Real estate commission fees – what should I be paying?
03/07/2019|Written By Matt Jackson
No-one wants to feel ‘ripped off’. When you’re selling your home or investment property, you need to trust your real estate agent to have your best interests at heart. But the cost of commission fee payments can make this confusing. You want them to do a great job, but you’d also like as much money as possible to end up in your bank account.
So, how do you know how much to pay?
What is real estate commission?
In simple terms, ‘commission’ is the fee paid to a salesperson in exchange for their service in facilitating or completing a sale . Commission can be either a:
- flat fee
- percentage of the revenue, gross margin or profit generated by the sale
In the real estate world, commissions are usually 2-3% of the sale price and are paid when your property settles.
It’s important to remember that commission is only paid on a successful sale. You need to know what you will receive for your payment because it’s the quality of service that determines the success of the sale and, therefore, the money in your pocket.
How to measure a successful property sale
Following a sale, the success of your campaign can be measured in several ways:
- Marketing / advertising – were they a high standard? Were they effective?
- Open for Inspections – were they conducted on a regular basis?
- Did your agent communicate well, keeping you informed throughout the sale campaign?
- If you sold via auction, was your auctioneer competent?
- Was the achieved sale price at, below or above your expectations?
- Was the achieved sale price at, below or above what the agent had quoted you prior to winning your business?
- Did your property sell? Or did it languish on the market for months on end?
While these points are easy to consider in hindsight, they also form the basis for the conversation every seller must have with their vendor advocate must have before choosing the right agent for them.
You need to find out what work your agent will be doing in order to sell your property. And when you look at it this way, it makes it much easier to understand what you are paying for and what the commission fee is worth.
Low commission fee strategies
Like most industries, choosing a real estate agent can be a simple case of ‘you get what you pay for’. While it’s wise to be wary of paying an exorbitant amount, you also don’t want to be sucked in by those agents who promote the lowest possible commission.
Often, the only agents that offer low commission either have no valid experience in the real estate industry, or they can’t win business through their past sales results and marketing ideas. Their aim is simply to engage you as a client by quoting the lowest commission, which is generally a recipe for disaster.
Consider the recent example of Purple Bricks, a UK company that abandoned the Australian market in 2019 after only three years’ involvement. Their premise was to commission a low, fixed fee for selling your home. As a seller, a fixed fee may appeal to you because you know exactly what you are paying your agent. And a low fee means more money in your pocket, right.
Not necessarily! Some of the issues with Purple Bricks’ strategy were:
- Most of the time, the agent selling the property had very little local market experience
- The low fixed fee meant the company did not attract any well reputed, experienced agents due to the low earning potential
- The low fee structure meant that agents were more focused on selling a larger number of homes rather than worrying about what price they achieved for each individual property
All these scenarios can also be applied to those agents who rely simply on their lowest commission offer to gain your business.
Commission fees in action
Paying a lower commission does not translate into more money in your bank. Imagine you are selling your home and potential agents have told you it’s worth $1,000,000.
Agent A is quoting you 2.2% commission, Agent B is quoting you 1.7%.
At first glance, this looks like a potential saving of $5,000 commission if you sell through Agent B. But these commission rates are negotiated prior to your sale campaign. No matter how much you are hoping for, you don’t know what the final sale price will be.
So, if Agent A sells your home for $10,000 more than Agent B (because Agent A is far more experienced and a better negotiator), then you end up with almost $5,000 more by selling through Agent A, even though their commission percentage is higher.
Remember, commission is payment for a service
Real Estate is a service industry. When you buy a brand new car, although the price may differ between dealerships, the product is essentially the same. But the commission you pay a real estate agent is for the service you receive. And that can vary markedly.
So, it makes sense that you entrust the sale of such a big asset to the best agent you can find – one that can use their skills, experience and expertise to negotiate the highest price.
Too many real estate agents are selected purely by their commission fee rates; it’s really common for people to choose the agent who charges the least. But bear in mind that, if they can’t negotiate a fair commission with you, they may not be able to negotiate a successful sale on your behalf. When choosing a real estate agent, find someone who stands up for their value, is experienced and knowledgeable and is, therefore, in the best position to negotiate the best possible price for you.
A Vendor Advocates’ view on commission
As Vendor Advocates, we support incentive based commissions. When we ask for proposals from agents, we want them to be competitive with their commission and will always advise our clients if we believe the commission charged is over-the-top or too cheap.
Our belief is that if the agent achieves what he says he will, then he should be paid accordingly.
Of course, the same applies if the agent attains an underwhelming price, or if they achieve a price above expectations. For example if the agent quoted that your property was worth $500,000 – $520,000, I would advise you to structure the commission so that the agent was paid less if sold under $500,000 and more if he was to achieve above the price range.
Commission works by creating an incentive to drive the agent to work on your property to achieve a great result.