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How Real Estate Commissions Work

I want to share this article from the Toronto Sun with you – it clearly spells out how real estate commissions work.

The real estate industry operates on being paid only upon a successful result. This means that if your property does not sell or close, you do not pay.

The fact that the fees associated with real estate are based on this contingency is good for consumers. But does this mean that a successful seller pays for the collective work done by real estate agents in all of those unsuccessful transactions? This may be a reason why fees have hovered around 5% for some time now, even as house prices have escalated tremendously over the past 20 years. I guess the real question is what is a fair fee to pay for a successful real estate transaction and how does it all work in paying for the services of both the sellers’ agent and the buyers’ agent?

To put it all in perspective, a lawyer might charge upwards of $1,000 per hour for their services, and where half of the lawyers lose half of the time also happily will take contingency cases on a 30-50 per cent basis. In comparison, the real estate industry offers better value by charging only on success. But how it all works is tricky and requires some understanding.

Once you have chosen a real estate agent to sell your home, they present you with a listing agreement which is probably a Multiple Listing Sale (MLS) and you have to agree on a fee for their services. This is not only for what they will do for you, as it also includes the amount that you will be offering to the buyers’ agent for participating in the transaction. Let’s start here as all buyers’ agents are paid by the seller through their listing agent upon a sale. This means that once the deal closes and the seller gets their money, both agents get paid.

The commission offered to the buyers’ agent is publicly disclosed on the MLS listing, and this is a key incentive to buyer agents. If your listing offers 3% to the buyers’ agent, this is going to be more positively viewed by them than if you are offering 2.5% or less. You should offer a commission that is consistent with what’s being offered in your area. For comparison, ask your listing agent to show you all of the broker full listings, as this is where the commission rates are fully disclosed to the real estate industry. My advice is that if all of the competitive neighbourhood listings are offering 2.5% to the buyers’ agents, you should consider offering the same amount or possibly more for your listing to stand out stronger to the agents compared to the other listings being offered for sale.

This takes care of the buyer agent; however, in most cases, the sellers’ agent is doing more of the work. They should have the incentive to try and earn an amount equal to what’s being paid to the buyers’ agent.

Have a candid discussion with your agent to confirm all of the things that they are including in their package of real estate services: MLS listing, sign on the property, advertising, floor plans,

photographs, video tour, drone photography, full colour brochure, pre-home inspection, etc. Go over everything that they propose to do and the costs (to you as well as to them), then discuss and decide on a fair fee.

What if your agent double-ends the property without the help of a buyers’ agent? Should the overall fee be reduced? This is difficult to do if there are competing offers as your agent is required to make disclosures about this and can alienate the buyers’ agents who are participating in the multiple offer bidding at the time.

Good real estate agents provide excellent and fulsome services that are varied and unique. The ones who deliver you a successful transaction with no problems deserve to earn a fair fee, which may not be the lowest. I always say that you get what you pay for. Make sure that everything is crystal clear from the outset on the total cost of their services to you, as well as what is included and what is not. Consider, as well, that the fees are subject to HST.

Remember: the buyer is really paying the cost of the fees, which are built into your asking price. Allow your agent to be properly incented to do the best job that they can. Let them show their mettle by pushing the buyer to a price that gets you the net that you want!

Stephen Moranis, B.Comm., MBA, FRI, CMR has been active in the North American Real Estate Industry for more than 40 years. He is a former President of the Toronto Real Estate Board and a former Director of the Canadian Real Estate Association.

Toronto Sun, July 2016