One of my good friends bought her first condominium through an online mortgage broker 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! I mean this whole adulating thing is a pretty big deal right? She said it happened really quickly, and that in addition to using a mortgage broker to guarantee that she got the best mortgage rate, she went with a real estate agent who took her to view a few condos every weekend. She finally found the condo she wanted with the help of her agent – and best of all – she said it 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? On the other hand I love free things! (What personal finance blogger doesn’t?) I had to get to the bottom of just how “free” this service actually was.
As I am doing my own fair share of house hunting these days (June 2017 Update: purchased my home several years ago and am loving life!), 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 all real estate agents must make big time money. While agents are bringing home massive commission cheques these days, I was surprised to find out that they have to split that commission several different ways. If an agent gets a referral from another agent for example, 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.
How Your Commission Pie Gets Sliced
Here’s how real estate commissions actually break down:
The real estate agent’s cheque comes from the seller. The buyer’s real estate agent will claim that the services they are providing are “free”. This isn’t actually true. It would be much more accurate to tell buyers, “you do not have to cut a separate cheque to me for my services, I will be paid out of the fees charged to the seller, and paid to the seller’s real estate agent.” To be honest, the entire world of real estate commissions can seem a bit convoluted and misleading at times because, if we’re all being straight with each other, if I bought the same house without using a real estate agent, I could easily ask for an immediate 3%+ discount because the seller would no longer have to compensate their real estate agent for the work my real estate agent would have been doing. If that sounds confusing, don’t worry, you’re not the only one!
Typically, (here in B.C. anyway) the real estate commission is 7% of the first $100,000 and then 3% (to 3.5%) on the balance if you’re using the big guys (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= $7,000
- 3.5% on the remaining $500,000 = $17,500
- Total= $24,500 + Tax
(Yes, you have to pay tax because it’s considered a “service”.)
So, the seller of the home paid $24,500 out of the cash that came from their home sale for the commission to the real estate agent. 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… there might be other real estate agents involved like I mentioned above.
The agents normally have to pay about 30% or more of their commissions back to their parent company, depending on their agreement. Some brokerages don’t ask their agents to pay much 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 has decided that whatever deal that sellers/buyers negotiate with real estate companies is fine. You can negotiate whatever package you would like for the price you agree upon – the “3% rule” isn’t actually a thing, but real estate companies sure like to pretend it is! This is why companies like 1% Realty can exist (their pitch is that you only have to pay 1% of the entire listing price). Make no mistake, 1% Realty and similar brokerages likely won’t be able to offer the same package and time commitment that a “full service agent” will be able to most of the time – but they can also cost tens of thousands of dollars less once you do the math for your specific situation.
Save Thousands of Dollar in Real Estate Commissions by Negotiating
I personally think that paying an agreed upon fee based on the amount of work required (an estimate like a lawyer or contractor might give for example) is a much better set up than a commissioned-based pay structure. Check out our FREEeBook: Getting Your Foot in the Door – How to Buy Your First Home in Canada for more information on how to keep real estate fees under control from both a buyer’s and seller’s perspective.
Many people don’t know that commissions can easily be negotiated, 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 only $6,900 (one percent realty exists only in BC and Alberta currently).
- Macdonald Realty – same commission structure as RE/MAX, I believe.
Check out the ComFree.com Blog for more information on how to cut your real estate agent commissions to the bone.
Because the real estate brokerages have seemed to form an oligopoly (just like many other Canadian industries), some real estate agents will try to prop up their quickly declining commissions model by only showing homes that are listed with full service brokerages. Like most other things in the financial sector at the moment though, FinTech companies are quickly chipping at the advantages the old guard depends on. Given how much money we are dealing with when it comes to the buying and selling of Canadian homes, I think there is a massive incentive to do some of this stuff on your own and save some big bucks.
Recently the Canadian Real Estate Association (CREA) and the Federal Competition Bureau have been a odds for several decades now because the Competition Bureau wants to open up the Multiple Listings Service (MLS) for use by low-fee brokerages and individuals. The MLS is where most Canadians start looking for a home and the Bureau wants it available to all Canadians. The problem is that the MLS (found at realtor.ca) is owned and maintained by the CREA, so there has been a constant tug-of-war over this market access issue. Slowly but surely, more information and broader access is becoming available to non-traditional players. I’m fairly certain this will aid competition and continue to put pressure on fees.
Updated for 2017
While the Great Canadian Real Estate crash that all of the “market experts” have been predicting for years has not occurred yet, the competition for your mortgage dollars has only intensified as online mortgage brokers keep taking a larger and larger slice of the market. It stands to reason that given the fact these FinTech companies have zero brick-and-mortar expenses to contend with, they can simply pass those cost savings on to their consumers. If you’re willing to do a bit of your own leg work and compare options online, substantial savings can certainly be had!
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 or did you save a bunch of money by DIY?