Most Canadians use a real estate agent when buying a home, paying real estate agent commission. A realtor can help purchasers find the right home for the right price and guide them through the entire home buying process.
Generally, buyers don’t pay realtors directly. Instead, their compensation comes in the form of a commission on the property’s final sale price. Commissions for both the buyer’s and seller’s agents are taken off the top of the proceeds of the sale. While this might create the impression that the seller pays for the services, making realtors “free” for buyers, that’s not the case.
So, how does a buyer know how much they’re paying a realtor, and is there any way to pay less? Here’s what you need to know about real estate commissions when buying a home in Canada.
How much are commission rates for real estate agents in Canada?
Commissions paid to real estate agents in Canada typically range between 3% to 7% of the final purchase price, depending on region and the agent used.
So, for example, commissions on a home that sells for about $500,000 — the average price in Canada — would total $15,000 to $35,000. This amount would be split between the buyer’s and seller’s agents.
A home in a pricier location such as Vancouver or Toronto, which may sell for $1 million or more, would have total commission fees starting at $30,000 to $70,000.
Is it really “free” to use a realtor when buying a home?
No, this is a common misconception because the fee is built-in to the transaction. The buyer actually pays for all the commission fees — both for their own agent and the seller’s agent — as these fees are worked in the home’s total purchase price. The buyer is the one who will be paying off those extra thousands of dollars (plus interest) over the next 25 years.
To fully understand how buyers are on the hook for realtors’ commissions, you need to look at the transaction from the perspective of the seller.
Sellers want to get as much money as they can from the sale of their home. If 1.5% to 3.5% of the purchase price is going toward the buyer’s agent, that’s thousands of dollars the sellers will never see. In other words, if sellers know that they can reduce or eliminate the amount of money they must pay to a buyer’s agent, they’ll be open to negotiating a lower sale price on the property.
Tips for buying a home without an agent
Get a pre-approved mortgage. You don’t want a sale to fall through because you couldn’t get your financing arranged in time. Contact your bank or mortgage broker well in advance of making an offer to get pre-approved for a fixed or variable rate mortgage.
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Do your research. Without the expertise of a realtor, you’ll need to brush up on the ins and outs of buying a home to ensure your purchase goes smoothly and you avoid any unexpected fees at closing. You should also research details that are particular to the neighbourhoods you are looking in, such as previous sale prices, typical closing periods, and if winning offers tend to be conditional or unconditional (more on this below).
Obtain legal advice. A home purchase involves contracts, title searches and other legal documents. Even if you decide to go without a realtor, you should still hire a real estate lawyer.
The risks of buying a home without an agent
Sales data is currently hard to come by. To negotiate effectively, you need to know how much comparable homes in the neighbourhood have sold for. (List prices aren’t much help since many homes sell for tens or even hundreds of thousands of dollars over asking.) Right now, realtors are the only ones who have easy access to this information online. But this is expected to change soon in Toronto and other regions in Canada, as the Toronto Real Estate Board recently lost an appeal to restrict such information.
Not everyone is a good negotiator. And even if you are, you probably haven’t negotiated many home sales. An experienced realtor, on the other hand, has done this very thing dozens or even hundreds of times before and has a sense of what works and what doesn’t.
You don’t know what you don’t know. A realtor knows the red flags to look for regarding potential problems (such as wet basements or mould) and is aware of all the disclosures a seller must provide. If you go it alone, you may not know what to ask or what you are legally entitled to.
What are the potential savings for buyers who don’t use an agent?
Say you’re buying a home in a neighbourhood where properties typically go for $800,000. Let’s assume commissions in this case total 5%, or 2.5% to the buyer’s agent (if you use one) and 2.5% to the seller’s agent. That’s $20,000 each, or a total of $40,000 in commissions. The seller would clear $760,000 from the sale ($800,000 sale price – $40,000 commissions).
If you decide not to use a realtor and explain this to the listing agent, you could put in a bid of $790,000 instead of the typical $800,000 and still win the sale. How so? The seller’s realtor should have no issue with the lower price since he or she will still receive about the same commission ($19,750 instead of $20,000). The seller, however, will clear $770,250 in the transaction ($790,000 sale price -$19,750 commissions), or $10,250 more than they would receive in the first scenario.
In this example, you save $10,000 off the purchase price (and thousands more in interest over the life of your mortgage) by not using an agent.
How to save money on real estate agent commission
There are a few options available to buyers who want to save money on real estate commissions.
- Negotiate a lower commission. While most home buyers understand they should be negotiating with lenders to get the best mortgage rates possible, many aren’t aware they can also negotiate commission fees with realtors. For example, if agents in your neighbourhood usually charge 3%, see if you can negotiate down to 2% instead.
- Use an online real estate brokerage. Purple Bricks, for example, recently began operations in four Canadian provinces (Alberta, B.C., Manitoba and Ontario). Buyers are assigned a realtor in their neighbourhood and receive $2,000 cash back on their purchases, while sellers pay a flat fee of about $800 instead of a commission. Similarly, Moncton, NB-based Property Guys avoids commissions as homes listed on the site are for sale privately — meaning there’s no listing agent — for a flat fee. Buyers deal directly with the seller.
- Buy a home on your own. If you’re looking for even greater savings, you could find and buy a home on your own without hiring a discount brokerage or buyer’s agent. Website such as Realtor.ca, the Multiple Listing Service website run by the Canadian Real Estate Association, and Zillow, a U.S. website and mobile app, allow you to search for Canadian properties by postal code, city or province.
The Bottom Line
Buyers who use a real estate agent do pay indirectly for the expertise that a professional provides. But they can reduce the amount they pay by negotiating a lower commission with their agent, using a discount real estate brokerage, or forgoing the services of a realtor entirely if they feel comfortable going it alone.