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Percentage-based commissions reward agents for quick sales, not outcomes, creating conflicts of interest – meaning sellers risk losing tens or hundreds of thousands. So what might a fairer model look like? Examines property marketing strategist David Kaity.
There’s never been a better time to be a real estate agent than right now.
Across the country, agents are quite literally cashing in on the housing crisis, enjoying uncapped percentage-based commissions from selling our properties. But just how ethical is the widespread practice of percentage-based commissions, and might there be a better way?
Most of us believe that a percentage-based commission incentivises real estate agents to work hard on our behalf to achieve the highest sale price possible for the vendor, because the higher the sale price, the higher their commission. Unfortunately, this is only partially true.
Uncapped percentage-based commissions create a conflict of interest between the agent and the vendor by encouraging the agent to sell quickly, instead of achieving the highest sale price possible, potentially costing the vendor tens or hundreds of thousands of dollars. Under this model, without even realising it, they risk leaving five or six figures on the table.
So, it’s essentially not about how much money agents are making, thanks to higher property prices, but that their percentage commissions encourage home owners to undersell their homes to get a quick sale and allow them to pick up the bulk of their commissions sooner.
Consider this: If an agent charged 2 per cent commission on the $1 million sale of your home, they would only get $2,000 on the last $100,000 of the sale price – which is often the most important part of the sale, to the seller. Anyone can sell $1 million home for $900,000 – a scarecrow in the front yard holding a sign could achieve that result. So, why reward someone with 90 per cent of their commission on the easiest part of the sale? This way, an agent would only lose $2,000 if they convinced the vendor to sell quickly for $900,000, so they could then pocket their $18,000 fast.
How much incentive do you think this really gives the agent to find all the ways to increase the sale price of your home?
If an agent charges you 2 per cent commission to sell your $1 million home, it only costs them $1,000 (in lost commission) to convince you to lower your price by $50,000 to achieve a quick sale and still pocket $19,000.
This is why it’s critical that sellers understand that the last stretch of the sale price of your property doesn’t make much of a difference to your agent’s commission.
Would you engage someone to negotiate for you who doesn’t have a strong incentive to achieve the highest sale price? No, you wouldn’t. But this is exactly what you’re doing when you engage a real estate agent to negotiate on your behalf.
Frustratingly, negotiations also happen behind your back where you never see or hear what’s being said about you or your property. It’s rather like entrusting your chickens to a fox.
If we can agree that it is easy to sell a million-dollar home for $900,000, then we can also agree that the first 90 per cent of the value of a home is the easiest to achieve.
Logically then, the last 10 per cent or the last stretch of the value of any property is the most important to achieve. Wouldn’t it make more sense then to tie the reward for the sale to this last stretch?
In my view, anyone who helps you sell your home should only be paid based on this last stretch, which is the cream, or premium of your home’s value. They shouldn’t be paid anything for the first 90 per cent and certainly not the bulk of their fee, which is the case with a percentage-based commission model.
There’s a perception in real estate that achieving a quick sale is a mark of success, but unfortunately, more often than not, the opposite is true. While sellers are often keen to get a deal done quickly, under the prevailing commission system, which we’ve been conditioned to accept as “best practice”, many sellers are underselling their property and are completely oblivious.
David Kaity is the property selling consultant, vendor guardian, and marketing strategist at Revolutionary Real Estate.
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