Real estate commissions: Easy money or hard-earned cash?

With the housing market running red-hot, sellers could be forgiven for seeing real estate as a money-printing machine right about now.

More properties were sold in November than at any other point in the past decade. Median sale prices have increased by $24,000 in just over a month. The most successful agents on Homes.co.nz – Yvenna Yue and Craig Annandale – have sold 297 properties worth $209 million over the last 24 months.

Some homeowners in the market are questioning the value of real estate agents in a world where it seems easier to sell a house than ever before.

Jane is one of them. She doesn’t want her surname published, but recently had to use an agent to sell a house that she and her ex-partner jointly owned. Agent fees came to $26,000.

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“In this climate I think we should all be thinking ‘do we need an agent’? Everything goes on Trade Me and anyone looking for a property is always going to go on Trade Me anyway,” she says.

“I have a sister, she sold her property a couple of years ago without using an agent. She got more than her asking price and it sold in the first couple of weeks.”

Real estate agents earn their money through a formula for commissions which has stayed the same through booms and busts.

Normally it’s a percentage of between 2.5 per cent and 3.95 per cent on a sale amount of up to $400,000 with 2 to 2.5 per cent on the amount paid above that. If an agent works for a large real estate company this commission can be split 50-50 between the agent and the agency they work for.

There are some alternatives, including the flat-fee model, but these are in the minority.

The formula means agents get more cash in hand as house prices rise. The costs of advertising are normally lumped on top of this as an extra for the seller to pay.

Yet when real estate agents get more money in their hand they typically don't sell more houses.

US economists Chang-Tai Hsieh and Enrico Moretti found when the price of land increased in major American cities it drove an increase in the number of real estate agents and a decrease in their productivity (houses sold per hour worked).

Between 1980 and 1990 the number of real estate agents in Boston doubled as land prices did, but the number of properties sold remained unchanged.

The other gripe sellers like Jane have is the costs to agents of selling a house haven’t risen at the same rate house prices have.

“It doesn't cost $26,000 to sell a house.”

A report from the Brookings Institute in 2019 compares real estate to other professions which charge a percentage commission fee and notes their fees have stayed the same as others in similar industries have fallen.

The average commission on trading a stock on the sharemarket in the US fell from 1.2 per cent to below 0.2 per cent. Percentage fees charged by the mutual fund industry halved between the early 2000s and 2018 too.

‘A lot of agents are going hungry’

Real estate agent Mark Honeybone runs the NZ Property Podcast and confronts these kinds of arguments all the time.

Agents earn $84,500 a year, on average, according the Ministry of Business Employment and Innovation numbers.

That was $40,000 a decade ago, Honeybone says, and he admits the increase is probably largely down to how house prices have risen in that time.

However, he notes the relatively low average wages recorded in census entries are proof there’s a big gap in the industry between successful agents and unsuccessful ones.

“There’s either 50 or 100 people in New Zealand earning [over] $1m selling real estate. If the average is $80,000 that shows there’s a heck of a lot of agents that are earning nothing and about to leave the business.”

While the market is booming and some agents are making a lot of money, others are dropping out or discounting their prices as rising house prices drive more agents to compete for a limited number of listings.

“There’s a lot of agents going hungry at the moment.”

The number of registered real estate agents does fluctuate over time. There were over 1400 fewer of them between the 2006 and 2013 census. A 9 per cent drop.

This trend is forecast to reverse with the number of real estate agents in the industry set to grow by 3.2 per cent every year until 2023.

Real Estate Institute of New Zealand chief executive Bindi Norwell notes the average amount agents earn depends on a lot of factors including the number of people competing with them for listings.

In places like Auckland the number of listings was flat for a number of years, which reduced the amount of money agents could earn even if their commission rates didn’t change.

"We’ve had a number of years now where volume and the number of listings has gone down. Sometimes 20 per cent year-on-year.

“So the whole pool of properties to be sold has shrunk, but the number of agents in the industry has not.”

This matters because negotiating the price up won’t earn them as much as if they can squeeze through an extra sale.

“The number of properties sold. That’s the key driver in a real estate market.

“A percentage on a bit of a difference in price? That’s not a massive impact.”

Getting rid of the risk

Norwell argues the commission model is a very risky one for agents. They can spend a lot of time and energy trying to sell a property and not be paid at all if it doesn’t sell.

So charging the same commission in a booming market is, in part, compensation for all those sales which fall through.

People selling houses often valued selling a property quickly over squeezing out a better price. And properties with a high commission rate attached to them often sold more quickly because they were prioritised by agents, according to the Brookings Institute.

A lot of sellers are risk-averse when it comes to holding on to houses once they’ve made the decision to sell.

Some need their house to sell quickly so they can put a deposit down on their next one, while others believe listings which are open for longer sell for less in the end.

Norwell says the best agents are very good at maintaining their networks, often keep in touch with unsuccessful buyers and chase them when a new house comes up for sale.

Honeybone says there are also some buyers who simply won’t purchase a property through private sale. So by paying a commission and going with a real estate agent you get access to these buyers too.

He argues a high rate of commission also buys you inside knowledge of the week-by-week movements of prices in your area.

Private sellers might be able to make a profit on their initial sale, but wouldn't be as clued-up when it came to more recent shifts in price.

The costs

Honeybone says there have been cost increases, too. Mainly in the form of compliance requirements which didn’t exist a number of years ago.

Real estate companies can take up to two weeks to list properties in some cases because of these.

Agents now have to perform checks to comply with things like anti-money laundering rules before they put a listing up (a house can’t be listed until an anti-money laundering officer at a real estate company has signed off on it).

“You have to identify who the owners are and how they sourced their money when they bought the property,” Honeybone says.

“People think it’s a pain, but it’s a really important step in the process and you’re stopping, potentially, a lot of bad stuff going around the world.”

Entering the profession can also see you without an income for a while until you get settled in.

Honeybone says it takes at least three months to enter the profession. Much longer than it used to. After you enter it you can’t really do anything as an agent without supervision.

‘An agency can run away with that amount of money’

Many of those arguments don’t wash with Jane.

From her perspective every buyer browses listings on sites like Trade Me and she’s not convinced people will really skip over a listing on the site just because the sale is being made privately.

And in her case she didn’t see much evidence of a great commitment by the agent who sold her property.

She says her agent didn’t seem to do much other than putting a listing up on Trade Me. Charging for it. Then charging a commission on top of that.

“You just see around town [houses where] the for sale sign has gone up and the next day there’s a sold sign on it.

“And then agents are running away with $20,000 or more, for what?