There are a few persistent myths in real estate that we see come up on a regular basis. These are beliefs that buyers or sellers (and occasionally agents) hold that make sense in theory but don’t actually exist in reality.
One of the most persistent myths is that a buyer can get a better deal on a purchase of a property if they don’t have their own agent. In 99% of cases, that just isn’t true but it is understandable why it persists. Let’s review why it seems like it would make sense and why it actually doesn’t work in practice.
At first glance it seems reasonable.
The idea of getting a better deal by not involving a purchasing agent makes a fair bit of sense if you don’t understand the specifics of how commissions and responsibilities work in real estate.
The thinking is generally that if a buyer doesn’t involve another agent, rather than the seller having to pay both the listing and co-operating (buying) commissions, the seller only has to pay their agent half of the commission. It saves the seller money, and they will pass that savings on to the buyer in the form of a lower purchase price.
In essence, it follows the basic principal of skipping the middle man. Less people involved means lower costs, which means a better deal. A reasonable way of thinking about things, but when it comes to real estate, there are three reasons why it generally doesn’t work.
Reason #1 – There might be no actual savings.
An integral part of this myth is the idea that by removing a second agent representing the buyer, costs are lower. This is because most buyers don’t understand listing documentation and commission agreements.
First, let’s review how commissions work. There is no real estate commission that is set by the government, associations or all real estate brokerages, and every agent is free to charge whatever commission they wish. This follows the principles of the Competition Act of Canada and the real estate industry has as a standard the following:
Commission rates or fees members charge for services offered to the public, and the division of those fees among cooperating members, are solely the choice of those providing the services.
In many areas, commissions tend to be similar, but it is not mandated. In the GTA, commissions are often, but not always, 5%, with half going to the listing brokerage, and half paid to a co-operating brokerage if one is involved.
In Ontario, our standard listing agreement has a commission section that looks like this.
We’ve filled in two sections, where the Seller agrees to pay the Listing Brokerage a commission of 5% and the Seller authorizes the Listing Brokerage pay the co-operating brokerage a commission of 2.5%, out of that 5% commission.
If you’re looking for where it says if there isn’t a co-operating brokerage (i.e. the buyer’s agent and their brokerage), then the seller only pays 2.5%, you won’t find it there. Unless the listing agreement adds in wording in the “or” section about such a circumstance, the listing brokerage gets paid 5% for selling the property.
This means, if a buyer comes to the table without an agent of their own, the listing agent’s brokerage keeps all of the commission. No discount is given unless the seller and their agent negotiate that amongst themselves, as the paperwork says a 5% commission. If the seller isn’t saving on commission, all that happens is the buyer without an agent…doesn’t have an agent. Put simply, no one is representing their interests, which leads us to the second reason why this myth doesn’t hold up.
Reason #2 – Presenting something as a discount doesn’t mean it’s actually a discount.
If you’ve ever peeled off a sale sticker at a store and found a lower “regular” price below the supposed sale price, you know where we’re going.
Despite the fact that the paperwork likely doesn’t include any requirement for a discount to be provided to the seller if no buyer agent is involved, let’s say a seller and their agent agree to a lower commission with no buyer agent involved.
Many buyers assume that the 5% commission (that may or may not be charged to the seller, as again, it’s not a mandated rate and varies) would be cut in half to 2.5%. This would mean a 2.5% savings to the seller, which could be used in full or in part to discount the sale price they would accept.
The reality is that if a listing agent does agree to a reduced commission with no buyer agent involved, it is almost never a reduction by the full commission they were going to pay to that agent. A buyer without an agent doesn’t have someone to do the paperwork for their offer and without an agent on the other side, the listing agent has to do the work of both sides, including preparing the offer, presenting it, and negotiating it. Twice the work and twice the risk, as a buyer is much more likely to sue or complain about the seller’s agent if things go wrong as they are literally the only real estate professional involved in the transaction.
As such, if a seller and their agent agree on a discounted commission, which is rare, the discount is most often 1% or 1.5% off the agreed upon commission. This is a recognition that the listing agent has more work and risk, but didn’t have to show the buyer around for months and advise them on the market.
Whatever the discount that may be agreed upon, the listing agent can offer to split this with the buyer in some fashion, so the seller saves some expenses and the buyer gets a lower price. They could even offer to pass on that full 1% or 1.5%. The problem with this is that it assumes that the list price is the only price the seller would accept and no negotiation is possible. In the vast majority of cases, a purchasing agent could negotiate a better price than the list price.
In our experience, when a listing agent “gives” the buyer the commission discount, it is often less than what an experienced buyer agent could have got their client if he or she had been hired to represent the buyer.
While these two reasons (no commission reduction, and if there is, no actual discount to the buyer) may be enough to show how the myth of a better deal with no buyer agent is rarely true, there’s one further reason.
Reason #3 – The purchase price isn’t the only financial aspect of a property.
The idea of cutting out the middle man works relatively well for products where the attributes and value of the item are fixed. If you go to a factory to pick up a product rather than going to a store that is selling it, getting some sort of discount is reasonable. The manufacturer incurs some additional costs in being able to retail and sell the product to the public, but they are less than a separate retail store would likely incur and there are no transportation costs.
With real estate, let’s think about what happens if a buyer finds a property where the seller and their agent agree to a lower commission if another agent isn’t involved. It’s unusual, but it can happen. Then let’s say that the seller actually gives a real discount on the sale price rather than pretending the price they would have taken anyway is somehow a discount. Both taking place is quite rare, but say it happens and the buyer gets a bargain on the property. Whatever the savings they realized can disappear when other costs materialize.
If a buyer doesn’t have their own agent, they don’t have someone who is legally required to look after their best interests. In real estate in Ontario, we have a distinction between a Client of an agent, and a Customer of an agent.
If you are the buyer Client of a real estate agent, they are required to:
- Promote and protect your best interests
- Negotiate favourable terms for you, the Buyer
- Maintain confidentiality
- Take reasonable steps to determine and disclose material facts about the property
In the overwhelming majority of cases, when people talk about “working with an agent,” this is the kind of relationship they mean.
In contrast, if you don’t have your own agent, where you are their Client, you will most likely be treated as a Customer by the seller’s agent. In theory they could take you on as a Client, just like their seller Client, but if they do so, the seller (and you as the buyer) get a restricted version of that Client relationship and sellers often refuse. The most common compromise is to take on the buyer as a Customer, where the agent has a much more restricted role, and their only obligations are:
- Fairness, honesty, and integrity (ethical duty)
- Exercise due care when answering questions and providing information (legal duty)
- Avoid misrepresentation (legal duty)
Examples of what can and cannot happen under a Customer Service relationship:
- If the brokerage is representing the Seller, they must disclose anything pertinent about you (the Buyer) to the Seller (e.g., motivations and budget)
- The agent is not obligated to show you all properties that you are interested in
- They will not generally provide you with comparable sold data or price recommendations
- They are not required to perform additional due diligence about the property – they only need to disclose the material facts that are already known or ought to be known
- The agent may not disclose the terms of your offer to any other buyer
- The agent can’t lie to you
As you can tell, it’s a pretty low bar. It’s not working with someone to help them find a property or making sure you’re protected, it’s being polite and providing information that must be provided and staying quiet about anything else.
The listing agent can’t lie or hide known defects in the property, but they are under no obligation to be proactive or make sure the buyer is fully aware of all possible issues with a purchase. Their job is to sell the property, not to protect the buyer.
A good purchasing agent helps avoid other costs that will cost the buyer money. Whether it is pointing out the age of the furnace means it is at the end of its useful life, requesting the planned special assessment be paid by a condo seller rather than the buyer or just identifying potential issues with the property, a buyer’s agent is obligated to look after the buyer, as they are their Client. When no one is obligated to do that, it is very common for the buyer to have costs pop up during or after the closing that destroy the “savings” they received by not having their own agent.
If you’re a buyer who wants to get a deal on real estate, then the way to do it is to work with experienced, connected agents who can help you find opportunities, negotiate a great price and protect your interests. If that sounds appealing, get in touch with us!