We’ve been helping clients buy and sell real estate for a while now and real estate commissions remain one of the most misunderstood aspects of our job. The most popular article on our website remains this one about what is the average real estate commission in Ontario. Spoiler alert, there isn’t one, real estate commissions are not set, are fully negotiable and vary based on location, type of property and price points.
We wanted to focus on a different aspect of real estate commissions for this article, namely the commission offered to the agent who represents the buyer in a transaction. A reminder that while listing brokerages are paid whatever commission is agreed upon with their seller client, they are also to pay the buyer’s agent brokerage out of that total commission.
Almost all listings on the market specify how much of a commission the buyer’s agent will receive if they bring an offer from their buyer client that is accepted by the seller. Just like the total commission paid to the listing brokerage, these buyer commissions are also not set and vary within any given area, neighbourhood, building and price point.
When we work with our clients on either side of a deal, we have the ability to see how much the buyer’s agent and their brokerage (the co-operating brokerage in our real estate terminology) is to be paid. If you’re thinking of selling your home, your agent can (and should) show you what is being offered to the buyer’s agents in the area. While these tend to find an equilibrium, with most commissions being similar, there are often sellers that are offering less or more than the majority of other sellers.
A client considering selling their condo apartment recently asked us if we would recommend a higher commission for the buyer agent than is typical in their building. We decided to look into it before answering and this article is the result. Let’s get into it!
First, a look at the number of agents out there.
We’ve previously written about how Toronto and the surrounding areas are very well served when it comes to real estate agents.
Sorry, let us try that sentence again, as it sounds as if we’re saying how lucky you are to receive such tremendous, professional service from agents if you live in Toronto and the GTA.
We meant to say, we’ve previously written about how Toronto has one of the highest levels of licensed real estate agents for our population. As of about three years ago (December 31, 2021 to be exact), there were just under 63,000 real estate agents licensed with the Toronto Regional Real Estate Board (TRREB).
That seems like a lot. Is it a lot?
In the absence of other numbers, it can be hard to determine if 63,000 realtors is a lot or realtors. We’ll get into the numbers but from a practical perspective, have you ever heard someone talk about how hard it is to find a real estate agent these days? The answer to that is almost certainly no, unless they were asking it in a sarcastic fashion.
The 63,000 licensed realtors we had in TRREB back at the end of 2021 worked out to one real estate agent for every 59 people working in Toronto. As a comparison, for teachers, it was one teacher for every 226 workers in the city, so there were about four times as many real estate agents as teachers.
If that sounds like realtors would win easily in a fight, keep in mind that some of those teachers are gym teachers and they’re in very good shape. Actually, come to think of it, a number of those teachers are also probably real estate agents on the side, so it might be difficult to know which side they’d choose!
All jokes aside, back then we had an awful lot of real estate agents that are licensed to work in Toronto and the GTA.
Things have surely gotten better.
Despite all the turmoil of the past few years, we haven’t seen the number of agents drop to a number that is more reflective of our population.
In fact, since we last looked at these numbers, we’ve seen even more real estate agents get licensed and the number is now considerably higher! This is despite the fact that we’ve also seen a significant decline in real estate agent licensing renewals recently. As we started 2024, we have had 8% fewer memberships renewed this year compared to 2023. Despite that recent decrease, right now we’ve got around 76,000 realtors licensed with TRREB, which works out to about a 20% increase in the number of real estate agents in our area.
How about sales? We have lots more sales right?
After a super busy 2020 and 2021, the past few years have been less active in terms of real estate transactions. In fact, at the same time as we’ve seen an increase in the level of real estate agents in the city and GTA, we’ve also seen a decrease in the number of actual transactions taking place. At the start of 2024, TRREB projected that we would see about 77,000 sales in Toronto and the GTA during the course of the year.
As of the end of October, we have had around 58,500 transactions. Will we see over 18,000 sales in November and December to hit that projected 77,000 sales? When we look back over the past 10 years, the average number of sales in the final two months of the year was about 11,700, so it seems highly unlikely we’ll hit that 77,000 level of transactions that were projected for this year. Personally, we think we’ll be about 10,000 sales short of that projection.
With more agents and fewer sales, you’d think it would lead to even more agents leaving the industry. Let’s take a look at some numbers to see how much an agent makes, on average.
Gross income of $43K isn’t too bad.
We did some quick number crunching and here’s what we found.
With 58,433 sales so far this year, there has been about $65 billion dollars worth of real estate sold in Toronto and the GTA this year. That works out to about $1.1M on average per transaction and if we assume a commission rate of between 4% to 5%, we have somewhere between $2.6 billion to $3.3 billion in commissions being paid out to real estate agents.
With 76,000 real estate agents licensed to trade with the Toronto Regional Real Estate Board, that means if all the deals were divided equally, each agent would have made about $43K this year at the high end, or about $34K this year at the low end.
Of course, the deals aren’t spread evenly across all the agents.
While annual income so far this year of between $34K to $43K isn’t a lot, that is based on the silly idea that all the commission revenue was split equally amongst all licensed agents within TRREB.
If we look at statistics gathered from third party data aggregators, about a third of licensed agents do no deals at all. Whether they are brand new and not having any luck, part-time agents who do a family or friend deal every couple of years or someone who has their license but isn’t actively working, these agents are not getting a single penny of the real estate commissions earned so far this year.
When we remove those agents, the average commission for active agents works out to between $52K to $65K so far this year. Again, however, that’s if everyone who was working each took an equal piece of the commissions, which is definitely not the case.
We know from this third party data aggregators that about another 18% of agents only do one deal per year. That means more than half of the agents who are licensed to do real estate deals in Toronto and the GTA do one or fewer (i.e. none) deals.
If we kept going down this path, the “average” commission income for the remaining agents would keep going up, but it will still very much be a silly exercise. This is because the reality is that a very small percentage of active agents do a very high percentage of the deals and as such earn a lot of that commission income.
What’s this got to do with getting a place sold?
We started off this article with a question from a client about whether offering a higher than typical commission in their building would be helpful in getting their condo unit sold. Now that we’re up to speed on the break down of number of agents licensed within TRREB and how many actually do deals, we can answer the question.
If we’re talking about the more than a third of agents who do no deals, then the commission offered is irrelevant. They aren’t bringing a buyer client to the table, so the commission doesn’t impact them.
If they are part of the 18% of active agents who do one deal a year, then it seems logical that they would be impacted by the offer of a higher commission. After all, if they can effectively increase their annual income by 20% by steering a client to a property offering 3% commission rather than 2.5% commission, it seems logical some agents would do so. This is despite the fact that it is against our code of ethics and is a punishable offence.
Using the same logic, what happens as we move up the ladder of active agents? Logic dictates that the more deals an agent does, the less impactful any one deal (even one that offers a higher than typical commission) will be on their compensation for the year. In addition, the more active an agent is, the more likely they are to be interested in a long, successful career in real estate. Such agents value their reputation and are focused on doing deals that result in happy clients who refer other clients and who become repeat clients over time. An agent who steers their buyer clients towards a property that gets the agent paid more is likely not working in the best interests of their client and over time, that most certainly results in a less successful real estate career.
Logic, schmogic, what actually happens?
While thinking through whether a high commission being offered is helpful, we wanted to look at some datasets to see if the logic holds up.
We pulled the data for condo apartments in the Kensington-Chinatown MLS Community in Toronto and looked for sold listings this year. There were 115 sales in that area so far this year and all but 8 of those sales were offering 2.5% commission to the buyer agent. On the lower commission side, three sold units offered 2.25% commission and one offered 2% commission.
If we look at the units that were offering higher than that commission rate, one was offering 3.5% commission to the buyer agent, two were offering 3% commission and one was offering 2.75% commission.
Let’s see how those attempts worked out.
3.5% Commission
Let’s look at the 3.5% commission unit first. The unit was initially listed for $680,000 with a 2.5% commission. After 91 days on the market, that listing expired and it was relisted for $678,000, offering a 3.5% commission. They dropped the list price to $668,000 after a bit and eventually sold it for $655,000 after 62 days on market. That’s neither a speedy sale nor a higher than asked for sale price, so the extra 1% commission they paid to the buyer agent (compared to the more typical 2.5% in the area) didn’t seem to do much.
3% Commission
Listed for $739,900 with a 2.5% commission being offered, eventually dropped down to $724,800 but with no impact, this listing was terminated after 96 days on the market. It was relisted at $699,000 with 3% commission and was then further reduced down to a list price of $669,900 before being sold for $650,000 after 37 days on the market. Once again, a long listing period with multiple attempts and even with the higher commission being offered, it still sold for less than asking after a lengthy additional listing period.
2.75% Commission
Listed for $589,000 with an offer date, offering 2.5% commission. No takers, so relisted at $668,000 and after a few days with no action, increased the commission to 2.75%. A month later, they dropped the price to $658,000 and three weeks later, after a told of 68 days on the market, it sold for $636,000. Again we see the same story of a long list period and a significant discount on the eventual sale price compared to what the buyer wanted earlier in the listing period.
There are a few insights that stand out to us from this review.
First, a higher commission that is offered after the market has already seen and rejected the property is not very effective. In all cases, it didn’t result in a quick sale after the higher commission was offered.
Secondly, a higher commission is not the way to get your asking price. These three examples all sold for between 2% to 3% below list price and in all cases, that was after they had already lowered their list price from their initial hoped for price.
While it is impossible to know all the specifics that went into these eventual sales, it is clear that a higher than typical commission being offered to the buyer agent is not a panacea for being priced too high. We’d wager that in the above cases, the sale price they received was probably what they could have got if they priced it properly to begin with – and instead they had to pay additional commission.
We think that a higher than typical commission could be effective at generating a quicker sale if it was done from the start. Despite that, we certainly think that the price needs to be realistic and in keeping with market conditions.
A final thought on this commission discussion. When we work with buyer clients within our team, the level of commission offered to us isn’t a consideration. If it is lower than might be typical in for the type of property, we shrug our shoulders. If it is higher than is typical, we raise our eyebrows in surprise. The analogy we often give is that of a store putting things on sale and failing to advertise the sale. Customers who show up to buy their regular items are pleasantly surprised to find they have to pay less, but with no increase in new customers as it wasn’t advertised effectively, they’re just selling the same products they would have, but for less money.
If you’re thinking about selling a property and you want to make sure you get the best price, in the quickest time, with the least amount of stress, then get in touch with us!
