All too often property owners sign up a real estate agent and engage them to sell their property as either their sole agent or exclusive agent without really appreciating the difference between the two.
Some investors think they should only ever use a sole agency, just in case they can sell the property themselves and therefore avoid paying commission.
Careful thought needs to be given to this issue.
At the end of the day, are you really going to put that much effort into selling the property yourself?
And if you are, then that raises the whole issue of whether you should be doing the whole job yourself.
If you engage an agent it’s important not to disincentivise them.
You must ensure that you’re both working together as a team.
Let’s start with the basics.
There are three ways you can engage an agent.
1. OPEN LISTING
This general style of appointment means that the agent only gets paid if they find a buyer to sell the property to.
If you or another agent sells it then no commission is payable to them.
You can appoint many agents under this appointment structure.
One of my experienced builder/developer clients only ever appoints agents on this basis on the principle that he “just lets them all fight it out amongst themselves about who gets what commission”.
He doesn’t want to be playing favourites and engaging one to the exclusion of the other, let alone trying to sell it himself under a sole agency, so he opts for the open market approach where the best man wins. “I just engage them all,” he says.
2. SOLE AGENCY
Under this method of engagement only one agent is officially engaged and the agent will always get paid regardless of whether they or another agent sells the property.
They won’t get paid, however, if you find a buyer and sell it yourself.
An agent generally won’t feel too vulnerable about being appointed as a sole agent as opposed to an exclusive agent if you’ve done this to allow yourself to sell the property to your neighbour, for example, after you’ve listed it for sale.
That chance is usually more of a fluke than anything else and that’s why a lot of agents generally won’t feel threatened by it or will often agree to it.
3. EXCLUSIVE AGENCY
This is the ultimate recognition of your confidence and loyalty in an agent, as you’re appointing them (and eliminating all others) to sell the property for a fixed period.
With residential property, this is usually for 60 days and with commercial real estate typically 90 days from the date of commencement of the marketing program.
Regardless of who secures the outcome of selling the property (yourself, the agent or any other agent), the exclusive agent will get full payment.
To appreciate the issue of disincentivising the agent and the importance of ensuring that all efforts to sell the property are a team effort, let me share with you a couple of real life examples.
One case was the sale of a large cattle property in New South Wales where the owner of the smaller adjoining property had on many occasions at local district social events told the owner that if they ever wanted to sell the property and actually put it on the market for sale, they would welcome the opportunity to buy it.
When the owner eventually advised them that they were now sellers, the neighbour still showed some interest in acquiring it, but not enough to sign a contract of sale.
So, the owner approached their favourite agent to start an auction sales program.
Some serious negotiation, however, took place between the agent and the owner whether the owner appointed them as their sole agent or exclusive agent (the owner didn’t want to pay commission if the neighbour did eventually buy).
The agent pointed out that if they accepted an engagement as sole agent and the neighbour bought the property, all of their efforts and hard work would amount to nothing as they would receive no remuneration.
The owner’s point was that if the neighbour bought it then this was as a result of their efforts and not the agent’s, so how was it fair that they’d be paid for it?
The compromise reached between them was that the agent was engaged as an exclusive agent but on the basis, that if the property was sold to the neighbour (and the neighbour signed the contract of sale before the auction date), then no commission would be payable as the seller’s claim about the sales being brought about as a result of their efforts was valid.
The agent’s point was thought (and the seller agreed) that if the buyer came to the auction and bought on or after the auction then it was as a result of the agent’s good work and marketing efforts that they bought the property and therefore commission should be payable.
This was a sensible and reasonable compromise and one that ensured that the owner and the agent worked together as a team.
Another example involved the sale of a commercial property.
The property was placed on the market for sale by way of ‘expressions of interest’.
This is a process whereby the property is advertised for sale and people are invited to express an interest in buying it, and at the end of the marketing period, say four to five weeks, the date for lodgement of expressions of interest closes.
The seller would then consider all expressions of interest and ideally negotiate the terms of a contract of sale with the party that showed the most interest.
A contract of sale would usually be entered into with them a couple of weeks later.
In this case the owner of the property wanted to secure the agent as a sole agent only and market the property jointly with the agent (i.e. they would conduct advertising through targeted investment publications, with the agent conducting advertising through the usual national and major state newspapers).
The owner proposed to the agent that they would be paid only if they sold the property or is some other agent sold it, but in the event that the owner sold the property themselves no commission would be payable. A true sole agency.
An unenthusiastic agent called the owner to place this issue on the table as a major impediment to their involvement in the sale process.
The agent said the fact that the owner could sell the property himself was a major disincentive to them.
They could find themselves in a position at the end of the day where, despite all their good efforts, the ultimate buyer noticed the property for sale in an investor magazine on the same weekend they saw it advertised in a national newspaper.
They’d then realise that the seller was attempting to sell the property himself as well as through an agent.
Human nature would lead them to approach the owner direct then, rather than the agent, on the assumption this would achieve a purchase at a lesser sale price as no commission was payable.
How do you resolve such an impasse so that the agent and the owner work together as a team and the agent isn’t disincentivised?
The solution was that the agent was appointed as an exclusive agent, but on the basis, that if the owner sold the property himself through his marketing and efforts (legally called “the effective cause of sale”) then the agent received 50 per cent off the normal commission.
The agent therefore was highly motivated to sell the property and secure their full commission, but didn’t feel cheated if the seller ultimately sold it as they would receive a minimum of 50 per cent of the commission. A sensible outcome.
CHECK THE TERMS OF YOUR SALE APPOINTMENT
In New South Wales and Queensland, the real estate industry recognises the three methods of marketing discussed in this column and allows you as an investor to appoint your agent in this column and allows you as an investor to appoint your agent on the basis of any of the three.
However, each state has its own laws and real estate industry body.
They recommend to their members (real estate agents) Sales Appointments which don’t all offer the three styles of appointment.
You must therefore read the document given to you by the agent to formalise their appointment so you understand what your options are in engaging them.
In Tasmania, for example, a sole agency and excusive agency mean the same thing and your legal obligation (if you use standard industry documentation) under the sole and exclusive agency is that the agent gets paid if you, the agent you appointed, or any other agent sells the property.
Your obligation to pay the agent depends on the terms of what you sign with them, so read it carefully.
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