Tuesday, August 08, 2006

Viva to list at 2%

Has the cheese finally slid off the cracker? Or is this a bold stroke of genius? Viva Estates, one of southern Spain’s largest real estate agents has dramatically changed its listing commission from 7.5% to 2%.

Agent commissions have long been the subject of argument here in Spain, particularly since the introduction of the Interagency Network Multiple Listing System (MLS) a few years ago. 5% remains pretty much the standard commission charged by agents across the board (compared to 1-2% in the UK), although properties listed on the MLS are sold on a sliding scale starting at 7.5% for the lower value properties.

To UK estate agents, and to many vendors and buyers this rate seems exorbitant. “At least Dick Turpin wore a mask”, etc.. Read Mark Stucklin’s article here.

But, and I must declare my interests here - I work for an MLS agent - I have seen how the MLS works at its best, and why it can be argued, that if you want your property effectively marketed and sold within a reasonable timeframe, then sometimes the 7.5% route is a good option. The commission is usually split (although not always) between 2 agents who have cooperated to sell the property. A small admin fee is also retained by the MLS themselves.

This produces a situation where 2 agents are healthily incentivised to sell the property, whilst working within a set of policed guidelines (the IN code of ethics). Providing the vendor is not too greedy or unrealistic (expecting [put silly number here]% growth inside of a year), he can expect to move his property reasonably quickly and confidently. In a buyers market, where we are seeing a surplus of product - this can be a sensible option for the vendor to consider.

I’ll stop banging on in defence of the MLS now, but perhaps we can see now why Chris McCarthy’s change in policy seems so dramatic. At 2% there will be no agent cooperation. There will be a significant interim cashflow issue too, I would guess, as the reduced commission rate will necessitate an increase in sales volume to keep the ship afloat. There will be staff changes afoot too, no doubt, since the prospect of earning significantly less commission (or even none) will make salespeople vote with their feet. Rough seas ahead.

But what if it works? Well for vendors and buyers, it is a no brainer. In theory at least, reduced commissions make for cheaper listings, make for increased sales. It could potentially change the market as other agents are forced to reduce their commission rates in order to keep their rapidly diminishing slice of the pie. Plus what many consider to be an overcrowded marketplace will no doubt thin out somewhat, as many real estate agents fail to “rationalise” and pack up and go home. Or to Bulgaria.

Interestingly the 2% covers resale property, what about offplan property where developers are offering commission rates in double figures? A recent email I received, proudly declared that the developer was offering 18% commission alongside generous volume bonuses including free apartments. Mmm, 2% resale, or 18% offplan - if I was a salesman, I know which I would rather be selling.

There is, interestingly enough, a precedent for Viva’s actions. UK agent Foxtons opened a branch in downtown Manhattan, undercutting the local NY realtors by 3%. The outing was not an unqualified success, though, as you can read here.

So we await the next few months with eager anticipation. If nothing else, Viva have got everyone’s attention. Maybe its just a marketing exercise, after all.

Update: Chris McCarthy explains all

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