If you have done real estate transactions in Nigeria, you may have noticed the variation in service fees that agents charge on successful deals. These variations are more noticeable in states that have big ticket transaction running into hundreds of millions and billions. One of the biggest contentions in the real estate market is the question of what constitutes appropriate agency commission on real estate transactions. What is the ideal fee? Is there an official document that sets the standard or scale for such service fees or is it at the discretion of the agent? We spoke to some of the players in the industry and will share their views on these questions and more in this article.
Before we dive in, it is important to mention that the Nigerian Institution of Estate Surveyors & Valuers (NIESV), and The Estate Surveyors & Valuers Registration Board of Nigeria (ESVARBON) are the professional bodies established to regulate Estate Surveying and Valuation profession in Nigeria; of which “Real Estate Agency” is one of their services. The institution is recognized by the government under the enactment of the Estate Surveyors and Valuers (Registration Act) Decree No. 24 of 1975. You may use this link to read more about the laws establishing the NIESV/ESVARBON. For the purpose of this discussion, we will be reviewing the professional scale of charges set out by these bodies.
Agency fee in Nigeria is 10% of Gross Rent Payable, or Gross Proceeds of Sale/Purchase.
In 2014, the NIESV set out to review the Institution's Professional Charges in line with contemporary realities in Nigeria and consistent with global best practice. Based on the revised scale of charges, an agent in Nigeria is expected to charge 10% commission on gross rent payable, or gross proceeds of sales on a property as the case may be. This is meant to be the standard practice, yet, if you are familiar with the industry, you will see that a 10% commission rate is not usually the case. The commission rate is often subject to negotiation between the parties.
When we looked at global practice, we found that the recommended charge for real estate associations in the U.S and U.K falls below the 10% rate. For instance, agency commission in the United State is between 5-6% of the transaction value and usually varies depending on location. Commission on property transactions consummated in the San Francisco area attracts a 5.04% agency commission while those in Atlanta can charge as high as 5.98% . In the U.K, the fees are between 0.75% and 3.0%+VAT on transaction value.
After giving a close look at the agency fees set out by the NIESV and comparing it with the U.S and the U.K, a few things stood out.
10% Agency commission in Nigeria is high, and this is giving too much room for negotiation.
Generally speaking, commissions on real estate transactions are usually negotiable anywhere in the world, what makes the big difference is the negotiation window. In the US, the agency commission range is between 0.75% and 3.0%+VAT which is quite wider than the 5-6% range in the U.S. This allows agents to negotiate within this range, and the final fee depends largely on the value of the transaction. For transactions exceeding £500,000, agents are most times willing to accept commission closer to the lower end of the scale. If an agent for instance agrees to charge a 1% fee on a £500,000 deal, the commission would fall around £5,000.
Bringing this home, we found that irrespective of the recommended 10% agency fee in Nigeria is 10%, the actual commission that agents achieve in practice can range from 0.5% to as much as 20% of the transaction value. Agents can charge as much as 20% commission on rental transactions of less than ₦1 Million value. On the other hand, it is quite difficult for sellers to pay up to 10% fee on sales transactions, especially if the value of the property runs into hundreds of Millions and above.
We spoke to Chibuzor Arukwe who is an Associate member of the NIESV/Deputy Head of Valuation at Diya Fatimilehin & Co, a leading Estate Surveying firm in Lagos. He mentioned that transaction fees are now dependent on the negotiation power of the parties involved in the transaction. Speaking on the impact, Chibuzor mentioned that other Agents are willing to collect lower fees on transactions and this is making the competition even tougher.
This 10% commission cap is not realistic across all transaction types and this is making compliance much more difficult.
While setting a 10% standard rate can sound reasonable considering the unique economic realities in Nigeria, this high rate is opening room for negotiations and concessions beyond reasonable boundaries. A seller who is disposing of a property worth ₦1 Billion naira will most likely never agree to pay a 10% (₦100 Million) commission to the Agent. On the other hand, most Agents will argue that a 10% (₦50,000) fee is sufficient to compensate for the troubles associated with renting out a ₦500,000 rental property. What this does is that it throws open a wide window for negotiation between the parties, and without a negotiation ceiling set by authorities, the process ends up creating a loser vs winner situation. Speaking on this, Chibuzor also noted that the 10% cap is giving leverage to quacks to penetrate the market. He described quacks as unlicensed individuals who are operating as one man businesses. According to him, they have minimal expenses and no administrative costs to bear and therefore can afford to take almost anything as agency commission on transactions.
Unlike in the U.S and the U.K where the negotiation window is very well defined with relatively high levels of compliance, Nigeria’s high agency commission rate has opened room for foul play among practitioners in the field. The market has become very competitive, which has forced a number of agents to cut on their revenue in a bid to secure briefs. Picking a page from the practice in the advanced world, agency commission should at least be a range, to start with. Where this exists, it is easier to have a guided negotiation. Much more work is needed in regulating Agency practice in Nigeria, and developing a more flexible scale of charges is one.
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