Follow the money in the real estate industry

by Alistair Helm in


As I have expounded before, when it comes to the real estate industry the subject of money is little discussed and little understood. I have sought to answer the often asked questions as to what are the real estate commissions charged by the large companies? what does a real estate agent earn? and also just how efficient is the real estate industry?

To add to this list I have for quite sometime been meaning to do an analysis to see exactly where that c.$18,000 of commission fees goes when the property transaction goes unconditional and the selling agent collects the deposit from the buyer from which they are entitled to deduct their fees.

In the calendar year 2013 the 80,119 property sales reported through the Real Estate Institute’s members generated a total sales value of $40 billion and a commission fee of $1.4 billion in residential real estate alone. The question I think should be asked and investigated as to the flow of this revenue stream as to who are the beneficiaries. I make the statement of beneficiaries not as a judgement in any way on any party to the real estate service, I merely believe it is insightful to see the flow of money.

Firstly the $1.4 billion in commission fees actually scales up to $1.6 billion when the GST is added, meaning that the average amount property sellers paid to real estate agents was just over $20,500.

As far as following the money the first beneficiary is the government - a tidy $200 million a year of GST on the transaction invoice comes right off the top the government. In fact when you add up the total tax take including GST plus notional PAYE and company tax I would conservatively say that the government coffers benefit to the tune of $400 million a year from the operation of the real estate industry. This total conveniently matches the total budget for the Ministry for Culture & Heritage with a 2013 budget of $398 million - seems somewhat fitting that the real estate industry effectively under-rights Arts & Music, Broadcasting & Films, Sport & Recreation and Heritage.  

This significant take by the government however only represents just under a quarter of every dollar that sellers pay to real estate companies, the balance - 76% or in total $1.2 billion is distributed as represented in the chart below.

The largest chunk - a total of $610 million representing $37 in every $100 paid by sellers goes to the people who provide the services to the sellers of property - the agents or more appropriately titled licensed salespeople. There are around 10,000 of them in residential sales. So the reality is that agents see only just over a third of the total money paid by the seller.

Somewhat surprisingly only $7 of every $100 that vendors pays in fees goes to the marketing of their property (or in fact marketing in general as this total of just over $100 million includes the real estate companies and agents own brand marketing) - given the desire by sellers to see the property sold which as a natural precursor requires a marketing campaign, it may comes as a surprise just how little of their money is spent on marketing.

A large portion, $27 in every $100 paid by property sellers goes to the business owners who run the real estate industry, not for those flash high street offices as this cost is separately accounted for as $5 in every $100; but to the structures and operations that support the individual real estate agents whilst they are out and about prospecting for business and negotiating the sale.


Notes: These calculations are based on the starting point of the sales data from the Real Estate Institute, to this I have added published data from some individual real estate companies (Barfoot & Thompson and Ray White) together with market share analysis of the market to create a model of the sales value by company. I have then factored in the average commission split between salespeople and offices as well as commission rates recognising regional variances and factors for median price. Lastly I have estimated the franchise fees charged by the groups based on market intelligence I have acquired over the many years I have worked in the industry. I accept that there is a lot of estimation in these calculations but as an indication I believe them to be robust enough to publish.


NZ real estate commissions

by Alistair Helm in


Transient

When casually asking people recently how much they would expect to pay real estate agents to sell their home, I was surprised to find a variety of answers. I should point out I was looking for numbers as answers, not just the predictable answer of "too much"! 

I was equally surprised when the article on the influx of agents into the industry recently quoted a commission range from 3.5% to 5% of the sale price. 

So I set out to seek to get some facts on agent commissions. What I found was that no company charges 5% - but the fees charged do vary significantly. Most agencies seem to charge around 4% on the first $300,000 of the sale price and then around 2% on the balance with often an admin charge and of course GST applicable to all commission charges.

What I found most surprising though is just how difficult it is to find out what companies charge via their websites.

Of the larger groups only Barfoot & Thompson provide the fees in detail. They provide a table showcasing the price advantage they offer as compared to the other major groups, this is due to the fact, they state that they own most of their branch premises. Searching online across all the other major groups provided literally no details of commission fees. I did however find that the newest entrant into the market Mike Pero not only states their fee structure on the site of 2.95% up to $390,000 and then 1.95% for the balance plus GST, but it also has a handy calculator to allow anyone to compare Mike Pero commission with the fees of the major companies. Thanks to this feature of the Mike Pero site I developed this chart below: 

As I stated the commission charged and presented in this chart for the other groups is sourced from the Mike Pero website, as each of the other companies do not provide a commission structure online then it is not possible to separately validate those commission fees.

The blue bars represent the commission charged by each company for a property sold at the current median price across NZ  (REINZ Stratified price $385,275) with the red bars representing commission payable on the current price across Auckland (REINZ Stratified price $547,375) . All commission charges include GST.

These commissions are expressed as $ amounts as is now required by the Real Estate Agents Authority who stipulate that a listing agent must provide you with an estimate in dollar terms of the commission you would have to pay if your property sold at the appraised price

The commissions are surprisingly variable with a range at the NZ national sales price from just over $13,600 to $18,300 and in the case of Auckland sales price from just over $17,300 to nearly $25,000.

It is valuable to put these commissions into perspective when you consider the appreciation or lack of it of property prices across the country over the past 5 years. In that time period since August 2007 the average NZ house as measured using the REINZ stratified median price, has gone from $377,425 to $385,275 - an increase of just $7,850, the commission on the sale of that house today would be swallow up all of that appreciation. In the case of an Auckland property which at the stratified mean price, has risen from $510,400 to $547,375 - an increase of $45,975, then in this case the commission would be covered by the appreciation but could consume more than half of it.  

Now before I get a barrage of comments from those within the industry I thought for the sake of completeness that I would also highlight some alternative operators which are all licensed real estate companies who charge very different rates.

In Auckland The Property Market charges 2% - a flat commission irrespective of the sale price.

In Christchurch Total Realty charges 1% as a flat commission rate

There is also a unique online real estate company 200Square which charges $4,500 as a flat  fee - no commission

This is by no means an exhaustive list of alternative providers of services in the real estate market, I just happen to know of these companies and felt the need to include their details. I do not at this stage propose to analyse their services save for to highlight their consistent focus to the role of online in the process of  marketing property for sale.