We promise this isn’t going to be a bait and switch article.

We’re not going to start out talking about lower commissions and then try to convince you how a good Realtor earns their commission.  While we do actually believe that to be true, if someone has had bad experiences with Realtors who don’t do much to earn their commission, then it isn’t true for them.

In the years that we’ve been working with clients, we find that any conversation about commission with people who don’t see much value being added by Realtors is taking place in what is called a negative bargaining zone.

When there is no room to come to an agreement (also called a zone of possible agreement), then we have a negative bargaining zone, where one side’s worst case is still higher than the other side’s worst case.

If you’ve ever tried to come to an agreement with someone where they keep offering variations on something you don’t want, you know what a negative bargaining zone feels like.

Here’s a story from one of our agents about how he encountered this while travelling in Thailand

Towards the end of my trip, I looked at a pair of engraved silver salt and pepper shakers in a shop, thinking they would make a good present for my mother.  The cost was about $50 Canadian.  It was a little high in my opinion and I left the store.  Right outside the store was a street stall where they were selling a pair of shakers that were identical.

 I asked the vendor how much he wanted for the shakers and he said $90.  I was pretty surprised given I thought a stall should have cheaper costs and therefore prices.  I told him that the exact same shakers were in that store right beside him, for $50.  He sighed dramatically and told me he would lower the price to $70 but that was it. His lowest price was already higher than the highest price at the store and I wasn’t planning on paying even that $50.  (Sorry, mom.)  We were in a negative bargaining zone, where his lowest price (worst case for him) was higher than my highest price (worst case for me).

Situations like this definitely occur in real estate.  Sometimes buyers have an absolute maximum price they’ll pay that is still lower than the absolute lowest price a seller will accept.  When that happens – no deal.

It isn’t just during negotiations between buyers and sellers that negative bargaining zones can exist.  They can also appear when a would-be seller is deciding on how to sell their home and is considering hiring a real estate agent to list the property for sale.

If the price a seller will pay to a listing agent is less than the lowest price a listing agent will charge for their services, it’s definitely a case of a negative bargaining zone.  In such a case, unless one side changes their mind, the two don’t work together on the sale of the property.

For sellers like that who don’t see much value in using realtors, here’s how you pay less in real estate commissions in three handy steps.  They actually start from nothing spent on realtors and increase with each step.  In all cases, the end result is less money paid out on commissions.

Skip real estate agents completely.

You don’t need to hire a Realtor to sell your house.  There, we said it.

A lawyer can write up the paperwork for the sale of real estate.  While there are fees to do so, it isn’t a percentage based fee it is almost certainly the lowest cost option.

Find a buyer, agree on a price, hire a lawyer, receive the money, give them the keys.

Such sales are called For Sale By Owner and the lawyer does the paperwork and the seller does the rest.  Here’s the list of what the seller does.

• Take your knowledge of local market conditions to set an asking price that will attract interest.
• Promote the property to attract buyers.
• Inform Realtors who call that you are not paying any commission and will only deal with buyers without Realtors.
• Answer factual or legal questions about your property from prospective buyers or pay your lawyer to do so.
• Manage open houses and showing the property to prospective buyers.
• Review offers and negotiate terms and conditions and if you’re in an area with high demand, do that with multiple offers.
• Provide the lawyer with all of the paperwork filled out with the sale details.

Not a penny in Realtor commissions, just some legal fees.

Pay to just get it on MLS.

Within the Toronto Regional Real Estate Board, there are agents and brokerages that focus on what is called a “mere posting”.  ComFree and Property Guys are probably the best know but there are literally hundreds of brokerages that offer this service.

The term “mere posting” refers to when a seller pays a flat fee to get their property up on the Multiple Listing Service, or MLS, and may not have any other services provided by the listing brokerage.

In terms of commission, some offer a flat rate to purchasing agents who bring a buyer and some offer a typical percentage based commission.  Regardless of what they decide to offer, such listings on MLS show a commission of a minimum of $.01 to the co-operating agent, often $1, with a note to call the seller to discuss commission.  While a penny or a dollar may not seem like much, sellers legally have to offer a commission to the purchasing agent if they are to appear on the MLS system.  With an uncertain commission being offered to the buyer’s agent, some don’t bother to show clients such listings or call to find out what commission is being offered.  It’s unethical and illegal but it still happens.

Sellers can even hire these types of brokerage to represent them in negotiations, set the list price and in essence, do all the things you typically pay a listing brokerage and their agent to do.  Think of it as a-la-carte rather than a set menu.

While you can pay for all of the same services as a typical brokerage, these “mere posting” brokerages exist to give sellers who primarily want to have their home listed on MLS the opportunity to do so at a set fee.  Typically these brokerages let sellers handle everything except getting that listing on MLS.  If a purchasing agent has a question, wants to see the place, wants to submit an offer and so forth, they do so directly with the seller.

The cost for using one of these brokerages depends on the level of service you purchase.  At its lowest price, it is a flat fee (such as $999) to post it on MLS.  Think of it like buying an ad in a newspaper.  The rest is up to the seller.

Hire a discount agent from a discount brokerage.

The third option for how to pay less in real estate commissions is to hire a discount agent from a discount brokerage.

These brokerages (and there are a lot of them) fight at the low commission end of the listing pool.  Whether it is 1% (with a minimum commission of $6,900) that is split between both the listing and purchasing agents (so half a percent each) or a higher commission (such as 3.5%, with 2.5%. to the purchasing agent and 1% to the listing agent), these agents purport to do the same job for less money.

Without question, you hire one of these discount agents and you pay less commission.  If you believe that they do the same job as a full-service agent, it makes sense.   You’ll never know if that is true, because you’ve only got the one house, selling in one market, at one particular time.  Could a full-service agent have got you more money on the sale price than you saved in commission fees?

If such a full-service agent can’t show sellers they would do just that, we honestly don’t blame sellers who choose to believe selling a home is a commodity rather than a service that varies widely between providers.

The cost for these agents varies from brokerage to brokerage and even agent to agent.  Just like full-service agents, some know what they are doing and some don’t.  It is rare to find experienced, successful agents offering their services at below whatever is common in the market, as they simply don’t need to do so.  A proven track record of getting sellers the price they want for their homes means that they can justify charging commissions that reflect those desired results.

Now that we’ve followed through on our word and shown how to pay less in real estate commissions, we’ll leave with these parting thoughts.

Banks, governments and insurance companies use appraisals, assessments and valuations to determine how much something is worth.

Manufacturers, retailers and celebrities use packaging, marketing and branding to convince the buying public how much they should pay for something.

Corporations, unions and international organizations use contracts, negotiating and diplomacy to come to an agreement between parties that want different outcomes.

A Realtor should price your property right, market it effectively and negotiate it aggressively.

If you or someone you like needs help in selling real estate, we’d love to show you how we earn our commissions by getting you the best results.  Get in touch with us to arrange a time to talk!

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!