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?
rant open.
Real Estate Agents or might I say rip me off agents. I have only sold once with a real estate agent, that person didn’t do anything I am not capable of doing myself.
Never again! the next time I wish to sell, i will do it by myself. What a waste of money those commissions are.
rant closed.
@Beating The Index- lol Rant Open and Closed. Rip Me Off Agents LOL. Yeah, BF and I are currently NOT using a real estate agent, BUT there is one who decided to tag along and send us automatic info on townhouses that isn’t appropriate to our “wish list”. The problem with doing it yourself, is that MLS is funded for primarily by the real estate agents. The only place you could list (other than craigslist or facebook lol) is for sale by owner. Not many people look and list there (I’ve eagerly tried to find something on there to find out later it was outdated by a time period of about 3-6 months). I wish we didn’t have to use real estate agents at all either. Agree that those commissions are a huge waste of money, especially if your property was >1million or something! They make a killing!
When we purchased our first house we went the private sale route and found a nice house that we liked while we were driving around checking out various neighbourhoods.
We actually hesitated on the house for weeks and then contacted the sellers again after much discussion. It turns out that they were just about to list the house with a real estate agent and we got in under the wire. We negotiated on the price quite heavily and were able to walk away with a pretty big discount. It was win/win because they didn’t have to pay the commission.
Thanks for clarifying exactly how the commissions break down. I think it is pretty similar to that here on the east coast. Realtors definitely seem to protect their own by avoid those properties that are private sale or offer less commission … or maybe I’m just jaded.
@Saving Mentor- Private sales sound like the way to go. You were so lucky you found your first house while driving around! I wish I could say the same. This house hunting ordeal has been going far too long and is getting depressing. I love win-win! Commissions can eat up so much of the house cost (for both parties).
No, I definitely don’t think you’re jaded, you’re RIGHT! They likely don’t show you the properties that are for private sale because there’s less incentive for them. It’s too biased. Just like bias that is intrinsic when you choose a financial adviser and they give you mutual fund products in which they would get the most commission out of *SIGH*!!!
I fundamentally believe that realtors (especially on the buy side) don’t add that much value.
If you are buying, not using a realtor may provide some wiggle room at the end, when the negotiations get close, you can hold firm at the end and get the realtor to cut a bit of their commission to make up the few extra K. This only works in slow markets (which Vancouver appears to be entering).
Another thing look out for…I’ve heard stories lately of the selling realtor mentioning that they are “expecting other offers to come in”. I think this is a tactic to get the potential buyer to up their bid price (since Vancouver had a strong market last year where people competed for places). If the buyer doesn’t make an offer, the selling realtor calls them back and says the “other offer fell through”. It all seems a bit shady to me.
I’m hoping Vancouver crashes…some greedy people deserve it..!
@Tiny Potato- I’m in the same boat- I’m hoping Vancouver crashes too!! You know what is really shocking?? Realtors have been taking their clients to NEW CONDOS that haven’t been completely finished yet here. Talk about EASY MONEY!! I was looking in a new condo a year ago and the developer told us that they would give us the “developer” price if we didn’t have a realtor with us. Imagine if you had a realtor, you basically are giving away a couple thousand grand for them doing absolutely nothing!
I haven’t heard of that tactic before- that’s actually a terribly seedy disgusting tactic!! Some selling realtors have told us that (actually, come to think of it) most real estate agents we have dealt with when actually putting offers in told us that. That’s why it’s important not to sacrifice or “fold” under pressure and stick to the amount you were thinking of initially. I ain’t interested in bidding wars, yuck!
Y&T,
Actually you can list with duproprio.com and a couple of other sites. I don’t know if this one operates in BC though.
For buying, you can have an agent tagging along since you won’t be directly paying but for selling, no way jose!
My first condo was found by my wife and my current house was found by us. Agent never contributed any meaningful results.
@Beating the Index- Thanks Mich! I checked out duproprio, and I think it’s the Quebec equivalent of the FSBO sites. Duproprio looks like there’s a lot of activity. I actually am not planning to use an agent for buying. Our strategy is to use the selling agent and do a dual agency agreement so they can cut their commissions.
Recently, many people are doing the FSBO approach.
I have also seen a local agent do a 70% cash back.
That industry is going through a major change. I am not sure where I stand on the fees charged – it would be great if it was a per hour charge for some people.
@Steve Zussino- Yeah, I’m glad things are changing. I’ve been looking on the FSBO sites, and find that they aren’t that updated. I find that there are good postings for places that are more rural in BC (like on the island, or up north) but for Vancouver, I don’t really find too much. Wow a local agent do 70% cash back? Now thats what I’m talking about!
Commission is WAY overpriced! Not many are customer focused either. It’s really a monopoly.
We used 1% Realty to sell our first place and we hardly saw any of the big name realtors since the commission was lower. It was our first experience since we bought new from the builder. We bought our second place new but to sell and buy the next one. We picked a good realtor. The problem is that the good realtor usually work as a team and not all of the realtors in the team are the same …
You need to do your homework and NOT rely on a realtor for your decision (sell or buy). Buying / Selling a place is very emotional and the realtors can play on that. Realtors should be a tool in your toolbox so you need to do your homework. I have found that some realtors are good for shopping, some are good at selling and some are good at negotiating a price. Based on your need, change realtors. The realtor you use to buy a place may not be good at selling your place.
If you don’t have experience, I recommend you have someone with experience tag along. A 3rd party will keep everything in perspective because it’s not their place. They have no emotions involved and it can help balance what the realtor says and what your emotions tell you.
Maybe I should start a side business and offer services to not get screwed by a realtor and charge a slight fee
@The Passive Income Earner- Yeah! Great idea! I’m sure there’s a HUGE market for there here in Vancouver (huge!). There are just way too many real estate agents out there who shouldn’t be there. I remember going to an open house this summer and the real estate agent showing the home couldn’t answer how OLD the house was!!! She said (as she chewed her gum with her mouth open) “I dunno… it’s old. An old timer” and she didn’t even offer to look it up lol. That’s a great idea you have, to have someone as a 3rd party… you’re right, buying is such an emotional decision, and it’s hard not to be rational when you want-it-so-bad!
[...] Of Your Rut why the experts don’t tell the truth about stock investing.Young and Thrifty decodes real estate agent commissions.Smart on Money suggests you pay cash for everything you buy.Free From Broke 5 simple steps to save [...]
The commissions are atrociously high!
Should be more like 2% or FIXED FEE period!
@Yakezie- Yeah, especially for markets like Vancouver and SF, where the prices are already ridiculously high to begin with!
Don’t stone me for what I am about to write–but I think the commissions are fair *I’m not joking*
I feel people understand this career and base their judgments on it with emotion generated by money and limited understanding. Much like a person who bet on a football game and watches it from his couch. Before you know it, ever penalty the team gets is a “bad call” by the Ref.
It is one thing to be outside looking in and a whole different thing to be in the game–I would bet a lot more is involved than our view point provided from our sofa can provide.
But I will agree with the housing prices being too high!
@Dd- lol, I promise I won’t stone you =) (how graphic, Dd!). Hey, are you a closet real estate agent by any chance? Yeah, I’m not saying they’re UNFAIR, but in some certain scenarios, I find that the work they put in isn’t worth it (like the brand new condo situation). Then again, a lot of real estate agents have to suffer through doing cold calls, hold open houses, try and contact people who might not be interested in using you anyway. It takes a lot of guts and a sales person mentality, that’s for sure.
[...] Young and Thrifty – Real Estate Commissions Decoded [...]
I have sold my latest house without an agent and I can only tell you how I made 19K in my pockets!
In my opinion, anyone who is willing to take a few hours to make decent comparables, put a few hundred bucks in home staging and take a few hours to take good pictures can save the commission.
website like bytheowner.com is awesome!
@The Financial Blogger- Thanks for visiting! Yeah, exactly 100% agree! I heard that there will be very BIG changes to the real estate market once they open up posting on MLS.ca for people who are NOT real estate agents. That will change the way people use real estate agents for sure! Hopefully it happens soon.
Obviously any negative replies are from people who are NOT realtors. If you dont know what your talking about especially when it comes to the competition bureau – why comment. What do you do for work, could i just walk in and take over your job.
ive always had great experiences with my realtors!
@Canadian Coupons- Good to hear. Do you have any examples of how they shined for you?
don’t bite me head off here… I am a realtor in Vancouver and I have been doing it since graduating university in 2005.
Being a realtor is a tough job. Many people think its easy and we don’t do much. I think the big problem is there are a lot of ‘bad’ realtors out there, that give the good ones a bad rep. Getting licensed in BC is a little too easy in my mind.
I work very hard and I know many other hard working ethical agents in Vancouver that earn their money. A good agent will net you more money than a FSBO… and when hunting for properties with the right agent you will find deals that most people will never come across.
Anyway… some realtors are Great… I promise!
@Pete- Hi Pete
I’m not going to bite your head off. You are right- as with every professional there are good ones and bad ones. I will have to agree that there are a lot of “bad” realtors out there. I know some real estate agents who were previously wannabe gang members at my high school, even!
[...] If you’re looking to read more on how real estate commissions work, I have an old post about it here. [...]
One thing I’ll always remember my real estate agent doing is always bringing me a warm Starbucks coffee when heading out to look at condos. It’s a small gesture, but memorable.
@canadian coupons- Wow, if I had a realtor like that I would use one LOL.
Honestly saying you guys are right it does look like a big waste of money but let me ask you a question. When you fly a plane would you question the pilot’s salary, how about a doctor whos doing brain surgery, how about a lawyer fighting for a very important case. Would you go and cut your own hair? Why would you play around with the biggest investment of your life, even though real estate agents make a lot of money all of the access is through a real estate agent. How many people buy a house of a $30 add or privatly it is just by luck and it is very rare. You may sell it yourself no problem but your leaving a lot of money on the table and your attracting unqaulified buyers. When you go private you are bargaining with emotion and that is never a good way to bargain. Why not interview agents, see which one is the most powerful and hire he/her. These sities FSBO.com or whatever may look good but unfortunatly in todays high inventory market where 1 out of 12 homes that are listed are actually selling, the question should not be how much do you charge but what will you do to sell my house?
There are agents who charge 1% or $999 you guys don’t have a clue what kind of scam your in. At the end of the day you get what you pay for I am just educating you guys so you don’t make the wrong decision. Those guys will come in and tell you just what you wan’t too hear and they won’t even give a hoot about your property even if it doesn’t sell. First things first they are not going to care about your property, they weren’t strong on their commision in the first place, how strong could they possibly be at the negotiating table when it comes to your price they are going to do the same thing discount your price. If you were at work and your boss all of a sudden said XYZ my factory is very important too me, I put my life savings in here but I am only going to pay you a qaurter of your pay this week how hard would you work? Same concept, they are just going to pick up buyer traffic from your house and then they could make that buying side commision 2-3 times depending on how many times they sell a house to a buyer. 99% of the time when somebody calls of an add they don’t buy that house, they are just shopping around. You definatly want somebody whos honest even if it hurts a little bit and unattatched to the outcome. Don’t worry about the commmision worry about the net.
Sorry for the long post I felt I needed to educate before anybody makes the wrong decision thanks.
Source? I am a realtor lol…
@Raman- Thanks for the post
You do make some valid points. To be honest, I think it really boils down the the real estate agent you get. There are some good ones and there are some bad ones. I know that all the “social yet bad kids” at my high school became realtors by taking a short course. There are agents who can get you over and above what you have been asking for and there are some who don’t do anything but let it sit on the market until the contract ends.
To me, the reason why FSBO type sales don’t work well is because realtors who are bringing their clients around are not interested in looking at homes with FSBO. There aren’t enough people doing it collectively.
Thanks for stopping by and sharing your two cents
sorry one more thing too add….Here is the owner of FSBO.com, lol he got caught using a Real Estate agent to sell his condo.
http://blog.buzzbuzzhome.com/2011/08/founder-of-for-sale-by-owner-site-calls.html
@Raman Kainth- Thanks for sharing that link- looks like an interesting read!!
Standard talking points from a realtor. True: Not all realtors are bad. However the industry on a whole is undereducated and vasty overpaid for what they do. There is also a great deal of opportunism for commision with little actual regard for the clients at time. Do i trust a pilot to fly the plane? Yes because he’s had 10,000+ hrs or flight training and experience. And that brain surgeon has about 12 years of schooling and work experience before he cracks into your skull. You guys take a couple 4 week course and write a test and you consider yourselves highly trained professionals. The vast majority of buyers and sellers out there wouldn’t be so insenced by your profession if it wasn’t ridiculously overpaid. The entitlement here is obsene. I’ll get my own coffee and save the 12K. Thanks though. Best Regards.
@Eddie- LOL “I’ll get my own coffee and save the 12K” That’s exactly how I felt! Honestly, for me, I know too many realtors who were my classmates from high school and they were into drugs/ looking cool/ clubbing/ gangs. And now they’re realtors. They took like a 1 month course and passed the exam and now they are realtors.
of course that being said, there are lots of realtors out there who work for that money. I’m just saying there are more bad apples than good ones.
Realtor Pete here again…
I have a big problem with how easy it is to become licensed (I know better than anyone… try working with them all day in and day out!). I personally have gone beyond the trading services course and have my Managing Brokers License and I also have a Commerce degree in Urban Land Economics from UBC.
Picking the real estate agent to represent you is 100% your decision. There are lots of us who work hard and save/make our clients a lot of money/time… and eliminate a lot of confusion and stress (as well as buy coffee (and more) for our clients).
Being an open market to select your own realtor, I have to put some blame on the picker… not just the pickee. Ask for testimonials and experience to date… peer reviews are all over the net, go with someone proven!
When you are making -most likely- the biggest investment of your life you will benefit from the guidance and experience of a top class realtor! I promise
We’re not all so evil, us real estate agents I promise!
I agree with Pete Shpak above me, as well; it is far too easy to become a licensed Realtor, and unfortunately a lot of people see it as a way to make “easy money”. The problem is, it’s actually a heck of a lot of work to be a good agent, and many agents aren’t looking out for their client’s best interest as they should (which makes the rest of us look bad).
Of course it’s entirely your decision, but I do believe there is a lot of value in hiring a Realtor. Included in the commission cost (for most realtors), are all the marketing fees, strata documents and MLS listing fee, but there are two other very important reasons why you should hire a Realtor to sell your house.
First off a Realtor helps you safe time. My checklist for things to do when selling a home is over 4 pages long, and the process can take some time. A Realtor can take care of showings, open houses and answer all questions about your home from other agents or potential buyers, taking the stress away from you. Not to mention all of the time marketing, and advertising your property to help it sell.
Second, a Realtor’s got your back. We actually follow a very strict code of ethics, with steep penalties for breaking them. Our duties and obligations are written in the listing contract, and by law we are required to promote our clients best interests and disclose all relevant information. If a Realtor is ever in breach of our code of ethics, they can be reported to their Real Estate Board. The board also has a public list of all realtors who have been in breach of these ethics, up for all to see for all of time (I strongly encourage you to look at the list before hiring an agent). We’re also very highly insured, in case someone ever goes wrong with the sale of your home. For instance, if the home were to sell to someone who later discovers the house was previously a grow op, and both the sellers and agent didn’t know about it…Booom! We’ve got insurance! There’s a thousand more cases where this is important, but with your most important asset, I just think it’s better to be safe than sorry.
As far as hiring a realtor goes to buy a house I think that one’s a no brainer, especially if the person selling their house has an agent. Without an agent representing you as the buyer, the sellers agent double ends the commission, and regardless of them writing up the paperwork for you, have NO obligation to you as a client meaning they are not allowed to help you negotiate a better price, because they’re working for the seller. It will save you money if you hire your own agent.
Lastly, just with regards to the actual article. It is well written and mostly true, however all agents are allowed to charge whatever they like, the brokerage doesn’t choose the commission. I’m with Macdonald Realty and personally I charge 7% on the first $100,000 and 2.5% on the remainder, which I will point out, after I split commission with the buyers agent, my brokerage and my marketing costs, a sale which can take up to 6 months will only actually earn me around $5000. Don’t think that’s so outrageous after all. And as a rule I will never discount my commission rate (except if I’m working with someone to both buy and sell a home, in which case I drop it to 6%), because I believe my services have value, and I like to have food with my meals. If an agent isn’t willing to negociate their own value, how do you think they will negociate the value of your home with a buyer. Never hire a push over agent.
@Stephanie- Thanks for sharing your 2 cents and clarifying!
I actually had to report my real estate agents (husband and wife team), the listing agent and the brokerage for breach of ethics (they were all in cahoots) involved in a purchase of a home. The agents were judged by a group of their peers! Are you kidding me? They were all fined (not heavily) and got a minor slap on their hands…and I was not compensated whatsoever (problem not satisfied – nor compensated monetarily). I suffered a nervous breakdown as a result of this inquiry and situation and couldn’t proceed with a proper lawsuit in court. My opinion is that the lawyers actually do the work required in ensuring that you’re protected and that your best interests are looked after with regards to “the biggest purchase of your life”. The lawyers only make a pittance compared to the agents in real estate transactions. If it wasn’t for my lawyer (who I paid less than $1,000), I would’ve lost $450,000 instead of the $50,000 I did. Agents do NOT have your best interest at heart…they have their OWN best interest at heart. There is no incentive for them to do anything but look after themselves.
I have bought/sold all of my other properties on my own with the assistance of a real estate lawyer – all have been a great experience and a win/win for me and the buyers involved.
I think some profound changes need to be made in regulating the CREA/MLS/Real Estate Brokers & Agents in Canada and it can’t happen soon enough.
Wow! Thanks for sharing that experience LD. That is very enlightening and definitely reinforces my instincts and minimal experiences. I think in terms of the real estate market, the world is getting flatter in terms of information advantage, and the value of a “real estate expert” is not highly questionable. If you spend a few hours reading, and then make the effort to list your home on your own terms, the benefits are well worth it in my opinion.