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Real estate sales model needs a shake-up

New Zealand real estate agents charge up to three times as much commission as those in Australia, the UK and US - and now those in Auckland earn up to $10,000 more for the same, or less, work as a decade ago. Is our commission model broken? Morgan Tait asks if one of the country’s most contentious industries is about to be disrupted. 

The median house price in Auckland has risen more than $500,000 since 2007, meaning agents in the city are earning more commission for the same - or less - work.

Economists, low commission realtors and a real estate expert say the traditional model is stacked against vendors who are losing out on the biggest transactions they may ever make.

In New Zealand, most real estate agencies charge 4 percent commission for the first $400,000 of a house's selling price, and 2 percent after that. In Auckland, the median house price was $465,000 in April 2007, in May this year it was $940,000. While fewer houses were sold this year (2370 versus 2510 in 2007), the median commission would have gone from about $17,600 per sale then to $26,800 per sale now. That is growth of nearly $10,000 in a decade, a rate unmatched in virtually all of the country’s other business sectors, especially those with relatively low barriers to entry - like real estate.

In the UK, commission is about 1.6 percent to 2.5 percent; in Australia commission ranges from 1.6 percent to 5 percent depending on the state; in the US it is between 2.5 and 3 percent, although it can double if a buying agent is employed, too. While some companies, such as Barfoot and Thompson and Mike Pero, offer rates slightly below the 4 percent (3.95 and 2.95 respectively) and a number of flat rate or low commission options have emerged internationally - the status quo seems to be stacked against New Zealand consumers.   

Massey University Property Studies senior lecturer Dr Susan Flint-Hartle said she has long considered the commission model unfair. “For many years I have felt that the commission structure was high and it’s even worse with values rocketing up,” she told Newsroom.

“The price is huge.”

She said the costs for vendors quickly added up as listing agents, selling agents and auction houses all received a cut of the sale price.

One of her biggest gripes was that consumers paid additional marketing fees, she said. “The marketing markets the agency as much as it markets the actual property, it’s almost like getting free marketing for the brand. At open homes, half of the time they’re in there trying to sell to the people coming in - but they are also expanding their business with potential new clients.

“They are wanting to sell the house that they're standing in, but it’s not their only objective.”

Flint-Hartle said the marketing costs should be shared between agents and sellers. “I think they’re using the houses to market themselves, so that needs to be an expense that needs to be cut down.”

Economist Shamubeel Equab, who has written a book about New Zealand’s housing, said fee structures needed to be more transparent.

“Buying a house is such an important purchase, often it is the biggest of people’s lives, they probably believe that choosing a company with the proven track record is the best option.”

He questioned if the percentage model reflected the effort agents put into selling the properties.

“The housing market has doubled, or in some places quadrupled, in value in a very short period of time. Has the cost of selling a house doubled in the same amount of time? My instinct is [that is has] not.”

University of Auckland behavioural economist Ananish Chaudhuri said it was unlikely any of the big companies would lower their fees unless more competition was introduced.

“People are clearly willing to pay the price, or don’t understand that they might be able to pay less. If the market was far more competitive we might see people competing for lower rates.

“[The Real Estate industry in] New Zealand it is relatively uncompetitive, so … I think there is probably some amount of collusion between real estate agencies where they try not to undercut each other’s fees.”

Agents also profited from the importance Kiwis placed on home ownership, he said. "Some other countries I have lived in, such as the US, people invest in shares and market funds. Whereas New Zealanders tend to sink their money into real estate, which seems to create the market.”

There are a number of low and flat rate commission models popping up in New Zealand, to the praise of these experts.

Aucklander Antonia Baker in 2010 started The Property Market, which offers a 2 percent commission fee, plus GST -  a fee structure she says will save vendors about $10,000 per sale.

She says New Zealanders are paying for an outdated model and the inefficiencies of large companies. 

“There is a lot of wastage and inefficiency in the traditional agency model. The traditional agency has a branch and then it has a cluster of one-man bands all working under it. They pay a desk fee or a percentage back to the agency. About 25 percent will actually write sales for the business, the other 75 percent will just be there occupying a desk and creating a perception of a large busy office.

“People believe that if you have a big team you must be able to sell houses.

“Not anymore, it takes one salesperson.”

Flint-Hartle agreed. 

She thought 20 percent of real estate agents would be giving clients appropriate service, while 80 percent would not be.

“I have always thought that there was not enough education for these people, but that has evolved more.”

Currently in New Zealand, agents needed accreditation from the REAA and could also obtain a real estate degree or diploma from Massey.

Baker comes from an advertising background and launched The Property Market after spending a year at Barfoot and Thompson.

She said the average sale price at The Property Market was between $850,000 and $1m, meaning commission fees were between $17,000 and $20,000.

If those figures sound familiar, it is roughly the price people were paying 10 years ago.

“Back in the days before internet it probably did take more than one salesperson ... but the internet has changed that. It’s effectively taken that role and responsibility away from agencies. Our role is changing. Yes there are more agents now competing for sales, but that’s not necessarily a cost consumers should have to foot,” said Baker.

“Consumers are unfortunately still a little bit behind and it’s going to take some time to turn that perception around and help people understand that you don’t need a big agency to sell a property these days - and in fact as we move forward it’s going to be less and less easy to justify a big commission fee.”

Harcourts Chief Executive Chris Kennedy said consumers paid for professional service.

He said low commission models often popped up when the market was good, and “fell by the wayside” when there was a downturn.

“Are [the low commission models] offering all the systems and processes, the data, the technology, the experience, the training? I believe we offer good honest service and are good at what we do. There is a need for specialist advice and we offer that specialist advice and deliver good results.”

Overseas markets were “totally different models to the model we offer”, he said. Kennedy said Harcourts, which listed about 33,000 properties each year, not only had a proven track record but was able to get some discounted services for customers.

He said its advertising prices were lower through its relationships with large media companies NZME and Fairfax. “I am more than comfortable to say if you went to the Herald or Fairfax you wouldn’t be able to place [an ad] as cost effectively as we would.”

More expensive houses required specialist agents, he said. “If you want to question the value of what you’re getting then you go to a low fee operator, but they have come and gone. There is nothing wrong with what they are doing, but they have come and gone.”

One notable example of a failed flat rate agency is The Joneses.

Launched in 2006 by four prominent Aucklanders, The Joneses' business model was based on a single flat fee of $8995. It had offices in Auckland, Wellington, Christchurch and Dunedin, but went into voluntary liquidation in 2008. One of its four founders, Peter Gilchrist, a real estate coach now based in Australia, said GST affected the business by pushing up operating costs. 

He told Newsroom he believed the model could work again. “Everyone is talking about disruptors and I think there will be another one coming, it’s only a matter of time before somebody makes it work.”

He said he still did not understand why consumers went with traditional agencies.

“If two houses go on the market on the same day, one is $500,000 and the other is $1 million. They both take two weeks to sell, what is the difference in the work done for the $1m sale? The answer is zero, but the fee is double - and that makes no sense whatsoever.”

Ten years ago the information required to sell a house, such as property sales records and council reports, were only available to agents, said Gilchrist.

“Now anyone can access them on their iPad in about three minutes, so people are less likely going forward to pay for information, but will pay for intelligent interpretation of that information.”

Asked if she considered herself a disruptor, Baker said: “I don’t feel disrupty, I feel logical.” 

That logic was not shared by one Auckland real estate agent, who asked not to be identified due to the media policy of her employer.

She used to work for the failed flat fee company, The Joneses.

“We weren’t charging enough commission,” she said. “We would have to sell 10 houses a month to make the model work, it was exhausting, it was terrible. I loved the idea of a lower commission company but I would never do that again.”

It was tough going being an agent, she said. “My clients are very happy to pay me commission when I get the results that I do, and they come back to me again and again.

“The service that they get from us is higher than any other industry. We work seven days a week, I get calls at 10pm at night and texts at 5am in the morning. We get no weekends and have huge liability through the REAA.”

Baker said it was not a question of work ethic, but actual ethics.

“Yes it’s a seven day a week job and you have to be with your phone 24/7 so you have got to be paid well, you just can’t fleece the public.”

While The Property Market has been successful in Auckland, Baker attributes this to strategically slow growth using cash flow instead of debt, saying it might not work in regional New Zealand where house prices were lower and sell times were longer.

This, said Kennedy, was why the reputation of a company like Harcourts was important, and why it needed to compensate for its operational costs.

Flint-Hartle said consumers should try to negotiate with agents for a lower rate before they sign up.

“Negotiate the commission because you can. If they want to list your property to sell it they might have to reduce their commission and if they won’t reduce their commission you might end up going to someone else.”
 

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