Real estate commission, is 5% too much?

Index

• Why pay a 5% commission and what services do you receive in return?
• Is the 5% Commission Excessive?
  • What do owners and buyers think ?
  • 5 reasons that justify the value of the real estate commission
• Factors that Influence the Commission Amount
  • Table of Commissions paid to Real Estate Agents in Portugal, in 2024
• Is the 5% Commission a universal rate?
• Fixed Commissions
• Is the commission rate a regulated amount fixed by law?
• And in the case of a lease, what are the market commissions?
• Real Estate Commission FAQs

(Topâ–²) Introduction

The topic of real estate commissions, especially the 5% rate that most mediation agencies apply, generates many doubts and even a few raised eyebrows among owners . One of the most frequently asked questions is whether this commission will be too high. In this article, I will delve into the reasons behind this value and take a look at the available alternatives.

Before going into the explanations, it is essential to understand that the world of real estate mediation, the one that works day and night to facilitate and speed up transactions between those who buy and those who sell, offers a set of services with high added value. This sector plays a fundamental role in the real estate market in Portugal, ensuring that the entire sale or rental process runs safely and achieves the desired success.

(Topâ–²) Why pay a 5% commission and what services do you receive in return?

It should be noted that successful real estate agents do not limit themselves to looking for buyers and property owners, they provide consultancy and facilitation services throughout the entire process.

A qualified and experienced Real Estate Agent must justify the value of his commission based on the tasks carried out to obtain the desired results, including:

1. Help in estimating the most appropriate sales price for selling or renting a house, presenting the owner with a "Market Study", usually using the comparative method and using specific technological resources.
2. Advise the owner on the best selling strategy. Show the weak points of the property and how to overcome them, possibly using small works or ' home staging' , adapting the strategy to the local market and competition from other properties for sale, etc.
3. Promote the sale of the property in an appealing way and using modern multimedia tools and develop a digital marketing strategy, investing in advertising platforms, in order to highlight it and maximize its visibility.
4. Carry out visits to the property , manage and respond to requests for information about the property, qualify interested customers, avoiding wasted time and inconvenience to the owner.
5. Mediate negotiations between buyers and the owner , helping to improve purchase proposals with regard to payment conditions and adjustments to the final sales price.
6. Help buyers in the process of analyzing and choosing the most favorable mortgage loan , whenever necessary;
7. Prepare purchase and sale contracts , validate and collect all documentation, as well as monitor the transaction from the CPCV to the signing of the Purchase and Sale Deed.
8. Accompany the owner and buyer in the after-sales , facilitating the transfer of water, electricity and gas contracts, etc.

This range of services requires specialized knowledge, experience and dedication on the part of the mediation professional. Of course, there is no shortage of mediation companies and agents promising "this world and the other" in exchange for a lower commission, but we all know that the quality of the service is inversely proportional to the remuneration charged ;) It is therefore important to know how to identify the Bad Real Estate Agents use these "deceptive strategies" and don't fall for the tricks.

(Topâ–²) Is the 5% Commission Excessive?

(Topâ–²) What do owners and buyers think?

As with everything in life, there is always more than one perspective:

Owners’ Perspective

• I'm afraid of the impact of the commission on the sales or rental price , contributing to making the property's sales price more expensive and making it less competitive. It would be true, if the majority of houses for sale on the market didn't use real estate mediation. Now what happens is exactly the opposite, so properties end up being "benefited" or "harmed", all equally.
• Many people have the idea that the commission is a necessary investment to sell the property. This perspective is correct. I have enough experience to say that there are few cases in which the owner is able to sell or rent their home more quickly and receive a higher amount, selling it directly instead of trusting an experienced and proven agent.
• Expectation of a quality service that justifies the amount paid. This is a legitimate doubt. Not all agencies are the same and not all Real Estate Agents can be ' Top Producer ', but many of my colleagues do serious and hard work. They are reliable. The question is how to identify the right and proven agent .

Buyers' Perspective

• The perception that the commission makes the property more expensive and, therefore, the buyer, by directly approaching the owner, can get a lower price and negotiate a good discount, is false and true at the same time. While it is true that the buyer, negotiating directly with the owner, can try to "squash the price" and obtain a greater discount, to the detriment of the owner's interest, on the other hand, owners who decide to sell directly without real estate mediation are, normally, those whose property is overvalued. Not to mention the risk of carrying out a real estate transaction without the support of a professional.
• Inclination towards "do it yourself". With the growth and importance of advertising platforms in the real estate market (Idealista, Imovirtual, Casa Sapo, etc.), the perception has become that it is easy to look for a property on your own, without resorting to the services of a Real Estate Agent, which is a wrong perception for several reasons:
  • Increase the range of options available - The agent has access to search software that can search on several websites simultaneously and not just on a specific platform.
  • " Off-Market " Properties - With their experience and range of contacts, an agent who knows their area is more likely to show options that are not being promoted on the sales or rental market.
  • Negotiation Skills - The agent is a specialist in mediation and negotiation and will be able to better defend the buyer's interests.
  • Free is good - Lastly, and most importantly, why waste your time when you can get help from a qualified professional at no cost? Don't forget that, in Portugal, the owner pays the commission.

(Topâ–²) 5 reasons that justify the value of the real estate commission

If the Real Estate Agent is not up to the challenge, obviously the 5% will be too high a commission.

But, as this is a service that lacks value-added skills , there are reasons to justify the value of the real estate commission. Here are 5, but there would be more:

1 - The Client's Risk: A relevant aspect is the complexity and risks of a real estate transaction, given that the purchase or sale of a property involves complex legal, tax and financial issues. Experienced real estate agents, equipped with knowledge and appropriate advice, minimize these risks and ensure the correct conclusion of the transaction. The 5% commission reflects this crucial role in reducing risks and protecting the interests of the parties.

2 - The Consultant's Risk: The process of selling a property can be complex and time-consuming, and can take up to 12 months, if the sale or rental price of the property is above market values, or in an area with low demand, or with weaknesses that make it less appealing. Thus, the agent invests his work and expensive resources at the risk of not receiving any remuneration if the property is not sold or leased.

3 - Work and Investment: One of the reasons for using a commission of 5%+VAT is that it serves to reward the hard work and "expertise" of a mediator and cover all expenses and tax obligations that affect this activity . Good real estate professionals are committed to ensuring that all steps are carried out properly. They invest time and resources to understand the market, correctly evaluate properties, carry out market research, pay multimedia professionals, promote properties through effective marketing strategies, monitor the entire process closely and invest a lot, a lot of money. All of this is done over an indefinite period of time and without any remuneration. In other words, the risk is on the agent’s side.

The 5% rate serves to adequately remunerate the work and effort expended by mediators, in order to complete the transaction successfully and minimize risks, taking into account the high value of selling a property.

4 - Context Costs: The 5% commission also allows real estate companies to invest in technology and innovation. The real estate market is constantly evolving and companies need to be up to date with the latest trends and tools to provide a quality service to their clients. In an increasingly global market, success involves investing in advertising and social media platforms , property management systems , digital marketing and other technological solutions that contribute to improving the service and the level of customer satisfaction. The 5% rate allows companies to make these investments and remain competitive in the market.

5 - Not everything that shines is gold: Charging a 5% commission to an owner does not mean that this is the net amount that the agent or agency receives:

1. The amount actually received by the Real Estate Agent is lower and can vary between 30% and 98% of the commission charged by the agency , depending on the real estate agency and the agent's status. In Portugal, in most real estate agencies the commission charged is 5% + VAT (this value can be negotiated downwards, in the case of projects or in specific situations).

(Topâ–²) Table of Commissions paid to Real Estate Agents in the main real estate agencies in Portugal, in 2024

2. It is usual for the commission to be shared with another real estate agency , with the agency that acquired the property receiving 2.5% and the agency that provided the buyer with the remaining 2.5%. Despite this "rule" tacitly accepted by everyone, Remax has been involved in strong controversy since it changed its commission sharing policy to 70/30%, that is, 3.5% for the brand and 1.5% for the other agency. This measure has already been partially reversed, although some agencies/agents still continue to obstruct the 50%/50%.
3. Additionally, the commission received by each agency is divided between :
   1. The Real Estate Agent who closed the transaction;
   2. The broker of the agency to which you belong;
   3. Master franchising, national or international, if it belongs to a franchise brand (common situation in Portugal).
4. Finally, it is important to note that the commission received on each transaction is subject to a high tax burden. In the case of a large agency or a top agent, this can be around 50%, even exceeding this value.

Therefore, the Real Estate Agent often receives only 1.25% of the total commission amount, or less . This value can be low or high, depending on the work carried out, the costs incurred, the value/merit of the mediator and the results obtained.

It is also important to note that the value of the commission paid by the property owner to the real estate agent can be deducted in full from the value of the capital gains, for the purposes of paying the respective IRS tax. You can find more information about this topic on my page " How much does a Real Estate Consultant earn in Portugal? "

(Topâ–²) Factors that Influence the Commission Amount

Experience and reputation of the real estate agency: Real estate agencies with greater experience and reputation can charge higher values.

Difficulty in selling the property: Properties that are more difficult to sell may have higher commissions.

Property location: Properties located in more valued areas may have higher commissions.

Property value: Higher-value properties (developments, buildings, luxury homes, hotels, etc.) may have commissions of different value, higher or lower, depending on each case.

(Topâ–²) Is the 5% Commission a universal rate?

Firstly, it is important to highlight that the 5% rate practiced in real estate mediation in Portugal is in line with the international average practiced in many countries. However, we have seen the emergence of intermediaries that offer lower commissions, whether in percentage or fixed value, focusing their marketing on the value of the lowest commission and devaluing the service provided. Now, we all know that the secret is in the details and that there are no miracles:

If the commission drops, everything decreases proportionately: investment in property development, the quality and professional experience of agents, investment in training and legal advice, etc.

It is important to highlight that there are exceptions and that the value of 5% can be negotiable and vary, and may decrease depending on the complexity of the sale of the property, the location, the amount involved in the transaction, among other relevant factors . Some of these factors may be:

• if the property is part of a project under construction, raised together with several properties;
• if the value of the property exceeds a certain level considered luxury;
• if the location of the property is less densely populated, or if market sales values are lower, which may result in a higher rate;
• etc.

However, the percentage of 5% + VAT serves as a standard reference and is widely practiced in the Portuguese real estate market.

The globalization of the economy, where the majority of agencies operating in the national market belong to international franchises, mostly North American, has resulted in the normalization of prices and commissions. Thus, in Portugal, real estate agencies such as KW Portugal (Keller Williams), Remax, JLL, Sotheby's, Zome, Century 21, Decisões e Soluções, Christie's - Porta da Frente, ERA, among others, charge the same commission value.

(Topâ–²) Fixed Commissions

When the property has a low sales price, for example less than €100,000, there is a rule tacitly accepted by everyone to charge a fixed commission of €5,000 + VAT. However, in all other aspects, the quality of the service remains.

However, there are real estate agencies that adopt a different business model, charging a fixed commission rather than a percentage. For example, a real estate agency may charge a fixed commission of between €2,000 and €3,000, regardless of the sale price of the property, if the transaction is completed. Normally, this type of real estate agency does not send professionals to carry out the multimedia reporting, and the entire process is done online by the owner. There may be a need to pay an initial, non-refundable fee to cover administrative and other costs.

In the real estate market, there is room for all business models, as long as they are presented in a transparent manner. However, as with everything else, the customer receives a service proportional to the amount they pay. Taking into account all the costs described above, it can be concluded that selling houses is not the same as selling consumer items online , it is up to the owner to decide what they want: do they want a good service and sell their house at the best price and safely? Or do you want to waste time and "devalue" it with a "cheap" strategy , when hundreds of thousands, if not millions, of euros in real estate value are at stake?

(Topâ–²) Is the commission rate a regulated amount fixed by law?

According to Luís Lima, the president of the Association of Real Estate Professionals and Companies of Portugal (APEMIP)

The value of the commission to be charged by real estate agencies is not regularly established , however, depending on the value of the property and the characteristics of the business, as a general rule this commission varies between 3% and 5% , and in the vast majority of cases it is fixed effectively at 5%

(Topâ–²) And in the case of a lease, what are the commissions charged in the market?

If it is a lease, the most common thing is that the commission is equivalent to one to two monthly rents. For example, in the case of KW Portugal, the commission is 1.5 times the monthly rent. At Century 21, this rate varies between 1.5 and 2 rents. In ERA, the value is 2 rents. To this amount, the value of VAT is added.

(Topâ–²) Conclusions

In summary, the 5% percentage applied to real estate mediation in Portugal has several virtues and justifications. This reflects the intense work, added value and investment in marketing and technology on the part of real estate agents, and these factors are directly related to the success of the real estate transaction.

Additionally, it allows for civil liability coverage and the necessary insurance to protect customers. It is in line with the internationally accepted average and highlights the relevance and complexity of the role played by mediators. When choosing real estate mediation services, clients can count on specialized and professional support at all stages of the real estate transaction process.

But of course, paying a 5% commission to a mediator is not, in itself, a guarantee of obtaining the advantages listed here. Choosing a good mediation company, but above all a Real Estate Agent with experience and a "track of success", is essential. Trust those who have proven themselves!

(Topâ–²) Real Estate Commission FAQ