URA Asks About Realtor Commissions, Here’s How It Could Affect You, Money News
Real estate developers have been complaining lately, and we’re not talking about potential new cooling measures. The criticism concerns the commissions of realtors and their growth over the years.
In the latest news, agents and market watchers told us the URA has started to dabble and probe how developers pay their real estate agents.
It’s usually a prelude to change, and here’s how it can affect you as a buyer:
How do developers pay real estate agents now?
On paper, commissions paid to agents can be anywhere from two to three percent of the price of real estate. Note that this is much higher than before. In the late 90s and early 2000s, 1% commissions were considered high.
In practice, commissions could sometimes go as high as seven or eight per cent. This has been reported in the news, although the commissions are not officially shown to the public (more details below).
The higher commissions occur towards later launch phases, or when the development is close to its Additional Stamp Duty for Buyers (ABSD) deadline.
Conversely, commissions can sometimes be lower than the three percent declared, due to gray area “benchmarks” and practices.
The impact of these commissions on the final price of a new introductory property should not be underestimated. A 2% commission on just 100 condo units, at $ 1.6 million each, increases development costs by $ 3.2 million (and remember commissions can be even higher closer to the bottom line). ‘ABSD, or for special units).
Note that the amount spent on commissions is not included in the overall prices, as the authorities do not like this. This means that the prices may be higher than the recorded data suggests.
How did the commissions reach current levels?
Real estate developers have five years to complete and sell their entire project. Otherwise, they will end up paying an additional stamp duty for buyers (ABSD) – 30% of the price of the land. This regardless of the size of the development or the number of units remaining.
If even one or two units remain unsold, the developer will have to pay the entire huge tax. As such, real estate agents often receive higher commissions for completing these urgent transactions. (Frankly speaking, this should really be scaled based on the size of the development, it really penalizes big developments).
So, if the remaining units are difficult to move, the developers will naturally prefer to pay the eight percent commission to sell it, rather than pay the ABSD.
Besides the ABSD deadline, higher commissions can also be used to stimulate the sale of high volume units like penthouses, or units in a less desirable stack. This is of concern to buyers, as it could cause agents to push them to more expensive properties than their budget would allow.
(By the way, this problem was partly addressed by restricting OTP re-issues. Buyers who could not afford the down payment on these expensive units were often forced to pledge, on the promise that the OTP would be reissued until they had sold their old home).
Another persistent problem is the unofficial “cash back” of agents.
Suppose an agent claims a five percent higher commission, on a $ 1.6 million ($ 80,000) unit. The agent then reimburses the buyer $ 32,000 in one form or another – often passing the money to the buyer’s brother or family as a referral commission.
The buyer gets a discount, the agent makes a sale at no additional cost to himself. This could be interpreted as going against the directives of the CEA, which do not allow cash back. It is difficult to detect such transactions when buyers are complicit in them. There are even buyers who force agents to do the legwork first, and then threaten to find another agent if they don’t comply with the cashback.
So not only are these cash back offers not allowed, but buyers should note that you will have no recourse if you agree to one with an agent to “let your down payment be cheaper.”
Some large buyers – large investors who buy wholesale – now have a habit of looking for agents specifically for these reasons. They want agents to give more of their commissions in the form of discounts.
It is difficult to quantify exactly how this affects the real estate market. It is not easy to claim that this is hurting or helping the market. However, this muddies the quality of the pricing data, as the transaction amount recorded will exclude commissions.
Another factor is that with this approach the developer is incentivizing the agent rather than lowering the price of the unit. While generally good for the buyer in question, it is less favorable for those who bought early in search of discounts.
There is also the risk that, as developers increase commissions to attract agents, buyers will be pushed into developments that pay more commissions, instead of the units that suit them best.
What are the likely fixes we’ll see this year?
URA asked real estate developers questions, mainly about how commissions are paid and how much. These kinds of questions are often a prelude to policy changes (for example, questions were also asked regarding the issue of OTPs and reservation systems, just before they were restricted).
From the information on the ground, there are two possible changes that we can see this year:
- Developers are forced to show how much they pay to real estate agents
- Commissions for agents on new capped / regulated launches
Here’s how it might interest you as a buyer
1. Developers are obligated to show how much they pay real estate agents
Broadly speaking, this helps the authorities to get a better idea of house prices. Greater transparency could also help cut costs – few developers would want to be seen paying higher commissions (buyers would read too much, assuming the developer is desperate or there are issues with the project. ).
The most immediate benefit for buyers is that they will know when an agent is prompted to push them towards a particular development.
The downside is that it can intensify the practice of unofficial cashback / kickback deals. Right now, only a handful of buyers know about commissions and how they work; highlighting it can also arouse bargain hunters.
2. Commissions for agents for new capped / regulated launches
To date, Singapore authorities have never regulated real estate agent commissions, leaving that to market forces. However, we may now see regulation, or at least a maximum cap, on the commissions developers can pay. This could help control overall house prices. At the very least, it helps standardize and plan costs among developers.
On the other hand, the idea that it could help lower or control prices has been contested. Some of the industry veterans we spoke to said that fixed commissions will slow the sale of some units; such as high quantum units or units in less desirable stacks. But there is no reason why other units should be cheaper.
It was also pointed out that setting a cap could increase commissions. If the cap is set at three percent, for example, one can expect that all commissions will simply be set at three percent; even for units like the easier to sell shoebox units where the commission would likely be 2%. It doesn’t help buyers.
All scrutiny is about more than real estate agent commissions
We believe the latest inquiries aren’t just due to realtor commissions (commissions worked this way before and after CEA, and that hasn’t changed for decades).
On the contrary, as with recent restrictions on OTP re-issuance, it may all be part of a larger decision: whether or not to implement new cooling measures. The government has expressed concern about the exuberance of the housing market, which started at the end of last year’s breaker (see linked article).
Looking at the commissions could be one way to try to determine the price more precisely, before you act. Any cleanup or tightening of industry practices is probably just a passing opportunity.
Either way, the changes help buyers and sellers create a more transparent real estate industry. It will also be instructive to see how real estate agent commissions change based on the number of new launches for the year or at different stages of the sales process.