This article was published on 8 May 2010. Some information may be out of date.

Q&As

  • Two readers’ bright ideas on how to negotiate with real estate agents
  • Everything you need to know about tax on PIEs, which include almost all KiwiSaver funds

QThe idea — as discussed in your column last week — that you should not bargain when selling the most expensive item you are ever likely to own is absurd.

I think the real estate commission structure is the problem, rather than a desire to see agents have their incomes haggled within an inch of the breadline. The percentage paid to the sales agent should reflect that the last few thousand is the hardest part to obtain. Consequently, the confident agents should be able to adjust this figure according to their ability.

My experience of selling a house was one of frustration that the agents kept bringing offers that we had clearly indicated we would not accept. The agents had no sense of pushing the potential buyers to anything but an easy sale, because the final negotiations are worth a small fraction of the overall price.

If the incentive in the fee structure was such that the reverse was the case, then there would be a much keener agent negotiating on your behalf, which surely is the point.

When we sold, the first $250,000 had a fee of $10,000 or 4 per cent and 2.5 per cent thereafter, so a half million dollar house would have $16,250 in commission to pay.

If the fee structure was, for instance, that the first 80 per cent of valuation (GV maybe) was at 2 per cent and anything above that was 8 per cent, then the end result is roughly the same in an average situation, and reflects the skills of the agent in a normal marketplace.

AI couldn’t agree more — to the point that I once sold a house with the sort of commission structure you wanted.

We started by calculating the agent’s fee if the house sold for what we hoped for — let’s say it was $500,000. We then said we wanted to structure the commission in a different way, which would actually give the agent a somewhat higher commission if she sold at $500,000. If she sold for more, she got lots more. If she sold for less, she got lots less — much as you have described.

It was a period of flat or falling house prices and a tough time for agents — not unlike the current climate — and the agent reluctantly accepted the deal. Even though we didn’t get the price she had thought we would get, I assume it gave her an incentive to perform as well as she could, rather than just closing a deal as quickly as possible. And while we were disappointed with the final price, we took consolation from the fact that we paid the agent a relatively low commission.

While — as you found — many agents don’t want to accept a deal like that, it seems to me to be the ultimate test of an agent’s confidence in their own ability. If they really think they can get you a higher price than other agents can — and higher than you expect — they should grab the chance to make a much bigger commission.

QWhen I sell a property I never pay the agent’s full commission. Here’s how:

I always get a professional valuation. I don’t see the point of skimping on one that normally costs a few hundred dollars, for my property worth several hundred thousand dollars. Knowing your home’s current market value gives you enormous power when negotiating with agents and potential buyers.

I always invite three agents to submit a marketing proposal including their assessment of my property’s value and their commission rate.

I never try to negotiate the agent’s commission at the beginning of the sale process. From experience, agents won’t negotiate at the outset. Also if they think they are getting their full commission they will work harder for me.

My strategy moving forward now depends on how I’m selling, as follows:

  • If I’m selling with an asking price, I never let on to the agent that I have a professional valuation.

I set the asking price based on my valuation or the agent’s valuation — whichever is higher. Then I add a “haggle” component, which I can “give away” during the negotiation to achieve the price I want.

Once we have a potential buyer, negotiations usually proceed to a point where both parties reach a stalemate. You need to hold your nerve at this point.

Say both parties are $15,000 apart. I will say to the agent I will come down $5000 provided the other party comes up $5000 and the agent is prepared to take $5000 off their commission.

Remember the agent has invested a lot of time in the deal already and feels he almost has it in the bag. Is he prepared to forgo $5000 to ensure the deal doesn’t fall over at the last minute?

From my experience nearly every time they will compromise a portion of their commission to complete the deal. The amount is dependent on your own skills as a negotiator.

  • If I’m selling at auction, it is harder to negotiate a reduced commission.

I set the reserve price based on my valuation, and I never reveal it to the agent until the last moment. Agents hate this.

If the auction is passed in, then the same negotiation rules above apply.

ASomething tells me agents might hate more than that last bit of your letter. But — given that it’s not unknown, shall we say, for real estate agents to play games with sellers — I don’t see why sellers shouldn’t also play games.

Thanks for sharing your strategy.

QI read in the Herald recently that if I underestimate my PIR tax rate for my KiwiSaver account then I will have to pay more tax, but if I overestimate the rate then it’s tough luck and the IRD keeps the overpayment.

That seems a remarkably unfair situation. I guess this applies not just to KiwiSaver but all PIR investments. Why?

AFirstly, yes these rules apply to all PIEs, or portfolio investment entities, which include practically all KiwiSaver accounts as well as other PIE savings vehicles.

PIEs pay tax at 30 per cent unless an investor gives the provider their PIR (prescribed investor rate) and IRD number, in which case the investor’s share of the income is taxed at their PIR — which might be 12.5, 21 or 30 per cent.

It’s worth making the effort to look into this each year, as you could save heaps in taxes. Children are among those likely to benefit.

Inland Revenue’s answer to your question is not particularly satisfying. PIE tax, a spokesman says, “is generally a final tax, and is not a withholding tax like resident withholding tax (RWT) that is deducted on behalf of the investor. RWT, but not PIE tax, can be refunded if it is more than an individual’s tax liability.

“The relevant tax is paid by the PIE not the investor. That is, it is not the investor’s tax and therefore cannot be refunded to the investor. Although a PIE pays tax based on the tax rates of its investors, it is still the PIE’s tax.”

What this is really about, I suspect, is that things might get horribly complicated if investors in PIEs started changing their minds about their tax rates. Tax on PIEs is taken care of by the PIE managers. It doesn’t appear on our tax returns. So alterations looking backwards could lead to an administrative nightmare.

Given that many people’s taxes are lower because they invest in PIEs, perhaps we have to accept that the onus is on us to make sure we tell our KiwiSaver or other PIE provider our correct PIR.

What are the correct rates, after the changes that took effect on 1 April 2010? Some articles have got this wrong, so I asked Inland Revenue to check that this rundown is accurate.

Your PIR is based on two components:

  • Your taxable income, which excludes PIE income.
  • The total of your taxable income and PIE income in the last two years that end on March 31.

Situation one: Let’s look first at people whose income from their PIE investments is less than $22,000 a year — which will apply for the vast majority of people in KiwiSaver at this stage, unless they have other substantial PIE investments.

Where your taxable income:

  • in either of the last two years is $14,000 or less, your PIR is 12.5 per cent.
  • in either of the last two years is $48,000 or less, your PIR is 21 per cent.
  • in both of the last two years is more than $48,000, your PIR is 30 per cent.

If you qualify for more than one PIR, use the lower one.

Situation two: If you have more than $22,000 in PIE income and your taxable income in both of the last two tax years is more than $48,000, your PIR is 30 per cent.

Situation three: This applies if you have more than $22,000 in PIE income and your taxable income in either of the last two tax years is less than $48,000. You’ll need to find out your PIE income for the two years. Your PIE provider should be able to give you the number for the year ending March 2010 in the next month or so.

Then, in either of the two years — you can choose the year that gives you a lower PIR — see which of the following applies:

  • Your taxable income is less than $14,000. If the total of your taxable and PIE income is less than $48,000, your PIR is 12.5 per cent. If the total of both incomes is $48,001 to $70,000, your PIR is 21 per cent. If the total of both incomes is $70,001 or more, your PIR is 30 per cent.
  • Your taxable income is $14,001 to $48,000. If the total of taxable and PIE income is less than $70,000, your PIR is 21 per cent. If the total of both incomes is $70,001 or more, your PIR is 30 per cent.

Until this month, PIRs were 19.5 or 30 per cent. Unless both your old and new rates are 30 per cent, it would be wise to tell your provider your new rate. Ring or email them or check their website to find out how to do this. It should be quite simple.

As our reader says, if you give a lower rate than you should, and you are caught, you may have to pay the extra tax plus penalties. If you give a higher rate than you should, bad luck!

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.