They work at their own risk of not earning an income when they do not succeed in concluding a sale.
Cape Coastal Homes provides some more information regarding this important aspect of buying or selling a property.
The inherent risk in such an endeavour is obvious, as it means that they are constantly investing money and time into the marketing of property with no certainty whatsoever of an income.
There are a few exceptions to the above rule. For example, estate agents selling development property may be paid a fixed monthly income to compensate.
This is especially for their loss of income due to being taken away from their field of interest or area where they have been selling or not being able to earn commission for an extended period as the development first needs to be marketed and developed before any sales can take place.
What is an estate agent's sales commission and when is this payable?
Commission is negotiable. The Estate Agency Affairs Board does not prescribe a fixed or specific amount as would be the case with attorneys for their time spent or services rendered in transferring the property.
The commission is earned when all suspensive conditions on the sales contract (offer to purchase/OTP) have been met. That is when the buyer has, for instance, obtained a bond or when the buyer has indeed managed to sell his house before a certain date, which has been a "subject to condition" in his OTP to the seller.
The conveyancer (attorney who effects the transfer of the property into the name of the buyer), however, acts as the gatekeeper.
He will only pay out the commission to the estate agent after the registration of the property at the deeds office.
The seller and the estate agent will in effect receive respectively the purchase price and the commission on the same day - after the attorney has reconciled the transfer account.
What is the difference between sales and rental commission?
Rental commission is normally paid monthly and is between 10% and 12% plus VAT of the monthly rental amount payable to the landlord by the tenant.
There are also some estate agents who will work for a so-called placement fee - which is normally equal to the first month's rental income.
The rental agent will in such a case only source and pre-qualify a tenant for the landlord.
He would, however, not be involved in the monthly management of the property (like maintenance) and the contractual relationship between the landlord and tenant (ensuring timeous rental payments; maintaining trust accounts; initiating legal action when needed).
The percentage payable is linked to a variety of administrative services involved in the month to month management of the rental property and of the relationship between the tenant and the landlord.
The rental agent in effect becomes a property manager for the landlord (owner of the property).
Sales commission is an once off fee - paid on registration of the property.
The commission is earned by the estate agent whose marketing actions were the real cause for the property transaction.
What is the average or going rate for estate agent’s commission?
Normally sellers can expect to pay between 5% and 7.5% of the selling price plus VAT on the commission (if the estate agency is a VAT vendor).
The average commission rate during the boom phase in our property industry has been relatively higher than during the present down cycle in our industry.
The percentage commissions also vary between estate agencies and one would not expect to pay a standard percentage across the board.
The extent and or level of service a client can expect from an estate agent do in fact vary quite dramatically between the different estate agency models in the market.
Estate agencies have different business models - which all have evolved into different marketing programmes with different fixed costs attached to each of them.
The marketing programmes of the so-called discount commission estate agencies (3% to 4%) will never equate with the extent of coverage offered by the estate agencies which operate between the 5% to 7.5% commission parameters.
The easiest way to verify this is to Google the estate agent's name + your area name + property for sale.
Discount estate agencies normally struggle in buyers' markets - that is when inventory (property on the market) exceeds the supply of buyers.
In these markets, some homes are not selling at all. This is where expertise and extra work pays off.
Listings that sell at top price are typically those exposed to the most buyers, which are priced well, marketed well and introduced to as many of the buyers in the market as possible.
When selling property through an estate agent, what are some of the things a seller should know regarding commission?
Sellers need to insist on a properly constructed marketing plan for the property - that is contract with the estate agent in terms of a sole mandate and at a certain commission percentage.
An exact and comprehensive marketing plan will include items like:
When/where will the property be advertised in the electronical and printed media.
A detailed outlay of exactly on what property portals the property will be hosted and what other tools are employed by the estate agent in his marketing efforts (for instance social media; email campaigns; show houses; open houses for all other estate agents in the area).
The less commission the seller would commit to, the less would be his property's reach (for instance via property portals; printed media; marketing efforts via other estate agents' contact networks).
It is of the utmost importance that sellers should be aware of a variety of "agendas" which form part of the real estate industry.
These will have a direct influence on the seller’s choice of estate agency and the commission he will be contracting.
Agendas to be aware of:
The majority of all property sales (up to 70%) are effected within the circle of estate agents.
Not being willing to pay more than 5% when two estate agencies are involved in a transaction means that the estate agencies will be paid less than 2.5% each for the transaction.
By far the majority of estate agents in South Africa work on a 50/50 commission split with their company.
This relays to a gross income of 1.25% for the estate agent. Further intra-office commission splits could also be subtracted (for instance other estate agents within his office provided the selling agent with information about the property).
Estate agents can, therefore, end up earning even less than 1% commission.
This takes place in the worst property market of the last three decades - contracting from 40 000 sales per month (2007) to about 19 000 sales (2012/13) - to be shared amongst 30 000 estate agents.
To contract with the best possible agent is therefore much more important than trying to undercut sales commission.
Sellers should ensure that the mandated estate agent will not exclude other estate agents from their property (mandate), for example by offering other estate agents not a 50/50 split, but an unequal split of the commission like 60/40 up to 80/20.
Such a split will make it even less acceptable to other estate agents to introduce their buyers (who are in the present market the dominant party) to the property.
Estate agents, who offer less than 50% of the commission to other estate agents, effectively drive even more agents and their buyers away from the seller's property.
This is because the buyers agent will in such a case be earning even less commission than in the scenario sketched above.
What should you be aware of when an estate agent makes promises of a higher price and a lower commission?
Sellers should be very wary of estate agents who promise them a higher price based on hot air and a lower commission.
It is these listings that often show up six months later with reduced prices and a stale marketing plan.
The number of the price reductions, not surprisingly, tend to exceed the difference in commissions asked by the other estate agents who gave a lower valuation - but a market-related price.
In these scenarios, sellers often receive fewer services and end up losing money on the sale as well.