Having spent over a year writing blogs via the realestate.co.nz website and having clocked up 79 posts with unique visits now heading firmly toward 10,000, my stream of fresh ideas for posts that are relevant, insightful and original has waned to a trickle. In an effort to find topical subjects, I turned to the analytics provided by the blogging platform to find the keywords or topics that readers have used most in their search for information. The subject of real estate commissions came up over and over again. And why shouldn’t it?! The industry has been strangely silent on the subject!
Taboo Topic
For some reason there seems to be an unwritten rule within the real estate industry that you don’t talk about commissions in a public sphere, so having decided to write a little of my learnings from my ten years at the real estate coal face, I approach the subject tentatively. Please, before I begin, let me say that these are my own thoughts and opinions, they don’t necessarily reflect the thoughts and view of other players in the industry or even of the colleagues in my office.
Let me begin with the basics
There is a distinction between Real Estate agents and salespeople (now called licensees under the new Act introduced in Sept 2009 ). Most people who market real estate in New Zealand are NOT agents. An agent is someone who holds a qualification that enables them to carry out agency work on their own behalf. A salesperson (licensee) is someone who holds a qualification that allows them to carry out real estate agency work for and on behalf of an agent. Agents start on their own and if successful, hire additional salespeople to work for them. In the majority of cases, the real estate person you come into contact with buying or selling a house is a salesperson.
When you enter into an agency agreement, you are contracting yourself to the Agent NOT the salesperson. The commission you pay when your property unconditionally sells, goes to the agent. The agent then pays the salesperson a percentage of the commission based on the individual employment contract the salesperson has with the agent and the part they played in the selling process of your home. Most salespeople work on a commission only basis, with no base salary or wage. NO sales, NO pay!
When an owner signs up their house for sale with an agency, the agency calls this house for sale a listing. When a salesperson lists a house for sale with the agency they work for, they become known as the Listing agent for this house. When a salesperson sells a house for sale from the stable of listings on the agency books, they are classified as the Selling agent in this instance.
Commission Splits
In very broad terms, the full commission amount that is paid by a seller can be separated into four distinct pieces.
Agency share + Lister’s share + Seller’s share + Government’s share (GST)
The percentage that each of the parties get from a selling fee can differ from agency to agency and even from salesperson to salesperson within the same company! If you were to make a general call, an old school style of agency may operate on a 35%+27.5%+25%+12.5% split or similar.
Agency Share – In most realestate agencies in New Zealand, the agent will provide a workspace for the salespeople, pay part or all of the office overheads including reception and admin staff, stationary, office landlines, internet connection etc. They will also often contribute to the branding part of any advertising that is carried out by salespeople. Some agents also provide a base level of advertising including print media, signage, and website exposure that can be shared out between salespeople for promoting office listings. This is all paid for from the agency slice of the commission.
User Pays
There has been a move within the industry especially over the last ten years towards user pays. Affectively what this means is that the agent is prepared to spend less of their share on the items mentioned above, and expects the salespeople to take the costs on themselves or pass them onto the seller (vendor). The slide towards salespeople shouldering the cost is usually balanced by the agent taking a smaller share of the commission and giving a greater share to the salespeople. The Remax system is an example at the extreme end of the scale. In this system, the agency takes a very small portion of the commission but charges all the overheads including the advertising bill and office space, to the salespeople they employ. Understandably, this became known as the rent-a-desk system. Salespeople employed under this system pay a monthly fee for using the space in the local office. There are variations on this theme and again, it can vary from salesperson to salesperson within the same office. Eg Salesperson A works from home and only uses the local office for meeting clients and signing contracts and thus, pays a minimal monthly fee to the agent. Salesperson B has a dedicated work space at the local office and uses the office internet and landline, and therefore, pays more to the agent for that privilege.
Lister’s Share – Most real estate companies try to encourage their salespeople to list houses by offering a higher share of the commission. The listing agent will spend much time behind the scenes coordinating the marketing, script writing, sign erecting, photo taking, and communicating with the seller and this higher share of the commission reflects this extra energy and time spent.
Sellers Share – If you buy a house, the salesperson who introduced you to the house will claim a portion of the commission. If the listing agent also sells the house personally (as opposed to any other salesperson working for the same agency), they qualify for two slices of the commission pie being both the lister and the seller.
Govt Share – With increases in GST being proposed, you will be paying more to sell your house because the government wants a bigger slice.
Why mention all of this?
It can be helpful to have an understanding of how the process within the agency works when you meet a salesperson and start talking commission. You are thinking about the full sum you are going to have to pay to get your home sold. The salesperson on the other hand, is thinking about the percentage that he or she will personally get from the sale. As you can now comprehend, this slice can be much smaller than the full amount that you pay and can vary dramatically from salesperson to salesperson and agency to agency.
How is the commission calculated?
The majority of realestate agencies in New Zealand charge commission as a percentage of the gross selling price of the home in question. This commission sometimes also has a nominal dollar amount added to set a base level of commission payment. GST is then added. A commission charge on a listing form from an agency may look something like this….”The commission fee payable is as follows, first a basic fee of $500 plus 4% of the sale price plus Goods and Services tax (GST).”
Some companies use a tiered system to calculate commission eg 4% of the sale price up to $400,000 then 2.5% on anything above that.
A flat fee?
The last five to ten years has also given rise to flat fee companies who charge one single all inclusive amount. Many of these companies are known as discount agencies. Often in an effort to present budget marketing packages to the marketplace, they cut corners on other parts of their business. This type of agency doesn’t appear to have much longevity. There have been plenty of start ups that have crashed and burned because they lacked the understanding that successful property marketing isn’t simply about profits and expenses. It is about people. Especially the people who are employed in agency sales teams. Nothing beats a solid history of successful selling, local knowledge and experience, a friendly, positively motivated, vibrant sales team that has some personality, and the networking that naturally takes place over many years when an agency is active in their local market.
Fixed fee structures haven’t been as popular as a way of calculating commission for a couple of reasons. There is no monetary incentive for a salesperson to get a higher price for the home sellers they represent. And maybe this is unpopular because a percentage sounds a lot smaller than a dollar value that can be in the tens of thousands 
A change in the playing field
Regardless of how the commission is calculated, the recent ushering in of the Real Estate Agents Act 2008 has changed the playing field for all agencies in operation in NZ.
By law, licensees are now required to give you a) an accurate indication of the likely selling price of your house and b) an estimate of the amount of commission you will pay in actual dollar terms based on this selling price. The new law has been drafted in an effort to make professionals working in the real estate industry more accountable and make the processes more transparent. No longer will real estate salespeople be able to hide their commission charges behind complicated percentage figure calculations. Though many salespeople in the real estate industry see parts of the new law as potentially problematic, the fact remains that we all have to work within this new law until it is again reviewed. Because salespeople now have to talk in dollar value terms when discussing commission, it will be much easier for sellers to compare agency offerings and there will be more of a focus on commission in terms of value for dollars spent.
In general, I personally think this move toward greater transparency is a great step forward.
Are salespeople valuers?
The part of that process that I struggle with is that there is now an obligation on salespeople to effectively be property valuers with little or no training given. To quote from the new Code of Practice…
9.5 An appraisal of land or a business must be provided in writing to
a client by a licensee; must realistically reflect current market conditions;
and must be supported by comparable information on sales of similar
land in similar locations or businesses
My issue with this piece of the law has to do with being legally obliged to take an educated guess at the likely selling price of a house. This is all well and good when the property in question is fairly generic in an area with lots of similar homes and plenty of sales stats to use. But appraising a property that is unique from its neighbours, has few comparable sales in the area, or has structural defects that may affect its value (eg leaky building syndrome) becomes very difficult. This piece of legislation is untested so far, as is most of the new Act, and the real estate industry is watching and waiting with baited breath as to how the newly appointed Authority will rule when complaints are made and cases are tried in Court. I’m not alone with this view, check out Steve Koerber’s blog on the subject. Now back to the topic at hand….
What does the commission include?
To be able to get an accurate picture of what it is going to cost you to sell your home, and to be able to accurately compare competing agency offers, you need to get a handle on what the salesperson and/or agency is prepared to provide as part of the commission. Is there a base level of print media advertising provided or are you as the seller expected to foot the total bill?
Vendor contributions (or vendor paid advertising) are separate from the commission and go towards advertising costs. With agencies moving towards providing less base level advertising, either the salesperson has to pay for the advertising or they have to get the owner to pay. There are a decent number of educator/trainer/motivators moving around NZ on the speaking circuit making money from salespeople by teaching them ways to get a higher commission percentage and greater vendor contribution from the homeowners they have contact with.
As a seller, are vendor contributions compulsory? No, they aren’t compulsory but you may see it as valuable in assisting the sale of your property to purchase advertising upgrades or add ons. If you had the chance of getting another $10,000 in selling price for the investment of $500, it is good value right? It pays to remember that the salesperson is getting a far smaller amount on the successful sale of your house than you are getting. The salesperson will think twice about spending the same $500 on advertising for your property because it represents a huge chunk of their potential commission. If you are going to spend your own money up front on advertising, do your homework. Not all advertising is equal. In my view, $500 bucks goes much further when put into web upgrades than invested into print media. The writing is on the wall for print media for property searching.
Under the new Act, agents are obliged to obtain best value for you in terms of any advertising purchased on your behalf (rule 9.17). Could this be interpreted to mean that they should also guide you towards the best advertising media? They should also disclose any kickbacks or incentives that they are offered to sign you up to advertising.
Will you get less service by paying less commission?
Some agencies prioritize higher commission paying properties in terms of free upgrades to advertising etc if it becomes available, but in general terms, I don’t believe that you will receive less service because the commission has been discounted. In most situations, the salesperson you have employed will work just as hard selling your place as selling any other listing they have. I want to say so much more here but am aware that I am still working actively in the industry and don’t want to raise the ire of my colleagues and peers. Suffice to say that it is my opinion that even if you are receiving a good deal on the commission, a good agent will still market and sell your home to the best of their ability. Good agents have pride in their work, and it is not all about the money. You may smirk at this comment but it’s true. The best salespeople enjoy their work, have a people focus, and fulfill their obligations with energy, positivity, and enthusiasm. Though they are competitive, they are not necessarily driven by the profit motive. Being the top seller or top lister in their company can be as much of a motivation for these salespeople as anything else. Money, fame or power – the three most powerful motivators right?
As an extra comment on this subject, it is my view that if a salesperson suggests that you will get anything but the best from them because of a commission cut, MOVE TO THE NEXT AGENCY!
I do feel the need to balance what I have just said though. Some salespeople are worth the extra commission they charge. I emphasize SOME. It can be hard to know which salespeople are worth their weight in commission, but how to choose an agent is a whole different blog post!
Time for the big question!!
Is there an industry standard level of commission?
Yes and No.
On the surface, a level of commission around the 4% mark plus gst could be considered to be a standard in New Zealand. Certainly, naive media commentators have picked up on this magical 4% ish mark as the expectation of what real estate companies charge for their services.
HOWEVER! And it is a BIG however… The real estate industry is a very free market in the basic sense of the words, meaning that it is easy to enter and exit the industry, there is little government intervention or regulation in terms of commission setting etc, and the laws of supply and demand reign supreme. Pundits who rail against what they see as horrendously high real estate commissions forget that it is one of modern humanity’s oldest professions. If there was no longer a need, the industry would dry up. Technology is changing the way buyers and sellers and agents communicate offerings to each other, but there still appears to be a place for the good ole real estate professional standing at the door to the open home.
There are huge variances in commission charges from market niche to market niche within the real estate industry in New Zealand. Geography both physical and social has an impact on real estate demand, prices, and commissions. What you would expect to pay in commission will differ in a small holiday town like Pauanui compared with the commission you would pay in an outer suburb of Christchurch. Smaller provincial areas often have less agency competition, and less competition means higher commissions.
Even within towns, standard commission rates can differ. An example of this could be the student accommodation investment market in central Wellington vs the suburban homeowner market in Khandallah, a prestige suburb of Wellington. Within the industry it is known that passive investments are a hard sell currently and, therefore, few agents are really keen to take on such listings = little or no negotiation on commission. On the other hand, if you a get a chance at a listing in Khandallah that isn’t texture coated and ticks all the common sense boxes like sun, drive on, indoor/outdoor etc it will be out the door in a week or so = drop the commission, just get that listing!
This variance was highlighted to me just this week by two phone calls I received. One call was from an ex-client who is now living in a town about an hour north of Wellington on a couple of acres. She has her home on the market currently. She told me that in her locale, the average time to sell a house is over a year. The value of her property is around the $800k mark. She is being charged 4.5%+gst by the agent she signed up. When she tried to negotiate on the commission, the agent told her that this is what the commission is, take it or leave it and that no agent in the area would take on listings for less because of the length of time it takes to sell houses in the area, and the traveling distance for the agent from the township to this semi rural property. The agent also mentioned that she was aware that this particular lifestyle property has a neighbour who was going through the process of subdividing and there would be a bunch of new houses on the boundary that would make this property hard to sell as a semi rural lifestyle place.
The second phone call was from an acquaintance who wanted advice. He was trying to buy the next door neighbour’s property in a good part of an inner Wellington Suburb.
The owner of the next door property had approached an agency and they had agreed to sell the house (worth around $700k) for $8000 representing a commission rate of around 1%.
One percent you say! But wait there is more…. One of the salespeople in this agency wants to buy the property. Oh really, you say??? In the face of a guaranteed sale within a day or so, wouldn’t you sign up the agency for a paltry 1% if you were the listing salesperson? A couple thousand dollars for visiting the house maybe twice??? Corse you would!
So you can see, agency commissions are never cut and dried. There is often stuff going on under the surface. The going commission rates can vary depending on where you live, the salesperson you talk to within an agency, your price expectation (if you believe you home to be worth more than than fair market, it will take longer to sell or not sell at all and the salesperson will alter their view of the coming time and energy to be spent on selling your home. Based on this you may pay more in commission), what type of property you want to sell, the part of the property cycle you are attempting to sell in (in a sellers market you can expect to pay less commission than in a buyers market), and the characteristics of the property market in your specific area.
I know that this doesn’t really help in terms of knowing whether you are paying too much commission for the sale of your property or not, but at least it gives you a small insight into the workings of real estate agencies, some of components that go into the commission an agency charges, and some of the factors that influence commission rates.
Thinking of selling? My advice…
If you are looking to list your home and haven’t had any contact with agents active in the area, talk to more than one agency. Get them up to give you an idea of your property’s worth and an estimate of the commission. Let the salesperson gently know that you have invited other companies in to talk to you also. You won’t have to say any more to get them sharpening their pencils! In this way you will have marketing packages to compare.
NOTE: I used the word “gently” because salespeople are people too! No one likes the feeling that they are being used, and the salesperson is taking time out of their day (or evening or weekend!) to come and talk with you and provide you with a service. The old adage applies – treat people in the same way you would like to be treated. Believe me when I say that the real estate world in any locale is a small world! Salespeople talk with their peers in competing agencies. Snarky no-it-all people can have their reputation precede them. Salespeople have their own informal black list of people who are dodgy or nasty. These types of people will have a totally different experience at the buying and selling coal face than the nice people. IN my experience, it isn’t unusual to be texted by opposition agents to warn me about such and such who may come through my open home or call me. The real estate grapevine is a strong one, and salespeople have very long memories when it comes to past buyers and sellers. People who stir the honey pot run the risk of getting stung!
If you have bought or sold a house before and rated the service of your previous agent positively, then make contact with them first. Nothing appeals to the sensibility of a good agent more than loyalty. Make it known that you contacted them because of a good previous experience and that you trust them to give you a good deal in terms of commission. No good salesperson would abuse this trust as it is a very rare and beautiful thing in the real estate industry. You will get the best that the salesperson has to give!
