Which is Worse? Paying Too Much or Too Little Commission to Your Property Agent?

Which is worse- Paying too much or too little-
Which is Worse? Paying Too Much or Too Little?

“It’s unwise to pay too much, but it’s worse to pay too little.” – John Ruskin

My Food Mixer Experience

my food mixer experience.JPG
$20 -> $50 -> $250

Have you ever bought any budget appliance that broke down on the very first day? I bought a budget food mixer for less than $20 which surprised us with a motor burned out on the first use. We were so disappointed that we didn’t bother to do any claims for it. Thereafter, we bought a slightly more expensive food mixer at $50 and it suffered a motor failure as well after using it for 3 occasions. Paying a little and expects a lot just doesn’t work in reality. Our disappointment in food mixer had turned into frustration and we finally decided to buy a reputable one which cost us a good $250. Keeping our fingers crossed, we have been using it for more than 20 occasions in the past 6 months and it is still spinning well.

my food mixer experience cost per use
Food Mixer Cost per Usage

Now let us evaluate the actual cost per usage for each mixer. As the cheapest $20 mixer was faulty on the very first usage, the cost per usage will be $20, while the reputable one which we are still using it now cost only $12.50 per usage. Ironically, the expensive mixer now seems to be cheaper than the cheapest mixer.

This example is essentially what John Ruskin is trying to illustrate as follows;

 “When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.” – John Ruskin

Paying Your Property Agent

The same logic applies to paying your property agent fairly for the result you are expecting. Although, the industry typical commission rate is 2%, let’s me use 3 different commission rate scenarios to illustrate John Ruskin’s advice.

Property Purchase Price (2008): $650,000

Your Asking Price (now): $1,000,000

Agent net commission
Agent’s Net Commission

Ranking of Your Listing

Depending on the rate agreed on, the following table shows the initial net commission that is in his target board. On the average, a good agent typically has at least 4 listings at any point in time and based on the net commission of your property, it will be slotted into his sorted list.

current agent's listing net commission.JPG
Ranking of Your Listing

From the point of a viable business, just like how supermarket strategically places their high value products closer to their customers, the same logic generally applies to agent’s business model, either consciously or sub-consciously. The larger amount of revenue will receive more attention and will be of a higher priority relative to the other listings under the agent’s care. Moreover, in order to be fair to his other clients who are paying him 3%, it is only reasonable for him to allocate more of his time and effort to deliver better results to them. So which position do you want to be in your agent’s list?

From this natural preferential allocation of effort, if you still insist on underpaying the agent you engage, find one who is new and does not have many listings on hand that would push down the ranking of your 1% rate listing.

Co-broke Attractiveness

By putting the seller’s interest as a priority, most agents are open to co-broke with incoming buyer’s agent at the expense of their own commission, usually 50% of it. The amount offered to the co-broke agent will then determine how attractive it is for him to promote this listing to his client. This is especially crucial in the current buyers’ market where buyers are spoiled for choice, and if the commission shared is ranked lowly in co-broke agent’s list of possible units for his client, he may not be even shortlist your unit for viewing.

Furthermore, take a closer look at your agent’s net commission after sharing half with the co-broke agent, this will further drop the position of your listing under his care. Where do you think you stand now?

Agent net commission after cobroke.JPG
Agent’s Net Commission After Co-broke

Think Twice Before Pushing Too Much

I have encounter sellers who try all sorts of way to request his agent to absorb the 7% Goods and Service Tax (GST) into his own share of commission. By squeezing every single cent out, you not only reduce the motivation, marketing exposure and the number of viewings but also introduce risks that are unfavourable to a serious seller who doesn’t have the luxury of time to sell his property. The inevitable consequences will then be longer closing duration which will eventually force you to accept a lower selling price. Be realistic with your asking price from the start.

Agent net commission gst adsorbed.JPG
Net Commission with GST Absorbed

Honestly speaking, to be blinded by this little cost savings has a larger implication – the seller’s  profitability.

“The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better” – John Ruskin

Your Profit and Cost

Now let’s take a step back and focus on your overall profitability. Let’s assume the following:

  1. The higher the commission you pay your agent the faster you sell
  2. The higher the commission you pay your agent the higher price you sell
  3. $50,000 different for each scenario

Higher Commission = Higher ROI

As commission is a percentage, by closing at a higher selling price, the agent will receive a larger sum of commission, hence it is likely that your agent will use all his might to get you the highest price possible. Being a salesperson, he would have the skills that will connect with the buyer and using different approaches to showcase the value of your property.

ROI for different selling price and commission rates.JPG
ROI for Different Selling Price and Commission Rates

Note: Based on John Ruskin advice, by paying too little to your agent may result in you not able to sell your property at all, hence scenario 1 above is rather optimistic.

Paying More = Gaining Much More

In order to show why paying more will result in a better profitability, let’s do a cost benefit analysis. By increasing the commission rate from 1% to 2%, every additional dollar you pay your agent, you are getting additional $3.76 of profit, and from 1% to 3%, you are getting additional $3.55 of profit.

Cost benefit analysis.JPG
Cost Benefit Analysis

In short, paying your agent the right amount has significant impact on the overall experience and eventual profitability of your property. Paying less may be more costly than paying more.

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