You’d think that like many other industries, as technology gets better and the industry becomes more efficient, the end user would see the benefits and better value service. Not so with the real estate industry.
Just 10 years ago (2006) the average house price in New Zealand was around $370,000. Based on a traditional commission of say 3.5% the average selling fee was around $13,000 plus GST.
In 2016 the average house price is around $597,000. Even if we base the average commission now at say 3% (because it usually steps down to a lower percentage over $400k) then the average selling fee is now around $18,000 plus GST.
So the fact is, the average Kiwi home seller is now conservatively paying $5,000 + GST more for the privilege of selling their home.
The first question that comes to mind is: Does it take $5,000 more work to sell your house than it did back in 2006? The simple answer is no. In fact many would argue that, with the current market conditions, modern technology and internet marketing, it now takes less work and outgoing expenses.
Has the industry added $5,000 worth of extra services or value to you the home seller? That’s also a resounding no. (Some agents may try and argue that they now get you a higher sale price. But your home’s value has increased because of market forces, not because of the real estate industry).
You naturally think that your every day real estate salesperson is on an easy ride – with close to a 40% increase in income for no extra effort. However that’s not quite right. Their average income has actually dropped slightly. They however need to do less work to get it.
Back in 2006 there were approximately 11,000 agents and 100,000 sales. Meaning the average production per agent was around 9 sales per year. Multiply this by 45% of the average commission (which is about what the salesperson actually gets in their hand after all the franchise and office cuts are deducted) and you get an average earnings per agent back in 2006 of around $53,000 p.a. Despite the perception, that’s not exactly lifestyles of the rich and famous.
There are currently 15000 licensed real estate agents and approximately 93,000 sales. Therefore the average production per agent is now only 6 sales per year. Making the average earnings per agent around $50,000 pa.
So here’s the theory of “Diminishing real estate industry efficiency”:
As as property values increase, the commission per sale increases. As commissions get larger, they can support an increasing number of agents to be recruited by the industry. As the number of agents increase the production per agent drops and the earnings per agent remains similar. The net effect being that sellers pay more for a less efficient industry.
Test this theory in any local market. The higher the average local commission is, you’ll find more agents chasing those commissions and their average productivity per agent will be lower, while their average earnings will remain similar.
As long as the industry is based on the commission-only business model, this cycle will continue.
Why is this happening?
It’s really pretty simple and it’s driven by the big traditional franchises. What some call the ‘Mega Agents’. Most real estate brands and offices are essentially the same. They all operate on the same underlying business model and sales culture. They are therefore constantly struggling to differentiate themselves from the competition. The only path to brand dominance in this model, is what’s called ‘bums on seats’. It’s not about becoming better or more efficient, it’s not about innovating a new model, it’s not about increasing production per person or providing their clients better value for services. It’s simply a race to be the biggest.
The thinking being… the bigger they are, the more successful they will look. If they have the largest pack of salespeople hunting around the market, then by shear force of numbers they should have the biggest profile and get the most listings. The more listings they have, the more sales they make and more commissions. Now obviously for the franchise owners at the top, this makes sense. After all, the more salespeople they have, even if the production per person drops, they are still clipping the ticket from more transactions. So what they preach to those below them is “Recruit, Recruit, Recruit more… Build a bigger team.”
But as you can see, although the ‘Mega agents’ may be creaming it… it’s at the expense of you the consumer. And to be frank, the everyday real estate salesperson (trying to make a decent living) is also no better off.
You (the home seller) pay more, to support less work being done by more agents. Nationally, compared to 2006, home sellers are paying the industry an estimated $365,000,000 more in fees, for 36% more agents doing 33% less work per agent. It’s nuts when you think about it.
The other thing to note from these statistics is the massive flaw in the mega agents argument that “they are better because they are bigger”. You’ve all seen or heard their claims, “list with us, we are the biggest, we have the most salespeople and therefore more buyers for your property”.
This is total nonsense. If more salespeople means more buyers, then why is it that there have been 7000 less sales in 2016 (compared to 2006) with 4000 more agents? The fact of the matter is that the number of buyers (or sales per year) is not a function of the number of salespeople chasing them. Just like the amount of work involved to sell your home is totally unrelated to it’s value – yet you are charged based on the value.
In summary, the real estate industry operates on a model that benefits nobody but the big wigs at the top. We think it’s time for a change. We think both you (our clients) and us (the agents here to serve you), deserve better.
So we developed a new approach to real estate, designed to be not only more professional and efficient, but also ‘fairer’ for us both.
It’s helped clients bank an average of over $4,500 more than they would have under the old way, and has been judged a winner at the 2016 South Canterbury Business Excellence Awards.
Join the revolution. www.restate.nz.
“The Restate team was really good to work with. They were obviously always working in our interests and we knew where we stood at all times”