Want to Reduce Commissions? Start with the Deposit

Despite intense competition and huge technology advances (eg listing websites, smart phones, laptops, wireless etc) real estate commissions have increased dramatically in absolute dollars over the last decade or more. Simply because they are calculated as a percentage of house value and are not based on the effort involved or value delivered.  

While many other industry fees and costs have come down real estate commissions have remained stubbornly high. 

Why have sellers allowed this to occur? One argument is something called the Framing Effect. This is where a price is bundled into other things and as a result purchasers are far less sensitive to it. In real estate the commission cost is taken out of the deposit before it is handed over to the vendors solicitor, where it is bundled into the overall settlement statement. People are less sensitive to it because there is so much to look at, with often quite large numbers (the house price, the mortgage amount and so on). It’s not ‘real’ money, you don't actually see how much it is (and when you do it's small compared to the other numbers on the page), and you don't really have to pay it (it's all done for you at settlement).  

There is a straightforward fix to this.  

The purpose of Real Estate Agents Act (2008) when it came into effect in 2009 was to promote and protect the interests of consumers along with promoting public confidence in real estate work. The new Act made one important change - requiring the actual likely commission to be quoted in the agency agreement as a total dollar figure, rather than as a percentage or other mechanism. It certainly helped remove the obscurity surrounding actual fees. But, it has resulted in pretty much nothing in terms of reducing fees.  

The simple way government could promote the interests of consumers and reduce the costs of selling? Clear up the ambiguity - remove the ability of agents to deduct their commission from a deposit. After all that is a part payment in good faith by the purchaser for the benefit of the seller. Require the seller to actually pay the commission as a specific and separate bill. Get them to write the cheque. All of a sudden it becomes real. Just watch the uproar......