Agents face a world of lower commissions
New ways of working are imposing a world of lower commission rates on overseas property agents.
Online marketing, online lead generation, the economic slump, more sophisticated buyers questioning agency or introducer payment terms, smaller down-payments and a glut of bank repossessions are all combining to push average commission rates down to low single figures in a number of key markets.
Banks in high repossession regions like Spain, for instance, refuse to countenance a 10% commission rate.
“The old model which paid 8% to 10% for an off-plan sales order has gone” says Ian Waudby of Crest Group International. “It can be really tough out there.
“There are two things going on. Commissions on the whole are being driven down and you’re also going to have to wait until the back end of the deal for the second 50% of your commission to be paid. You will get 1% or 2% on the order coming in and 1% or 2% on full completion.”
In Spain, where Crest is based, Waudby says “payments on good quality bank repossessions have crept up from 1.5% 18 months ago to an average of around 3% now … or occasionally 5% at best.”
“Make no mistake,” he adds, “lower rates are here to stay and bigger groups with big databases and online marketing strategies and completely different financial models, used to much lower margins, are moving into overseas property markets like Spain.”
A new breed of more sophisticated investors are questioning why agents should earn as much as 10% to 15% on a good quality project. When agents turn to database marketing and secondary agents to find buyers, the commission earned often has to be shared and a new business model is emerging.
Many agents are finding it too expensive to market through traditional media such a magazines and newspapers and many agencies now use online lead generation specialists who charge £20 per lead.
Pick your clients and your way of working and stick to it says Rene Mulder of 2nd Homes International in the Hague. “Refuse to work for developers who will not give you a reasonable rate.”
Samantha Gore of uv10 agrees: “developers know that if they want good agents who are going to spend money on marketing their projects, they are going to have to compensate us.”
But many developers are clearly finding life tougher too. “The big slow-down in European home sales has forced developers into selling at lower prices,” says developer Richard Cash of Invest in Brazil, “so everyone’s margins are getting squeezed. Everyone has become very cash-conscious … you have to look at every project individually and think … can we deliver on this? Is it worth it?”
Jeremy Knight of Knight Knox International says that his business, which has a large and well-established database of buyers and properties in more than 50 countries worldwide, agrees that some distressed market are getting very tight, but “there is still plenty of business to be done if it is packaged right. We have not really seen commission rates fall because I won’t take the properties on if the deal isn’t a good opportunity.” But he already works in a more modern way.
Knight Knox has a 3-stage checklist that every deal has to get through. “First we look at the quality, the reputation, the communication and the management of the partner we are considering doing business with” says Knight, “and then we see if the price is right. Finally we look at the commission rate … and if it isn’t good enough we don’t get involved.”
He never uses magazine or newspaper ads and looks for online referrals and matches within the company’s own database. “It is much cheaper that way,” he says, “and we are currently selling at least 20 to 30 houses a month just from our own database.”
Adapt to the new rules says Knight and work with banks in markets like Florida provided they will give your business the leeway and the support needed. “I am netting 10% per property where there is a tenant in place and the bank is happy to take an 80% under-value proposal.”
According to Chris Mercer of international agency Mercers “when I first started selling off-plan Spanish property 28 years ago commissions were as high as 18%!! Nowadays in Costa Calida 10% is closer to the norm.” He also believes that it is essential that you should find a formula that works for your company - and then stick to it.
“Mercers currently only sells re-sales in Spain, mainly within Camposol Golf Resort in Mazarron - minutes from the proposed Paramount Pictures theme park site - and here we hold the initial reservation fee of 3,000 euros which is then deducted from the final commission of 4% which is paid at completion, normally one to three months after the reservation fee.”
One agent, who did not wish to be named, told OPP “retained profits can be as low as 1% or 2%. The industry can’t go on like this for much longer, especially in distressed markets.”
Paul Collins of the Buy Association agrees. “There is undoubtedly pressure on profit margins at all levels of the industry – the global economic situation means that everyone from developers to sub-agents are having to squeeze prices as low as possible in order to generate client interest.
“Customers know there is competition for their deposits, so developers and agents are being forced to find more creative ways to generate leads and runs their sales operations in the most efficient way possible. Being able to offer developers and agents effective marketing solutions with a guaranteed volume of leads” is the way forwards says Collins.
Ken Spencer of Property Options Spain says “there are areas just outside Marbella where you can now buy at 50% of the true valuation … and the Spanish banks remain notoriously difficult to deal with.” Spencer recommends being highly selective using “caution and common sense … there are still some 100% mortgage deals out there but you will still have to pay the closing costs. My advice is to go on meeting with and speaking to the local reps who know the market and the community. Find a good deal but not a crazy deal.”
John Sebree of the Florida Realtors Association reckons that rates and prices are going to remain very tight for several years to come in distressed areas. “There is just too much distressed property on the market in places like Florida right now” he says.
Expect 70% off the peak prices in places like Florida and demand at least a 30% discount if you are buying direct from a developer. Things have now slipped so badly in Florida, says Sebree, that the average family house in the state now commands a median price of £85k and the average condo a median price of £51.7k.