Alistair Helm wonders how many vendors are being told that their agent will likely earn more if their sale is by auction

Alistair Helm wonders how many vendors are being told that their agent will likely earn more if their sale is by auction

By Alistair Helm*

The real estate industry keeps telling us that auctions are the best way to sell a property in today’s market.

They reiterate that nationally 20% of properties are sold by auction and in Auckland that number is 40%.

Leaving aside whether those numbers are truly reflective of a successful sale at the fall of a hammer at an auction, there is another side to this Pied-Piper-like behaviour by agents to encourage sellers to choose auctions.

It is simple and yet not as well reported as the “success rate”.

Real Estate agents are being financially incentivised to persuade vendors to go for an auction.

I have been provided with information that shows that a real estate agent listing a median priced house in Auckland today could earn an extra $2,000 by gaining the listing as an Auction than as a standard Sale by Negotiation.

The extra $2,000 would be in addition to a standard earning of $5,300. That is, in effect a 40% bonus incentive to list a property as an Auction.

Here are the facts:

The sales commission payable by the vendors for a median priced Auckland property today would be $20,528 inc GST based on a $600,000 sale price.

It is likely that on average the real estate company will pocket 40% of this commission ($7,140) and then distribute the balance ($10,710) to the agent or agents involved in the successful sale.

If the agent who lists the property, also successfully sells the property with no other agents acting for or introducing a buyer then the sole agent will pocket the full $10,710.

However, if as does occur especially in larger companies and as a function of the heated property market, buyers are introduced to properties by eager agents, then these agents described as  "selling agents" are entitled to a split of the commission with the listing agent. 

This is where the real estate company leverages that incentive.

If you list a property as as a standard 'for sale by negotiation' or as simply a priced property and the subsequent sale involves a separate 'selling agent', then you as the listing agent pick up just 50% of the commission – you take home $5,355, and the selling agent picks up $5,355.

If however you persuade the vendor when you list a property to take it to an Auction sale (or a Tender) then you as the listing agent will receive not 50% of the commission but 70% - allowing you to take home $7,497 with the selling agent getting just $3,213. Therefore as an agent listing a property as an Auction in a way secures you a higher guaranteed income than as a standard listing.

Now there is nothing wrong, illegal or unprofessional with companies providing sales people with incentives to encourage performance or direct outcomes that suit the company – that is human nature and how commerce works and has done for centuries.

However when it comes to selling a home there is a deeper principle of conduct that should be paramount above and beyond the personal financial motivation of agents and their bosses.

After all their clients as vendors of houses look to agents to advise them on how to sell as vendors are not that aware of the best approach.

That is why the Real Estate Agents Authority, the governing body that oversees, regulates and administers the industry in their latest update to their Code of Conduct specifically included the requirement for agents to disclose to their clients any financial benefit they may receive as a result of a choice in how to sell their house.

Clause 10.5 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012 states:

Before a prospective client signs an agency agreement, the licensee must explain to the prospective client how choices that the prospective client may make about how to sell or otherwise dispose of his or her land or business could impact on the individual benefits that the licensee may receive.

Are agents actively informing vendors when they recommend an Auction that they may be receiving a benefit in recommending this approach to selling? – who knows, it is a legal requirement of all agents to make sure they do.

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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here

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15 Comments

My parents has just sold their house in Auckland and the agent collected a cool $49250 for one week of running around.  
Beat brain surgeons by a mile

I sold my property for $210,000. Paid the agent (http://200square.co.nz/) $2,000 incl GST fixed commision. They put up their price to $4,500 incl GST, but even so, it is a bargin compared to the crazy precentage prices agent collect.

Guess they should have just listed on trademe for under $500.

In Wellington, there seems to be lots of short term (often two week) tenders. Is that for the same reason? Or is it to just hurry the process along so that the agent doesn't have waste more weekend days?

Another all about nothing light weight story from Mr Helm.
The vendor pays the agreed seeling fee one way or the other, and how it's divided up is of no interest or consequence.
What a vendor pays or agrees to pay is no body's business.
If a vendor is happy to pay the fee then who is Mr Helm to say otherwise?
There's enough regulation already- some say too much.
Vendors should be free to negotiate whatever fee or method of sale they like without interference from busybodies.

"The vendor pays the agreed seeling fee one way or the other, and how it's divided up is of no interest or consequence."
Well actually it is of consequence as it is the vendor that has to pay for the advertising/bill boards for the auction whereas for a normal listing it's paid out of the seller commission.

"Vendor should be free.........."
Buyers should be free to carry out proper checks into the property and finance and not be subjected to wasting $1000's on Valuations etc. Over 80% of buyers are excluded and many are pushed into taking shortcuts for fear of 'losing out'. Vendors are price conditioned too, only winner at most Auctions is the Agent.....surprise surprise.

Looks like you have touched a nerve, Alistair!   Good on you.
I sold my house earlier this year partly because I think the buying and selling of houses in NZ is the wild wild west.   The balooning market is a symptom of something broken, not naturally booming for clear reasons .   It's an anomaly that no-one truly understands.   Always invest in things you understand.  
Online selling is ideal, but the agents still have the registers of interested buyers.  
In my direct experience, finding an Agent that won't sell by auction was very hard.   We were on the brink of selling by auction as a last resort...but a good buyer came along at the 11th hour,  thankfully.  
Why I don't like auctions:
1.  It all-but guarantees a sale for the agent.   Selling for $50K less makes little difference to the Agent, commission-wise. 
2.  The bidders in the room are after a bargain because agents have told them there is a chance to snaffle a bargain i.e. they don't want to pay a fair price. 
3.  When the auction fails to meet reserve, the vendor is told that "the market has spoken", pointing to the people in  the room.   The vendor relents and is pressurised to accept the low offer.
4. You pay for the campaign, the auctioneer, the slot in the schedule.
It's a murky, expensive and highly stressful business.  The customer is thrown into a seedy and intimidating process that the agents control from beginning to end.
I do concede that there are some great results, sometimes.   But the results aren't made public.   I would like to see some stats like reserve prices, highest bids, how many achieved higher than the reserve price etc.  If auctions were so great, I'd be publicising those figures.    Hard to come by, those stats.  
 
 

Charging a fixed percentage of the selling price for providing a service is an antiquated method that is now only used by the R.E. industry, and gives them exorbitant profits.  Just look at the above example $49,250 for one weeks work, why do NZ'ers stand for this?    Obviously rising house prices only make the selling fees more lucrative.

I wonder how many agents bought buyers to that property that sold and got paid nothing. Must have been a few for it to sell in only 7 days. Outrageous, working for nothing. Just makes me feel sick.
They should all get a real job like the people off this website - like Alistair Helm.

Those 200 agents have retired as wealthy people. Have you ever seen an agent drive anything other than an expensive European car?

Leased!!

No wonder there are so many auctions when the salesperson listing your house as an auction will get 40% more commission for the listing if someone else in their company has the winning buyer! That's a massive incentive for the salesperson who lists your home to convince you as an owner to use an auction method versus any other method. I can see why the REAA have a rule requiring the salesperson to disclose that the method of sale may secure that salesperson a large financial benefit. 

In 90% of cases the Auction benefits no-one apart from the Agent. They exclude 80% of buyers needing finance and put emmense pressure on buyers to shortcut due dilligence. The Vendor is also price conditioned as I found when I bought my last house at Auction, I got a really good 'deal' as they say. For regular property they are NOT the way to go.

Its a commision quicker with Auction.
Many auctions right now are being brought forward early due to a pre auction offer. Vendors are being talked in to selling at this point as it will be their "best" offer as told to them by the agents ....
Legal shannigans ....
 
Matt the lad