Understanding real estate sales commission

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".

Engel & Völkers 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 his clients.

When is a commission effected?

An agent's commission comes into effect when he successfully matches 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 he was successful at completing the sale, which means ensuring that the finances are arranged and the transaction is registered at one of the eight 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 that 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 his home. On very rare occasions, a buyer who is looking for a new home or investment could instruct an agent to find him a specific home and then he is 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 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 his 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 he signs a commitment.

Should the agent not keep to his 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. 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 rather to negotiate on such disputed commissions and no one disagrees with 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 his 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 two days instead of two 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 that often arises is where a seller receives a lower offer, and thus feels they have to cut the agent's 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?