Estate Agents’ Commission Ins and Outs

Selling your home is an important financial – and often emotional – decision. Property transactions also involve complex legal processes associated with the contract to sell and register the property into the new owner’s name, not to mention marketing the property so that you get the optimum price.

A real estate agent works with property sellers to market the property and once a buyer is found and the best possible offer is secured, the agent ensures that the transaction is as smooth as possible. The commission that they earn is, effectively, the fee for these services.

In this article we’ll look at how the commission percentage is set, who pays the commission – the buyer or the seller – how the amount is calculated, what other fees or taxes may apply, and when it becomes payable.

What is the standard rate for estate agents’ commission?

In South Africa, there is no set or standard rate for estate agents’ commission. The rate typically falls anywhere between 5 to 7,5% (or more depending on the value the agent can bring to the sale) plus VAT. The commission percentage is negotiated when the seller mandates an estate agent to market their property. This percentage is recorded in the mandate agreement (a legally binding agreement between the seller and agent) which means that the commission rate is set before the property is sold.

What are the factors that influence commission?

It can be helpful to remember that the sales commission is an estate agency’s primary income source. They do not have a set salary. This makes them even more motivated to make sure your home is sold for as best value as possible.

An agent’s commission can also depend on the value they are able to bring to the table. Agents who have a proven track record of successful sales in the area and have a large database of clients to market your home to might charge more than a real estate agent who is just starting out and hasn’t built up his/her database yet.

Other external factors influencing commission include the value of the property (which your estate agent bases on a comparative market analysis). For example, on high-end luxury homes of very high value, the commission rate is often lower.

If it’s a competitive market – i.e. there are not a lot of sellers in the area – agents are often open to negotiating a lower commission rate in hopes of securing the listing.

Finally, and depending on the agent and the agency they represent, agents could be governed by their specific brand’s internal rules which vary from agency to agency, and even from agent to agent. At RE/MAX, each of our offices are independent franchises, which means that each office is free to set their own rules regarding their agents’ commission rates. There is no one set rate at RE/MAX.

Other charges

Sometimes, and depending on the agreement with your agent, you may also be charged for advertising or administration fees for things like preparing contracts or hiring a professional photographer, etc. There may sometimes also be cancellation fees (which we discuss in more detail below). Not all agents charge these additional fees, but it is worth finding out about this from your agent before signing any agreements.

Calculating the total commission payable

The commission that an estate agent charges is a percentage of the actual price that the seller accepts on an offer for their property. This amount is then deducted, usually by the transferring attorney, from the sum that is ultimately paid to the seller.

Let’s use the example of a property that sells for R1 million and where the agreed estate agent’s commission is 6% plus VAT:

R1 000 000 x 6% = R 60 000 (nett commission amount)

Because any business that has a turnover of more than R1 million must pay Value Added Tax (VAT) on goods and services rendered, this must be added to the commission. The VAT amount is calculated on the commission amount because this represents the fee for the service (the value add) that the estate agent has provided to the seller:

R 60 000 x 15% = R 9 000 VAT

This means that the total amount that the seller pays to the estate agent will be R 69 000 and the nett amount that they get for the sale of their property is R 931 000.

Who pays the commission, and when?

Similarly when the seller signs a sales mandate with an agent, the percentage payable is recorded in the OTP which will also spell out what happens if either the buyer or seller backs out of the deal. Most OTPs include standard clauses which state that if this happens, the party that is at fault – breaches or cancels the contract – is liable for the estate agent’s commission. They must pay it directly to the estate agent and/or their attorneys.

The OTP forms part of the batch of documents that goes to the Deeds Office. The commission on the sale of a property is usually paid when the transaction is concluded – i.e. when all the conditions set out in the offer to purchase (OTP) are met and the property is transferred into the new owner’s name.

Once the property is transferred and registered in the new owner’s name, and the transferring attorney disburses the proceeds of the sale, they will usually deduct the commission amount, plus VAT, and pay it directly to the estate agent.

A last word

A property transaction is complicated: it involves more than a web listing. Finding a qualified buyer, marketing the property, and negotiating the best possible price is a time consuming process and a skilled art that real estate agents have mastered. This is why it is important to make use of a reputable, experienced real estate professional who can secure the best possible sale for you. What you pay on real estate commissions is money you might otherwise have lost out on if you hadn’t brought on an agent to effectively market and sell your home. Contact your nearest RE/MAX office to find a real estate professional to support you as you buy or sell your property.

Have more unanswered questions? Here are some related questions – and answers – that might help…

Do you pay commission when you buy a house?

No, when you buy the house, you do not pay commission. The seller, who ‘commissions’ the estate agent is responsible for paying the commission.

When can an estate agent claim commission?

An estate agent can claim commission when, in legal speak, they can prove that what they have done was the ‘effective cause’ of a sale, which could become complicated if there is more than one estate agent involved. This is why it is important that all the conditions – for everyone – are spelt out in the offer to purchase (OTP).