A window into real estate costs

Acouple I know well sold their house recently. There was a marketing campaign of four weeks, then an auction. The house was passed in but sold in negotiations afterwards. There was only one serious bidder.

For her work of running a basic marketing campaign (which the vendors paid for), the agent extracted more than $25,000 from the sale price.

Not bad for less than a month’s part-time work, you might say.

Real estate agents and their commissions are a fascination for many of us. Buying and selling houses is a momentous life decision, dealing in amounts of money that we would never encounter otherwise. But these people do this all the time and seem to attract large amounts of income along the way. All real estate brands have a different way of calculating commission.

Generally it is charged at a rate of about 4 per cent up to the first

$300,000 of the sale price, and then

2 per cent above that.

The salesperson – usually employed as an independent contractor – who markets the house and gets the deal done does not pocket the whole payment.

Newer salespeople are usually paid about 55 per cent of what the vendor is charged. High performers can earn up to 70 per cent or more. They move up the scale year by year, depending on the number of sales in the preceding year.

From their allocation, the salesperson covers their costs – they might have a personal assistant, a leased vehicle, phone and office requirements.

The person who owns the franchise, such as the LJ Hooker or Harcourts office, takes the remaining 30 per cent to 45 per cent of the commission payment to cover the costs of running the business, including administration staff. They would then also have to pay an annual franchise fee of 7 per cent to 10 per cent of their revenue.

Economist Shamubeel Eaqub said it was likely that there were a number of salespeople who did not make much money, while others earned hundreds of thousands a year. ‘‘When houses aren’t selling a lot of them don’t have a job.’’

There were 7578 houses sold across the country in May. There are 15,500 active real estate salespeople.

There are agencies that employ salespeople on salary and do not pay a commission, but they are in the minority. There are lots of industries that pay their staff on commission. You encounter them when you buy a car or even furniture in some chain stores.

But the big problem with real estate is that the prices are much more variable. If you’re a saleswoman getting a 15 per cent commission on the sale of a new dining suite, you’re probably still getting much the same amount you might have got 10 years ago.

Not so for real estate. When I sold my house in Auckland

10 years ago, the roughly-average sale price gave the agency

$15,000-ish in commission. Now, that same house is worth more like $700,000 and an agent selling it now would get $25,000.

The amount of work involved in selling a house hasn’t changed. In fact, you could argue that in recent years it’s been a lot easier to sell a property. But what we are expected to pay for the job has increased.

Real Estate Institute of New Zealand (REINZ) chief executive Bindi Norwell has previously rejected suggestions that salespeople were paid too much.

‘‘The idea that an agent ‘just’ advertises a property and it sells straight away is a huge misconception,’’ Norwell said.

‘‘The median timeframe for selling a property across New Zealand is 44 days. However, in places such as Westland it is as high as 105 days – in what other industry would you be expected to work week after week without any payment whatsoever?

‘‘Additionally, if a property fails to sell or the vendor does not like the price offered, then the vendor is not required to pay for services carried out by the agent, excluding marketing costs.

‘‘Therefore, an agent takes on a level of risk with each property.’’ It has become standard for vendors to have to pay for the marketing of their own properties – this can vary from $2000 to more than $10,000, depending on the type of house that is being marketed and the campaign required. You’ll also pay extra if you need an auctioneer.

This marketing bill is also a concern – it means the vendor has ‘‘skin in the game’’ early on and is less likely to pull out if the results aren’t what are expected.

There are also questions about what is being advertised. Vendors who pay top dollar for glossy advertisements featuring their salesperson’s face are doing as much a service for that brand as they are for the profile of their own houses.

This is especially true of adverts that continue to run after the property has been sold, ‘‘because the space has been booked’’. A skilled agent who is a good negotiator should be able to add value to the process beyond what their commission removes.

If you’re thinking about signing up a real estate agent, ask them what they’re going to provide for the money you’re paying.

They should have access to good databases of potential buyers, a knowledge of your area and a clear idea of how they will get the top price for a property.

Be wary of those who push you to a certain sales method without evidence of why it should work.

Some are big fans of auctions – and these can work for the right property. But they also backfire if there is not enough interest.