When you’re selling a property, the biggest expense is going to the real estate commissions you pay. It’s a perennial hot topic and while real estate commissions are not set or regulated, each real estate markets tends to come to a consensus on what the “normal” commission is for selling a property.
On the selling side, the commission you pay is largely a reflection of the skill and experience of the listing agent. After all, when you are talking about a sale of hundreds of thousands or even millions of dollars, the impact of errors can be huge. While you can hire agents to sell your home for very little, agents who command larger commission fees do so because the sellers realize their agent can make or lose them tens of thousands of dollars. The wrong pricing approach, poor marketing efforts and weak negotiating skills aren’t just harmful to the sale price you receive – they’re disastrous.
On the buying side, real estate commissions that are being offered to the buying agent are visible to real estate agents on the agent version of MLS that we use.
This commission may vary from market to market, but within a given market, you will find that the vast majority of commissions being offered to the purchasing agent are the exact same.
Part of commissions not being set or regulated is that a seller is free to offer whatever commission they feel is fair or appropriate.
It is also true that according to the regulatory obligations as set out in REBBA 2002, all Realtors (or registrants in the act) in Ontario have to abide by a Code of Ethics.
The Code of Ethics (Ontario Regulation 580/05) provides that a registrant’s loyalty rests with the client by protecting and promoting his/her best interests. The Code also requires that, in doing so, the registrant must also deal honestly and with integrity with every person with which he or she is involved in the course of a trade and provide conscientious service to both clients and customers.
Here are the specific parts of the code that are relevant:
In addition, there is even a list of all obligations imposed by common law and inherent in the single representation relationship that was developed by the Agency Task Force of the Canadian Regulators Group (of which the Real Estate Council of Ontario is a member).
The very first obligation on that list is Locate Property—Promote Buyer’s Best interests, where it states that the registrant must use best efforts in locating a property in the specified market area(s) that meets the material requirements identified by the buyer and to promote the interests of the buyer.
If that wasn’t clear enough, there is another obligation on the list, Seek out Available Properties, where it states that the registrant is to seek out and advise the buyer in a timely manner of available properties in the market area which may meet the buyer’s requirements, including those listed with other brokerages, those “for sale by owner” and other available properties known to the brokerage or its representatives.
All of this makes it pretty clear that regardless of what commission is being offered, a buyer agent should show the home if it fits their clients’ needs.
They absolutely should.
Unfortunately, sometimes things that should happen, don’t happen.
In our years in real estate, we’ve heard of a number of agents that refuse to show listings offering lower commissions. If they do show such listings, they might do what they can to encourage their client to dismiss the property as unsuitable for some reason.
It’s unethical, it’s reprehensible, it makes Realtors as a whole look bad – but it happens.
If we deal with the reality of such agents existing, it leads us to one of the only situations in which we would tell a client their idea is a horrible one – when they suggest that we offer a lower commission than is typical in the market to the buyer agent.
We’ll say it is a horrible idea because we honestly believe that doing so is absolutely not in their best interests.
They will have fewer showings of their property, which will translate into fewer interested parties and fewer offers. They will likely sell their home for less than what they would otherwise receive.
By “saving” on the commission they pay the buyer’s agent, they end up selling for less money and netting less overall on the proceeds from the sale.
In Toronto, the most common real estate commission offered to buyer’s agents is 2.5%. Sellers can offer whatever they want, but the vast majority of listings offer this 2.5%. What do we mean by “the vast majority”?
Let’s take a look at what a typical day looks like in Toronto.
April 7, 2021
On April 7th we had 108 freehold sales in Toronto. 4 offers 2% commission to the buyer’s agent, 4 offered 2.25% and the remaining 100 sales offered 2.5%. That means that 93% of sellers offered a 2.5% commission.
If we look at one of the homes offering a lower than typical commission, it tells us an interesting story. It is a detached home near Keele and Greenbrook in west Toronto, with a huge lot backing onto a ravine. By all measures, it looks like an attractive home in a good location. It listed at $1.599M and after holding back offers for a week, it sold for 94% of asking price, at just over $1.5M.
It’s hard to infer causation from just one variable (even as important a one as commission), but let’s run the numbers to see what we can discern.
We had 108 sales and the average sold price that day was $1.591M, placing this home solidly in the average range. They offered 2% commission, significantly less than the average commission of 2.5% that was offered by 93% of the sales that day.
The average sale to list price was 114% and this house got 94% of their list price. That’s a staggering 20% lower than the average result from selling on April 7, 2021.
With their sale price of $1.5M, the sellers “saved” $7,500 in commissions to the buyer agent.
If they had received the average sale to list price for their home, it would have sold for 114% of list price, which would mean $1.822M. That’s about $322,000 more than they sold for, but at least they saved $7,500.
As we’ve said, it is hard to infer causality strictly from one variable, so the math above is likely not reflective of the whole story. That being said, it’s clear that the listing agent made a mistake in the list price. We say that because if in this hot market they were 20% below the average sale to list price ratio, something is clearly amiss.
We will say for certain that by saving a small amount on the commission they paid out, the sellers’ ended up with fewer agents showing the home, fewer potential buyers seeing it and that likely meant fewer offers.