Hidden costs when using set-fee estate agencies

Hidden costs when using set-fee estate agencies

MAIN IMAGE: Tony Clarke, managing director of Rawson Property Group.

Low-cost real estate agencies have been making an undeniable splash in the media recently. With the cost of living for South Africans rising every day, it’s certainly refreshing to see a service that claims to be dropping prices rather than increasing them. Like many things in life, however, low-cost real estate agencies can’t always be taken on face value. Tony Clarke, managing director of the Rawson Property Group, explains.

“It’s always exciting to see new approaches to the traditional real estate model,” he says. “Disruption of the status quo makes for a stronger, more innovative industry, after all. That said, the introduction of new models can make it more difficult for homeowners to understand their options. In the case of low-cost realtors, I think there’s been a lot of buzz around fees, but very little publicity on what those fees actually get you, and what you’d potentially be giving up by going the low-cost route.”

According to Clarke, one of the most common misconceptions is that low-cost realtors are always going to be the most affordable option for sellers. “In reality, all the low-cost agencies have a minimum fee ranging from R29.5k to R39.995k, plus VAT,” he says. “This isn’t surprising – they need to be able to cover their costs – but considering the current median property price in South Africa is just over R1 million, those minimum fees are often equal to or even more than a traditional real estate agent’s 5%. That means for sellers in the mid- to low-end of the market, for whom savings are arguably the most important, so-called ‘low-cost’ agencies are actually the least affordable option.”

Sellers of higher-valued properties may find ‘low-cost’ fees more affordable, but Clarke warns that added extras could still push up the price tag. “Your typical ‘all-inclusive’ low-cost commission, or flat fee, only covers the bare essentials – it certainly doesn’t get you all the services you’re likely to expect,” he says. “Sellers could expect to be charged an additional amount to even conduct viewings of their property.

The hidden costs don’t stop with optional extras. Most low-cost agencies also charge a cancellation fee if sellers decide to opt out of their services for any reason.

“I’ve always believed that it’s very important that sellers can cancel their contract with their estate agent at any time if they’re not living up to expectations,” says Clarke. “It incentivises good customer service and decreases the seller’s risk. By adding a financial penalty for cancellation, these agencies can essentially do as they please with no repercussions. It’s a setup that puts all the power in the agency’s hands and leaves the seller with little recourse if they’re unsatisfied with the service.”

Technology can’t replace the human touch

One of the most common ways low-cost agencies claim to be able to offer their publicised rates is by leveraging the latest technology to automate much of their service. According to Clarke, this sounds great on paper, but makes little sense in practice for an industry that revolves largely around human perceptions and emotions.

“Data and statistics are great,” he says, “but when it comes to property, they only tell half the story. Technology can never replace the market insights and instincts of a highly-trained, locally-based agent, and certainly can’t offer the personal touch that is so important when it comes to negotiating and closing a deal.”

While all agencies make use of data-driven insights during processes like valuations, Clarke says statistics can only take valuations so far.

“Statistics are invariably based on recent transfers, not current properties on the market, and so they’re typically at least a couple of months out of date,” he says. “That, alone, can lead to inaccurate valuations, but statistics also ignore ‘soft’ factors like buyer trends, style and ambiance. To account for the effect of these on a property’s value, you really need to know your neighbourhood and its buyers inside out.”

For most low-cost agencies, this level of hands-on knowledge is literally impossible, as their agents are spread thin across huge areas.

“There’s also less incentive for agents to aim for the best price, since their commissions and flat fees means it’s often more profitable for them to sell fast than to sell high,” says Clarke. “That could easily leave sellers taking home less than they would have with a traditional agent, even if those services came with higher fees.”

Networks work

Sellers using low-cost agencies could still find themselves struggling to attract buyers, even if their properties are priced for a quick sale. “The market is under pressure at the moment,” says Clarke, “and agents are really having to leverage their referral networks to secure buyers. The newer agencies don’t have the traction or national footprint to be able to compete on that front yet. That leaves them relying solely on digital property portals which often struggle to convert online listings into actual leads.”

While Clarke acknowledges that low-cost models offer a new approach to an age-old industry, and looks forward to seeing where their business model ends up, he warns sellers not to get caught up in the buzz of publicity.

“Do the research, understand the options, and make an informed decision based on facts not assumptions,” he says. ““Property is a major asset and its sale shouldn’t be entrusted to just anyone.”

Article sent by Rawson Property Group.

Showing 10 comments
  • nanette roberts
    Reply

    Very well said – thank you!

  • John
    Reply

    Proof is in the pudding, what is the current average selling time of all stock for Rawson?

  • Francois Olivier
    Reply

    All so very true.

    Excellent summery of how it should be done.

    Welldone!

    • Hayley Le Roux
      Reply

      Well said, most local agents tend to go the extra mile, it’s not just about listing and selling, it’s about knowing your market, building relationships with buyers, sellers and other role players. Its about stepping in when a seller is out of town and requires assistance. It’s about assisting the purchaser who doesn’t drive, but wishes to view,assisting with requesting plans ……and the list goes on and on.

    • Colin Michael
      Reply

      Perfect summary of how things stand in the property market.

  • Jonathan
    Reply

    Very informative and great article that has certainly changed my perspective.

  • Tim Smith
    Reply

    Two possible major factors that are often overlooked when ’employing’ a budget agency option to market your home (marketing does not necessarily lead to a successful sale), are:

    1. The inherent inability to deliver a high level, sustainable marketing plan, that exposes the property to potential buyers that are ready and able to purchase your property, at a premium price.
    2. Unmotivated estate agents and support staff that are not able to cover their cost of service delivery to the seller, could result. The lack of incentive alone is an indicator of possible failure to deliver, and acceptance of first-come, first-served offers from potential purchasers becomes an option.

    Possibly seen by struggling estate agents as a short cut approach to real estate marketing, it is simply not a sustainable business model, and the client potentially loses.

  • Graham
    Reply

    I’m not a fan of one of the biggest “fixed fee” agencies as one has to show potential buyers your home and there is no agent present. I agree with most of the article. Traditional estate agents need to be far more flexible as their commission rates are too high. They would not get away with those rates in other countries such as the UK where the rate is around 2% not 5 or 6%.

    • Sam
      Reply

      Graham – commission rates are indeed much lower in the UK….but property prices are much, much higher in the UK. The proceeds of sale of a rather average home in the UK would buy you a ‘dream’ home in Cape Town. Also, it’s a more efficient market with higher turnover, especially in metropolitan areas; from a technological and regulatory perspective, it’s much more up to date and sophisticated. If we were all selling R15m – R40m homes in CT regularly, then 2% wouldn’t be so hard to bear – but we’re not. If agency commission rates dropped to 2% here, I think a very large number of agents would leave the business, as they wouldn’t make any money at, say, half of 2%. Moreover, their employers would either go bust, or have to drastically reduce agents’ share of the gross commission (prompting more agents to leave the business) – and the remainder might have to convert to digital, just like the disruptors the article refers to. So best keep commissions where they are and provide the best possible service to clients.

    • Laura
      Reply

      As an ex Agent and Principal of 30 odd years in the SA industry and now living in the UK, I can tell you that while the commission rates here are much lower (2-3%) the agents in SA earn and deserve every cent of their money. Agents in the UK do not have to go through the onerous task of studying (or RPL) or in fact be qualified in any way, they only work business hours, they do not go out to show properties but rather either send the buyer on their own or employ “viewing agents” who merely open the door but have little or no info about the property, the agent merely verbally passes on the price offer to the seller, the solicitors then write up the contract and also does the finer negotiation on fixtures, occupation date etc. Both the buyer and seller have to engage their own solicitor so in spite of the low commission rate, the seller has to still in addition pay for his legal representative and this runs into a couple of thousand pounds. All in all, South Africans get a much better deal for similar cost. When buying our house here, we dealt with nine different agents from the same agency – none of them took accountability, knew pretty much nothing and could not give us any advice or direction.

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