Are low-cost, online estate agencies the future for South Africa?

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Buying a home can be costly in South Africa, and high estate agency commissions do not help the situation.

On average, agents charge between 4% to 8%, plus VAT, of the sale price – with higher percentages generally being charged on cheaper properties.

For example, an agency could walk away with R175,000 (around US$12,180) for a 7% commission earned on a house sold for R2.5m ($174,000). While this is paid by the seller, it is factored in when setting the sale price, which means bigger home loans for buyers – at a prime lending rate of 10.5%. And a buyer of a R2.5m property would have to cough up an additional R140,000-plus ($9,798) in transfer duty and other costs.

It adds up, and some argue the commissions charged by real estate agents are too high, considering new technology has lowered the costs traditionally involved in selling a property. According to Marcél du Toit, founder of South African estate agency Leadhome, online portals, such as Property24, have considerably reduced advertising costs – yet agencies have not adjusted their fees to reflect this.

“In our experience it takes as much work to sell a R100,000 home as it does to sell a R10m home,” notes Du Toit.

Launched end of last year, Leadhome has joined a few emerging real estate agencies that are offering an alternative to the high commissions charged by their traditional competitors. The agency (currently only operating in Johannesburg) offers its clients a fixed rate of R29,995 ($2,100) regardless of the value of the house, and makes use of an online platform through which clients can schedule viewings.

Its offering is similar to Cape Town-based Steeple (which charges a flat commission of 1.5%) and Johannesburg-based Homebid (a set fee of 1.95%).

And in April the market got a new entrant. Property Fox, launched by entrepreneurs Ashley James and Crispin Inglis, also offers a fixed rate of either R25,000 or 1,5% of sale price – but aims to almost cut out the role of estate agents completely.

Sellers sign up on Property Fox’s online platform, and enter their property details. A photographer is then sent to visit the location to take professional pictures, while a valuation is provided through an outsourced partner. The property is then advertised on all major online property portals and a Property Fox ‘for sale’ board is sent to be placed outside the site. Buyers can then use the platform to set up viewings – which are hosted by the owner. Offers and negotiations are facilitated through the platform online.

Property Fox has also partnered with identity verification service ThisIsMe to authenticate potential buyers for security purposes.

While it may take some time to change perception around how estate agencies should operate, the founders argue the current economic pressures facing South Africans help in challenging the status quo. The South African Reserve Bank has already increased the repo rate twice this year in an effort to slow inflation.

“When the consumer gets under pressure from the interest rate, the banks respond from a loans point of view… They are now asking for slightly bigger deposits for people to receive the same loans,” adds Inglis.

“For example, with a sale in Pinelands (a Cape Town suburb), by selling with us at 1.5% commission instead of the 7% that the other agents were listing at, they saved R150,000. And to put that in perspective in terms of the interest rate putting the consumer under pressure, that R150,000 is another deposit. It is more than double the deposit. And we are actually finding that we are responding very well to the pressures the market is feeling at the moment.”

He notes that in developed economies such as the UK, similar models are taking off even though estate agency commissions are much lower – usually ranging from 0.75% and 3.5%.

“So when we did the math with the general commission in South Africa being 7% for traditional agencies, it was really a no-brainer because the job is going to be even easier for us.”

While Property Fox has only sold a handful of properties since its launch, it already has over 90 listings and is offering free trials in an effort to attract buyers to the service.

“The savings are our biggest selling point,” adds James.

“It is going to take some time to get our name out there and get credibility, but we are moving forward quite fast. People like our idea and our listings are increasing every day, and I am sure we are going to have [other] entrants that enter the market and compete because there is room for them.”