How much commission?

How much commission?

Posted on November 24th, 2009 Huis-Huis No comments

Commission cash

Everyone wants to pay as little real estate commission as possible, because more money in your pocket means a better house when you buy, or a bigger deposit to make your offer to purchase more attractive, or smaller monthly payments on a smaller mortgage loan, or better curtains for the new home, or a million other things, really. And every real estate agent wants to get paid as much commission as possible, because that is their livelihood – their bread and butter, their lunch money, the food from their children’s mouths… and their Mercedes Benz payments.

So how much commission should be paid?

The amount of real estate agent’s commission is NOT prescribed by law. Once upon a time there was a recommended tariff, which the Institute of Realtors used to make available to it’s members. But since the Competition Commission of South Africa found it to be counter-competitive, stopping just short of deeming it price fixing, this tariff guideline for South African real estate agents’ commissions has disappeared.

Many real estate agencies still stick to this defunct old guideline, which means that they charge around 7% (excluding VAT) of the purchase price of a property. And some of them will even motivate this as being “in line with industry standards”. But the truth is there is no such thing as a “standard” for real estate agency commissions. There is no law in South Africa that prescribes either a minimum or maximum amount for real estate agency commissions. So, the agent’s commission is determined by agreement between agent and client.

The commission is usually stipulated in the real estate agency’s written mandate forms, and/or in the eventual contract of sale. But “standard” contracts can always be amended, so the commission is only fixed once there is agreement between the parties about the amount of the agent’s commission.

Real estate agencies like to stipulate their commission rates as percentages of purchase prices. But nothing prevents a buyer or seller to stipulate a fixed amount of commission.

There is a valid argument to be made for real estate agency commissions as a percentage of the purchase price, because the real estate agent will be paid more if the seller (who’s usually the agent’s client) gets a better price for his/her property. But some folks figure that the motivation power of a commission percentage is negligible, especially in an open mandate situation, because the agent is likely to try to sell any offer to purchase he/she receives to the seller, because that is the only way to secure payment of ANY commission.

The important thing to realise, as far as the amount of commission you’ll pay is concerned, is that you have a say. Real estate agencies cannot one-sidedly dictate the amount of real estate agent’s commission you have to pay. And in the funky property market South Africa (and the rest of the world) is currently experiencing, buyers and sellers of real estate are in a strong position to negotiate commissions.