One year later, reform of brokers’ commission now part of daily life

It's exactly a year since a new law was introduced in Germany whereby the commission on the sale of a property was now to be paid equally by both the buyer and the seller, instead of solely by the buyer as had largely hitherto been the case.

Given Germany's very low rate of home ownership compared to its European neighbours, the move was strongly promoted by the then government to make it easier and less expensive for potential homebuyers. A year later, is there evidence that the halving of commission has led to benefits for buyers, or was the missing commission just simply added to the purchase price, defeating its purpose?

A study back in May by the Institut der deutschen Wirtschaft (IW) in Cologne found that the average brokerage commission in Germany had indeed fallen by 1.5% to just under 3.5% following the reform. On a purchase price of €300,000, the buyer would have saved €4,500.

There was also evidence that many sellers had clearly been trying to sell their own properties directly, without involving a broker. The IW study pointed to a strong rise in direct offerings, from 35% to 43%, but this didn't prove lasting. The lack of experience in marketing a property, by understanding really what motivates potential buyers, seems to have played a big role in the lack of success sellers had.

It's also not entirely transparent what was cause and effect, as properties rose in Germany throughout the year by between 7% and 18%, depending on region. And the so-called Kaufnebenkosten - the Grunderwerbsteuer, or land transfer tax (of up to 6.5%), the notary costs (2%) and other ancillary charges - are also hefty in Germany, and have to be paid from non-borrowed equity, in most cases.

The Grunderwerbsteuer, in particular, is the biggest burden, and depending on the federal state, amounts to between 3.5% and 6.5% of the purchase price. For example, if you buy a property for €400,000 in expensive North Rhine-Westphalia, expect to pay €26,000 euros in land transfer tax on top of that. The new incoming German government, in particular the FDP under Finance Minister Christian Lindner, has said they are going to try to introduce tax-free allowances to help out buyers - of up to €500,000 for first-time buyers. However, it's unclear when, and to what extent, this might occur. The individual Länder have grown very used to this high level of 'soft' taxation income, and won't easily renounce their claim to it.

Kurt Friedl, the CEO and managing partner of franchise broker organisation REMAX Germany, whom REFIRE interviewed in these pages not so long ago, is absolutely clear that the new law regarding commissions is a positive thing for the industry, and has helped boost the image and the professionalism of the broker profession across the country. Unqualified brokers, who might have offered their services for free to gain access to the potential buyers and built in a back-door commission, have largely been driven out of the market, Friedl believes.

With the new rules, a standard was created that helps the weaker party in the current seller's market: The winner is the buyer, because he now shares the commission with the seller, which was not the case before - at least not nationwide.

According to REMAX own survey, the buyer's commission has fallen by an average of around 2 percentage points in those federal states where estate agent costs were traditionally not shared before.

Private, direct sales - those without any broker - have only increased by around 1% , which is significantly less than many expected. The average brokerage commission has declined somewhat, with the broker usually receiving no more than 3% percent from the seller and 3% from the buyer, says REMAX.

Two basic models seem to have become the norm across the marketplace, twelve months after the intoduction of the new laws. These are:

Model A: The broker agrees in the brokerage contract with the seller the objective of a commission split (usually 3% plus statutory VAT per party) and that he will also conclude a brokerage contract with the subsequent buyer with the same commission rate.

Model B: The broker concludes a brokerage agreement exclusively with the seller and agrees on a total commission of usually 6% plus statutory VAT. In addition, the broker agrees with the seller on a dual activity to find a buyer. However, the seller can later decide whether to pass on part of the commission (up to a maximum of half) to the buyer.

In practice, agents and sellers have simply grown accustomed to splitting the commission, especially in the federal states of Berlin, Brandenburg, Bremen, Hamburg, Hesse and (partly) Lower Saxony, where the agent's fee was not split 50/50 between buyer and seller before the new regulation.

A year in, the new system seems to have bedded down, and brokers seem to have largely accepted it as a new reality of life.