If you ever want to get a Canadian riled up, don’t bother mentioning hockey, maple syrup, poutine, Tim Hortons, curling, or anything else Americans normally associate with their neighbours to the north (I spelled neighbors the Canadian way because I’m a better Canadian than you. TAKE THAT, HARPER.).
Instead, just mention real estate commissions.
I actually did this one day, and got the following responses.
“My house sold in a week, and I paid $10,000 in commission. I estimate my Realtor made at least $1,000 per hour. I hate him more than it is physically possible to hate another man.”
“My Realtor passed a three-week course for $1,200 and now makes more than I do. Naturally I want to murder him and feast on his brains.”
“I can’t talk. I’m actually going to jail for murdering my Realtor. I’m looking at 25 to life, but it was totally worth it.”
Yikes, I gotta start hanging out with less violent people.
These opinions are pretty mainstream when it comes to Canadians, except without the murder parts. Just about everyone thinks Realtors get paid too much. Will this ever change? Join me as I blindly speculate without any basis in reality. It’s pretty much a normal post.
Why are commissions so high?
There are a number of reasons why Realtors do well, including:
- Pretty much a monopoly when it comes to the MLS system
- A cartel-like attitude when it comes to discount competition
- The large number of part-time agents need high commissions to survive
- Offices are expensive, and depend on commission split agreements between the brokerage and agents
- Even though 95% of buyers end up going to MLS, Realtors are forced to spend on other marketing materials even though they make very little difference
- The Big 3 (Remax, Century 21, and Royal LePage) take a lot of fees just to fly the colors
- Folks are flaky and will often waste an agent’s time with unreasonable requests
There are probably more reasons, but that’s enough. We’ve made our point.
Essentially, real estate commissions are expensive because they’ve always been expensive. The entire business model is built around getting paid a certain amount. Think of it this way – if you were selling 10 ends per year (that’s Realtor talk for half of the transaction), would you rather get paid $4,000 each time, or $2,000? At a regular rate, you can make a living. At a discount rate, you’re hitting up the Early Retirement Extreme guy for dumpster diving tips.
And then there’s the discount brokerages. Essentially, they’re volume houses, just looking to replicate the same model but make up the difference by doing more transactions. I’m not sure that’s the ideal strategy either.
Here’s the way I look at it. If you own a $2 million home in Toronto or Vancouver, you’re not using a discount real estate brokerage. You’re happy to pay the fee, because it’s not that big of a deal to someone who can afford millions for a place to live.
If I ran a discount brokerage, I’d continually remind people that I cut costs so I could pass the savings to them. I’d share office space with a some other professional company, and point it out to clients. I’d enter into arrangements with mortgage brokers and insurance guys to pay me for referrals. I’d cut the amount of swag given to people to nearly zero. I’d pull up to listings in my ten-year old car. I’d try my best to communicate to customers that we were making sacrifices to keep their fees low.
Is there potential to lower fees?
There’s always potential to lower fees. Hell, there’s even potential that the Toronto Blue Jays make me their starting center fielder even though I can’t run very fast and wouldn’t have a hope of catching up to a major league fastball. But I don’t think either option is very likely.
As you probably remember, the Competition Bureau told the Canadian Real Estate Association that discounters should be allowed access to the MLS system just like regular brokers. The discounters seized that opportunity and have made progress, but they’re nothing more than an inconvenience at this point. The only brokerages that are shaking because of a discount competitor probably sucked in the first place.
There’s still a huge majority of agents that have every reason to keep your commissions high. That’s slowly changing, but not at a speed quick enough to make the naysayers happy.
Plus, the whole system almost reminds me of a perpetual motion machine of crap. Customers think Realtors get paid too much, so they’re flaky as all hell and will decide to fire a Realtor because they have funny shoes. Realtors get pissed off when this happens and feel justified in charging the high fees and making people sign Buyer Representation Agreements. And the cycle repeats itself.
At this point, I’m not optimistic that real estate rates are going to go down anytime soon. The discounters are making progress, but it’ll take at least another decade before anyone will get excited. I think entering a stage of the market where prices go down will help the discount guys, and I think that some will figure out how to change the model in their favor. But for the most part? Don’t hold your breath. Maybe try selling your house yourself?