A landmark ruling on Realtor® commissions in the U.S. sparks debate in Canada about how agents are paid.
Can you Imagine real estate brokerages conspiring to keep commission fees high? Never! Well, it took a Kansas City jury just under three hours to decide exactly that.
Following a four-year legal battle, the National Association of Realtors (NAR) was found guilty of conspiring with two of the largest brokerages in the United States to keep commissions on home sales high, making them liable for $1.8 billion.
Considering the rising costs of homeownership and high interest rates in most major North American cities, it’s not surprising this case has struck a chord here in Canada. In fact, a group of Toronto sellers is already attempting to sue several of Canada’s leading real estate brokers using many of the claims stipulated in the U.S. lawsuit.
So, what do these lawsuits ultimately mean for Realtor fees in Canada? Are real estate agents paid too much? And what are some potential solutions moving forward?
The core of the issue
What’s important to understand is that what’s at issue here isn’t just real estate broker fees but also the process by which those fees are negotiated.
In the U.S., as in Canada, when a homeowner decides to sell their home, they sign a deal directly with the seller’s (listing) agent, which also determines how much the buyer’s agent is paid. In the U.S., commission fees are typically between 5-6% and split between the selling and buying agents without much consultation or input from the homeowner.
In this particular case, the prosecution successfully argued that because sellers are not able to negotiate directly with buyer agents regarding their fees, the commission rates are, in fact, collusionary — meaning they prohibit competition and keep rates artificially high.
Are we comparing apples to apples?
Yes and no.
Generally speaking, the real estate industries in the U.S. and Canada are very similar, especially in terms of the negotiating process for commission fees. However, our commission rates can differ from the U.S., depending on where you are in the country.
In Toronto, where we mentioned a similar lawsuit was in the early stages of development, average Realtor® fees are 5%, with an equal share going to the buying and listing agents.
In Alberta, however, we have some of North America’s lowest commission fees, with the average rate slightly above 3.0% (1.5 % for each agent). This is because our fees are structured differently.
Here, sellers typically pay 7% on the first $100,000 and just 3% on the remainder. So, for a home valued at $545,998 (the average price of a Calgary home in October 2023), the total commission rate would be 3.7%.
The 1.3% difference doesn’t sound like much, but on a $545,998 home, that equals around $5k in savings on total commission fees. It’s also worth noting that all commission fees in Canada are, in fact, negotiable, and these are average rates based on typical scenarios.
Regardless of where you live and the fees you’re paying, there’s no doubt innovation is on the way.
Even though the NAR has indicated it will appeal the lawsuit, some brokerages named in the lawsuit have already demonstrated a willingness to be flexible with both fees and the process for negotiating them.
A better system will likely emphasize the need for more transparency in the negotiation process.
Some proposals include home buyers paying buying agents directly, conducting separate negotiations for buyer and seller commissions, or instituting variable (instead of fixed) commission rates.
Does the need for innovation mean Realtors are overpaid?
That’s a great question.
From the seller’s perspective — I get it. You just sold a home for $545,998. The $10,190 you paid to the buyer's agent seems astronomical, considering you probably never even met them: “They just got how much? For doing what?”
The feeling is understandable.
Remember, however, that Realtors® are small business owners with overhead and operating expenses like any other business. 25-30% of every commission cheque goes to paying brokerage fees, marketing costs, services fees, gas, office space, etc.
That’s not to mention that calculating the hours that go into earning commission fees is almost impossible, considering the countless phone calls, text messages, emails, driving hours, and personal interactions that go into every deal — especially in a low inventory market where agents are usually writing multiple offers to secure their clients home.
So, what you see on paper isn’t really anything close to what the Realtor® takes home as net income.
It’s important to consider that while the system for deciding commission fees is due for a shake-up, that doesn’t necessarily mean the optimal outcome is the Realtor® being paid as little as possible.
At TB Real Estate Team, we’re proud to say that most clients feel our moral support, insight, and expertise are intangible. They are happy to pay for the exceptional, turn-key style service only years of dedication and experience can provide.
If being a real estate was easy and purely transactional, it’s hard to fathom why 85% of real estate agents would give up on their real estate careers within the first five years. But that’s precisely what happens.
Most aspiring real estate agents quickly discover that clients look to us to manage much more than their transactions. They are seeking our guidance, input, expert advice and counsel on one of the most important decisions of their lives. Our professional obligations to our clients extend well beyond dotting the ‘i’s and crossing the ‘t’s.
There’s no doubt industries need to stay robust, competitive and fair. Yet, suppose real estate commission fees were to drop precipitously. It would be hard to imagine buyers having the same level of access to professional, experienced, and qualified agents they do now. If faced with a lack of qualified Realtors, many buyers who are skeptical about fees may come to see the value in paying for good counsel when making one of the most significant purchases in their lifetime.
At any rate, change is on the horizon. We are excited to see what this shake-up brings and look forward to adapting to shifting realities while continuing to provide the absolute best representation for our clients.