Selling a house: 5% commission for a real estate agent - expensive?

Over the last 10 years, especially at the moment with inflation, rising interest rates and resistance against the trend of rising real estate prices due to lack of supply, it is important to understand whether the price of the service offered by most properties in Portugal is expensive or whether it is really fair for the service rendered.

Before judging anything, it is important to note that as far as I know, there are no recent and neutral surveys, i.e. from organizations not related to the real estate business, on the topic of "prices". The last survey study I participated in through Domínio Binário took place in 2018, when a survey was conducted among more than 1,000 real estate agents and intermediaries. The following conclusions were drawn from this survey: it was clear that the average commission is approximately 5% + VAT of the transaction amount.

We can talk a lot about quality and service, but the fact is that real estate properties are primarily valued for their ability to achieve a goal, with the path to that goal often ignored. But the truth is that the way we charge for service is also centered on the outcome and as simple as this: when a client enters into a contract with an agency, even if they have demonstrated and provided excellent service, they are only rewarded if they have a successful real estate transaction.

This is all true, but it is worth noting that if an agency has spent its time and resources to achieve a set goal and does not get results, it remains at a loss and receives nothing. This is a huge risk and therefore a reward that compensates for the effort and risks is justified.

To be clear, the term used for real estateagency remuneration - "commission" - is the correct one, despite the many attempts to associate it synonymously with more affectionate names. Now, if we examine the meaning of the word, we will easily find that the definition of commission is "remuneration, most often financial, offered for brokering business or achieving predetermined objectives in order to stimulate commercial results."

Thus, it makes sense that the Portuguese law, among others in the world, states that the commission must be paid to the agency only at the full completion of the transaction, which in the case of buying and selling real estate coincides with the moment of contract conclusion. It is also true that the same law allows for advance payments of commission if the parties (agency and client) agree and specify this in the written mediation contract.

Let's move on to people:

those who engage in real estate activities, we call mediators and real estate agents. An intermediary is the owner of the intermediary agency and is therefore required to have a license to operate (called an AMI license); a real estate agent is someone who actually provides a service, often also called a consultant, perhaps because they also do some consulting work to maintain the quality of their service, or because the term "consultant" is more endorsed.

Just to clarify this point: an agent is "a person or company doing someone else's business"; a consultant is "a qualified professional who is called upon to advise or obtain independent advice". The former are remunerated as a commission on a real estate transaction; the latter are paid for the reports or technical opinions they present, whether or not they are involved in a real estate transaction.

Now that everything is more or less clear, let's try to understand what is behind the 5% commission + VAT. From the commission that the client pays to the agency, the real estate agent should be remunerated.

Unfortunately, again, there are no specific and neutral studies on how much real estate companies pay their agents on average.

It is worth noting that when the commission paid to agents exceeds 60%, the agency charges a fixed fee to compensate for the use of the entire structure in which they operate, which must be organized to provide all the necessary support, because, again, if there is no deal, no one gets anything.

Then it is necessary to take into account structural or service costs. In recent years, even with a growing market, meaning a high number of transactions and rising sale prices, companies have been increasing their expenses. This is fine because the more transactions there are (and there has been a significant increase) and the higher the transaction value (the average sale price is always rising), the more money real estate agencies earn.

However, revenue is not profit, and with constantly rising fixed costs, the business only operates at scale. Without barriers to entry and with increasing competition driven by a positive market phase, the structure and services provided to an ever-growing number of people become cumbersome.

As an example, the average structure of the companies I observe can account for about 20-30% of revenue (about 5 percent of that). The larger the company, the more it invests in its structure to ensure the agent's success: premises; marketing, commercial management, administrative management, process management, financial management, human resources management, expenses on credit intermediaries, and, no less importantly, training.

And, of course, in many cases, the cost of the brand. Although the market is still very diverse, some intermediaries choose international and national brands to improve their position, recognition, and potential for attracting contacts. But not only that; they prefer to have a partner who can guide and strengthen them, helping to manage all the resources that, in many cases and in large companies, are actual departments with several people and even teams.

Franchise networks or other similar models with joint-stock companies can charge direct or indirect fees amounting to about 6-10% of the results obtained from such a 5% commission.

So, if we add everything up and do some quick calculations on taxes, mandatory payments, and fees in Portugal, we can see that real estate activity, like any other, can indeed be profitable if managed well. The costs required to ensure a serious, professional, efficient, and effective service are very high, and importantly, they are often fixed, meaning they are not directly tied to a transaction.

Therefore, if you are considering hiring a brokerage agency that will be represented by your agent, don't focus solely on the commission amount - focus on what will be guaranteed and expected with that commission, the level of service, the measures offered, support, consultations, and everything that lies behind those 5% that you are paying.

Fortunately, we are in a free market, and there will always be companies that operate with lower fees. However, you need to understand very well what this means in terms of service and especially in terms of the expectation of completing your transaction in a timely manner. Every experience is unique, so you'll be able to determine whether 5% is expensive once you complete your deal.