One of my good friend bought her first condominium a few years ago when she was 26. I remember her telling us the details over dinner one night. We were so excited for her. She said it happened really quickly, and she went with a real estate agent who took her to a few condos every weekend. She finally found the one she wanted with the help of her real. She said using the real estate agent was free.
When she said the word ‘free’, I was a bit confused. Why on earth would a real estate agent take time out of their weekends to help someone find a place with no monetary compensation?
As I am doing my own fair share of house hunting these days (just an update for you, still looking, and waiting for the bubble to burst), I have had my own interactions with real estate agents. Because there are multi-million dollar homes for sale in the Vancouver real estate market, I thought that real estate agents must made big time money. I was surprised to find that they have to cut the commissions sometimes a number of times. If an agent gets a referral from another agent, the referring agent (even though he/she did absolutely nothing except for “hey, did you want to use this person?”) gets a cut of the pie.
Here’s how real estate commissions actually break down (in case you ever wondered, like I did):
The real estate agent’s fees are paid by the seller (or actually, you the buyer because you’re the one paying for that amount!).
Typically (here in B.C. anyway) it is 7% of the first $100,000 and then 3% (to 3.5%) on the balance if you’re using the big brokerages (like RE/MAX). This is split between the buying and the selling real estate agent, and usually it is split 50/50.
So that means, if you’re looking to buy a $600,000 home, the commissions would look like this:
7% on first $100,000= $7000
3.5% on the remaining $500,000= $17,500 Total= $24,500 + Tax
(yes, you have to pay for tax because it’s considered a “service”)
So the seller of the home paid $24,500 out of their home sale for the real estate commissions. This $24,500 is split between the two agents, netting $12,250 each. However, this is not always the case and it is not always 50/50… and their might be other real estate agents involved like I mentioned above.
The agents normally have to pay about 30% of their commissions back to the home company or even more, depending on their agreement with their home brokerage company. Some brokerages don’t ask their agents to pay money back to them because their agents do all of their own advertising themselves.
However, many people don’t know that the commissions outlined by these brokerages don’t have to be that way. It’s not “set in stone”. The federal Competition Bureau enforces to real estate companies that they can charge whatever they want, so real estate companies like 1% Realty can exist (you only have to pay 1% of the entire listing price).
Many people don’t know that commissions can easily be negotiated- especially in a slow buyer’s market (and if your real estate agent isn’t up for negotiations on the commission, you should probably dump him or her because they don’t have YOUR best interest at heart). Because buying a home will be your largest purchase in life, it makes sense to want to save as much money as you can with said purchase.
Here are some real estate brokerage companies and their commission structures:
RE/MAX- 7% on the first $100K, 3.5% on the balance
One Percent 1% Realty- You pay 1% of the balance, so with the $600K example, it would cost $6900 (one percent realty exists only in BC and Alberta currently)
Macdonald Realty- same commission structure as RE/MAX, I believe
However, because the real estate brokerages have seemed to form a oligopoly (just like the Canadian wireless industry: hello ROBELLUS!), many real estate agents refuse to even look at 1% realty homes (because they personally won’t get very much out of it themselves, when they are used to higher commissions).
I hope that answers some of the questions you might have had in terms of real estate commissions. I know that in the US, real estate commissions are much higher than ours.
Recently the CREA Canadian Real Estate Association and the federal Competition Bureau are at odds because the Competition Bureau wants to open up the MLS (updated and maintained by the CREA) to make it more friendly for consumers and detailed (so you can find out the nitty gritty of the place without having to ask the realtor). Of course the CREA isn’t happy with this because their reign of the oligopoly might be over. Change is coming, folks!
Readers, how much is the going rate for real estate commissions in your area? Do you find it helpful to use a real estate agent?