New German laws come into effect on splitting broker fees
For property buyers in many parts of Germany, it’s welcome news. On the 23rd December the new law passed by the Bundestag and Bundesrat relating to the payment of real estate broker commissions comes into force, whereby in future, both buyers and sellers will each pay half of the brokerage commission due.
In many parts of Germany to date, it’s been common practice for the buyer of a property to carry the whole burden of paying the broker’s fee on purchase. For a house costing €300,000, that’s a commission fee of at least €18,000 on average on top, or more likely €21,420 if paying the full fee. The new law means the uniform splitting of the commission between buyer and seller right across the country.
In theory, a broker represents the interests of both parties in a sales process. Naturally, however, if the seller alone pays the fee, the broker has an incentive to achieve the highest possible sales price – while the risk to a seller in engaging a broker is zero, since the seller is paying no fees. The new rule is designed to clarify the role and thus the payment of the broker fee in the interest of all, with the fee now to be divided between the two parties. A seller does, however, have the option of paying the entire brokerage fee if he wants his interests to be given greater weight.
The new regulation applies only to single-family houses, semi-detached houses, terraced houses and condominiums purchased by private individuals - regardless of whether they are used for their own purposes or rented out. However, the law does not apply to land, apartment buildings or commercial real estate.
A new posse of discount brokers has sprung up in Germany over the past few years with all manner of service offerings to undercut the typical 7.14% brokerage fee (the maximum permissible) that the tens of thousands of individual brokers across the land have typically tried to get their hands on. These commissions have amounted to about €6bn a year.
Companies such as the Berlin-based Homeday are pre-empting the new regulations by a week with the introduction of their own flat 3.9% broker commission including VAT, payable 50:50 by buyer and seller. Their brokerage deal applies to all types of property, including land and multi-family housing.
Homeday’s co-founder and CEO Steffen Wicker said: “We’re expecting that in the medium term there’ll be more competition in the market, which will benefit both buyers and sellers. That’s long overdue, given the high additional purchase costs associated with property buying in Germany. We’re expecting commissions over the coming two years to fall by up to 30%.
The Homeday business model is based on integrating local brokers and using digital processing, such as their valuation tool “Homeday Price Assistant”, dispensing with the need for an expensive physical presence. The company, with 200 employees and a network of 200 brokers, says it has accompanied more than €3bn of property deals to date and saved buyers and sellers €24m in fees.
Homeday is one of the startups that sprang up in the past few years that have survived their initial hype-phase. Homeday raised money from publisher Axel Springer and British digital broker Purplebricks, who after pumping in €40m are now the majority shareholders. Others in the space are Hausgold, which garnered investment from Deutsche Bank, and McMakler.
Berlin start-up McMakler has had significant growth and is aiming for turnover in 2020 of €50m, despite Corona. The broker market in Germany is highly fragmented, with tens of thousands of individual brokers, and no one player with a dominant position in the market. Hence McMakler says it sees plenty of scope for growth. Well-known franchise operator Engel and Völkers, for example, had a turnover last year of €820m, to put things in perspective.
McMakler has just raised a further €60m, with a large chunk coming from private equity group Warburg Pincus. Others taking part in the latest funding round are British venture capital group Balderton, along with Berlin’s Target Global and Cavalry. Early investor Lakestar is exiting, selling its share to Warburg Pincus and the other entrants. McMakler is now thought to have a valuation of €400m.
McMakler is NOT a discount broker – it still charges 7% for each house it sells. It employs its own brokers, rather than working with a network of independents, which it says gives it better control. Half of its 600 employees are brokers. Last year it spend €22m on television advertising to boost its brand recognition.
René Obermann, the ex-head of Telekom and now Co-Head of Europe at Warburg Pincus, said of its recent investment in McMakler: “The traditional real estate sale process is inefficient, often opaque and does not harness the full potential of available data and technology. McMakler, optimises cutting-edge technology and data, to provide a highly professional and efficient service for customers. Felix Jahn, (CEO of McMakler) and his team have the potential to redefine the real estate market and the Warburg Pincus funds are proud to support McMakler on this journey.” McMakler is active in Germany, Austria and France with more than 20 branch offices.