Often development finance will have a pre-sale requirement. Unlike a sale of an existing property, a pre-sale settlement isn’t realised until the project is complete which can take up to 24 months or more at times. Because of this there are different ways and amounts that a real estate agent may charge for pre-sales. We explore below what these real estate agent costs are and how they might be charged.
Amount Charged
Agents charge varying real estate fees for the sale of properties. There are two primary methods, however. The first is a percentage of the sale price, normally this is between 3 and 4% for the first $300,000.00 - $400,000.00 reducing to 2 – 3% thereafter. Note this is exclusive of GST.
This method works very well for properties with a lower value as the commission is based on the sale price. It is quite common with most traditional larger agencies in New Zealand.
The other approach which is common, more so with firms that sell a lot of off plan properties, is a flat fee model. Typically these sit somewhere between $20,000.00 - $30,000.00 + GST.
This method works better for properties with a higher price as the commission is fixed. If we compare the two scenarios based on a fixed fee of $30,000.00 versus a staggered percentage amount of 4% on the first $400,000.00 and 2% thereafter the percentage method would be cheaper right up to a $1.1 Million purchase price.
It should be noted, however, several firms that offer a fixed real estate fee model also cover marketing costs. This can make the break-even price lower for the percentage model.
Timing of the payment
Having covered off the two primary ways of calculating the amount charged now we can investigate the timing of the payment.
Paid on Settlement
This most closely aligns with a normal sale where a real estate is paid on settlement of the property, normally from the proceeds. This is perhaps the least common for off plan sales because, as mentioned above, there can be a significant period of time between the sale being made and the payment of the fee. Further, there is the risk that the development isn’t complete, a sunset date lapses or the purchaser fails to meet their obligations which puts the agent's fee at risk.
Paid on Finance Date
This agency agreement is normally reached with an agent where there is a pre-sale threshold required under a finance offer. By agreeing to be paid on finance the agent is agreeing that the development finance will cover their fees and therefore they can be paid when that loan draws down.
It works well when there is a pre-sale requirement in the finance offer as the agent is required to meet the threshold to release their fee. It ties them to the condition within the offer.
It also ensures that the real estate fees can be covered from the finance arranged and therefore is not a cash expense to the developer. It is more beneficial to the real estate agent as well as they have greater certainty as to when they will be paid.
Paid in full upon the contract becoming unconditional
This is where the full commission is paid when the sale and purchase agreement becomes unconditional. This is paid by the developer and normally not funded as is often paid prior to the finance being drawn.
It is quite common with specialist off-plan real estate agents who want to ensure they are paid when they make the sale. The risk sits with the vendor who is required to pay well before the property is settled and therefore carries the risk of the purchaser performing on the contract.
Some agents will agree payment terms (up to 90 days) after an unconditional date, however, the fee will become payable once the contract is unconditional regardless of payment terms.
Part paid on unconditional, or finance and part paid on settlement.
Agents will at times agree to charge half their fee on the unconditional date or drawdown of finance with the balance on settlement. This can be a nice middle ground for both parties that allows the agent to be partially paid early whilst retaining some of the payment through to settlement.
The above is a good summary of the varying ways an agent may charge their commission and the rates they may agree to. You can always further negotiate the terms such as you can with most agency agreement contracts. We recommend engaging with your agent and working to find a solution that suits all parties. Also, be prepared to fund some or all the commission if necessary as you may not be able to finance it.
Lastly, whilst payment amounts and terms are important, ensure that you get the agent best suited to sell your properties and realise the best price.
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