Estate agents left out in the cold

When Darren and Tanya Miller decided to put their five-bedroom home in Titirangi, West Auckland on the market recently they were shocked to discover that it could cost nearly $30,000 to use an estate agent.

"We only saw one agent and they said they wouldn't negotiate on the fee," says Darren. "Their charge for advertising was on top of the commission."

They went to HomeSell, one of a new breed of companies offering a marketing service for people selling privately. A representative visited, took photographs, and within 24 hours the house was listed on HomeSell's website. Within two days the "for sale" sign arrived. Neighbours selling through an agent were still waiting for a sign three weeks after putting their home on the market.

"I just don't think the real estate agents earn their money. All they do is stand at the open home and fill out the paperwork," says Darren.

Like many homeowners with properties on the market this spring, the Millers have discovered that as the value of their home increases, so does the cost of selling through an agent. The real estate industry's commission-based fee system, charging a percentage of value, ensures that charges rise with the market.

Commission varies but charges of 3 to 4 per cent are fairly typical.

A recent survey by the Consumers' Institute put the cost of selling through an agent on a median priced house in Auckland in March this year at just over $17,000, up 25 per cent from $13,568 in 2003.

As the Millers discovered, the cost of selling higher up the housing ladder - their home is listed at mid-$700,000 - can involve sums equivalent to a deposit on a median priced home. You can buy a lot of building and renovation for $30,000. These costs can make a significant difference to long term returns on the portfolio of property investors buying and selling regularly.

It is hardly surprising that homeowners are being wooed by companies offering to undercut the traditional agents.

HomeSell's managing director Kirsty Gillespie says: "People have looked at it and thought, 'Gosh, I could do this myself'."

Some newcomers to the market are advertising heavily as the spring selling season gets underway. Homeowners need to understand the differences between the services available and some potential pitfalls.

HomeSell is one of several companies that aim to take the hard work out of selling privately by providing advertising support, including internet listings and sale boards. But they do not negotiate with buyers. They charge a non-refundable fee and although these companies claim a high success rate, there is no guarantee of a sale. Estate agents operate on a no-sale, no-commission basis. Prices for private sale services may vary from one part of the country to another and according to the value of the property. In the Auckland region HomeSell has a series of GST-inclusive packages ranging from $895 to $2595. There are options to add extra marketing and advertising services for add-on fees.

Marketing company Green Door offers five GST-inclusive packages ranging from $500 to $4500 on properties worth up to $300,000. For properties worth more than this, prices operate on a sliding scale.

The North Shore and Rodney franchise of No Commission Property Sales has two main packages - $4500 and $6500, including GST.

A recent report of the Consumers' Institute said that, of the three marketing firms, HomeSell had the clearest advertising costs and add-ons.

Marketing firms are not governed by industry specific consumer protection legislation. Estate agents are governed by the Real Estate Agents Act 1976 and must be licensed.

The Real Estate Institute of New Zealand has taken legal action against two branches of No Commission Property Sales, alleging they were effectively operating as agents, resulting in the closure of one franchise. John Smart, a director of the main franchise operator, says it is one of the reasons the Invercargill head office went into voluntary liquidation earlier this month.

Smart told the Herald on Sunday the company was reorganising itself as a co-operative, and the Invercargill liquidation would not affect other offices. He claimed that the REINZ was using "bully tactics" to fight competition from newcomers.

As far as he was aware no customers had lost money by paying for services that had not been delivered.

Not all the newcomers think that the real estate agent is a dying breed. The most recent entrant to the property sales market, The Joneses, is a licensed agent and member of the REINZ. It aims to offer a better service, says former Vodafone director Chris Taylor, one of the founding partners. The Joneses sells homes at a flat fee of $7995 including GST but, as with traditional agents and unlike the private-sale marketing companies, this is payable only if the property sells.

Taylor says the commission-based system operated by traditional agents is fundamentally flawed and encourages bad practice. The Joneses pays its employees salaries rather than commission but they are invited to become shareholders as motivation to perform.

The arrival of The Joneses follows the launch in New Zealand 18 months ago of Australian-based fixed-fee agency Go Gecko, which aims to undercut conventional agents with fixed charges.

TradeMe resisted suggestions that it deal only in private sales when it moved into property a year ago. Head of business, Michael O'Donnell, says the company's pre-launch investigations convinced it that private sales would suit only a minority of sellers.

Anecdotal evidence suggests that private sellers stumble when it came to negotiating with purchasers.

"Most New Zealanders are bad negotiators," insists O'Donnell. "One of the skills a good estate agent brings to the process is that they can keep one party warm while one party evaluates.

"Private sellers tend to have rose-tinted view of being able to sell privately. When it comes down to negotiation they don't have the skills or aptitude to do it."

More than 90 per cent of TradeMe's property listings are from estate agents, but individuals who want to sell privately can list for $99. The listing can be refreshed indefinitely at no extra charge.

O'Donnell says in the last 12 months TradeMe has consistently been the most visited real estate site in New Zealand. Nielsen statistics show that it received 387,782 visitors in August, followed by Harcourts at 127,280. The REINZ's revamped site realestate.co.nz had 125,105 visits.

Around 10 to 12 per cent of total property transactions in New Zealand are private sales.

Kirsty Gillespie of HomeSell accepts that private sales have not taken off as quickly as might have been expected given the potential savings involved. She believes this is partly due to a campaign of misinformation by estate agents about what they offer.

Home sellers may be tempted to side-step all outside agents and marketing firms. Lindsay Lloyd, a former chair of the property section of the New Zealand Law Society, says he is seeing more private sales than in the past. He urges vendors to take legal advice before starting the process. It is vital to ensure that the property is accurately described in documentation to avoid potential actions for breach of contract. Contracts should be drawn up carefully, and submitted through the solicitors of the buyer and seller rather than face-to-face.