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22 Oct

Real Estate Commission Structures


Posted by: Kimberly Walker

Your options in the brave new real estate world

Garry Marr, Financial Post · Saturday, Oct. 16, 2010

How would you sell your house today if it was on the market? Would you use a real estate agent or go it alone?

It’s no small issue given the typical commission paid by the seller in this country is about $15,000 based on the latest average sale price of an existing home. When you consider most home sales are for principal residences — and profits are not subject to capital gains taxes–that $15,000 looms larger because it is after-tax money.

The truth is not much has changed since the Canadian Real Estate Association updated its rules in March to make its Multiple Listing Service more flexible, thus allowing agents to simply list a home with the consumer handling all other aspects of a transaction. Those changes are about to be made permanent because of a consent agreement with the Competition Bureau reached last month.

So, what’s the difference today? On a practical level, it’s hard to argue against listing your home on the MLS, which controls about 90% of transactions in Canada. And while you may pay as little as $109 for that listing, you can almost be sure to pay a commission of 2% to 2.5% to any agent bringing his or her customer to your door.

The option to use one of the dozen or so for-sale-by-owner, or FSBO sites, exists, but you can expect to pay a fee for the service. Plus, you can also assume any customer who buys a house through a FSBO site wants a discount on the market price because they know you are saving commission.

I tried it myself for two weeks before listing my own home on the MLS six years ago. My agent encouraged me. What happened is people who did show interest immediately started to talk about a discount. I was back to an agent and the MLS system.

But maybe there is a compromise solution, where I list on the MLS using an agent who helps me with part of a transaction. After all, there are people who paint their own homes but are reluctant to dabble in electrical wiring.

“Commissions are flexible,” says Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada. “There is [a middle ground] and people have to look for it. Many agents will offer a menu of services and that is out there already. Most people will choose to list with an agent who manages an entire transaction.”

But now that that choice is part of the game within the confines of the MLS, expect consumers to take advantage of it to save some cash.

“I’d still use an agent. My life is too busy,” says Craig Alexander, chief economist with TD Bank Financial Group. “But there are going to be people who only want an agent for some things.”

Mr. Alexander thinks changes are coming, but couldn’t put a timetable on it. He says it is basic economic theory that once you introduce elements of competition to a system, it will start to become more efficient.

Robert McLister, editor of Canadian Mortgage Trends, says many realtors will start offering a la carte services such as document preparation, showings, valuation and offer negotiations. He believes high-end real estate will be less affected by the changes and the industry might gear its efforts more to that end of the market.

And, he adds, FSBO sites that charge listing fees could be devastated by a bargain-basement MLS.

“Removal of listing barriers will allow efficient markets to take over. That will put obvious pressure on realtor fees. The era of 5% commissions in Ontario [other jurisdictions vary] could become a distant memory in three to four years,” says Mr. McLister.
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