WARNING: Another ugly side of real estate
by Neil Jenman
READING TIME: APX 3 mins.
Like all scams, this one can appear perfectly reasonable – at first. Especially if suggested by a smooth-talking agent or, sadly, media commentators who haven’t done their research.
But be warned: This is a scam that can really hurt.
Here’s what happens: You want to sell your home and the agent suggests a method of charging commission that seems reasonable. The agent has a low standard fee – usually one or 1.5 per cent – and then, if they get you a lot extra, you pay them a lot extra. But only on the extra amount they get for you. Of course.
Let’s say you’d be happy to sell your home for eight hundred thousand dollars. The agent agrees to charge you one per cent up to $800,000 and then, if or when they get above that amount, they agree to pay you a “bonus” on the extra you get.
That’s the public name for it, a “BONUS FEE”. Among agents, it’s known as a “KICKER COMMISSION” and not because, as you’ll see, sellers usually get a ‘financial kick in the guts’ but because, according to the agents, their extra work and their great negotiation skill, was the reason the sellers got a hefty amount extra for their home.
Now, you’re probably wondering how much extra the agents expect you to pay if they get you extra. Well, I have heard cases where agents charge as much as fifty (yes, 50!) per cent to sell a home above the sellers’ agreed minimum price. So, in the above example, where the sellers are happy with $800,000, if the agent sells their home for one million dollars, the agent will get a “bonus” of one hundred thousand dollars. The sellers will pay a total of $108,000 to sell their home for one million dollars. That’s a commission of 10.8 per cent on the total price.
So why is this a scam?
The agents will say something such as, “Even after our commission, the sellers still got an extra hundred thousand dollars! They wanted $800,000 and we got them an extra two hundred thousand dollars, so we split the extra, a hundred thousand dollars each! How can that be a scam? Jenman, you’re scare-mongering again.”
Well, here’s why it’s a scam. The home was always worth a million dollars, but the sellers didn’t know it. Maybe it had been a while since they got a price update on their home and they don’t know how high prices have risen. Or, worse – and these are the most common victims of the ‘kicker scam’, they were elderly and alone and they trusted an agent who wasn’t worthy of being trusted.
An agent (one of the good ones) who despises this method of charging sellers once told me about a widow in her late 80’s who sold home for $650,000 and the agent charged her a fee of $80,000 – one per cent for getting five hundred thousand dollars, then fifty per cent for getting one hundred and fifty thousand dollars above $500,000. A commission rate of 12.3 per cent.
When asked what he thought the property was worth, the good agent said, “At least $700,000.”
So, at best, this widow paid $63,750 in too much commission (compared with an agent who’d have charged her 2.5% on the total selling price). At worst, she effectively lost $113,750 when you factor in the commission plus the amount by which the home was under-sold.
Can you see how websites that claim to “compare commission rates” can be dangerously misleading? So often, the agents who appear the cheapest are the dearest.
Now, granted, I haven’t heard of many agents charging 50 per cent. The most common amount is 20 per cent. But even 20 per cent is an obscene amount to charge anyone, especially when, in most cases, the agents are not getting extra, they are simply selling the home for its true value often in a hot or rising market. Or maybe, they happened to stumble across buyers who wanted the property so much they were quite willing to pay extra – there was no special skill on the part of the agent. Whatever the reason, the kicker fee (or the Bonus Fee as they call it) can seldom be justified.
Besides, if an agent needs an incentive of a massive increase in percentage to do what the agent has a duty to do – namely, get the best price for the sellers – that’s an agent that’s surely deeply devoid of character, never mind ethics.
The best way to pay an agent is to follow what I call the ‘Golden Rule of Selling Real Estate’: “NEVER PAY ANY AGENT ANY MONEY FOR ANY REASON UNTIL YOUR HOME IS SOLD AND YOU ARE HAPPY WITH THE SALE PRICE, THE FEE AND THE SERVICE.”
If you need help to find a good agent, please click here or contact Neil Jenman direct on [email protected]
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