4 truths about realtor commissions you need to know, Money News

Real estate agent shenanigans are much more muted these days, thanks to the internet/social media. It also helps that the buyers/sellers are much more educated than before and are able to provide more resistance.

However, this sensitive issue may still cause some anger among some buyers and sellers.

Very often, we hear whispers that the process is still too opaque; or that there are certain “grey area” practices that harm the customer. Here are some of the uncomfortable truths we are still facing right now:

1. An exclusive agreement requires you to pay the commission to the contracted agent, regardless of who sells your property

Most sellers are encouraged to sign an exclusive agreement with an agency – this is to prevent their listing from being put on the back burner (if you don’t have an exclusive agreement, agents may be more reluctant to really market your ad because someone else may rush in and sell it after their marketing efforts).

But there are sellers who still don’t understand what the contract means. An example of this was a case in March of this year:

During this transaction, the sellers had an exclusive agreement with their agent. However, another agent – who was originally a buyers’ agent – approached them with a deal to sell their home, at a potentially higher price and commission.

The sellers agreed, suggesting they may not have understood the implications of the deal. Because there was exclusivity, the sellers would still have had to pay the commission to their original agent, even if someone else had sold the property for them.

So consider the implications before agreeing to exclusivity. This is especially important if you have children, siblings, in-laws, etc. who are considering buying your home.

If your children end up buying your apartment, for example, exclusivity still requires you to pay commissions to your contract agent. It doesn’t matter that the agent wasn’t involved in finding the buyer (although the agent will at least help with the paperwork).

Another potential danger to watch out for is lying about ready buyers.

Unethical agents sometimes pretend they already have offers for your unit, just to trick you into giving them an exclusive deal. They would later claim that their “ready buyers” ended up buying elsewhere, after securing exclusivity.

That said, many sellers also fail to realize that exclusivity is time-limited.

If you read the terms of the exclusive agreement, you will see that there is often a delay of three to four months. After this period, you are free to sell your property by other means, without the obligation to pay a commission to your former agent unless he is the one who sold it.

Keep this in mind if the agent is slow to get offers or doesn’t really put that much effort into helping you sell your home.

2. New launch properties have higher commissions

This may seem obvious to some, but for those new to the scene, commissions for new launch properties are not the usual 2% for resale condos.

Developers in Singapore rely heavily on real estate agents to sell their projects (and it’s not like they have a wide range of competing choices).

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Agencies are in a strong position and can negotiate higher commissions.

In 2019, it was reported that realtor commissions (when buying direct from developers) were 2.3%. However, agents can be incentivized to clear less desirable units for commissions of three to four percent (and even more).

Today, from information on the ground, we understand that commissions for new launch properties can reach up to 5% and sometimes even more to move units. This number could continue to increase, as real estate agencies consolidate and the competition between them decreases.

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The concern here is twofold. First, it can mean that an inordinate amount is spent on commissions only, for new launch buyers.

Second, buyers need to worry that agents have such strong incentives to offer less desirable or less suitable units. For example, some agents may use resale listings to push their buyers to a new launch unit instead.

While the resale unit may have been a better fit for the buyer’s needs, the pressure for a new, higher introductory commission ends up being a disadvantage for the homebuyer.

This era of high commissions has also led to a growing problem with commission cash back – like a rebate you get from your agent for buying the unit through them.

We’ve written about it in detail here, but in a nutshell – it’s illegal to do so, and officers caught doing so will face disciplinary action from the CEA.

Also, it should be noted that since this is not allowed, if you agree to such a deal with your agent – and they don’t honor you the cashback at the end – there is no one to who you can complain about.

3. Some agents refuse to participate due to lower commissions, which may affect your transaction

Complaints about this have been happening for some time now, even long before Covid. In most transactions, the seller pays a 2% commission – this commission is then split between the buyer’s agent and the seller’s agent (usually the buyer pays nothing).

The split of this may not always be an even split, and it may depend on which side has the upper hand. If you have a hot unit where there is more demand from buyers than sellers, the selling agent may request a higher split (eg, 70/30 or 80/20).

If there is little demand on the buyer’s side and the buyer’s agent decides, then the agent can sometimes negotiate a higher allocation.

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However, some realtors are unwilling to co-break this way because they don’t want to split commissions. If you were to buy the property without the buyer’s agent, for example, the seller’s agent could pocket the full two percent.

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This can result in poor service for both buyer and seller. The seller’s agent may, for example, refuse to respond when contacted by the buyer’s agent; or they may invent outright lies, such as claiming the unit is already sold.

In some cases, agents may lie about the offer made, to increase their own commissions. In 2019, for example, the CEA imposed one of its highest fines of $30,000 on an agent for doing so.

The main problem here is that you, as a seller, may not even hear about certain offers, which your agent has declined without your knowledge.

It’s also possible that they end up selling to the buyer who gives the agent the highest commission (e.g. a buyer who doesn’t have an agent), rather than a buyer who has made the highest bid.

Remember that buying agents can also help secure a higher price by letting the buyer know that paying a premium for the unit might be worth it.

4. A very low commission may not be the best offer

Some agents seem willing to accept low commission rates of 1%. That sounds like a lot, but you have to consider that these agents usually go for speed and volume.

This approach may mean that the agent is not focused on obtaining the highest possible price for each unit. On the contrary, they want to close deals quickly at a rapid pace – that may mean grabbing the first deal that comes along, collecting their one percent, and moving on to the next unit before the month is even over.

Now, we’re not saying that’s entirely a bad deal; especially if you also need an urgent sale. Certainly, it can save you money. But consider that the agent may spend less time prospecting and lobbying for a higher price – you may close on the fastest offer, rather than the highest.

You also worry that these agents will give you less time and attention because they operate in volume; they will juggle more customers simultaneously.

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That said, if your unit is an easy sell (although you’re naturally biased as a judge), going for such an option can sometimes make sense. You would have more demand than you would know what to do with in this still hot real estate market anyway.

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Ultimately, the best way to manage real estate commissions is to make them work for both you and the agent. You want the structure to incentivize them to get you the best deal, to create a win-win for both parties.

The idea shouldn’t be how much you can save on commission – if it can get you a higher price.

For example, suppose you want to get a price of $2 million for your house. If you’re firm on the one percent commission, that would equate to a $20,000 cost of sale for you.

So, for that to make sense, you could structure a higher commission of 2%, if you are able to secure a prize of $2.05 million. That way, if the price is hit, your payment to the agent would be $41,000. As such, you can get a final prize of $2.009 million (was $1.98 million) even with the highest commission.

It can also go up even more levels. The next level could be a fixed price of $2.08 million, in return if the price is hit, for a 2.5% commission. From this, you will pay a total commission of $52,000, but you will get a final prize of $2.028 million.

This article first appeared in Stackedhomes.

Penny D. Jackson