When people talk about the cost of a new home in Ontario, they usually focus on the price tag from the builder. Everyone understands that it costs money to build a home and most people realize that you also to have land to build upon, which pushes the costs up even more.

Many people don’t know that behind the scenes, there are a whole bunch of extra costs that make their way into that sale price number. One of the biggest is development charges and it’s time we talk about them – and why they’re causing housing affordability to get even worse in Toronto and the GTA.

So, what exactly are development charges?

Development charges (DCs) are fees that cities and towns in Ontario collect from developers when new homes or buildings are built. The idea is simple: new housing brings new people, and those people need roads, transit, water, fire and police services, and other infrastructure. Development charges are meant to cover those growth-related costs.

Good, make those greedy developers pay.

If you don’t see a problem with making developers pay for these growth-related costs, you’re not alone.  While it has been a rough road recently, developers can make significant profits after all is said and done.

The challenge with DCs is that builders don’t absorb those fees—they pass them on. Developers often borrow money to pay the charges upfront, then recover the cost (plus interest) when they sell the homes. By the time you buy a newly built home, development charges have been baked right into the price.

In some Ontario cities, all the various municipal housing taxes (including DCs) can add $250,000 or more to the cost of a modest family home. That’s a huge factor in why new homes are so expensive compared to resale properties.

Here’s a breakdown of the typical costs that go into a new build property.

While construction costs and the price of the land itself make up about 75% of the cost, development charges and other taxes and fees can add up to 25% of the eventual purchase price.  With the average price of a detached home in most parts of the GTA at over $1M, that’s hundreds of thousands of dollars.  Crucially, it’s the sale price that is subject to HST, land transfer taxes and all sorts of other fees, which means that you’re effectively being taxed upon a tax.

At least we get something out of it.

Even if you’re OK with the idea that the fairest way to cover the services and infrastructure required for a new development is to charge the people who are directly benefiting from it, the reality around what is charged for – and spent upon – varies tremendously.  There is provincial legislation that outlines the legal framework for when, what, and how development charges can be used (the Development Charges Act or DCA) but within that framework, there is a lot of variation.

Ontario municipalities are not legally required to use development charges, and only 216 of the 444 municipalities in the province (48.6%) do so.  With about half of municipalities not charging DCs, you start to understand why it seems like some places have tons of new developments happening and others have none at all.  The pro forma for a builder will always look a lot healthier – and appealing – if they can cut 15% to 25% of the costs incurred, and it typically means a lower end user price as developers pass on some of those savings.

Even if we look at just those towns and cities that choose to charge DCs, what is covered and what is charged varies tremendously.

It’s complicated – and sometimes unfair

A few things make development charges tricky so let’s go over them.

• They’re based on averages. A large detached home and a smaller detached home often pay the same fee, even though the bigger one might use more services.
• They vary by area. Some charges cover city-wide infrastructure, while others are specific to certain neighbourhoods.
• They’re political. Cities make assumptions about future growth and infrastructure needs when setting the fees. Small tweaks to those assumptions can raise or lower the costs dramatically.

Let’s say you’re comparing a new townhouse in Markham to a new townhouse in Toronto.

In Markham, you’ll see both municipal-wide charges (for big-picture services like major roads or water treatment) and area-specific charges (for things that only serve that neighbourhood).

In Toronto, which is a single-tier municipality, all those charges are rolled together.

The end result? Two similar-looking townhouses could have very different development charge costs built into the price—sometimes tens of thousands of dollars apart.  That’s before the cost of land is factored into the list price!

Here’s the bottom line.

Development charges are a big reason why growth in Ontario doesn’t always feel like it’s paying for itself. Instead, new buyers often end up shouldering costs that benefit both new and existing residents.

If you want to do deeper dive into understanding development charges, the fine folks at the Missing Middle Initiative (out of Ottawa University) have written a fantastic primer the subject and you can read the PDF here.

If you’re considering buying property to build your dream home, or investing into the build of a multiplex income property, then we’d love to help you make it happen.  It’s complicated, sometimes challenging, but ultimately it can be very rewarding.  Get in touch with us to talk about next steps!

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!