Understanding and justifying the Real Estate Comission

22 February 2022 | 0 comments

It is undisputable that competition favours the consumer. The more providers there are for certain goods or services, the greater the choice is for consumers and the greater the market pressure is on the provider to match the prices of the competition. However, providers will not work for free and they will – as a bare minimum- have to break even.

The business model of real estate agents features certain particularities that set it apart from other businesses. In this article we would like to provide you with some insight into these particularities and show how they determine the real estate comissions.

As it is the case with many comission based businesses, Real Estate companies only make money if a property is sold. If a comission of 5 % or 6% (common comissions on the portuguese markets) may seem high, bare in mind that for every property sold there may be many more that were not sold.

This is because most of the properties listed by real estate agencies have a non-exclusive contract; this means that there can be as many as three, four or even more different agencies marketing the same property. Thus, an agency has no guarantee that a non-exclusive property will not be sold by a competing agency. Regardless of this, the agency will of course invest time, resources and money in giving this property the best possible chance of finding a buyer.

In addition to the risk of investing money in the promotion of a property that could be sold by a competitor, there is also the possibility that owners may decide to remove their property from the market, for many different reasons. In this case too, the agency has incurred in non recoverable costs in promoting a property, as the object is now no longer for sale.

Also, no company could exist without its workers and this is perhaps even more true for real estate companies. The vast majority of real estate agents works on a comission basis too, either in part or fulltime. The agents only make money if a property is sold and there is no knowing when the next deal might come through. The percentage that agents can receive varies from agency to agency but in our case an agent can make up to 50% of the total comission. So, in addition to having to pay for all the fixed costs such as office rent, insurance, CRM software subscriptions, etc. an agency that values the work of their employees will also need to allocate a fair share of their revenue to the agents.

A further argument against low comissions is the way in which many of the properties in Portugal are sold. Most of the agencies, such as ours, are open for cooperations with other agencies. If we for example list a property, we will of course develop efforts of our own to find a buyer, but we will also be open to accepting buyers that came through another real estate company. In these cases, if – and only if – the property is sold, the comission will be split between the two agencies, one having provided the property, the other the client. The split is usually 50/50 and if a low comission has been contracted by the agency that listed the property, there is a risk that the agency which has a buyer might shy away from the deal in question and perhaps even consider not working with us in future deals.

And, speaking of the future, it should be clear that a company who wants to ensure that they will be in business for years to come, will have to do more than break even. Working with low comissions will not only mean that individual agents receive less payment for their work, it also can jeopardize the survival of the agency in the medium and long term. As tempting as it sometimes may be to get a vendor on board by offering a reduced comission, a short-term gain may be offset by the fact that other vendors will now want a reduced comission too. And offering low comission as a rule will reduce the total revenue of a company. The next real estate crisis may be just around the corner and real estate agencies that have not saved for a rainy day will find themselves in a difficult situation.

Last but not least, a final note regarding the party that effectively pays the comission:

As mentioned in a previous article, in Portugal the real estate comission is generelly paid by the vendor, as he/she is the one that signs the contract with the agency. However, the prices at which a property is put on the market by an agency always includes the agencies fee. When a vendor decides on the price he will want to sell his property, he will always calculate the cost of selling it. Thus, for all practical purposes, it is the buyer who will pay the comission.

So, if one would agree that the above mentioned reasons for justifying standard market comissions are valid and if the fee is always included in the price of a property, is there a chance that a 5% comission could present an obstacle in the process of selling a property? Definetely not. A property that is evaluated correctly at current market prices will remain competitive even with the addition of a reasonable estate agencies fee. If a property has all the documentation in order and is not selling within the timeframe that it should, the owner and agency should consider adjusting the price as a whole.

For any questions regarding the real estate comission, please get in touch with us: CONTACT