Understanding Real Estate Fees

If you are choosing to sell with our Flat Fee Full Service Program, then the following is an explanation of how real estate fees are offered and paid by real estate brokerages. If, on the other hand, you are choosing to sell by using our For Sale By Owner (FSBO) Package and decide to compensate buyers’ agents, the same basic logic applies, however, you will pay the buyer’s agent commission yourself, typically through your lawyer rather than through us as the listing brokerage. Flat fee, 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® System and how commissions play a role in the sale of your property is to first understand that the public website www.REALTOR.ca is not “the” MLS® System. This site is 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. CREA also provides for its members that choose to participate, a Data Distribution Facility (DDF®) that distributes an MLS® System listing to hundreds of real estate websites.

However, CREA’s popular public website www.REALTOR.ca, or any of the websites that CREA feeds through the DDF®, is 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 display their active listings on a daily basis so the public can see what is for sale. The information provided on these sites is a stripped down version of the actual MLS® System. 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, Alberta has 10 of them, operates its own proprietary database. These databases are internet based but unavailable to the public. All of the REALTORS® belonging to a particular board work within these databases 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. All real estate boards in Canada operate such a proprietary database which excludes access to all but their own members.

The aggregate of these proprietary databases are “the” actual MLS® System 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. It is also important to understand that any particular REALTOR® can only access information from the board(s) to which they belong, so generally speaking, a REALTOR® in Edmonton will not see the Calgary database and vice versa.

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 the public website www.REALTOR.ca. In Canada, the MLS® System 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. Part one is the commission that your listing agent will earn and part two is the commission the cooperating buyer’s agent will earn. It is this cooperative nature between all real estate companies that makes the MLS® System such a powerful marketing tool and the reason you need it to achieve the highest possible sale price for your home. Commissions can be either a percentage charged based on the sale price of a property, or a flat fee.

Let’s assume there is a home for sale somewhere in Alberta, listed at $419,900, 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 Alberta is 7% on the first $100,000, plus 3% on the balance of sale price (7/3). So, in this case the 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 sake, we will ignore it. Therefore, by choosing to sell with a traditional real estate company and paying 7/3, the seller would net $398,550 after real estate fees.

So where does the $16,450 go? Frequently, but not always, the commission is split equally. It is important to note that the vast majority of transactions conducted through the MLS® System involve two REALTORS® and that is why the commission is split into two parts. In this 7/3 commission example, the listing agent would earn $8225 and the buyer’s agent would earn $8225. Although less common, it is important to note that if the listing agent finds the buyer for the home, they would likely earn both parts of the commission, or the entire $16,450 in this example.

These 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. And remember, buyer’s agents are almost always compensated from the proceeds of the sale of the property. At rhinorealty, if you choose our For Sale By Owner (FSBO) Program, and agree to compensate a buyer’s agent, your lawyer will arrange payment to that agent’s brokerage. If you choose our Flat Fee Full Service Program, we will pay the buyer’s agent on your behalf, as part of the total commission that is paid to us upon the closing of your sale.

First, let’s examine the listing agent’s role and compensation. The listing agent, in our 7/3 commission example, is likely 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® System. 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 these tasks varies between 20 and 40 hours. Therefore, using our example, having earned $8225 on the sale, the listing REALTOR® 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® System, 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 agent side of the commission is payment for your REALTOR® to work for you, and the buyer’s agent side of the commission is payment to attract all the other REALTORS® to your home. In other words, in an MLS® System 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.

So here’s the question, is this excessive, 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 when compared to the compensation earned as per our 7/3 commission example. Without question, time is by far the biggest expenditure a REALTOR® will incur on your listing and as we all know, time is money. But, is it worth that much money?

Consider that, in this day and age, most REALTORS® do not advertise your home outside of the MLS® System and some, like rhinorealty, take advantage of CREA’s DDF® to maximize your property’s exposure. The reason for this is because, at best, it’s redundant advertising. If your home is on the MLS® System, all REALTORS® can see it and are aware it is for sale. As well, your listing will automatically be uploaded to www.REALTOR.ca where the public can see and view your listing and possibly through CREA’s DDF®. While no form of advertising can guarantee that it will reach 100% of the targeted audience, the MLS® System and its public website www.REALTOR.ca comes very close, and if you add in the DDF® sites, it gets even closer. So it follows then, if you are on the MLS® System, 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 the MLS® System. As a home owner, you cannot list your home on the MLS® System without hiring a licensed REALTOR®. The reason for this is that collectively, REALTORS® own the MLS® System. 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. Here at rhinorealty, we are very careful in assessing our risk of working for free and avoid doing so whenever it is apparent that that will likely be the case. This is the main reason that our listing fees are so much more attractive than traditional fees.

Now let’s 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, it is usually the home seller that compensates the buyer’s agent, rather than the buyer themselves paying their own agent. In our example, the buyer’s agent 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 the 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 in our example earned $8225, there’s really no way of knowing whether he or she was excessively, inadequately or fairly compensated for their time and efforts. Unless of course they’re willing to tell you how much time and effort they put in with that particular buyer.

Unlike the listing agent’s side of the commission which has nothing to do with the cooperative nature of the MLS® System, 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 go back to our $415,000 sale price example where the total 7/3 commission for both the listing agent and the buyer’s agent totaled $16,450 and apply this logic. Let’s say the listing agent was going to earn $16,449 for his or her self and only $1 would go to the cooperating buyer’s agents. How many buyers’ agents do you think will show the home for $1? I think we can safely say none. In other words, the seller will likely get 0% cooperation from the MLS® System for $1. If, on the other hand, the listing agent offered half of the 7/3 they were charging, 3.5% on the first $100,000 plus 1.5% on the balance (3.5/1.5), or, in our example $8225, the seller will receive 100% cooperation from the MLS® System. The reason for this is that, in Alberta, this is the “normal”, or most commonly quoted buyer’s agent commission on the MLS® System, so REALTORS® have no reason to avoid your property.

Two questions should come to mind when considering the buyer’s agent commission. First, do you need 100% cooperation? And second, will some lesser, but reasonable amount, garner enough cooperation to sell your home? Both these questions will be answered a little later on when we are discussing flat fee, or discount real estate companies. For now, suffice to say, the problem in trying to save on the buyer’s agent part of the commission is that most traditional agents 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 is necessary to sell your home. At rhinorealty, we know our interests should align with your best interest, and if it’s possible to save you money on the buyer’s agent part of the commission, we will do just that.

Let’s now consider our example sale using a flat fee or discount real estate company. In our example, the home listed at $419,900 and sold for $415,000. And, using the traditional commission of 7/3, a total of $16,450 in commissions, $8225 to the listing agent and $8225 to the buyer’s agent was paid out by the seller. What would happen if the seller hired a flat fee, or 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 the seller would save $4225.The money saved is a result of the listing agent working for less, but still receiving maximum cooperation available from the MLS® System by paying the buyer’s agent 3.5/1.5, or in this case $8225. As previously mentioned, the listing side of the commission has no impact on the cooperative workings of the MLS® System, so the reduction your listing agent has taken will have no impact on the sale of your home, providing of course, that their compensation is reasonable and they are working in your best interests.

So, 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, $4000 is indeed fair compensation. Perhaps even less than that amount is fair, depending on the amount of work the listing agent has to perform. Thus, 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 is not inaccurate to state that many flat fee or discount REALTORS® earn more annually than their traditional counterparts. As is the case at rhinorealty, their volume is generally higher, more than compensating for the lower per transaction compensation.

Will a flat fee or 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 flat fee or discount REALTORS®, and highly competent traditional REALTORS®. Unfortunately, there are also incompetent REALTORS®, both traditional and discount. Simply paying more in no way improves your chances of finding a good agent providing the compensation you’re willing to pay your listing agent is reasonable for the amount of work involved.

In most cases, $4000 is reasonable compensation and the seller in our example should expect qualified, experienced and competent service from their flat fee, or discount REALTOR®. So, did the seller suffer by paying the listing agent less? The answer is no. When the home attracted an offer, the negotiated price of $415,000 was in no way tied to how much commission the seller was paying the listing agent; it is simply the price at which the parties agreed through their negotiations. A traditional agent had no way of receiving a single dollar more for the property just because they were a traditional agent, and hence, the $4225 saved on the listing side of the commission ends up in the seller’s pocket. So now, instead of netting $398,550 from the sale, the seller netted $402,775.

So it follows then that 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 of 7/3.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 flat fee or discount brokerage than it does with a traditional brokerage except that a discount, or flat fee REALTOR®, is more likely to allow you the opportunity to try and save on this side of the commission. Buyer’s agents simply consider how much they’re being paid, not who’s paying them.

Saving money on the buyer’s agent part of a real estate commission is a little trickier than the listing agent’s part. 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 the house sold at $415,000, the seller paid $8225 to the buyer’s agent. Was it necessary to pay that much? The answer is probably not, and by offering that amount from the beginning, the seller will never find out whether, or not, there were savings to be realized on the buyer’s agent part of the commission.

Let’s say that instead of offering that “normal” buyer’s agent commission of 3.5/1.5 on the sale price, or in this case $8225, the seller offered 3.0% on the first $100,000 plus 1.5% on the balance (3/1.5), or $7725. Would the seller still receive 100% cooperation from REALTORS® and sell their home? Well, if not didn’t get 100%, then it would be something very close, say 97%, and yes, the seller would still sell their home and save $500 on the total real estate commissions. What about offering a flat rate of $6,000 to the buyer’s agent? Would the buyers’ agents still have come? Probably, and now the seller has saved $2225 on the buyer’s agent part of the commission. How about paying the buyer’s agent only $4000, will that work? It might. 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 or flat fee real estate company and saving $4225 on the listing side and perhaps $2225 on the buyer’s agent side, the seller has netted $405,000 instead of $398,550.That amounts to $6450 ($6772.50 when GST is included) in savings compared to paying the traditional 7/3 and could buy a nice winter cruise or maybe some new furniture. Or perhaps, if the seller only has a small amount of equity in their 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 part 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 commonly offered 3.5/1.5 to a buyer’s agent. They will tell you that no agents will show the property and that it will hurt your sale. It’s not true and don’t believe them. 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? We, at rhinorealty, think not.

The key to success here is that first, you find a real estate brokerage, like rhinorealty, who will at least try to save you money on this part of the commission, and second, that you raise the buyer’s agent 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 expect REALTORS® to show your property to their buyers for $500, be reasonable. Our experience has shown that an amount equal to approximately 75% of the “normal” 3.5/1.5 is generally sufficient to get the job done.

In summary, 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 generally pays all or both parts, of the commission. 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 excessively. Generally speaking, 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 the listing agent earns does not affect, negatively or positively, the cooperativeness of the MLS® System. 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. In Alberta, the compensation the buyer’s agent receives is generally paid by the home seller. 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” will likely produce enough showings on your home to secure a motivated buyer if the compensation is reasonable. 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, the buyer’s agent side, 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 us each and every day how many people still don’t get it. They continue to pay old-style traditional REALTORS® exorbitant and nonsensical fees as though they can magically get a higher sale price for a property. Some people will shop all day long to save $50 on a new television or computer and then put absolutely no thought into wasting thousands of dollars on real estate fees. Don’t be one of those people.

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