Real Estate Commissions - Reduced MLS Fees Calgary

Discount, or reduced fee, real estate companies have been offering their services to homeowners in Canada for decades, yet the public still hesitates to wholeheartedly embrace the concept. The main reason that there still exists a certain degree of skepticism about discount real estate companies is that for over fifty years the real estate industry as a whole has done a remarkable job in keeping the public relatively unknowledgeable about how commissions work within the Multiple Listing Service (MLS^®). The industry relies on the public's general lack of knowledge in order to maintain real estate fees as high as possible. Fortunately, people are starting to realize that it should not cost a small fortune to sell their home and that alternative real estate models do exist that can get the job done for a lot less money. Additionally, the Competition Bureau of Canada is demanding, and getting, the real estate industry to make certain changes to their rules and regulations that allow for and foster more competition.

The initial step in understanding the MLS^® and how commissions play a role in the sale of your property is to first understand that public websites like www.MLS.ca or www.REALTOR.ca are not "the" MLS^®. These sites are simply a compilation of active listings from all the member real estate boards of the Canadian Real Estate Association (CREA). CREA is the national association that represents more than 100 real estate boards and over 100,000 Realtors^® across Canada.

These public websites are not where Realtors^® work on a daily basis to either sell houses or to find houses for their buyers. These sites are simply a destination where all the real estate boards in Canada can upload their active listings on a daily basis so the public can see what is for sale. The information provided on these sites is stripped down versions of the actual MLS^® listings. Also, these sites display only active listings and contain no historical information on sold or expired properties.

Where, then, do Realtors^® work? The answer is that each real estate board in Canada, for example, the Calgary Real Estate Board (CREB), operates its own proprietary database. CREB's database is internet based but is unavailable to the public. All of the Realtors^® in Calgary, from every real estate company, operate here http://abmls.mlxchange.com on a daily basis, however, as a member of the public you will be unable to enter the website and gain access to their information. Every other real estate board in Canada operates a similar proprietary database which excludes access to all but their own members.

The aggregate of these proprietary databases are "the" actual MLS^® in which Realtors^® work across Canada each and every day. These databases contain a mass of historical information on sold properties and expired listings that real estate agents can utilize when valuing potential properties. Realtors^® may provide you with certain reports from their system, however, they are prohibited by their board from allowing you access to their database.

When Realtors^® view "active" listings within their own databases, a key piece of information they can see is what commission they will be paid if they bring a buyer to a listing and write a successful offer. This remuneration being offered to the successful buyer's agent is private Realtor^® information and is not available on public websites such as www.MLS.ca and www.REALTOR.ca. In Canada, the MLS^® rule for the posted remuneration being offered to a cooperating buyer's agent states that it cannot be zero. It can be as low as one cent, but it cannot be zero. There is no upper limit.

In order to determine how a real estate commission will or will not affect the sale of your property, you need to think about the commission you will be paying as having two completely independent parts. Even though you, as the seller, pay commission only to your listing brokerage, in fact, that money compensates both your listing brokerage and the buyer's brokerage. Your listing agent, through his or her local real estate board, will offer a certain portion of the commission to all other cooperating brokerages that may have a buyer for your home. It is this cooperative nature between all real estate companies that makes the MLS^® such a powerful marketing tool and the reason you need it to achieve the highest possible sale price for your home. Commissions can be a percentage based on sale price, or a flat fee. Generally speaking, but not always, commissions are payable only if a sale is completed.

For the purposes of this article, we will assume you have a home in Calgary, Alberta, listed at $424,900, and after negotiating a deal, the parties have agreed to a sale price of $415,000. Although real estate fees can vary, a common commission charged by traditional real estate companies in Calgary is 7% on the first $100,000, plus 3% on the balance of sale price. So, in this case your total real estate fees will be $16,450, calculated as 7% on $100,000, equaling $7000, plus 3% on the remaining $315,000, equaling $9450, for a total of $16,450. Note that GST does apply to real estate fees but for simplicity, we will ignore it. Therefore, by choosing to sell with a traditional real estate company you would net $398,550 after real estate fees.

So where does the $16,450 go? When a home seller signs a listing contract with a Realtor^®, the contract always states the total commission to be paid by the seller to the listing brokerage and how much of that total commission the seller's brokerage will pay to the cooperating buyer's agent. Frequently, but not always, the commission is split equally. This is especially true if you list your home with a traditional real estate brokerage. It is important to note that the vast majority of transactions conducted through the MLS^® involve two Realtors^® and that is why the commission is split into two parts. In this case your listing agent would earn $8225 and the buyer's agent would earn $8225. Although less common, it is important to note that with traditional brokerage, if your listing agent finds the buyer for your home, they would earn the entire $16,450.

The two parts of a real estate commission must be understood independently in order to successfully save on real estate fees. There is a difference between just knowing that these two sides of a real estate commission exist, and understanding how each side will, or will not, affect the sale of your home. Home sellers that take the time to fully grasp each of these two parts of a real estate commission and make educated decisions regarding each side will stand to save thousands of dollars on the sale of their home.

First, we will examine the listing agent's role and compensation. Remember, the listing agent retains the difference between the total amount they charge you to sell your home and what is paid out to the cooperating buyer's agent. The listing agent is being compensated to do a market evaluation on your home, take measurements and photos of the home, put a lock box and sign on the property and most importantly, to load your listing into the MLS^®. After your home is on the market, the listing agent manages requests for showings, monitors your competition, maybe recommends a price drop if necessary, and negotiates any offers on the property. Generally speaking, the total amount of time a Realtor^® will spend performing theses tasks is about 20 to 40 hours. Therefore, using our example, having earned $8225 on the sale of your home, the traditional Realtor^® you hired earned approximately $200 to $400 per hour.

It is very important to note, and understand, that the listing agent's side of a real estate commission has absolutely nothing to do with the cooperative nature of the MLS^®, rather, it simply represents the amount of money your listing agent is willing to accept for performing the aforementioned tasks. Think of it this way, the listing side of the commission is for your Realtor^® to work for you, and the buyer's agent side of the commission is to attract all the other MLS^® Realtors^® to your home. In other words, in an MLS^® transaction, the listing agent gets paid to perform tasks and the buyer's agent gets paid for bringing an interested buyer to your home and writing a successful offer.

The question is then, is this excessive, inadequate or fair compensation for a listing agent? Many Realtors^® will argue that they need to make this much on a listing because they don't sell everything they list. In other words, they have a risk of earning nothing and are asking you to pay for their failures. Also, they may argue that there are costs involved. But in reality, the costs that are associated with a listing are minimal and insignificant. For example, at the Calgary Real Estate Board, it costs a member Realtor^® $35 to enter your listing into the MLS^®. Signs are reused for years and the cost for a sign up/sign down service is about $40. Lock boxes are also reused for years and feature sheets cost very little. Without question, time is by far the biggest expenditure a Realtor^® will make on your listing.

Additionally, in this day and age, most Realtors^® do not advertise your home outside of the MLS^®. The reason for this is because, at best, it's redundant advertising. If your home is on the MLS^®, all Realtors^® can see it and are aware it is for sale. As well, your listing will automatically be uploaded to www.MLS.ca and www.REALTOR.ca where the public can see and view your listing. While no form of advertising can guarantee that it will reach 100% of the targeted audience, the MLS^® and its public websites comes very close. So it follows then, if you are on MLS^®, prospective buyers' and/or their Realtors^® are aware that you are trying to sell your property. Any additional money spent on advertising a listing to help sell the home is simply wasted money, some Realtors^® will choose to do additional advertising to help promote their own business and/or placate their clients.

Therefore, given the relatively low costs to a listing agent, is $200 to $400 per hour excessive? Most people would agree that strictly speaking, on an hourly basis, a Realtor^® should not make that kind of money. What you are paying for, in addition to their time and the minimal costs they incur, is access to their system, the MLS^®. As a home owner, you cannot list your home on the MLS^® without hiring a licensed Realtor^®. The reason for this is that collectively, Realtors^® own the MLS^®. It would be foolish for them to allow you free access to their system.

The other reason you are paying so much to a listing agent is the inefficiency of the industry. Because there are many more Realtors^® than are necessary, listings are very competitive. Consequently, many real estate agents end up taking listings that have little or no chance of selling. These listings either expire or get terminated and the Realtor^® likely did not get paid anything for his time or reimbursement for his costs. In other words, Realtors^® frequently work for free, so when they do make a sale, they need to make up for lost time and money. If Realtors^® made all their clients pay a fee whether the house sold or not, then the cost per successful transaction would go down substantially.

Now let us consider the role and compensation of the buyer's agent. Buyers' agents are paid to find suitable homes for their clients and to write and negotiate an offer acceptable to both parties. Remember, as a home seller, you are paying the buyer's agent through your listing brokerage. In our example the buyer's agent for your home earned $8225, is that fair compensation? It is impossible to say. In some instances, this Realtor^® may have been working with this client for months, or even years, and the pay cheque they finally receive can hardly justify the amount of work involved. On the other hand, this Realtor^® may have met the buyer only hours before writing your offer. In this case, the buyer's agent has clearly been over-compensated for the work they have done. Buyers' agency is very unpredictable. It can result in getting paid nothing for a tremendous amount of work, or being rewarded handsomely for little effort. Therefore, even though the buyer's agent on your home made $8225, you really have no way of knowing whether he or she was excessively, inadequately or fairly compensated for their time.

Unlike the listing agent's side of the commission which has nothing to do with the cooperative nature of the MLS^®, the buyer's agent side of the commission is the incentive for cooperation between Realtors^®. The amount of cooperation you receive from those Realtors^® will depend, in part, on the amount of buyer's agent commission being offered.

That said, let's again go back to our $415,000 sale price example and apply this logic. Say your listing brokerage charged you 7% on the first $100,000, plus 3% on the balance of sale price, or $16,450, and decided to keep $16,449 and offer only $1 to all cooperating buyer's agents. How many buyers' agents do you think will show your home for $1? I think we can safely say none. In other words, you will get 0% cooperation from the MLS^® for $1. If, on the other hand, they offered half of what they were charging you, 3.5% on the first $100,000 plus 1.5% on the balance, or, in our example $8225, you will receive 100% cooperation from the MLS^®. The reason for this is that, in Calgary, this is the "normal" buyer's agent commission.

Two questions should come to mind when considering the buyer's agent commission. First, do you need 100% cooperation? And second, will something less, but close, to the normal buyer's agent commission still garner 100% cooperation? Both these questions will be answered a little later on when we are discussing discount real estate companies. For now, suffice to say, the problem in trying to save on buyer's agency is traditional agents generally will not allow you to reduce the buyer's agent commission. They prefer not to look anti-establishment in the eyes of their fellow Realtors^® even if it means having you pay more than necessary.

Let's now consider your sale using a discount real estate company. In our example, you listed your home at $424,900 and sold it for $415,000. With a traditional agent, you paid a total of $16,450 in commissions, $8225 to your listing agent and $8225 to the buyer's agent. What would happen if you hired a discount Realtor^® to do the listing side for only $4000 and still offered $8225 to the cooperating buyer's agent? The simple answer is that you would save $4225. The money you saved is a result of your listing agent working for less and still receiving maximum cooperation available from the MLS^®. As previously mentioned, this listing side of the commission has no impact on the cooperative workings of the MLS^®, so the reduction your listing agent has taken will have no impact on the sale of your home, providing their compensation is reasonable and they are working in your best interests.

Is $4000 reasonable compensation for a listing agent selling a $415,000 property? The answer is yes. Given the average time a listing agent spends on a sale and the relatively low costs associated with a listing, then $4000 is indeed fair compensation. Providing the Realtor^® has a respectable sell through ratio, and they list enough homes throughout any given year, their annual salary will be quite respectable. It would not be inaccurate to state that many discount Realtors^® earn more annually than their traditional counterparts as their volume more than compensates for the lower per transaction commission.

Will a discount Realtor^® work in your best interests? Yes, they will. Do discount Realtors^® work less effectively for their clients? No, they don't. The fact is there are highly competent discount Realtors^® and highly competent traditional Realtors^®. And, unfortunately, there are also incompetent Realtors, both traditional and discount. Providing the compensation you pay your listing agent is reasonable, there is no correlation with the level of service you will receive.

In this case, $4000 is reasonable and you should expect qualified, experienced and competent service from your discount Realtor^®. So the question is, did you suffer by paying your listing agent less? The answer is no. When your home attracted an offer, the negotiated price of $415,000 is not a result of how much commission you are paying your listing agent, it is simply the price to which the parties agreed through their negotiations, starting at the $424,900 list price. A traditional agent would not have gotten you a single dollar more for your property and hence, the $4225 you saved on the listing side of the commission ends up in your pocket. So now, instead of netting $398,550 from your sale, you have netted $402,775.

So remember, on the listing side of the commission, pay your Realtor^® a fair compensation for the amount of work they will do and the costs they will incur, but do not overpay them. Ask the Realtor^® to explain the rationale behind what they are charging you for the duties they will perform as your listing agent. If the fee sounds excessive to you, then it probably is. Quite frankly, you will not receive a reasonable explanation for the rationale behind a traditional listing fee. The reason for this is that on a per transaction basis, it makes no sense at all. Remember, as mentioned earlier, part of what you are paying for is their failures, they have to make up for the time and costs associated with the listings they do not sell. However, if they tried to rationalize their fees this way, you would not hire them and they know it.

The second part of the real estate commission, the buyer's agent side, does not work any differently with a discount brokerage except that a discount Realtor^® is more likely to allow you the opportunity to try and save on this side of the commission. Just like a traditional listing, your discount Realtor^® will compensate the buyer's agent through your total commission payable.

Saving commission on the buy side of a real estate commission is a little trickier than on the listing side. Here, you have to weigh the potential savings against possibly not finding a buyer due to lack of cooperation from other Realtors^®. Let's go back again to our example. When you sold your home at $415,000, you paid, through your traditional listing brokerage, $8225 to the buyer's agent. Was it necessary to pay that much? The answer is probably not, however, if you offer that amount from the beginning, you'll never know whether or not there were savings to be had on this side of the commission.

Let's say that instead of offering that "normal" buyer's agent commission of 3.5% on the first $100,000 plus 1.5% on the balance of sale price, or in this case $8225, you offered 3.0% on the first $100,000 plus 1.5% on the balance of sale price, or $7725. Would you still receive 100% cooperation from Realtors^® and sell your home? Well, if not 100%, then 99%, and yes, you would still sell your home and save $500 on your total real estate commissions. What about 2% on the first $100,000 plus 1.5% on the balance, or $6,725 to the buyer's agent? Would that agent still have come? Probably, and now you have saved $1500 on the buyer's agent side of the commission. How about paying the buyer's agent only $4000, will that work? Quite possibly yes. Remember, many Realtors^® may be left with no other option than to show your home. Their client may be insisting on seeing the property, and rather than losing the client and earning nothing, they will show your home.

So now, by using a discount real estate company and saving $4225 on the listing side and $4225 on the buyer's agent side, you have netted $407,000 instead of $398,550. That $8450 in savings buys a nice winter cruise or maybe some new furniture. Or perhaps, if you have little equity in your home, in may be the difference between being able to sell or not.

The point here is that you will not save on the buyer's agent side of the commission unless you test the waters so to speak. The problem is, as previously mentioned, most traditional Realtors^® will not allow you to reduce the offering to the buyer's agent. They will tell you that no agents will show the property and that it will hurt your sale. These are lies. The fact is that it makes their job easier and they don't want to shoulder the burden of looking like the bad guy to their fellow Realtors^®. They just want to do what is "normal" and not rock the boat. Is that working in your best interests?

Many buyers' agents will show your property even if the commission being offered is not the "normal" compensation, providing it is reasonable. Remember what I said before, buyer's agency is unpredictable. What may be reasonable for one buyer's agent may not be reasonable for another, depending on the amount of time they have put in with their client. Your job is to decide what is reasonable and then find a listing agent that will permit you to lower the buyer's agent's side of the commission.

The key to success here is that first, you find a Realtor^® who will at least try to save you money on this side of the commission, and second, that you raise the commission in a timely manner if you are not getting enough showings to attract an offer. In other words, don't let your listing sit out there for 65 days with a reduced buyer's agent commission unless the showings are plentiful and continuous. Remember, the ultimate goal is to sell your house and maximize your bottom line. It doesn't hurt to try a lower buyer's agent commission, provided you do not allow your home to sit for an extended period of time at that lower commission rate. And, don't forget, it may in fact work provided that the compensation you are offering is reasonable. Don't expect Realtors^® to show your property to their buyers for $500, but $4000 may be enough. For all you know the Realtor^® who has that perfect buyer for your home may just have started working with his client when your listing is posted and $4000 may seem like easy money.

So you now have a much clearer understanding of the two parts that make up the total real estate commission, the listing agent side and the buyer's agent side. The home seller pays all the commission to the listing brokerage and, in turn, the listing brokerage pays out a portion of the total commission to the cooperating buyer's agent. Saving on one or both of sides of the commission largely depends on your understanding of the role each agent plays in the sale of your home. The fees you pay do not have to be a percentage of sale price, you and your agent can agree on a flat rate.

The role a listing agent undertakes is largely task oriented and he or she should be compensated fairly, buy not overly. Generally, a listing Realtor^® will spend approximately 20 to 40 hours from start to end on the sale of your home. Your agent will incur costs associated with your listing; however, the costs are minimal. It is important to understand that the commission a listing agent receives does not affect, negatively or positively, the cooperativeness of the MLS^®. Make your listing agent rationalize their fees. Do not pay a Realtor^® what is "normal" just because they tell you everyone else does it. Decide for yourself what is fair compensation for the hours they will work, the costs they will incur, and the risk they will undertake by accepting your listing.

Buyers' agency is not as predictable as the role of a listing agent. Buyer's agents may have to put in countless hours with their client before finding them a home, or, show them only a single property prior to writing a successful offer. The compensation the buyer's agent receives is paid by the home seller through the listing brokerage. The amount of commission offered to a buyer's agent will determine to what degree those agents will cooperate with the listing. Offering lower than what is "normal" may in fact produce enough showings on your home to secure a motivated buyer. Many Realtors^® will be compelled to show your home by their own clients even if the commission is lower than what the agent would like. This part of the commission may require adjustment throughout the course of your listing, to give you the opportunity to save as much money as possible, while achieving your goal of selling your property.

Saving money on real estate fees is like putting money in your pocket, a lot of it, however, it amazes me each and every day how many people still don't get it. They continue to pay old-style traditional Realtors^® exorbitant fees as though they can magically get a higher sale price.