It will only be worth paying estate agents a higher percentage if they make you more money, says Marc Coleman

IN THE latter half of the 18th century a Scot named Adam Smith came up with an idea that revolutionised the world economy; specialisation.

Smith's big idea was that rather than baking your own bread, weaving your own shirt and milking your own cow, you should concentrate on one activity you were good at and leave it to the market to provide everything else for you. Over 250 years later the idea may in one area be about to be rolled back a little.

According to the Institute of Professional Auctioneers and Valuers (IPAV), estate agent fees are going to rise to 2 per cent. The European Federation of Estate Agents has produced a study showing that Ireland has the lowest estate agent fees in Europe. At around 1.5 per cent of the final sale price, Irish fees compare with rates as high as 6 per cent in some countries.

The case for a rise from 1.5 to 2 per cent seems clear cut. But if that happens, won't many sellers simply decide to pocket the increase and pay it to themselves to do the job by themselves?

After all on a €400,000 dwelling, the estate agents fee will increase by €2,000, close to a fortnight's take home pay for most of us. Well not necessarily.

What Smith understood was that specialisation isn't just about cost benefit analysis. It's also about the fact that we are more productive when we do what we do best.

Estate agents, the good ones at least, know how to apply buyer psychology and use negotiation skills. Unless you can to, you're taking a risk by not using one.

Does that mean you should swallow the fee increase? Dermott Jewell of the Consumers Association of Ireland has described it as ridiculous, pointing out that however small the percentage by European standards, it is applied to a much larger price. Sellers don't get thousands of euro worth of service from their agents, he reckons.

There is a clear solution to this argument. An estate agent can be worth paying several thousand euro to if he or she does get you the price you want.

But does a crude percentage of the house price incentivise them to do that? Take a bog standard house in a reasonable area that was worth €400,000 this time 12 months ago. However slow the market is at the moment, should an estate agent be paid if it sells for €400,000 now?

Unless the house is structurally deficient or the neighbours are from hell, the thing will sell for at least €450,000 now. And yet estate agents are proposing to pick up a cool €9,000 from the sale of such a house.

Here is an alternative approach when setting a fee with your agent. Agree a reasonable lump sum that covers the fixed administrative and office costs of putting the house on the market. I'd be surprised if this exceeds more than a thousand euro.

The remainder of the reward should be a generous inducement for the agent to get the best price possible above a lower floor that is reasonable; a floor defined by the price that would have been achieved if the house had grown in line with the ESRI's house price index since it was last bought or valued. Taking the house above as an example, I would pay the agent €1,000 plus, say 15 per cent, of the difference between the price attained and the minimum price of €450,000.

That I am paying the estate agent to devote as much of his or her time possible to getting me the best price for my property, and not for work that the market will do unaided.