financial advice and hand-holding every step of the way. Our sales advisor's have an entire administrative team backing them ensuring they can be in the field, always marketing and canvassing for new buyers and new stock to ensure that you will find your dream home, or sell your home at the right price. We invite all clients to give us a try and to experience our red carpet treatment” Craig Hutchison, CEO of Engel & Völkers Southern Africa concluded.