Hidden costs when using set-fee estate agencies

Low-cost real estate agencies have been making an undeniable splash in the media recently. With the cost of living for South Africans rising every day, it's certainly refreshing to see a service that claims to be dropping prices rather than increasing them. Like many things in life, however, low-cost real estate agencies can't always be taken on face value. Tony Clarke, managing director of the Rawson Property Group, explains.

"It's always exciting to see new approaches to the traditional real estate model," he says. "Disruption of the status quo makes for a stronger, more innovative industry, after all. That said, the introduction of new models can make it more difficult for homeowners to understand their options. In the case of low-cost realtors, I think there's been a lot of buzz around fees, but very little publicity on what those fees actually get you, and what you'd potentially be giving up by going the low-cost route."

According to Clarke, one of the most common misconceptions is that low-cost realtors are always going to be the most affordable option for sellers. "In reality, all the low-cost agencies have a minimum fee ranging from R29.5k to R39.995k, plus VAT," he says. "This isn't surprising - they need to be able to cover their costs - but considering the current median property price in South Africa is just over R1 million, those minimum fees are often equal to or even more than a traditional real estate agent's 5%. That means for sellers in the mid- to low-end of the market, for whom savings are arguably the most important, so-called 'low-cost' agencies are actually the least affordable option."

Sellers of higher-valued properties may find 'low-cost' fees more affordable, but Clarke warns that added extras could still push up the price tag. "Your typical 'all-inclusive' low-cost commission, or flat fee, only covers the bare essentials - it certainly doesn't get you all the services you're likely to expect," he says. "Sellers could expect to be charged an additional amount to even conduct viewings of their property.

The hidden costs don't stop with optional extras. Most low-cost agencies also charge a cancellation fee if sellers decide to opt out of their services for any reason.

"I've always believed that it's very important that sellers can cancel their contract with their estate agent at any time if they're not living up to expectations," says Clarke. "It incentivises good customer service and decreases the seller's risk. By adding a financial penalty for cancellation, these agencies can essentially do as they please with no repercussions. It's a setup that puts all the power in the agency's hands and leaves the seller with little recourse if they're unsatisfied with the service."

Technology can't replace the human touch

One of the most common ways low-cost agencies claim to be able to offer their publicised rates is by leveraging the latest technology to automate much of their service. According to Clarke, this sounds great on paper, but makes little sense in practice for an industry that revolves largely around human perceptions and emotions.

"Data and statistics are great," he says, "but when it comes to property, they only tell half the story. Technology can never replace the market insights and instincts of a highly-trained, locally-based agent, and certainly can't offer the personal touch that is so important when it comes to negotiating and closing a deal."

While all agencies make use of data-driven insights during processes like valuations, Clarke says statistics can only take valuations so far.

"Statistics are invariably based on recent transfers, not current properties on the market, and so they're typically at least a couple of months out of date," he says. "That, alone, can lead to inaccurate valuations, but statistics also ignore 'soft' factors like buyer trends, style and ambiance. To account for the effect of these on a property's value, you really need to know your neighbourhood and its buyers inside out."

For most low-cost agencies, this level of hands-on knowledge is literally impossible, as their agents are spread thin across huge areas.

"There's also less incentive for agents to aim for the best price, since their commissions and flat fees means it's often more profitable for them to sell fast than to sell high," says Clarke. "That could easily leave sellers taking home less than they would have with a traditional agent, even if those services came with higher fees."

Networks work

Sellers using low-cost agencies could still find themselves struggling to attract buyers, even if their properties are priced for a quick sale. "The market is under pressure at the moment," says Clarke, "and agents are really having to leverage their referral networks to secure buyers. The newer agencies don't have the traction or national footprint to be able to compete on that front yet. That leaves them relying solely on digital property portals which often struggle to convert online listings into actual leads."

While Clarke acknowledges that low-cost models offer a new approach to an age-old industry and looks forward to seeing where their business model ends up, he warns sellers not to get caught up in the buzz of publicity.

"Do the research, understand the options, and make an informed decision based on facts not assumptions," he says. ""Property is a major asset and its sale shouldn't be entrusted to just anyone."

Source: Rawson Property Group