This article was first published in the third-quarter 2015 edition of Personal Finance magazine.

The overwhelming majority of homeowners go through an estate agent when they sell their properties, paying commission of five percent, on average, excluding VAT. But do estate agents really earn their keep, and, in our online age, is it necessary for sellers to pay someone to market their homes?

A colleague recently sold her house for R3.4 million. The offer that she accepted was made within five days of the property going on the market. The agent advertised the property once, held one show day (when the offer to purchase was made), and brought a few people to view the house. The agent earned commission of R193 000.

As a general rule, the cheaper your property, the higher the percentage you will pay in commission. Most sellers are charged between 5.5 and 7.5 percent, plus VAT, whereas sellers at the very top end of the market – we’re talking properties worth R50 million or more – pay two or three percent, or even a negotiated fixed fee.

Although the agent’s commission is deducted from the price realised by the seller, in a sense the buyer pays too, because, when setting a price, the seller must build in the commission. Most buyers have to finance the purchase; the higher the selling price, the bigger the home loan they will have to take and thus the more interest they will have to pay over the term of the loan.

There are cheaper alternatives to the “full-service” estate agency: you can sell your property yourself, or you can use what is called a low-commission agency, which relies exclusively on the internet to attract buyers. Unlike the private-sale experience, the low-commission route offers guidance and advice from a third party of the kind you would have from a “traditional” estate agent. However, the support staff operate from a head office, not the area in which you are buying or selling, and they earn a salary, not a commission.

Cape Town-based Steeple, which was started more than three years ago, is South Africa’s first low-commission agency. Homebid, which is based in Johannesburg, launched this year. Both companies charge sellers a set commission, but they differ radically in the type of services they offer.

Steeple

David de Waal, the founder and chief executive of Steeple, says his company focuses on residential properties in the major cities of South Africa and performs the critical tasks required to sell a property while leaving sellers to carry out the less important ones. De Waal, who is a chartered accountant and Chartered Financial Analyst, has a background in corporate finance, venture capital and e-commerce.

He says that, if the internet had been invented decades earlier, the way Steeple sells property would be the norm today. At the same time, he says, sellers want professional advice and help with the legalities of the sales process, and Steeple’s staff can provide these services via phone or email.

Unlike a traditional agency, Steeple’s staff do not have the pressure of securing a sale to earn their salaries, and therefore “work as a team” to help sellers, De Waal says.

Steeple charges a flat commission of 1.5 percent (Steeple is not, at the time of writing, in June 2015, a VAT vendor, but will become one in the near future), but there is a minimum amount of R22 000. The commission is paid only once the property has been sold. If my colleague had sold her house for R3.4 million through Steeple, she would have paid commission of R51 000, saving herself R139 000.

As a seller, you sign an open mandate with Steeple online. Steeple works with you to decide on a valuation for your property. It sends you a comparative market analysis report, giving the actual selling prices of the 20 most recent property sales in your area, and it advises you to do the following:

* Obtain the latest municipal valuation (which will probably be lower than the current market value, unless the valuation was done when prices were high);

* Establish how much you owe on your mortgage bond;

* Use property websites to find the prices of similar properties in your area; and

* Work out how much you have spent on upgrading (excluding repairs and maintenance) your property.

Steeple then helps you to decide on a selling price, after discussing the results of your research and based on the comparative market data it has sent you.

You can send Steeple photographs you have taken, or, if you live in one of the major metropolitan areas, Steeple can send a photographer to take pictures of your property, at a cost of R450. If you want a “for sale” sign, one can be couriered to you for R350. (These costs must be paid upfront; they do not come out of the commission.)

Steeple markets properties on the “big three” property portals (Property24, Private Property and IOLProperty, which collectively attract about 2.5 million views a month) and Gumtree. Prospective buyers contact Steeple, which forwards the enquiry to you directly via email or SMS. You and the buyer agree on a suitable day and time to view the property, and you show the buyer around. If the buyer wants to make an offer, you contact Steeple, which will then perform the functions of a “traditional” estate agent.

De Waal says Steeple will liaise with you and the buyer to customise the offer-to-purchase to suit your needs. Only once both you and the buyer are happy, will the offer document be sent for both parties to sign. You can choose to negotiate directly with the buyer, or can ask Steeple to act as an intermediary.

You, the seller, choose the conveyancer, or Steeple can suggest conveyancers in cities around the country. De Waal says that Steeple does not have a financial relationship with the conveyancers that it suggests, nor does it receive referral fees, which, he says, is the case with some estate agencies.

Steeple will guide you through the transfer and liaise with the buyer, conveyancer, bond originator and the bank. You will be told which certificates of compliance you must obtain.

Homebid

Homebid is the brain-child of Neville Berkowitz, who has worn various property-related hats over the past 40 years – economist, adviser to the Transnet Pension Fund and developer. Berkowitz, however, is not involved in the day-to-day running of Homebid. The company’s general manager is Gary Sacks, who worked for Investec and RMB private banks for 12 years, specialising in structuring property-related loans. The principal agent is Mike Mills, who has 30 years’ experience in property development, sales and administration.

Berkowitz says the traditional way of buying and selling property is not only unnecessarily exorbitant, but also lacks professionalism and transparency. He believes that the innovations introduced by Homebid address these shortcomings.

Homebid charges a flat commission of 1.95 percent, or 2.22 percent including VAT. If my colleague had sold her house via Homebid instead of a traditional estate agent, she would have paid commission of R75 480, which means she would be R114 520 richer today. Homebid’s marketing material does not mention a minimum commission, but Berkowitz says Homebid is not generally interested in listing properties with a value of less than about R600 000.

Homebid compares relying on an estate agent’s valuation of your property to “putting the fox in charge of the henhouse”, because, it says, the valuation will be influenced by the agent’s desire to convince you to sign a mandate, preferably a sole mandate. It says the valuation may be either unrealistically high, to make you feel instantly richer, or, if you are perceived to be “a desperate seller”, too low, so that the agent “can earn a quick commission”. Homebid also does not believe that most estate agents are qualified to value properties accurately.

Therefore, the first requirement in Homebid’s sales process is that you have your property valued by an independent, professional valuation company. Homebid has partnered with Quadrant, which, among other things, values industrial, commercial and residential property for insurers, owners and

asset managers. Quadrant’s valuers are registered with the South African Council for the Property Valuers Profession. Quadrant is based in Johannesburg, but Berkowitz says it does valuations around South Africa.

Berkowitz says the valuation costs R1 995 (including VAT) for properties valued up to R5 million and R2 565 for properties valued at more than R5 million. The valuation is not based only on statistical data; the valuer will inspect your property and check the building plans. Berkowitz says Quadrant’s valuers will not turn a blind eye if they come across unlawful additions – they will be noted in the valuation report – because they affect the value of the property.

Sellers can interrogate the report, and if they can produce information that they believe will influence the final valuation, the valuer will revise the report at no extra cost, Berkowitz says. The valuation report is valid for about 12 months. You don’t have to use Quadrant, although, Berkowitz says, Homebid has negotiated a lower rate on behalf of its clients. He says Homebid and Quadrant are completely independent of each other.

He says Homebid’s approach removes the incentive to over- or under-value the property, because the valuation is provided for a flat fee upfront, whether or not the property is sold. You can accept the valuation and walk away. However, if you proceed to list with Homebid and the sale goes through, you will be reimbursed the full cost of the valuation.

Homebid will generally not permit you to list the property at more than 10 percent above the valuation amount. For example, if the property is valued at R2 million, you can list for up to R2.2 million. Furthermore, you will have to sign a sole and exclusive mandate with Homebid for 90 days.

Homebid will send a photographer to take pictures of your home. A sales facilitator will use the pictures and the information from the valuation report to create a listing profile. Once you are happy with the profile, it will be listed on Homebid’s website and on 19 property portals, including the “big three”. Sellers are also provided with a “for sale” sign to put outside their property.

People who see the listing and who want to view your property will contact Homebid. Before a facilitator contacts you to set up a site visit, the buyer will be required to submit a copy of his or her identity document, which the facilitator may choose to verify.

You, the seller, show the prospective buyer around the property. Homebid says there is no need to discuss the price, because only financially pre-qualified buyers can bid on your home, and the issue of the price is handled by the confidential bidding process. To qualify to bid, buyers must be able to prove that, if the seller accepts their offer, they will have all the funds required to conclude the transaction: deposit, mortgage bond, transfer duties and fees.

Berkowitz says that, according to conveyancers canvassed by Homebid, about 30 percent of all sales via “traditional” agents fall through after the agreement has been signed, because it transpires that the buyer cannot obtain a home loan, has unresolved tax issues or cannot afford the transfer costs. He says this could be prevented if estate agents permitted only financially pre-qualified buyers to make offers.

Financially pre-qualified buyers are provided with a copy of the valuation report before they put in an offer, which, Berkowitz says, means that sellers and buyers can negotiate on a level playing field.

Homebid will obtain a home loan on behalf of buyers who need a mortgage bond to qualify as bidders. However, buyers do not have to obtain a home loan through Homebid, as long as they can prove to Homebid’s satisfaction that they will be able to obtain the finance to conclude the deal. Usually, offers are conditional on the buyer obtaining a mortgage bond, and this system eliminates that uncertainty.

Berkowitz says Homebid’s financial division is staffed by people with a background in private banking, and they know what lenders require. He says mortgage originators have a success rate well below the 60 to 70 percent they claim and most use a “shotgun approach” – in other words, they send buyers’ financial information to a number of banks simultaneously. Homebid will submit a tailor-made application based on a buyer’s specific needs.

According to Berkowitz, originators do not send your financial information to mortgage providers that do not pay them commission, whereas Homebid will approach all the banks that provide mortgage bonds and SA Home Loans, depending on which lender is most appropriate for a specific buyer. It will also follow up with prospective buyers and provide them with additional information about the property, such as levies and the rules of the complex, if it is a sectional title property.

A qualified buyer who wants to go ahead and buy a property submits a confidential, legally binding bid to Homebid, which will forward the bid to the firm of attorneys it has appointed to represent you, the seller. A bid is valid for 14 days. The attorney will discuss the bid, including terms and conditions, with you, in person or by phone or email.

If there is more than one bid, you can decide which one to accept. Homebid’s marketing material states that sellers are “at liberty not to accept any bid unless it is at or above your listing price”. Asked whether this means that you are contractually bound to accept a bid that at least meets the listed price, Berkowitz says Homebid “would not want to force people to take sales”, and sellers can delete this condition from the mandate.

Homebid has appointed MC van der Berg Incorporated, based in Centurion, to handle transfers. Berkowitz says the law firm will, in turn, appoint firms in the other parts of the country.

If you accept a bid, you and the buyer meet at the offices of the appointed law firm to negotiate any outstanding issues, and the buyer may bring his or her own attorney to the negotiation. The firm will draw up the sale agreement for both parties and attend to the transfer. The commission paid to Homebid includes the cost of drawing up the sale agreement, but the transfer fees are excluded, and the seller will pay these separately to MC van den Berg.

You can, “in exceptional circumstances”, use your own conveyancer, but your attorney will have to work with an attorney from MC van der Berg, and you will have to pay any additional costs.

Getting the valuation right

Both “traditional” estate agents and low-commission agents believe that one of the risks of selling privately is that buyers do not take private sellers seriously. There’s a perception that these sellers are “taking a chance” or, because they lack experience and expertise, may be susceptible to accepting offers that are far below market value.

Another, perhaps bigger, risk for sellers is pricing their properties incorrectly, typically by overpricing them. Andrew Golding, the chief executive of Pam Golding Properties, says that, despite their best intentions, sellers struggle to be objective when valuing their homes and this can significantly affect their ability to attract the right buyers.

He says buyers will shy away from properties they feel are overpriced; then, when the property has been sitting on the market month after the month and the seller is forced to relist the property at a much lower price, there will be a perception that there is “something wrong” with property. Golding says a major benefit of an estate agent is that he or she can provide an objective and independent valuation.

Private sellers can obtain data about property transactions from research companies such as Lightstone, which provides data, including property valuations and related statistics, to the property industry. They can download reports that provide a breakdown of sales according to criteria such as area, erf size and type of ownership at a cost of between R45 and R60. Although these reports provide a good idea of general value, Golding says, they cannot do justice to other important considerations, including a property’s position, architecture, views and finishes, as well as the lifestyle it offers.

An area specialist will have a lot of information about the property that cannot be contained in a report: for example, proximity to schools, highways and shopping centres, any servitudes registered against the property and potential developments in the area. All of these factors can affect the value of a property in a way that sellers generally won’t be able to assess objectively, Golding says.

De Waal says he has “no problem” with admitting that an estate agent who knows a specific area well is a significant advantage to sellers when valuing their properties. However, the value of this expertise is not as great as it may appear, he says, because potential buyers tend to assess the attractiveness of the price of a property based on available public information (websites, property reports, and so on). This “market view” of the price, even if it is ill-informed, is ultimately the determinant of the selling price. In addition, he questions whether sellers ultimately benefit financially from this once the agent’s commission has been deducted.

“Traditional” agents reject the argument that commission-based selling is an incentive for them to inflate the value of a property. Adrian Goslett, the chief executive of RE/MAX, says an overpriced property that sits on the market for too long will result in reputational damage for an agent, adding that referrals from satisfied clients are the main way estate agents secure new business. In the case of RE/MAX, about 70 percent of sales are the result of leads from previous clients or referrals, with the balance from advertising and marketing.

Goslett says an agent would prefer to sell more properties in a shorter time. Properties with unrealistic prices won’t move, and this will reflect poorly on the agent.

Golding has a similar view. He says: “Today’s buyer is tomorrow’s seller, and an agency with a long and respected track record will be known for its honesty, whatever the ups and downs of the property market. In any event, buyers will ultimately dictate the market value, so, while evaluation is not an exact science, the property must compare favourably to similar properties in the area.

“Over-inflating the price will reflect poorly on the property, because it will be compared to similarly priced properties that offer better value for money. It will also draw buyers in the wrong (too high) price bracket, with a similar result. However, the agent must allow for buyers to make an offer, thus establishing market value, and also for the seller to achieve the best possible price, so a ‘negotiating margin’ is usually advisable.”

Marketing the property

The type of marketing required to bring buyers and sellers together is a key area of disagreement between low-cost agents, operating almost exclusively via the internet, and traditional agents .

Low-commission agents believe that estate agents walking around with buyers and driving them from one property to another adds an unnecessary cost to the transaction. They argue that it is precisely because they do not have “feet on the ground” or offices in the high streets of suburbs and towns across South Africa that they can streamline the process and charge low commissions.

With all the information that is available online, De Waal believes buyers are sufficiently savvy about available properties not to require an estate agent – particularly given that an agent is limited to the properties on his or her books. He also believes that buyers prefer to ask the seller questions directly when they view a property, without having to go through an agent.

In De Waal’s view, the role that estate agents play in ensuring that a property sells is exaggerated. He dismisses claims that agents acquire certain sales techniques that equip them to nudge buyers into making an offer. He believes that a property purchase is a major financial and emotional decision and that buyers make offers only if they like the property enough. A buyer cannot be “sweet-talked or strong-armed” into purchasing a property that he or she doesn’t really want, he says.

Horses for courses

De Waal says the decision to sell privately, through a low-commission agent, or through a traditional agent has much to do with the seller’s personality and experience. He says that people who have a background in law or accounting, have bought and sold a few times, have an entrepreneurial spirit and are not in a particular hurry, will be comfortable to sell their homes privately. On the other hand, Steeple’s approach will work for all sellers, says De Waal, except for those who don’t feel confident to show buyers around their homes, or who aren’t comfortable with the internet.

Berkowitz, like De Waal, believes there are “horses for courses” when deciding how to sell your home. The commission required by traditional agents is probably not an issue for people selling at the top end of the market.

WHAT ABOUT SELLING PRIVATELY?

On the face of it, the financial benefits of selling your property privately are obvious. In March, the average property in South Africa sold for just shy of R1 million, according to First National Bank’s Property Barometer. Estate agents, on average, charge commission of five percent, excluding VAT. At the risk of erring on the side of optimism, if an agent sells a R1-million property for commission of four percent (including VAT), the seller will have R40 000 less in his or her pocket. A DIY seller can pay R875 to list his or her property on IOLProperty for six months.

However, if one peruses Private Property or IOLProperty, it is striking just how few people are selling their properties themselves. And even the few who are, may switch to an estate agent and conclude the deal “the old-fashioned way”.

Private Property, which started in 1998 as a web portal for private sellers, changed its business model in 2006 and now accepts advertising from estate agents and developers. Currently, about five percent of listings are from private sellers.

Private Property charges R1 295 (including VAT) for a DIY listing (you post your own photos), including a map linked to the listing, for six months. With a “verified listing”, which costs R2 495 for six months, a photographer will take pictures for you. Your property will come higher up in search results and your listing will include a virtual tour. You also get “for sale” and “on show” signboards. If you want your property always to appear at the top of searches for homes in your area, a “featured listing” will cost R4 495. You pay the marketing costs upfront when you list on a property website, whether or not the property finally sells.

Simon Bray, the chief executive officer of Private Property, says there is a place for selling your property yourself, but most people still want “to have their hands held” when they sell a property. They find the process too intimidating to undertake on their own, he adds.

Private Property has online tools and information about selling, buying and renting property. However, Bray says platforms such as Private Property make it very easy to market a property; but the challenge facing sellers is to close the deal.