Fixed and Tiered Commission
Commission structures are to the real estate industry what car insurance is to the automobile industry: it’s necessary, because it makes it easier to manage difficult situations when they arise. Wrecking a car that isn’t insured is just as inconvenient and irresponsible as cheating yourself by selling your biggest asset at a price that doesn’t do it justice. In both cases, you’re losing money because you were not willing to pay a small amount of what could turn into ultimate larger cost.
However, once you decide to put your property on the market, you are not compelled to make use of a real estate agent to help you sell. In fact, some home sellers do opt for private sales of their property, believing that they will save significant amounts on the commission and marketing costs that real estate agencies charge as a part of their fees.
With that being said, selling your property without the assistance of a real estate professional that knows all the ins and outs of selling a home does, in fact, come with some additional costs that you may not have been aware of. Together with this, selling privately means that your property will receive limited market exposure, when compared to properties that are sold through real estate agencies.
Aside from probably not possessing the experience and negotiation skills of a professional real estate agent, private sellers also often overprice their property, believing it is worth more than it actually is, because they have an emotional connection to a home that they may have spent many years living in. When a price that is too high leads to a property becoming stale, private home sellers may even be forced to sell at a price that is below the market value.
There’s no doubt about it: the property market is big. Recent statistics from CoreLogic revealed that the value of Australian housing sat at $7.5 trillion in January 2018 – that is three times as much as the total value of Australian superannuation at the same time.
According to the Australian Bureau of Statistics’ 8155.0 – Australian Industry, 2017-17, released in May of 2018, the total number of people employed in the property operators and the real estate services industry rose to 332,726 in June of 2017. This is a 0.6% increase, compared to June 2016, and a notable increase from the 117,880 people employed by the rental, hiring, and real estate services industry when the Australian Bureau of Statistics conducted the 2011 Census of Population and Housing Records.
Deciding which real estate agent to choose from a pool as big as this one proves a daunting task to many home sellers, leading to them turning to the internet to help them sell their property. Aside from the abundance of agents to choose from, real estate sellers are also sometimes discouraged from getting a real estate agent to help them sell due to the commission agents charge once the sale of a property has been completed.
First things first, though: when using a real estate agent to help you sell your property, paying commission is a given, as it forms a part of the fees that a real estate agency need to charge for providing a valuable service to home sellers.
Why do agents charge commission?
Real estate agents are marketing professionals, and the services they provide go much further than simply helping you to sell your home as quickly as possible, at the best possible price.
When paying commission to a real estate agent, you are also paying for their experience and expertise, as well as a comprehensive knowledge of the property market they do business in, their advice on repairs and improvements that will help you to fetch a higher price, their ability to handle paperwork on your behalf and – arguably most importantly – their objectivity in the negotiation process with potential buyers.
Real estate agents know how to efficiently market your property to the best potential buyers, and have access to extensive databases filled with people looking to buy a home. When marketing your property online and on the different social media platforms that agencies use, they also try to make your home as appealing as possible by using professional home staging and photography.
All this adds up to one particular consideration home sellers should keep in mind: even if many people view commission as an expense, it would be better to view commission as an investment, rather than a cost. Choosing to use the services of a real estate agent is paramount to an efficient sale process, as opposed to deciding to take your chances and attempting to try and have your property “sell itself”.
Compensation models like these are used for a variety of reasons, but also lead to real estate agents having a service attitude that is more consumer-focused. This means that real estate agents really consider the needs and requirements of the home seller (within reasonable bounds – like listing a home at a realistic price).
This means that real estate agents are ultimately there to provide a service to their client, the home seller. As with any service, the renumeration that is required to provide the service is based on a number of factors, which is why commission is typically split into two categories: fixed and tiered commission. The commission structure that the home seller agrees to will depend on what the home seller is aiming to gain from using the services provided by the real estate agent.
What are commission structures?
Commission structures are defined as a group of sales commission rules that lay out how real estate agents will be compensated for their sales efforts on a commission basis. In addition to their monthly salary, sales commission is paid to real estate agents as extra compensation to incentivise sales.
Home sellers may feel reluctant to use the services of a real estate professional because they do not fully understand the different commission structures that agents use to establish the amount of commission they will ultimately earn when a home is sold.
In terms of commission in the Australian real estate market, there are basically two commission structures that real estate agencies use: fixed and tiered commission. We’ll get into the differences between the two commission structures in the next section, but home sellers should take note that each commission structure has its own benefits, based on what the seller is expecting to gain from the sale of their property.
When it comes to commission, home sellers might feel stuck when deciding whether to choose a fixed or a tiered commission structure for the real estate agent that is selling their home. It is important to remember that commission structures may vary according to a number of factors, including where in Australia the property is located, what the local market is like at any given time, and how much commission the home seller is willing to pay after the property has been sold.
Commission rates in Australia have been deregulated by the Federal Government, and this means that commission rates may vary quite widely from state to state, city to city, suburb to suburb and even from agency to agency. Contact the Real Estate Institute in the state that you live in to enquire about the average commission rate in your state to ascertain what you can expect to pay, but don’t take this as a set percentage.
Fixed commission structures
Fixed commission structures (also called flat commission rates) are based on the specific percentage rate that is applicable in the state where the property is located. As mentioned, these rates vary from state to state and from city to city. This means that you will have to find out what the average commission rate is from the real estate agent that you use to sell your property. Because real estate commission rates and structures are deregulated in Australia, agencies might also have their own structures in this regard – confirm all these details in initial conversations with prospective agents.
Ultimately, a fixed commission rate simply means that the percentage of commission an agent will earn on any final sale price is fixed, regardless of the eventual price the property fetches.
For example, a real estate agent recommends a selling range of between $830,000 and $880,000 to a seller, after inspecting their property and establishing what comparable properties sell for. The real estate agent charges 1.9% commission on the final selling price of the property.
Market conditions are favourable to the home seller, and the property sells at a price that is higher than the agent expected: $890,000. At a fixed commission rate of 1.9%, the real estate agent earns $16,910 in commission. The home seller is delighted at the higher selling price, although this means that the commission will now be more than he prepared to pay when negotiating the commission with the real estate agent. But because the price the house fetched is also higher, he will be able to cover the commission costs, and still end up with more cash in hand.
Tiered commission structures
Tiered commission structures, sometimes also referred to as negotiated commissions, function as an incentive for the real estate agent assisting with the sale of your property. A tiered commission rate escalates according to the price that the property sells for, and it is important that home sellers negotiate this very thoroughly with real estate agents. In other words: should your property fetch a price that is above a certain amount, the real estate agent will earn more commission according to a sliding scale which is negotiated and decided upon when the home seller and their real estate agent undertake the initial negotiations regarding commission.
Tiered commission is the real estate equivalent of a “bonus” system, and is supposed to function as extra motivation for the real estate agent to get the best price for your home.
For example, a real estate agent recommends a selling range of between $830,000 and $880,000 to a seller, charging a commission rate of 1.9%. However, the home seller decides to incentivise the real estate agent by suggesting a tiered commission scale, where commission of 1.75% is paid for a sale price of below $830,000, 1.9% is paid if the sale price is between $830,000 and $860,000, 1.9% commission if the sale price is between $860,000 and $880,000, with 1.9% up to $860,000 and an additional 2.5% commission on anything over $860,000, and 1.9% commission for a sale price of between $880,000 and $900,000, with 1.9% up to $860,000 and an extra 5% on a price that is higher than $860,000.
If the property sells for $890,000, the home seller and the real estate agent both benefit. The home seller sold his property at a price that is higher than the suggested selling range, and the real estate agent earns $930 more than he would, had he been paid the commission rate he initially wanted to charge (1.9% commission on a sale price of $890,000 results in commission of $16,910, but with the additional 5% on the extra $30,000 that the property eventually sold for, the agent earns a total of $17,840).
Tiered commission structures allow for greater balance between a price range that is realistic, albeit high enough to impress a home seller enough to choose a specific real estate agent to help them sell their property.
Which commission structure should you choose?
Choosing a commission structure depends on a number of factors, and these will differ from seller to seller.
If a seller chooses a fixed commission structure, it is easier to budget, as they can estimate the amount of commission that will eventually be paid. Fixed commission is also preferable if you are looking to sell your property quickly.
Tiered commission means that the real estate agent is more likely to work a little harder to get a higher price, to also make it worth their while in terms of the commission they will earn. Getting a higher price for property means that it will likely be on the market a bit longer, though, due to a smaller pool of potential buyers.
When deciding on a tiered commission rate, many experts also believe that you are more likely to get a realistic estimate in terms of the selling range of your property from real estate agents. Some agents might propose a higher selling price when vying for your business, but ultimately negotiate a lower price once they have secured you as a client. This is less likely to happen when you opt for a tiered commission rate, as agents will have to reach a certain price in order to earn full commission on the sale.
Once you have made a decision about the real estate agent that you would like to help you sell your property, it is important to have thorough conversations about which commission structure best suits you in your current situation. This will give you a good idea of what kind of commitment you can expect from a real estate agent, as well as how much cash you will have to fork out once the property has been sold.
Be open and honest about your financial situation and expectation from the sale of the property, and don’t just go for the cheaper option unless you have to. Even if paying commission is non-negotiable, negotiating about the commission the home seller pays certainly isn’t.
Mansion Global recently reported about the creative commission endeavours some home sellers in the United States are undertaking by negotiating lower rates and offering extra incentives to real estate agents, ultimately getting the price they want for their property and paying less commission than they would have if they settled on paying a fixed rate. While agencies might not always be willing to negotiate commission rates that are as unusual as the ones mentioned in the article, it definitely won’t hurt to enquire about incentives to motivate your real estate agent to go the extra mile.
The most important factor of all is to compare real estate agents and commissions to ensure that you make an informed choice before agreeing to use a specific agent to help you sell. You can do this by obtaining the “vital statistics” on an agent. These include things like the amount of sales they have had in the past six months, the average days that the properties an agent has sold have spent on the market, the average selling time of an agent when compared to other agents in the area, and the average difference between the asking price and eventual selling price of the properties an agent has sold.
Commission is a given when using a real estate professional to help you sell your home. What commission structure you decide to use to compensate and incentivise your real estate agent will depend on the location of your property, the state of the housing market in general, as well as what a home seller’s personal financial situation is like, and what they can afford to pay after the sale of their property.
Even though commission structures may vary widely in your city and state, and even from agency to agency due to the unregulated nature of real estate agents’ commission, it is always negotiable with the real estate agent that you choose to help you sell your property. Fixed commission rates entail a set percentage of the eventual sale price of a property being paid to the real estate agent after it is sold, and a tiered commission structure is negotiated prior to the property being put on the market. Tiered commission rates escalate as the selling price goes up, and commission is paid according to a sliding scale that is decided upon before your real estate agent starts marketing your property to potential buyers.
It is important to note that once a commission structure is established, this cannot change once the property is sold. If the home seller and the real estate agent that is helping them to sell decide to use a tiered commission structure before putting the property on the market, but the home seller decides to change their mind and use a fixed commission structure after the property has been sold, this will be a breach of the contract between the home seller and their real estate agent.
This is why it is crucial to thoroughly and honestly discuss the expectations you have from your real estate agent with them, before settling on a commission structure that suits you. Real estate agents are professionals who provide a valued service to people looking to sell their home, and home sellers who have experienced working with qualified and experienced real estate agents know that commission isn’t simply an insignificant amount of money that is paid to sell a property quickly. On the contrary, selling a home may take a little longer when you and your agent decide on a tiered commission scale, because a higher asking price will lead to a smaller pool of potential buyers.
A real estate agent that has experience of selling in a particular part of the country will be well aware of the selling prices of comparable properties, and will also know what the average days on market is in a particular region, city or suburb. They will make recommendations based on the expertise they have accumulated in their time as a practicing real estate agent, but it is important that the seller remember that commission rates are always up for discussion and negotiation.
Both of the commission structures that real estate agents in Australia use have their own benefits and drawbacks, and the seller ultimately needs to decide which commission structure best suits them according to their own needs, and after discussing the state of the property market with their real estate agent.
Finding a real estate agent that can help you to sell at the best possible price in a time frame that suits you does not have to be a daunting process. Perfect Agent has a database of qualified, certified and experienced real estate agents all over the country. Contact us today to find a real estate agent who fulfils all of your property selling needs.