Selling a home: is 5% commission expensive for a realtor?

Over the last 10 years, especially nowadays with inflation, rising interest rates and a steady increase in property prices due to lack of supply, it is important to understand if the service offered by most real estate agencies in Portugal is expensive or if it really has a fair value for the service rendered.

Before judging anything, it is important to note that, to my knowledge, there are no recent neutral surveys, i.e. surveys conducted by independent organizations not related to real estate, on the topic of "price". The last survey research I participated in through Domínio Binário was conducted in 2018 and included more than 1,000 real estate agents and intermediaries. The following conclusions were drawn from this survey: it is safe to say that the average commission is around 5% + VAT of the transaction value. We can talk a lot about the service and its quality, but the truth is that real estate agencies are mainly evaluated on their ability to achieve a goal, with the path to that goal often ignored.

Real estateagency and remuneration risk

But it is important to note that if a real estateagency has spent its time and resources to achieve a goal without results, it remains at a loss and receives nothing. This is a huge risk, so it is entitled to a fee that compensates for the effort and risk. It should be noted that the term used to pay real estate agencies - "commission" - is actually the correct term, despite the many attempts to tie it synonymously with the bias of more refined titles. If we examine the meaning of the word, we easily find that the definition of commission is "a reward, most often financial, offered for mediating a business or achieving predetermined objectives to stimulate commercial results". Thus, the Portuguese law, as well as the laws of other countries, say 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 signing the contract. It is also true that the same law allows the commission to be paid in advance if the parties (real estate agency and client) so decide and formalize it in the mediation contract.

The difference between intermediaries and real estate agents

Now let's talk about people: those who are involved in real estate intermediation we call intermediaries and real estate agents. An intermediary is the owner of a real estate agency and therefore required to have a license to operate (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 support the quality of their service, or because the term "consultant" is more accepted. Just to clarify this point: an agent is "a person or company that promotes someone else's business"; a consultant is "a qualified person who is approached for consultation or pro bono advice." The former receives compensation in the form of a commission on a real estate transaction; the latter gets paid for the reports or technical opinions they present, whether or not they are involved in a real estate transaction.

Commission composition and costs

Now that things are clearer, let's try to understand what is behind the 5% commission + VAT. Out of the commission that the client pays to the agency, the real estate agent must be paid. Unfortunately, again there is no concrete and neutral research on how much the average real estate agency pays their agents.

In recent years, even in a high market, i.e. with a large number of transactions and rising sale prices, companies have been going the route of increasing costs, which makes sense because the more transactions (and there have been a lot of them) and the higher the transaction value (the average sale price is constantly rising), the more real estate agents earn. However, revenue is not profit, and with fixed structure costs, a business only works at scale. With no barriers to entry and with increasing competition stimulated by positive market conditions, the structure and services that need to be provided to more and more people start to put a strain.

In the example of medium sized companies I observe, structure can be around 20-30% of revenue (those very 5%). The larger the company, the greater the investment in the structure to ensure the success of the agent: premises; marketing, commercial management, administration, process management, financial management, human resources, credit intermediary costs and, just as importantly, training.

In addition, in many cases there is brand value. Although the market is still very dispersed, some intermediaries rely on international and national brands to improve their position, visibility and potential to attract contacts, and prefer to have a partner who can guide and help utilize all the resources, which in many cases, especially in large companies, are separate departments with many employees and even teams. Franchise networks or other similar models with publicly traded companies may charge a direct or indirect fee of about 6-10% of the results from that same 5% commission. If you add it all up and do some quick calculations taking into account taxes, social security and other fees in Portugal, you can see that the real estate intermediation activity, like any other, can be very profitable if it is well organized. The costs required to provide a serious, professional, efficient and effective service are very high and mostly fixed, meaning that they are not directly linked to the transaction. Therefore, if you are thinking about hiring a real estate agency to represent you as an agent, don't focus only on the commission - focus on what will be guaranteed and offered for that commission, the level of service, the actions offered, support, advice and all that is hidden behind the 5% you pay. Fortunately, we