Tom Denford
By Tom Denford
Aug 15, 2011 4:07:40 PM

The Problem With Agency Commission

 

Most agencies are still being paid by commission. Here’s why that’s a rotten idea.

Let’s consider the estate agent / real estate broker…

Most estate agents work on commission, averaging 2%. When selling your house, your goal will usually be to maximise the sale price and minimise the headaches. The estate agent’s goal may be very different, for example, to make the biggest operating margin on any house sale.

Using a scenario: you have a house, priced at £320,000 to sell.

Working with a commission based model, the estate agent would prefer to sell your house quickly by pricing it below the market at £300,000 (earning them £6,000 commission), even though it is £20,000 less than you wanted.

For the estate agent, this is better than working an extra month finding the right buyer for you at £320,000.

Putting in the extra time and effort to sell your house for the higher price would only earn them an additional £400, whilst their extra effort would be worth an extra £20,000 to you.

So, for the estate agent, earning the first £6,000 of their income is relatively easy, but the final £400 is what requires the most time and effort.

In this scenario, you can see that the commission model doesn’t actually incentivise the estate agent to work 100% in your interests because there will be a point at which delivering exactly what you want (as the client) becomes financially difficult for them (the agent) to do.

In most cases, commission payment models for agencies provide similar conflicts of interest. You can see here how a commission payment model doesn’t always provide the most value because it doesn’t incentivise behaviour which is in the best interests of the client.