By the most popular article we’ve ever written is this one.
What is the average real estate commission in Ontario?
It’s not surprising as people like to know how much it costs to sell a home.
In real estate, the compensation model for realtors is simple and the math is simple. Listing agents negotiate a commission rate, typically a flat percentage, based on the sale price of the property. Buying agents are paid a commission rate out of that commission.
It can get more complicated, but the above is basically the case in most real estate transactions. Since the compensation model is simple, the math is simple as well.
If a house sells for $1M and the listing agent gets paid 5% commission, their brokerage gets paid $50K. If they’re offering 2.5% commission to the purchasing agent, that brokerage gets paid $25K of the $50K.
Simple.
Now, of course the negotiated commission can and does vary. It can be any percentage of the sale price that the agent and the seller agree upon, it can be a fixed amount (a flat dollar amount such as $X thousand) or it can be a combination of both.
It can even vary on how much of the listing commission is shared with the buying agent for the property. An agent can charge a seller a 5% commission, keep 3% and offer 2% to the buying agent. The question that has to be asked though, is while it’s true that they can do that, should they?
Let’s take a look at what happens when a listing brokerage offers lower than the most common commission rate to a buyer’s agent. We pulled data from some live listings right now on the MLS where this is happening and ran the numbers. On average, it turns out that by trying to save $10K in commission, these sellers have so far had to drop their list price by about $154,000.
Here’s how it plays out.
The Listings
We looked at listings currently (as of June 24, 2022) for sale in Toronto and narrowed down to 16 properties that:
- Are offering a lower commission rate than the majority of the listings in the area
- Have had to lower their price due to not selling
How much were the sellers hoping to save by cutting the commission offered and how much have they already had to lower their price by as a result of their approach?
The Savings
With initial list prices ranging from $1.15M all the way up to $3.3M, the average initial list price of the homes was just over $2M.
The typical commission being offered to the buying agent from the listing brokerage for homes in Toronto in this price point is overwhelmingly 2.5%. These sellers chose to try to save half a percent in commissions to the buying agent, and are offering 2%, which equals a saving of approximately $10,000.
We do not know what commission the sellers agreed to with the listing agent, but let’s be generous and assume that they agreed to a 4% total commission, and the listing agent split that 4% to offer 2% to the buying agent and keep 2% for their work. That would double the effective savings on commission from $10,000 to $20,000.
The Cost
These 16 homes have all lowered their list price after failing to sell at the original list price. The specific amount varied, but the lowered average list price went from about $2M to just over $1.85M. On average, the homes are now $154,000 cheaper than the initial list price.
We know that blaming that lack of sales completely on the lower than typical commission is simplistic. The homes may have had other things that impacted their appeal to the market. They may have been priced inaccurately, they may have been marketed ineffectively and they may have been negotiated ineptly. It isn’t a coincidence that listing agents who allow their sellers to disadvantage themselves by offering a less competitive commission may also not be skilled at pricing, marketing and negotiating.
We will take the $154K average price drop with a grain of salt and cut it in half and say the lower than typical commission being offered is only partially responsible for the homes not selling, leaving us with a cost for the decision of approximately $77K.
The Result
When we take our projected savings on commission of 4%, which is 1% lower than the typical total commission of 5%, these sellers planned on saving on average about $20,000.
After failing to sell at their original list price, they’ve lowered their list price by, on average, about $154,000. Even if we say that the lower than typical commission to the buying agent is only responsible for half of that, it amounts to a cost of about $77,000.
By choosing to “save” on the commission being offered, these sellers have now lost about $57,000. That number is of course hypothetical, as these houses have not yet sold. They may need to lower their price again or they may accept a lower sale price than what is currently listed.
We can take a few lessons from the above review, even if we won’t ever fully know the exact impact of the lower than typical commission on the eventual sale price of these homes.
The first and biggest lesson is that offering a lower than typical commission can be a false economy. With the vast majority of real estate agents doing one or two deals a year, you can be certain that a lower than typical commission being offered to them will cause some agents to steer clients away from the home. It’s unethical, it’s against our code of conduct and it absolutely happens.
The second lesson is that whatever gain you see in paying lower commissions can often result in a lowered sale price that far outstrips your commission savings. Saving $20K on the sale of your $2M home is far less appealing if it costs you up to seven times that in lowered sale price.
If you’re thinking about selling your home, let’s have a talk about what makes the most sense, so we can get you the most money in your pocket. It’s not what it costs, it’s what it’s worth.
