How do real estate agent's commissions work?

Tuesday 25 Sep 2018

Many people look at the costs associated with the sale of a property as expenses, rather than as an investment. This simple shift in perspective not only makes the layout of cash less painful, it also motivates you to take a different approach to your relationship with the agent who is selling your property.

1. How do agents get paid?

Money invested in a good agent will rarely be spent with regret. What many people don’t understand, is that if your house doesn’t sell, the agent loses out on cash too. Australian real estate agents work on a commission basis so no sale equals no commission. This motivating factor means that the job they do to ensure the house sells, will be directly reflected in the final sale price and ultimately in the money that ends up in their pocket!

Working on commission is also a huge risk for them – they must invest considerable time, energy and expense into selling your house and without a final result, they will have nothing to show for their efforts. A good agent will only take on a property they feel confident they can sell – not only so that their client gets a good result but also for the sake of their own investment, reputation and commission.

In some cases, rather than a commission, an agent might prefer to charge a fixed fee. This can be useful as it makes your outgoing costs more controllable, however it really only motivates the agent to get the job done, rather than to achieve the best price possible.

2. How is the commission decided?

But how do real estate agents’ commissions work? There is a misconception that agent’s fees are too high however there are a range of hidden costs that make up the overall commission fee. Basically, the commission is a percentage of the final sale price of the property and that percentage varies from state to state and agent to agent. The Australian real estate market is currently unregulated, so individual agents can set their commission at a rate they feel is reasonable. This rate is based on the general expenses involved, as well as the work and time they know they will invest and the contribution of their own unique expertise and knowledge.

It’s up to the agent to set a commission rate that they think is fair and there seems to be a general consensus nationally that 2 to 3% of the sale price is a reasonable commission. If an agent offers a commission lower than this, be cautious rather than excited – it’s usually a reflection of the value they place on their own efforts and ultimately will result in you getting a much less impressive result than the one you might have hoped for.

3. What do I get for my money?

Unless you plan on taking a crash course in real estate sales to sell your property yourself, the value you’ll get from paying a real estate agent is almost immeasurable. Your investment will secure you an experienced professional, who will take all the complication out of the sales process for you and ideally get you the best final sale price possible. Not only will they be your go-to person for all your questions and concerns, they will also skillfully and professionally handle things you have no experience at dealing with.

In the initial stages, the agent will assess your home and provide an appraisal of it. Together you can then set a sale price based on this figure, or proceed with improvements on their recommendation, that might increase the value of your property. As well as advising you how to sell it and when, an agent will also be responsible for all of the marketing, advertising, and photography of the property, along with home staging, online listings, open houses, buyer communication and negotiation and finalisation of contracts and paperwork once the property is sold. Generally, all of this is included in the commission – though in some cases, specific marketing costs may be allocated separately but this will be agreed on between you, beforehand.

4. How do I ensure I get the best results from my agent?

Getting them to agree they can sell your house, and deciding together on an agreed figure for their commission is the first part of the deal. If you really want the best results possible for your property sale, you can offer to boost their commission with additional incentives. Generally, incentives can be developed on a sliding scale, resulting in bonuses for them for every price bracket over pre-agreed amounts. This offers them a greater incentive to strive for the best price possible. As you will be selling your property for a higher price than anticipated, the extra bonuses come from money you didn’t have before anyway.

Choosing an agent is an important task and deciding to invest well in their efforts is crucial to ensure everyone starts off on the right foot. If they feel trusted and supported by you, they will do the best job possible. There’s as much in a successful sale for them as there is for you, so let them do their job, knowing that the commission you’ll be paying them is covering a whole range of things you may never even know are happening.

Finally, if you have any concerns at all about charges or commissions, you should check that the agent is a member of their local Real Estate Institute of Australia, which requires them to abide by a specific set of guidelines and conduct. Check out Local Agent Finder to find and compare different agents and get an idea of potential costs.

DISCLAIMER: The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions.