Pay up

Marilyn and Jason finally sold their Bunnypatch house for $1.25 million. So, they ate a hundred grand after eight months on the market – because the distant burbs are no longer desireable or in demand. “I almost miss Covid,” she said with a painful laugh (they bought four years ago). “Not really. But you know…”

So the next blow was Re/Max. The commission bill was $56,250. Ahmed, their agent, had already agreed to cut his normal fee of 5.5% by a full point. With HST, it came to $53,560. About half of that, he explained, would be paid to Beth, the agent for the buyer (a single-divorced guy), who works for another brokerage.

Real estate commissions have been a hot topic lately as property prices start creeping skyward again. The debate was kicked up last Friday with a landmark settlement in the States, where sellers like M&J won a class action suit against the powerful National Association of Realtors. Overnight the 6% commission structure, the iron grasp on the market of MLS and the practice of forcing sellers to pay for the buyer’s agent went poof.

It’s a huge deal. There are 1.6 million realtors in America, and it’s estimated almost a million could be forced out of their jobs after this settlement. Already being an agent in the States is perilous, since last year half sold just one house – or none.

Said a report from the Consumer Federation of America:

“The residential real estate industry is truly a part-time industry with most agents working sporadically and holding another job, often full-time. There is no other financial services industry or profession where part-time, marginal workers are so ubiquitous.”

As in Canada (where we have about 150,000 real estate agents), high prices, higher mortgage rates and a lack of listings (exacerbated in the US by 30-year loans) have been a cancer on the industry. Dismantling a business model that’s been in place for a century is a potential death knell. Especially since almost all buyers now use online tools to do most of the work in finding suitable digs. (Isn’t needing an agent to sell a house like requiring a travel agent to book a flight? Or using a teller to make a bank deposit?)

So the NAR settled its antitrust legal action Friday with a payment of $418 million (it faced damages that could have exceeded $5 billion) and those big rule changes, including eliminating a standard commission rate. The cost of selling is now expected to fall by 25% to 50%. New business models are expected to emerge. Property selling prices are expected to fall. And a lot of agents are expected to look elsewhere for a living.

Fees for selling will be fully negotiable. Sellers will not be expected (or forced) to pay for the buyer’s representation. Those using an agent to acquire a property will pay for that service themselves.

So what are the implications for Canada?

Already the industry is changing, but real estate boards maintain their tight grip on local markets. Board-run MLS systems dominate and often dictate agent behaviour. For example, a FSBO listing (For Sale By Owner) can be placed on MLS through a shell brokerage, but agents will often shun it – bringing no potential buyers to view – since they’ll be paid no commission upon a sale, and that info is published.

So, what do Canadians pay?

Unlike was the case Stateside, there’s no mandated commission rate from CREA, the realtor mothership. It varies by region (and sometimes city). For example, in BC it’s a graduated charge – between 3% and 4% on the first hundred grand, then 1-2% on the rest. Overall, it works out to be just over 3% on total sale price in Vancouver, with the fee split 45/55 between the agents for the buyer and seller. So on a typical detached worth two mill, the commission would be north of $60,000.

In Ontario the real estate industry standard is 5%, but seller pushback amid higher prices (and a tsunami of agents) has dropped that to between 3.5% and 5% – as Marilyn and Jason experienced. Normally the buyer’s agent gets 2.5%, although it is often 2% – and that is published on the listing with the full expectation the seller will foot the bill. Plus HST, of course.

In Quebec the going rate is between 4% and 5%, once again split between agents. Quebeckers have done to real estate what they did to marriage, so the traditional compensation model has been falling apart amid a flood of FSBOs.

Albertans are paying 7% on the first $100,000 of a sale price and 3% on the remainder. Once again, the seller pays everything and the fee is split between the two agents (or pocketed entirely by the seller’s if the buyer comes naked). In Atlantic Canada the range is 4% to 6%, but most sellers end up being nailed for 5% plus 15% HST. Again, the commission is split between agents and the buyer pays nothing.

Can this model now last?

Not a chance.

About the picture: “Hi Garth,” writes Leah. “Happy Spring from the west coast.  The cherry blossoms are out, and our cat Rebel enjoys them as much as we do!  Thanks for all that you do.”

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