Real estate developers have been grumbling lately, and we’re not talking about possible new cooling measures. It was about real estate agent commissions and how they have grown over the years.
In recent news, agents and market watchers report that URA has started wiping out feelers and investigating how developers are paying their real estate agents.
This is usually a prelude to a change, and here’s how it can affect you as a buyer:
How do developers currently pay real estate agents?
On paper, the commissions paid to brokers can be anywhere from two to three percent of the property price. Note that this is much higher than it used to be. In the late 1990s to early 2000s, commissions of one percent were considered high.
In practice, the commissions could sometimes be as high as seven or eight percent. This has been reported in the news even though commissions are not officially shown to the public (more on this below).
The higher commissions arise in the later start-up phases or when the development is shortly before the ABSD (Additional Buyers Stamp Duty) date.
Conversely, due to gray area referral programs and practices, commissions can sometimes be lower than the stated three percent.
We shouldn’t underestimate the impact of these commissions on the final price of a new starting property. A two percent commission for just 100 condos at $ 1.6 million each adds $ 3.2 million to development costs (and keep in mind that commissions can be closer to ABSD, or even higher for special units).
Note that the amount spent on commissions is not included in the total prices as the authorities don’t like it. This means that prices may be higher than what is shown in the data recorded.
How have the commissions increased to today’s level?
Real estate developers have five years to complete and sell their entire project. Otherwise, they’ll pay an additional Buyer Stamp Duty (ABSD) – 30 percent of the property price. This is independent of the size of the development or the number of units remaining.
If even a unit or two go unsold, the developer has to pay the whole tax. As a result, real estate agents often receive higher commissions to complete these urgent transactions. (Honestly this should really be scaled based on development size, this really penalizes big evolutions).
Of course, if the remaining units are difficult to move, the developers prefer to pay the eight percent commission on the sale rather than paying the ABSD.
In addition to the ABSD period, higher commissions can also be used to drive sales of high quantum units such as penthouses or units in a less desirable batch. This is of concern to buyers as it could lead to realtors pushing them to more expensive properties than their budget allows.
(Aside from that, this issue has been partially addressed by restricting new OTP issues. Buyers who couldn’t afford the down payment for these expensive units were often required to sign up with a promise that the OTP would be reissued by the time it was reissued they had sold their former home).
Another persistent problem is the agents’ unofficial cashback