Why you shouldn't pay real estate commissions
The current structure of real estate commissions needs to be completely abolished in Australia – commissions are unethical, immoral and should never be charged or paid.
Firstly, real estate commissions don’t incentivise agents to achieve the highest sale price. One example is with an $800,000 home. At a commission of 2.5 per cent, an agency would only forego $250 for every $10,000 reduction that they convince their vendor to accept in order to secure a quicker sale and collect their $20,000 commission sooner.
Most real estate agents in Australia are employed by a franchise and only keep around 40 per cent of the total commission. For them, it only costs $100 for every $10,000 hit they convince their vendors to take in order to close the sale and pocket the commission sooner.
Commissions incentivise agents to get a quick sale at the expense of a great price, according to a comprehensive study conducted by two economists Dubner and Syverson, published in 2008. This study was also featured in the bestselling book Freakonomics and found that real estate agents have an incentive to convince clients to sell their houses too cheaply and too quickly.
The second reason real estate commissions are unethical is that they are 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 million dollar 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. This is an unfair reward scheme and another reason why commissions should be abolished.
A traditional commission is simply a percentage of the value of the sale price of a home, but the value of a home has no bearing on the time, effort, skill, knowledge and experience required to market it. Why should the owner of the million dollar home be punished by paying twice as much for no other reason than owning a more expensive home?
The third reason why real estate commissions are unethical is that they give agents an unfair and unearned pay rise. The same agent can sell the same home at the same rate of commission with the same effort and be paid significantly more, simply because the home has increased in value.
As we know, average property prices have outstripped inflation in Australia’s capital cities and so agents are unfairly getting paid significantly more for the same work.
The real estate sales industry has benefited significantly from the questionable lending practices of many of Australia’s big banks, now being exposed by the banking royal commission. The $6 billion real estate sales industry and its lifeblood - commissions - should also be overhauled.
A fairer reward to help a vendor find their ideal buyer is a flat fee that is charged at the end once the owner has achieved a pre-agreed price that they’re happy with.
David Kaity is a property marketing strategist and author of Real Estate Agents Don’t Sell Homes. He co-founded Revolutionary Real Estate to help downsizers pocket up to $50,000 more from the sale of their homes by increasing the market value of their homes and helping them find their ideal buyer without paying a commission.