The de­bate

Money Magazine Australia - - CONTENTS -

YES DAVID KAITY Co-founder, Rev­o­lu­tion­ary Real Es­tate

Real es­tate com­mis­sions are un­eth­i­cal and there are three rea­sons why they should be abol­ished.

First, they don’t in­cen­tivise agents to achieve the high­est sale price. Us­ing the ex­am­ple of an $800,000 home and a commission of 2.5%, an agency would only forgo $250 for ev­ery $10,000 re­duc­tion to se­cure a quicker sale.

This phe­nom­e­non has been proven by the find­ings of a com­pre­hen­sive 2008 study con­ducted by two econ­o­mists, Le­vitt and Syver­son. This study, which also fea­tured in the best­selling book Freako­nomics, found that real es­tate agents have an in­cen­tive to con­vince clients to sell their houses too cheaply and too quickly.

The sec­ond rea­son com­mis­sions should be abol­ished is that they are an un­fair re­ward and not tied to ei­ther ef­fort, ex­per­tise, skill or time spent by the agent. As long as they get the list­ing, an in­com­pe­tent real es­tate agent mar­ket­ing a $1 mil­lion home can still earn twice as much in half the time as a dili­gent agent mar­ket­ing a $500,000 home at the same rate of commission.

A tra­di­tional commission is sim­ply a per­cent­age of the sale price of the home but that value has no bear­ing on the time, ef­fort, skill, knowl­edge and ex­pe­ri­ence re­quired to mar­ket it. Why should the owner of the $1 mil­lion home be pun­ished by pay­ing twice as much for no other rea­son than own­ing a more ex­pen­sive home?

The third rea­son why com­mis­sions should be abol­ished is that they give an un­fair and un­earned pay rise. The same agent can sell the same home at the same commission with the same ef­fort and be paid sig­nif­i­cantly more sim­ply be­cause the home has in­creased in value. Be­cause av­er­age prices have out­stripped in­fla­tion in Australia’s cap­i­tal cities, agents are un­fairly be­ing paid sig­nif­i­cantly more for the same amount of work.

NO BRETT HUNTER Deputy pres­i­dent, REI NSW

Us­ing a real es­tate agent al­ways makes ab­so­lute sense for own­ers con­sid­er­ing the sale of prob­a­bly their most im­por­tant fi­nan­cial as­set. Agents work full time sell­ing and mar­ket­ing prop­er­ties in their nom­i­nated sub­urbs and towns, so they know ev­ery street, av­enue or crescent like the back of their hands. Bet­ter still, they can pro­vide a pre­cise price opin­ion based on cur­rent mar­ket con­di­tions, as they know the likely buy­ers for your home. They are ex­pert ne­go­tia­tors, skilled in travers­ing the com­plex con­tracts and fi­nance in­volved in a prop­erty trans­ac­tion.

For our ex­per­tise, we are usu­ally paid a commission cal­cu­lated on a per­cent­age of the sale price of a prop­erty. More­over, this fee is only paid by a ven­dor if we sell the prop­erty. With a flat-fee model, the ven­dor pays this charge up­front, ir­re­spec­tive of whether the agent makes a sale or not. There­fore, with a flat-fee model, the ven­dor must be pre­pared to take on the size­able risk that he or she could pay a sales fee whether or not the prop­erty sells.

To earn a suc­cess fee, a commission-only agent will work as hard as pos­si­ble on be­half of the ven­dor to achieve a sale. The suc­cess fee struc­ture used by commission-only agents also en­sures they aim to earn the best price pos­si­ble for the ven­dor no mat­ter what. With a fixed-price fee struc­ture, the ven­dor es­sen­tially may lose the op­por­tu­nity to achieve a pre­mium price for their prop­erty, as there is no real in­cen­tive for the agent. A commission struc­ture aligns the goals of the ven­dor and the agent.

More­over, I’ve heard sto­ries where ven­dors even use the commission struc­ture to in­cen­tivise agents to chase higher sell­ing prices on their be­half. Th­ese con­di­tions are agreed at the out­set and of­ten if an agent can achieve an above-mar­ket sale price, the commission in­creases ac­cord­ingly.

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