For most people real estate purchase or sales are anything but a regular event, so some unclarity exists around the real estate agents’ compensation (often referred to as commission, brokers fee, brokerage fee etc.). The lack of transparency in many markets does not help either.
So, let us shed some light on the topic.
Apart from the standard real estate brokers fee for a sale there are some other types a real estate agent might charge. Don’t worry, you rarely pay more than one of them.
Most are incentive fees or success fees respectively, meaning they become payable upon completion of a transaction.
The fees that should be on your radar should be the following:
- Sell-side fee
- Buyside fee
- Referral fee
- Sourcing fee
- Advisory fee (fixed or by the hour)
- Kicker (also: incentive) fee
1. Sell-side fee
This fee, also called sales fee or sales commission, is what the seller of a house pays to the real estate agent when a sale is concluded.
How much are real estate agent fees in Portugal?
The most common real estate brokers’ fee for the sale of apartments and houses in Portugal is 5% (plus VAT).
However, some agencies specialised in the upper segment or luxury respectively, charge up to 6% (plus VAT). These are usually the ones with a particularly strong brand, such as Sotheby’s and Christies Porta da Frente.
The sell-side fee can be freely negotiated, so you can also come across other percentages (down to 3%, but with very difficult assets 1-2% above 6%) or even fixed amounts. The latter makes sense for very small sales volumes, because a percentage might not reflect the effort the agent expects to make.
When you consider negotiating bear in mind the following:
- You want the agent to be incentivized and while they might be compensated sufficiently for the time or effort they make, there is a chance that in their daily work they prioritize an instruction that pays better.
- It is often the small agents with less resources, such as network and brand, who compromise the most on their sales commission. As a seller you should carefully consider if you want to enter this potential compromise.
- As you will see further below, the sales commission will often be shared with other brokers to find a buyer and close a deal. The less the lead agent is paid by the client the less they can share with other brokers, so there is less incentive to work towards a sale.
As mentioned, in Portugal this is paid by the seller. This differs from some other countries, however, it reflects that the sales agent is instructed by and acts in the interest of the seller.
2. Buyside fee
The second most common fee is the buyside fee, which is often referred to as the buyer’s fee.
This fee can vary a lot and can be anything between a fixed amount of a few thousand Euros or 50% of the respective sell-side fee (especially when agents’ share) up to a full percentage equal to the sales commission which would typically apply (rather rare).
Unlike the name suggest, this could be paid for by either the sellers’ side (through a fee share with the sales agent) or the buyer themselves as a fee that is unrelated to the sale-side fee.
In principle, it pays the agent or consultant who represents or supports the buyer of a property. There are two different situations in which a buyside fee would occur:
- Firstly, the buyer instructs a broker or consultant to find a property for him. In this case the buyers advisor often asks the sellers agent for a share of the sales commission in return for introducing a buyer.
- Secondly, the buyer instructs a broker or consultant to provide more comprehensive advice, such as preparing a valuation, an asset business plan, coordinate other experts etc. Since being compensated by the sell-side and acting for the buy-side constitute opposing interests, the compensation in this case should only come from the buyer.
Often, the buyside fee is a success-based fee, which means it only becomes payable when a pursued transaction is successfully concluded. However, since often much work is done in preparation parts of the fees may be agreed to be payable nevertheless or a abortion fee may occur.
Keep in mind that the amount or percentage of any buyside fee varies greatly. However, so do the services that you can expect in return. When working with a buyside advisor always clarify their experience, qualifications and which exact services they are going to provide to you.
3. Referral Fee
The referral fee, often called finders fee or tip fee, is just that. It someone’s compensation for bringing a buyer or, less frequent, a property or co-investor, into a transaction.
This can apply to other brokers or tip givers, meaning that whoever establishes contact between two parties who conclude a transaction with each other could negotiate a referral fee.
Depending on the constellation this fee is a fraction of the sales commission or, less frequent, the buyside fee.
In practice you find amounts of anything between 10% and 50% of the reference fee. It will depend on what the referring party brings to the transaction, how challenging that is and how well they negotiated.
This fee will ideally have been agreed and fixed in writing before the potential buyer or asset is established.
4. Sourcing fee
A sourcing fee is a compensation paid in exchange for identifying a property in the market for a buyer. This can be on-market (real estate portals, speaking to brokers) or off-market (approaching private individuals, speaking to people in the desired neighbourhood etc).
This can also, less often, refer to equity or debt souring, meaning bringing an equity investor or a creditor (the party that lends the money to someone else) to an investment.
A sourcing fee is usually paid buy the buyer, but other constellations, especially like the above-mentioned buyside-fees, occur.
If the process is rather simple or standardised (e.g. a debt broker requests conditions from several banks) this will usually not be more than a per mille of the reference amount. When the process is difficult and highly individual (e.g. finding an apartment with unusual characteristics off-market) this fee could be as high as a sales commission.
5. Advisory fee (fixed or by the hour)
A good real estate expert will have plenty of knowledge, skills and contacts around his actual core tasks. Often additional services are provided to facilitate the transaction from which the expert is paid. However, when the work they perform is to far outside the agreed scope or there is no base instruction (e.g. sales instruction) the advisor may charge by the hour or day.
These advisory fees are paid by the instructing party.
Rates can vary between fixed amounts starting at 50-100 Euros for help opening a bank account to daily rates above 1,000 Euros as often seen in business consulting.
Since the subject scope is usually fixed it advisable to compare alternative options, compare and, for simpler services, consider lower priced servicers.
6. Kicker fee
Most of the above success fees, so they become payable upon successful completion of a transaction. However, sometimes parts of the total fee will only be paid out when predefined conditions are met, e.g. a minimum sales price. Alternatively, this can be a fee on top of the base fee.
A kicker fee can often be found in larger commercial transactions, but is rather uncommon in the residential market. However, it can be a pragmatic incentive to negotiate into the contract with your real estate advisor.
In practice, these kicker fees can range from 0% to 70% of the base fee and are often a percentage of the amount achieved above the anticipated sales price.
Summary
There are various ways to compensate your real estate professional. As an investor, keep in mind that:
- There are at least six types of fees, each of which make sense in different situations.
- Fees can be negotiated, but you will have to carefully consider where this is advisable.
- In real estate, and especially in transactions, there is a lot of money at stake and compromising on quality to save fees may come at a much higher price later.
