Make estate agents sell at your rates

Commission structures do not push agents to seek a higher price. You can change that, writes Rob Stock.

Before he started filming TV programme The School of Home Truths, author Martin Hawes thought real estate agents were "basically good guys".

"Sure I knew there were some bad eggs among them, and I also knew the commission structure through which agents are paid meant there was some game playing going on."

During filming, that view changed.

Now Hawes believes people selling their home need to school themselves up to protect themselves from shonky, self-serving real estate agents, because there appear to be so many.

Secret camera footage for the show appeared to indicate unprofessional behaviour is rife in the house-sales industry, and that's encouraged by the way commissions are structured.

Typically, agents charge commission of about 4.5% on the first $275,000, but only 2% of every $1 they sell the home for over that, and that produces incentives that do not serve the interests of the seller.

"It's the seller who hires and pays agents. Sellers want higher prices for their properties, yet the commission structure that sellers agree on with their agents doesn't give any meaningful incentive to achieve higher prices."

Instead, Hawes says, the bottom-heavy commission structure encourages agents to sell properties quickly, and that can mean compromising on price.

Hawes believes sellers would be better off paying a lower commission on the first portion of the sale price, and higher commission on the extra the agent manages to squeeze out of the buyer.

Hawes says there is no reason why, with so many estate agents compared with house sales, that sellers shouldn't use the negotiating power they have. He says sellers need to agree a commission structure that works for them with the agents, who are desperate for listings.

That can be done only from a position of strength, and that means stumping up the $500 to get an independent valuer to value your home, says Hawes.

Armed with a valuation of say $400,000, for example, a seller can insist on a sales commission of 3% on the first, easily got $380,000. They could then agree to pay 10% on whatever extra is added between $380,000 and $420,000, which is a portion just to either side of the valuation.

Then 15% on anything added to the price between $420,000 and $450,000 and 25% on anything the agent manages to add onto that.

The specific commission structure would have to be worked out by the seller, but, says Hawes: "The important thing is that you work out a scale where the percentage fee rises with the price obtained."

Most real estate agents wouldn't like that, says Hawes, as too much of their commission would be "at risk".

Hawes says a study of 100,000 Chicago house sales shows how badly commission structures serve sellers. It found that when agents sold their own homes, they kept them on the market for 10 days longer than average, and got a price that was 3% higher.

In New Zealand, that translates to about $10,000 per house sale, and as there are more than 100,000 homes sold a year, that equates to roughly a billion dollars lost, says Hawes.

In other words, commission structures clearly motivate agents to sell quickly, at a lower price than they would personally accept.

Murray Cleland, president of the Real Estate Institute, said people needed to realise they could negotiate on commission, but that they had to be realistic.

"If you're going to list your property and the agent won't negotiate with you, go to another agency," he said.

There were significant costs to running agencies, he said, and that was reflected in the common commission structures which rewarded agents more for the first $300,000 or so of sales price, typically about 4%, and 2% on the balance. He said such negotiations on commissions were most common in larger property transactions, such as the sale of farms.

But Cleland said 25 years of experience had taught him that for most people, commission was secondary to service and trustworthiness.

HOW TO DEAL WITH REAL ESTATE AGENTS

Selling a home is the biggest transaction most people will do, so it pays to have a good agent. Finding one is hard, so author Martin Hawes has tips on how to get the person and the contract that suits you.

# Remember, real estate agents "selfregulate". It is hard to get justice if they treat you shoddily, as the Real Estate Institute does not have a good track record of throwing out bad apples or ordering reasonable compensation to those its members have wronged. Do your homework on who to trust.

# Do not try to please or befriend the agent. They are a professional you are paying. Many have their own agendas, so trusting them and letting slip information such as your willingness to move on price could result in them using it against your interests to get a quick sale.

# Beware the "big lie". An agent will often inflate the price they say they can sell someone's home at to get the business, and then sell it for much less. Get an independent valuation before interviewing agents. If they quote huge, unrealistic sums, be suspicious.

# Interview several agents and make sure they know you are doing so. Take notes, and be sure to understand who they are, their track record, their understanding of who will buy your house, their advertising strategy and their sales methods.

# Don't just hand over large sums for advertising. Ask what the advertising is for. If a third of an advert is the estate agent's brand, make them pay for that. It's not your job to build their brand awareness.

# Sign nothing before thinking carefully and getting advice. There's no reason why sellers should accept "standard" contracts. They are selling your home. Feel free to agree on how they do it, and how they will be paid.

# Remember, a fee of $15,000 is huge. Make them earn it.