Financial strife for private sale companies

Article originally published APRIL 26, 2003 –Reviewed and approved.

By Neil Jenman

Yet another company that helps homesellers to sell without an agent appears to be in financial trouble. According to a report in The Daily Telegraph (Sydney, April 26), an administrator has been appointed to FSBO Pty Ltd. (The initials FSBO mean For Sale By Owner). The company’s debts are reported to exceed $1.5 million.

FSBO’s troubles show how hard it is in Australia to compete against real estate agents. Despite the emergence of several private sale companies over the past decade, at best most have limped along, hardly denting the iron-clad hold of agents over their huge commissions. In the United States, around 16 per cent of homes are sold without agents. In Australia it is barely two per cent.

The Commission Boom.

Real estate prices are not the only thing to have boomed lately. Commission for agents has also boomed. In Australia’s major cities, commissions of $10,000 per sale are now considered low. Amounts of $20,000 are common. And for properties sold above a million dollars, commissions can exceed $30,000 per sale. One agent in Sydney’s Northern Beaches boasted about earning $90,000 for the sale of a $3 million home.

Despite private sale companies claiming to offer the same (or a better) result for homesellers at a fraction of the cost, they all struggle to survive against the thriving agents. There are four main reasons why private sale companies find it so hard to compete with agents.

The Collective Power of Agents.

The first reason is the collective power of agents and their use of muscle to stifle competition. Real estate agents are renowned for being savagely competitive with each other. But when it comes to companies that threaten the incomes of all agents, those companies face the savage wrath of all agents. Everything from massive misinformation campaigns to the banning or restriction on advertising by the private sale companies. Many real estate publications (including web sites) simply forbid anyone other than agents to advertise. In publications where private sellers can advertise, they often have to pay a rate far more than the rate offered to agents.

The Great Myth.

Second, the real estate industry has craftily created a myth that homes must be sold by agents. Some homesellers even believe the law states that homes must be sold by agents. This is not true. Thousands of homesellers would be better off without an agent. Not only do most agents charge too much commission, they also sell homes for less than they should be sold. Of course, such information is not only denied by the real estate industry, it is suppressed.

Agent Mentality.

Third, many private sale companies are owned by former agents. They have an agent mentality. While they may be able to save sellers a lot of money, their main motive is the same as agents. It is to make money for themselves, not to save money for consumers. Consequently, they act like agents. They charge up-front fees and don’t guarantee their service. Many sellers find themselves having to pay twice – once to the private sale company and then, if they don’t sell, they have to pay an agent.

Money and Skill.

The final reason why private sale companies have failed to make a mark in Australia is that they lack both funding and business acumen. It is not easy to take on an industry powerfully entrenched in the public psyche. But it is possible. It needs someone with pockets deep enough to survive the early years. It also needs good business skill to convince homesellers that selling without an agent means huge savings. That’s a truth that shouldn’t be hard to sell. Most agents overcharge on commission and undersell on the price of homes.

This is a fact that has been recognised in other countries, such as the United States. In Australia, it has also been recognised in the commercial sector where agents are missing out on millions of dollars in commissions because many sales are now done without agents.

The residential real estate industry is a different story. Agents are still in control of their prized commissions. But it’s a control built on myth and bluff. One day, someone with the funds and the skills to call that bluff will give agents a serious battle. The prize is waiting to be won, for the right private sale company. And for consumers.

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