A few years ago, I finished my on the job training and decided that I should find another job at a different company. After all, if you stay at the job you trained at, it will take longer for you to shake off the title of the trainee. It is far easier to move somewhere else so that you can reinvent yourself as fully qualified. But that’s another story for another day.
Since I had to move to a new city for my new job, I had to sell the house I had bought four years earlier. There was no way that I would have enough money to buy another house in the new city and keep a house in the old city I was moving out off. Never mind that if I were to keep the other one and rent it out, it would be a 5-hour drive between the two houses. Not exactly easy to rent a house out when you live 5 hours away, except if you want to pay someone else a hefty return on your investment.
I did what anyone else would do. I talked to numerous real estate agents. Listened to their pitches as to why I should list with them. That they had more buyers than the competitors and were waiting for quality houses to come onto the market if you have ever had to deal with real estate agents you will know what I am talking about.
Commission Rate of 4%
At the time, most of the agents were willing to sell my house at a commission rate of 4%. Now if you’re like me, that 4% commission seems a bit funny.
It should sound funny because in what other industry do people provide a service for a percentage of the sale price. Sure I know they do this on auction sites like TradeMe etc. I don’t understand the difference between selling a $200k house and a $400k house? They are both houses. Both requiring advertising, both requiring open days.
The difference is $8000. So if I was the owner of the $200k house, let’s suppose that this house is in the lower end of the market. I would be concerned that the agent would be doing less work to try to sell it. After all, they are being paid half the amount when compared to selling a $400k house.
Here is another reason why I think the % commission system is strange. Say what you want to sell your house for $400k. An offer of $380k comes in a week into the marketing campaign. The real estate agent persuade you that this is a great offer, and you should take it.
Now, why are they doing that? Persuading you to sell your house at $380k, when you know it is worth $400k. And besides, it has only been a week.
I will tell you why. Selling at $380k will bring in a commission of $15,200 for one week’s work. Now say it take 4 weeks to find a buyer who wants to pay the $400k. Now the real estate agent brings in a commission of $16,000 but had to spend an extra 3 weeks of work to get you the buyer, only receiving extra $800 for their efforts. Considering the weekly amount drops from $15,200 to $4,000, you can see exactly why the agent would want to pressure you into selling at $380k.
The agent sees a difference in the commission of $800, but you see a difference of $19,200. This fact alone should make you question your agent’s agenda. Especially when they keep saying that you should always take the first offer, as it is usually the best offer. And another thing. How do agents know this? Can they see into multidimensional timelines to determine that the first offer is the best?
Real estate online?
The second thing I don’t understand about real estate agents is the fact that it is one of the only industry that hasn’t seem to move online. Why is that? Physical stores are closing left right and centre due to the increase in spending online. Second-hand car dealerships are closing everywhere since you can just go on TradeMe to by a car. Heck, you can practically buy anything online if you know where to look for it. Everything is becoming peer-to-peer, from taxis with the likes of Uber, to accommodation with Airbnb, and even loans with the likes of Harmoney.
Selling houses privately
So why has real-estate not moved on from a commission-based system to a more online peer-to-peer system? And why on earth does it cost that much to sell a house? Thousands of dollars a week? Considering the average price of a house in NZ $670K, and the average time to sell currently is 46 days, a real estate agent working a 40 hour week will be earning around $102 per hour. For only listing one house! If the agent has 10 houses, that is $1020 per hour! What other job do you earn that kind of money?
Ok, let’s be reasonable, I have heard that half the money goes to the brand that they are associated with for expenses like advertising and admin overheads. Still, that agent selling 10 houses is earning around $500 per hour if they worked a full 40 hour week. That is absolutely insane! That puts real estate agents amongst professionals such as an anesthesiologist, commercial pilots, and even more than our prime minister!
After thinking about all this, I decided I would give selling privately a go.
* note: the example I gave above about how much a real estate agent earns are all rough ballpark figures using averages. The actual amount of money they earn probably varies widely, but still, the hourly rate at which it costs to sell your home, your biggest investment, is staggeringly high for what is actually involved.