In the past few weeks we’ve seen a lot of headlines about a recent US lawsuit as well as what is being described as the Canadian equivalent – both focused on real estate commissions.
We’ve had some clients ask us what it’s all about so we thought we’d write up a summary of the situation as well as our thoughts on what it means here in Canada. It’s complicated and we’re not lawyers, so this is our attempt to explain what happened and what the impact will be in Canada.
Let’s get to it!
The US Lawsuit
Back in October, 2023, a Missouri court found the U.S.-based National Association of Realtors (NAR) and two brokerage firms, Homeservices of America and Keller Williams Realty, liable for $1.8 billion in damages for conspiring to keep commissions artificially high in the states.
The cornerstone of the lawsuit was that the NAR was forcing home sellers to pay an inflated commission that was then split between their agent and the buyer’s agent. The home sellers argued commission sharing as a condition for access to the Multiple Listing Service (MLS) was unfair and kept commissions artificially high.
In the states, typically, when a home goes on the market for sale, the seller offers their broker a set commission. For decades, the commission has consistently been around 6% of the sale price, usually with a 3% split for the buyer’s and seller’s agent.
In a competitive market, the home sellers argued, the cost of the buyer’s agent’s commission would be paid not by the seller, but by the buyer who received the service. The sellers said that the buyers should be able to negotiate the fee with their agent, and that the sellers should not be on the hook for paying it.
What happened next?
In the months following the verdict in October, 2023, a number of the defendants agreed to settle. As those announcements were made, the story again popped up in the media.
In February, 2024, Keller Williams Realty agreed to pay $70 million to settle the lawsuit. RE/MAX and Anywhere Real Estate had earlier agreed to pay a combined $138.5 million. NAR and HomeServices of America initially refused to settle but NAR agreed this month to pay $418 million US to end the legal claims. This means that HomeServices of America is the final defendant left in the case, though HomeServices’ parent company, Berkshire Hathaway Energy Company, is appealing the verdict.
The decision by the NAR to settle reignited the story and the news reports here in Canada have often tied this settlement decision in the states with an ongoing lawsuit here in Canada.
What’s changing in the US as a result of the lawsuit and the settlements?
The NAR, which denied any wrongdoing in the case, has agreed to eliminate the standard six per cent sales commission and do away with other commission rules.
As part of the settlement, the NAR is mandating that all buyers must enter into a buyer’s agency agreement before viewing a listing, specifying compensation for their buyer’s agent. This compensation could be paid upfront by the buyer or come from various sources but crucially, it cannot be communicated through the Multiple Listing Service (MLS). Additionally, the buyer’s agent cannot receive compensation exceeding the agreed-upon amount.
Those are significant changes to how the US real estate market conducts transactions, but are they likely to impact how we do things in Canada? The answer to that is pretty clear when you look at the Canadian rules.
How’s it work in Canada?
If you’re reading about buyers having to sign a buyer’s agency agreement prior to seeing a listing, you may be thinking “Don’t we already do that?” and the answer is yes. Agents in Canada are already required to discuss compensation with clients, typically through Buyer Representation Agreements. Recent changes to legislation in Ontario (the Trust in Real Estate Services Act, or TRESA) have further bolstered the requirements to explain representation and clarify who works for who in a deal.
Canada has very different regulations and industry associations than the US and in a number of ways the changes taking place in the US have been here in Canada for many years. Commission rates have long been negotiable in Canada and Canadian law surrounding competition differs from that of the US. As such, the NAR settlement’s direct impact on Canadian realtors is minimal.
While media stories have tended to imply that two Canadian lawsuits here may have similar results and impacts, the differences between how the US did real estate and how we already do real estate is considerable.
So, what is the lawsuit in Canada about?
Back in April, 2021, the law firm Kalloghlian Myers LLP commenced a class action lawsuit against the following associations, brokerages and franchisors:
Toronto Regional Real Estate Board, The Canadian Real Estate Association, Re/max Ontario-Atlantic Canada, Inc. O/a Re/max Integra, Century 21 Canada Limited Partnership, Residential Income Fund L.P., Royal Lepage Real Estate Services Ltd., Homelife Realty Services Inc., Right At Home Realty Inc., Forest Hill Real Estate Inc., Harvey Kalles Real Estate Ltd., Max Wright Real Estate Corporation, Chestnut Park Real Estate Limited, Sutton Group Realty Services Ltd. And iPro Realty Ltd.
The lawsuit alleges a “conspiracy, agreement or arrangement to fix, maintain, increase, or control the price for the supply of real estate buyer brokerage services in connection with the purchase and sale of residential real estate listed on the Toronto multiple listing service.”
The lawsuit maintains that this arrangement has caused the Plaintiff and class members, who are sellers of residential real estate, to pay commissions to buyer brokerages. Absent the arrangement, buyer brokerage commissions would have been paid by residential real estate buyers who use buyer brokerage services, rather than the Plaintiff and class members. The arrangement has also thwarted competition in the market for buyer brokerage services, causing the Plaintiff and class members to pay a price for buyer brokerage services that is in excess of what they would have paid absent the arrangement.
The Canada-wide class action suit claims that the Canadian Real Estate Association (CREA) helped brokerages facilitate the alleged price-fixing scheme. CREA says the allegations are “without merit.”
What’s the point of the Canadian lawsuit?
The crux of the lawsuit seems to be that sellers have to pay not only the commission to their listing brokerage but also to the buyer brokerage. It seems like it is saying if sellers just paid their listing agent and buyers paid their buying agent themselves, it would be cheaper to sell a house.
Real estate commissions aren’t set in Canada, so we can’t do an exact calculation on the savings, but if we look at most markets in the GTA, we see commissions offered to the buying brokerage (out of the listing brokerage total commission) are typically in the 2% to 2.5% range.
The lawsuit seems to be saying, if the seller didn’t have to pay that 2% to 2.5% commission out of their pocket, and it was paid for by the buyer to their own agent, the cost of selling would decrease. At the same time, the lawsuit suggests that if that was the case, buyers would end up paying less than what sellers were paying, as if buyers were paying out of pocket, they’d negotiate for lower fees.
Does that make sense?
Let’s review the two key points of the lawsuit in as simple language as possible.
First, the lawsuit says that if sellers didn’t have to pay the buyer’s agent commission, it would cost less to a seller to sell their home. That is both obvious and accurate. If you push a cost you were paying onto someone else, your cost goes down. If we went out to dinner and instead of paying I asked you to pay for your meal, my bill would be less.
The second key point is where things get a bit murky. The lawsuit alleges that if buyers were paying their agent’s commission themselves, they would pay less commission. This is predicated on the idea that buyers would hire an agent who offers the lowest fee to represent them in the purchase of a home. The reality is that we already have agents who are paid less to purchase a home, as they rebate a portion of the commission paid to their brokerage from the listing brokerage to their buyer client. It is perfectly legal, and buyers who see little value in the assistance of an agent in finding, assessing and negotiating a purchase already find agents who willingly rebate some of their commission.
In short, the two key aspects of the class action lawsuit are:
- If sellers don’t have to pay for the buyer commissions, it will cost them less in commissions. Yup, that’s how math works.
- If buyers have to pay for their agent’s commission themselves, they will negotiate for a lower commission. Sure, some buyers will pay less to agents who don’t provide value in the purchase transaction. They can already do that now.
The specifics of this lawsuit aside, we regularly talk with our clients about commissions and how we earn them on the buy and sell side. As part of that conversation, we talk about one of the key aspects of all compensation models.
Impact of Errors
One of the cornerstones of compensation models is the impact of errors. The reason why the CEO of a company makes more than the receptionist isn’t only based on how hard each works or the difficulty of the job. The CEO can cost the company a lot of money if she makes a mistake, much more so than any mistake the receptionist could make.
As real estate prices have increased, your real estate agent can make a mistake that costs you a lot of money.
On the sell side, pricing the listing wrong (either too high or too low) can result in the loss of tens or even hundreds of thousands of dollars. Poor marketing that presents the home in a less than ideal light can reduce showings and thereby offers, lowering the sale price significantly. Finally, an inept negotiator can leave a lot of money on the table when faced with an expert negotiator on the other side.
On the buy side, the same arguments hold true. If you work with an agent who doesn’t understand your market and who fails to find and show you all suitable properties, you can have a mistaken understanding of what is available and what is fair for a price. If your agent can’t assess an individual property and determine what the fair market value would be for the property based on it’s specific attributes you can over pay or miss out because you wrongly assume it is worth less. Finally, transactions only take place when successfully negotiated between the two parties, and a poor agent who doesn’t understand negotiations can cause you to either overpay or to be rejected completely.
Now, back to the lawsuit!
What’s happening with the Canadian lawsuit?
On September 25, 2023, Chief Justice Paul Crampton issued a citation where the defendants motion to strike was dismissed in part and granted in part.
As we discussed earlier, the plaintiff alleges that certain defendants and their “co-conspirators” contravened subsection 45(1) of the Competition Act, RSC, 1985, c C-34 (the “Competition Act”). They have allegedly done so by “conspiring, agreeing or arranging with each other to fix, maintain, increase or control the price for the supply of buyer brokerage services (“Cooperating Broker Services” or “Buyer Brokerage Services”) that they provide to purchasers of residential real estate in the Greater Toronto Region (“GTA”).
Chief Justice Crampton concluded that “the Statement of Claim discloses a reasonable cause of action against the Brokerage Defendants with respect to the alleged arrangement to “control” prices for the supply of Cooperating Brokerage Services in the GTA during the Relevant Period. However, it does not disclose a reasonable cause of action with respect to the claimed “fixing, maintaining, or increasing” of those prices. Accordingly, the latter allegations will be struck from the Statement of Claim.”
Our understanding of the above is that the first aspect of the lawsuit, that sellers paying the cost of buyer’s agents’ commissions means it costs more to sellers, is reasonable. The second key aspect of the lawsuit that the current model means the cost of commissions are higher than they would be if the buyer’s paid their agent directly, is not reasonable.
The lawsuit will continue and we’ll be watching closely to see the result. Regardless of the decision, we believe that any comparison to the US lawsuits and their impact are deeply flawed as we have a much different set of regulations and structures here in Canada.
If you think working with real estate agents who are focused on providing value to both their buyer and seller clients makes sense, get in touch with us. We’d love to help you move forward!
