This article was published on 11 August 2009. Some information may be out of date.

Readers love or loathe real estate fee idea

The subject of real estate commissions brings out strong emotions — as reader response to my last column shows.

In the column I suggested you negotiate commission so that the agent gets much less if they sell your house for less than expected, and much more if they sell it for more.

Let’s say you and your agent expect your house to sell for around $300,000. A typical commission on $300,000 is $11,900. Propose that for every $1000 more or less you get, the commission rises or falls by $100.

If the house sells for $250,000, the commission will be $6,900 — down from the usual $10,000. But if it sells for $350,000, the commission will be $16,900, up from the usual $12,900. The agent has much more incentive to get you a high price.

While several readers loved the idea, one is “extremely suspicious.”

“If I were trying to sell,” he writes, “I would absolutely expect the agent to underprice the property, pressuring me to accept a lower target price.”

Maybe. But if you’re selling you should know your property’s approximate value — by checking out similar nearby properties.

Also, agents tend to set too high a target price when vying for the right to list your house. Don’t propose the new commission structure until contract discussion time, when the agent should be obliged to stick with their price. If they don’t, go elsewhere.

Sure, once they have the listing, they may use the common tactic of talking down the price in the hopes of making a faster sale. But they’ll be less likely to do that under this structure.

Another reader wrote, “When I lived in the UK I suggested the same idea to the agency we’d chosen; they were no more interested there than you found here…. Any agency will try very hard not to concede any change of rate, lest it set a precedent.

“I did see some research that suggested that when real estate agents sell their own houses they hold on longer for a price than the average vendor!” Telling.

As I said last time, once when I tried changing the commission structure all the local agents refused. And a lawyer has written to say he has been blacklisted by agents for suggesting something similar — including a fairly extreme 1 per cent up to GV and 10 per cent above that.

Admittedly, these commission structures make life riskier for agents. But if they are good at their jobs, they should come out winning.

I did manage to convince one agent to do it once — in a tough real estate market quite like the current one. And I know others who have also succeeded.

Another theme from a couple of readers is that all agent’s commissions are too high.

“I am surprised that you seem to accept that simply negotiating the transfer of one person’s capital asset to another person is worth the average Kiwi’s annual income, give or take a bit, in commission,” says one reader. “The defenders of the system (which include, I expect, you), not surprisingly, respond with the predictable ‘swings and roundabouts’ argument. Sorry, this does not cut the mustard with me!

“I would be interested in your comments on how some agents seem to survive when offering to sell for 1 per cent commission plus advertising.”

I’m not sure how I got to be a defender of the system that I quite often attack, but never mind.

Some agents do indeed make heaps. But it’s a free country. You can always choose a cheaper agent, or sell without any agent. If enough people think certain agents are overpaid, they won’t last long.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

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.