Shelley Bridgeman: Real estate commissions

What's your view on agent commission? Photo / Thinkstock

The real estate industry is sometimes viewed with suspicion - no doubt because some of its entrenched processes appear to essentially betray the interests of the vendor. What agents won't tell you about auctions examines the fact that auctions are favoured by real estate professionals in part because, in the absence of more than one "motivated bidder", the vendor is left in the unenviable position of feeling pressured to sell their property at the very lowest acceptable price (aka "the reserve").

Are open homes dodgy? alleges that open homes are used brazenly by real estate sales people but not for the purpose one would assume. For some it's less about showing off the actual house for sale and more about making contact with other potential house sellers in the neighbourhood.

The nature of the commission is the third part of the real estate business that can cause sellers discomfort. Firstly, the reasons behind the fact that an agent's remuneration is based on the value of the house concerned are not widely understood. Why should someone be rewarded more for selling a $5-million property than, say, a $500,000 one? Does it take extra effort to say "state-of-the-art Miele MultiSteam oven" than it does to say "plain old Shacklock oven"? Perhaps it's because marble floors wear out the soles of the real estate sale person's shoes faster than unassuming cork. Or is writing down that extra zero an especially onerous task?

The way commission is structured is also problematic. According to Consumer's 2011 survey, agent commissions in Auckland are 4 per cent on the first $300,000 and 2 per cent on the rest of the selling price. Because the commission is higher for the first few hundred thousand than the last few hundred thousand, real estate sales people have little incentive to negotiate a higher price on your behalf.

In fact, their emphasis on simply achieving the sale is likely to be counterproductive to getting the best possible price for the vendor. Given the fact that those extra thousands of dollars (which mean a great deal to the vendor) are of little significance to the sales person, it's clear that this commission structure has not been designed to satisfy the needs of the customer.

Financial columnist Mary Holm has been addressing this issue for years. In 2010 one of her readers asserted that "agents had no sense of pushing the potential buyers to anything but an easy sale, because the final negotiations are worth a small fraction of the overall price" and suggested, as a solution, that the "percentage paid to the sales agent should reflect that the last few thousand is the hardest part to obtain".

A second reader suggested a cunning ploy that could be used when negotiations for purchase stall: "Say both parties are $15,000 apart. I will say to the agent I will come down $5000 provided the other party comes up $5000 and the agent is prepared to take $5000 off their commission."

I'd love to try that strategy one day but after the (relatively mild) stress of selling a house eighteen years ago I'm hoping not to repeat the process. Rather than buy a new house we've recently made the decision to renovate our current place. There are several factors at play but one is certainly the desire to stay well clear of the questionable processes and systems associated with having an agent sell your home. I sometimes wonder how much the boom in home renovation can be attributed to people's active refusal to engage with an industry that seems deeply flawed. (Not everyone is suited to selling their own home privately.)

Obviously all commercial ventures are designed to make money. It's just that few are structured to potentially disadvantage the customer quite as insidiously as the real estate industry. And by the time you've factored in the consideration that for most of us our home is our most valuable asset it's a recipe for serious concern.

What's your view on agent commission? Should it be pegged to the value of the property or should it be a flat fee? Should the sliding scale of commission percentage be inverted?