Beware of Hidden Agendas behind Exclusive Sole Mandates

Caveat venditor – seller, be aware of the hidden agendas in the property market and ensure that the sole mandate you sign excludes it

Before committing to an exclusive sole mandate with an estate agent, the seller needs to clear the table of any hidden agendas which will be to his or her detriment. It is very important for sellers to clarify under what “office rules” the agent’s marketing program for the mandated property will be conducted. It is equally important for the seller to ensure that the sole mandate provided to the estate agent is an inclusionary one without hidden agendas which weakens the marketing effort of the sellers property.

 1.    Determine what office rules apply to the estate agent’s marketing plan

Sellers should be aware that there is a set of office rules which regulates most estate agents who are working for a principal agent and / or a regional or national estate agency. These office rules are operational rules which regulates the way the estate agent are doing or have to do their business. It differs from company to company – but create in general some hidden agendas which are not discussed with sellers during the marketing proposal or presentation phase when the estate agent approaches or makes for the first time contact with the seller.

Questions to ask:

-       Do you have the authority to negotiate a sales contract’s commission without your principal agent’s involvement and or approval?

 -       If you say you are an independent operator – do you have the authority to negotiate on your commission scale when a few thousand Rand or a reduction of 1% or 2% of the gross commission can make or break the deal? If so – do you get penalized financially when the commission percentage are below a certain percentage – e.g. 4% or 5%?

(Some estate agencies actually subtract all commission which the estate agent would e.g. negotiate below a certain percentage point from the estate agents side of the commission. Logically this places a huge financial strain on the estate agent who would in such cases rather walk away from a “penalisable” deal – than cough up from his or her commission to save the deal).

 -       Will you share on a 50/50 split will all other estate agents or estate agencies in the market? If so – can we add that in the sales agreement commission clause or in the addendum dealing with commission payable?

-       Will all estate agents working in the suburb / town / city where my property is located have immediate access to my property for their buyers?

 -       Do you prevent other agents to introduce buyers to my property with whom you are or have not been actively working during the last few weeks – in other words – do you keep a “buyers book” in your office with all people who contacted your company in the past or have had dealing with your company?

 (In practice the mandated agent in rare cases has already been working during the last 2 or 3 weeks with a specific buyer the other estate agency is trying to introduce to the sellers property. In such a case the mandated agent could be allowed to prevent the buyer’s agent of the other estate agency to introduce his own client to the property. If however the mandated agent has had no contact with the buyer for more than a month – he should be forced by the sole mandate to allow the other estate agent or agency to introduce the buyer, as he or she is misusing the sole mandate as a tool contrary to possibly the wishes of the buyer who has a working relationship with the buyer. It is also better for the seller to have the mandated agent only working for him and not also for the buyer);

 2.    Ensure an “inclusionary” exclusive sole mandate

The majority of estate agents always try to obtain an exclusive sole mandate from the sellers. It is the only tool available to estate agents which offers some form of income security. It is unfortunately also the marketing tool which has been the most misused in South Africa by some estate agencies who only focus, during their sole mandate presentation to the seller, on the tools (printed media & internet coverage) they employ and their own or their offices experience and market share – without pointing towards how they are going to work with the other estate agents during the mandated period.

It is recommended that the sole mandate should be geared towards including the marketing efforts and contact basis of all the estate agents in the local property market. Sellers should ensure that the sole mandate is only provided on condition that an even commission split is enforced between the mandated agency and all the other estate agents who will be introducing their buyers to the sellers home.

Sellers should also insist upon the exclusive mandate not reducing the exposure of the seller’s home to would be buyers from competing estate agencies or agents. The exclusive sole mandate should enforce the mandated agent and estate agency to act as an exclusive channel right from the start of the mandate – i.e. managing the exclusive mandate as a viewing controlling measure and not as a buyer prohibitive measure.

A properly constructed sole mandate can hone the combined marketing force of all the estate agents in the area where your property is located – a force whose “circle of influence or contact base” is, contrary to popular belief, responsible for more than ¾ of all property transactions by estate agents.

Sellers too often only negotiate the sales commission and leave the “nitty gritty” of the marketing plan in the experienced hands of the agent – lulled by either his or her recent sales success or the impressive national presence of the agent’s company. In a strong buyer’s market the most important item on the seller’s agenda should be to negotiate with his or her prospective sole mandate agent an inclusive marketing program.

The very high levels of competition for business in the property industry encourages a strategy of “indirect exclusion”  by especially dependent estate agents - i.e. agents whose marketing efforts are orchestrated by management or agency owners who funds the agents marketing costs in exchange for 50 or 40% of the sales commission. The estate agent is obliged to operate with a hidden agenda under a set of written or unwritten office or company rules geared at excluding other estate agents from marketing the mandated property for either a certain period of time, or for a disproportional share of the sales commission. Justification for such exclusionary practices are laid in front of the doors of “high marketing cost” or “creating a fair chance to recuperate cost”.

  3.    Exclude these 3 hidden agendas from your sole mandate

Sellers therefor need to ensure that the following 3 hidden agendas which accompanies a wrongly applied exclusive sole mandate, do not hinder the marketing program of their property:

3.1  preventing all estate agencies and their buyers immediate access to the property – i.e. “closing the doors”;

3.2  preventing a reaction of avoidance by all other estate agents of the mandated property

3.3  discouraging other agents to market the property due to unfair commission sharing structures.

 3.1   Closing the doors

Physically preventing other estate agents from introducing their buyers to the seller's property for a certain period of time - sometimes even agents belonging to the same office as the mandated agent. The mandated agent will not allow any other outside agent or agency access to the property for the first month (in the case of a 3 month sole mandate) and two to three months (in the case of a six month sole mandate) – hoping to attract buyers within this “closed” period without further diluting their “in house” commission share which is for the majority of estate agents on a 50/50 split with their company.

“Closing the door” as a company policy stems therefor from the owner of the estate agent (with the closing down policy) and or from the estate agent who are trying to earn maximum commission  - disregarding their fiduciary obligations towards the seller of sourcing as many as possible buyers as quickly as possible to make the best possible offer on the property.

The seller therefor unknowingly loses in such a “closed period” willing and qualified buyers. The property will therefore be in the market for a longer period and could even be denied the introduction of competing buyers to ensure obtaining a maximum selling price. Multiple buyers interested in the same property is the proverbial jackpot all sellers should hope and strive for. Agendas preventing competing buyer agents access to the property is in effect not only questionable in terms of the EAAB’s Code of Conduct, but definitely not in the interest of the seller.

“Closing doors” effectively can cost the seller money (lower sales price), time (property longer on the market), more effort (all the personal inconveniences accompanying the marketing effort for the owner or tenant) and lost opportunities (satisfying or fulfilling the sellers reasons for selling quicker).

In monetary terms, the closing the door policy is built upon the following money argument:

If the property is sold for R1000 000 at 5% commission, the gross commission payable by the seller is R50 000. If the mandated agent is on a 50/50 split with his or her company, the agent will earn R25 000 gross and the company R25 000. In the event another agency would introduce a buyer to the property, both the mandated agent as well as the estate agency’s gross commission will be halved to R12 500 each – as the other agency (who introduces the buyer) will earn half of the commission (R25 000 gross). Closing the door creates therefor for the mandated agent and agency an extended period during which they do not need to share the commission. They literally therefor hope that a buyer will get to them the longer they can act “exclusionary” towards other estate agents in the local market – even buyers who are working with other estate agencies – so that they can sell to the buyers without any sharing with other agencies.

 3.2   Creating an reaction of avoidance by the other estate agents of the sellers property

Other estate agents know there is a good chance their buyers will not be reached by the mandated agent’s marketing efforts and will actively market all other properties to which they have access to – excluding the closed door properties mentioned above.

Only about 8% of all buyers are finding a home via the printed media (+-5%) or the agent’s office (+- 3%). More than 75% of all buyers are introduced to the property via the circle of influence of the experienced estate agents – including those of other estate agents. These buyers are either previous clients or clients referred to the agents by their personal contact basis, or has reached them via the internet or other marketing channels.

A large percentage of home buyers reaches their home of choice via a “buyer’s agent” – but only after the “exclusive” period mentioned above. This is a real problem for sellers – as a big percentage of willing or “hot” buyers are either not introduced to their property before they make an offer on what they perceive to be the best choices available and introduced to them by the buyers agents, or are only introduced to the closed mandated property after the “exclusive” period to the property.

 3.3   Discouraging other agents to market the property due to unfair commission sharing structures.

Sellers should ensure via the sole mandate agreement, that the mandated agent will share commission only on a 50/50 commission split with other agents, and not on a 60/40, 70/30 or 80/20 basis. By allowing such an unbalanced and unfair commission split, sellers are indirectly losing those buyers whose agents are not prepared to work for an effective commission income of +- 20%, 15% or 10% respectively. The agent who introduces the buyer to the house has to pay not only half of his commission to his office, but most of the time also a listing fee to another agent who has introduced the property to the buyer agent’s office. Such an additional split will reduce the buyer agent’s commission to about 17%, 12% or 8% of the total commission – leaving him or her with not a big incentive to introduce a buyer to the property.

A commitment towards the pro-active introduction of sole mandates to the other competing agencies in the area via “open houses” within the first 2 weeks of marketing the property by the sole mandate agent, will dramatically improve the reach and effectiveness of the marketing program.

Homes listed as sole mandates with CCH, usually within hours of listing, are shared with fellow CCH member agents and after the first week with competitors (i.e. with all the other estate agents in the local market) on a real estate industry standard 50/50 commission split basis. The first week are then used to invite the CCH member agent’s present buyers whose needs and budget are closely related to the property. This prevents duplication of viewings by the same buyers working with more than one estate agent (agency), and, at the same time, it opens up the seller’s property to the widest possible net of buyers from all other estate agencies as soon as possible.

A further positive feature of this “open door marketing program” is that it stimulates agents to be more service driven, while at the same time creating a level of trust between the seller and mandated agent beyond the norm in the industry.

 In Conclusion:

If an estate agent would not budge on working with an inclusionary marketing program, he is not really working exclusively for you as the seller – he is in fact giving preference to company policy by trying to maximise commission earnings instead of maximising the mandate’s chance of selling quicker due to being marketed to all real estate professionals in the local property market without the restrictions of “closed doors” and “uneven commission splits”.

It is advisable for sellers to never provide estate agents who operate with the hidden agendas described above, with an exclusive sole mandate. At best - contract them only on a joint mandate basis and make sure that you give a joint mandate to a competing estate agency like CCH which have a totally inclusionary sole mandate system. That way you will ensure not only healthy competition, but also a totally open marketing approach.