It is indisputable that competition favours the consumer. The more suppliers there are for certain goods or services, the greater the choice for consumers and the greater the market pressure on the supplier to match competitors’ prices. However, suppliers will not work for free and will have to, at least, cover operating costs.

The business model of real estate agents has certain particularities that distinguish it from other businesses. In this article we would like to give you some information about these particularities and show how these determine real estate commissions.

As is the case with other commission-based businesses, real estate companies only make money if a property is sold. While a commission of 5% or 6% (common commissions in Portuguese markets) may seem high, bear in mind that for every property sold there may be many more that have not been sold.

This is because most properties sold by real estate agencies have a non-exclusive contract; this means that there could be three, four or even more 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, the agency will naturally invest time, resources and money to give this property the best possible chance of finding a buyer.

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

Furthermore, no company could exist without its employees and this is perhaps even truer for real estate companies. The vast majority of real estate agents work on commission, either part-time or full-time. Agents only make money if a property is sold and you never know when the next deal might come through. The percentage that agents receive varies from agency to agency, but in our case an agent can receive up to 50% of the total commission. So, in addition to having to pay all the fixed costs, such as office rent, insurance, CRM software subscriptions, etc., an agency that values the work of its employees will also have to allocate a fair share of its revenue to agents.

Another argument against low commissions is the way many properties in Portugal are sold. Most agencies, like ours, are open to working with other agencies. If, for example, we list a property, we will of course make our own efforts to find a buyer, but we will also be open to accepting buyers who have come through another real estate company. In these cases, if – and only if – the property is sold, the commission will be split between the two agencies, one having supplied the property, the other the client. The split is usually 50/50 and if a low commission has been taken out by the agency that picked up the property, there is a risk that the agency that has a buyer will walk away from the deal in question and perhaps even consider not working with us on future deals.

And speaking of the future, it should be clear that a company that wishes to ensure future business for years to come will have to do more than balance the books. Working with low commissions not only means that individual agents get paid less for their work, but it can also jeopardize the agency’s survival in the medium and long term. As tempting as it can sometimes be to get a listing by offering a reduced commission, this possible short-term gain can be undone by the fact that other owners will now want a reduced commission too. And constantly offering a reduced commission will reduce a company’s total revenue. The next housing crisis could be just around the corner and real estate agencies that don’t have enough reserves could find themselves in dire straits…

Lastly, a final note on the party that actually pays the commission:

As mentioned in a previous article, in Portugal, real estate commission is almost always paid by the seller, as they are the ones signing the contract with the agency. However, the prices at which a property is put on the market by an agency always include the agency’s commission. When a seller decides on the price at which they want to sell the property, they will always calculate the costs associated with the sale. So, for all practical purposes, the buyer pays the commission, as it will be included in the price.

So, if we agree that the above-mentioned reasons for justifying normal market commissions are valid, and if the commission is always included in the price of a property, is there any chance that a 5% commission could be an obstacle in the process of selling a property? The answer is no. A property that is correctly valued at current market prices will remain competitive even with the addition of a reasonable commission. If a property has all its documentation in order and doesn’t sell within the expected time, the owner and the agency should consider adjusting the price altogether.

Do you have questions about the real estate commission? CONTACT us