Real Estate Fees Explained
Real estate fees and commission rates are the most commonly asked questions by home sellers and buyers. Everyone wants to know what it’s going to cost them to buy or sell, and understandably so.
If you do a search online, it can be frustrating that all you can find online are vague references real estate commissions followed by an invitation to call a salesperson (yay, that’s SO fun) just to get a specific answer.
The reason for this is that the real estate industry is HIGHLY regulated, to protect the public interest and ensure that agents don’t collude together to fix prices or act in an anti-competitive way. Real Estate Agents are in NO WAY allowed to speak about real estate fees or commissions as if there is any industry standard or set price and this is a good thing.
Every company and sales person is allowed to set their own prices, and they certainly do.
So I will do my best to shed as much light on this as I can, first by going over the difference between Flat Fee and Commission based Real Estate Fees, and then explaining how they work in practice.
Finally, this article will provide you some tips on what to look for, so you can find the best fit for your situation.
Flat Fee Real Estate
Flat fee real estate services have risen in popularity in the last 10 years, as the Internet and real estate websites have become the main vehicles for finding buyers. Initially, Flat Fee Real Estate usually targeted ‘For Sale By Owners’ (FSBO) – people who were inclined to sell their own home – but have since expanded to offer a wide range of services.
Pricing for Flat Fee Services
Flat Fee service simply means that a brokerage is charging a fee to perform a certain duty upfront, instead of receiving compensation based on the outcome of the transaction. Many For By Owner Companies use this model. While some people believe (incorrectly) that you can get on MLS without using a realtor, the truth is you need to use a real estate agent to list on MLS in Ontario.
What surprised me is when I investigated some of the well known flat fee sites, that they no longer have prices on their website. Even these companies are now requiring you call in to get pricing information. Given that price is their main advantage, I was surprised not to see it on the front page.
Due this and the fact that I didn’t want to pretend to be a home seller to find out pricing information, I will keep the discussion of Fee for Service, sometimes known as discount brokerages a broad as possible. What I will say is that most of these companies will have tiered fee levels, depending on your market and how much service they provide you.
Advantages of Fee For Service Real Estate
- The consumer can pick and choose what services they want, allowing them more freedom to control the cost and experience.
- This model appeals to Home Sellers who are confident of the process and comfortable doing it themselves.
Problems with Fee For Service Real Estate
- Money is paid upfront by the consumer with no guarantee of sale. Unlike the traditional model where the broker is paid only on a successful outcome, you will have to pay money upfront.
- Since the brokerage’s revenue does not rely on your outcome (whether you sell or not, and whether you had a good experience) you may not get the results you were looking for.
- Not every house sells. Home owners risk money out of pocket.
- Consumers may not understand that the services provided and the duty of care owed to them is lower than with a traditional Client Relationship.
What to Watch Out For with Discount Brokerages
Make sure you get a detailed, WRITTEN list of services you will receive for the package you are considering, as this is the only way to compare with other options. Be aware of industry buzz words such as “Internet Marketing”, “Home Staging”, “Communication” and “Support” as these are all very general words that can be interpreted 1000 different ways.
Below are some points to consider with Flat Fee real estate services.
Level of Representation
There are 2 different forms of representation in real estate, Client Representation and Customer Service. Client representation means that your agent must promote and protect your interests and owes you fiduciary duties. On the other hand, Customer Service reduces the agent’s service level owed to you, sure they have to act professionally and treat you fairly, but they don’t owe you fiduciary duties or represent your interests.
Level of Service
Usually how much you pay will directly affect the level of service you receive. Do you get an agent available by phone or in person? How often do they meet with you? Will they guide you in the process? If you prefer the agent to be arms-length, this will not be a concern for you
How does the agent get paid?
Normally, an agent can make more money selling real estate on commission basis, so you should question why these agents choosing to what they claim is the same work for such a great deal?
Do they need to do a crazy high volume of transaction in order to be profitable? Will that affect the service and results you receive? What is their skill level? How do you ensure they will do the best job for you? If you feel there is no high-skill level required from an agent, this will not be a concern for you
Do you do the negotiating on your own behalf?
This will depend on what type of relationship you have with the agent. If it’s a customer service relationship they can’t advise or negotiate on your behalf. If you feel your negotiating skills are strong, and don’t need much support or guidance, this will not be a concern for you.
In closing, Flat Fee service is an option for sellers who are confident in their own skills to navigate the process. The only thing that concerns me on these Flat Fee websites, is when they try to make every agent look the same, usually with catch phrase like:
Get the same high quality service for less money!!
Just remember the old saying, “you get what you pay for.” If it seems too good to be true, there’s a good chance it is.
The Traditional Real Estate Commission Model
Traditionally, real estate commissions have been paid out of the sale of the home as a percentage of the sales price. This is paid to the listing broker, who in turn usually offers part of this commission as co-operating commission to a buyer’s broker that sells the house.
This is still the most common way real estate fees are collected and in my opinion, still the best business model. It protects the home seller while only rewarding the broker for a successful outcome – a sale.
I’m going to tell you the same precautionary tale for commission agents as I did for flat fee brokers: be wary of what you get for the price.
Real Estate Commission Fees
Agents charge a wide range of commissions for their services, the majority I see are between 1-6% based on the market and the services offered. However, some agents may charge even less or more than this, depending on the house, the location, and the needs of the client.
Real Estate Commission Advantages
- No money is paid unless there is a successful sale- limited risk.
- No upfront costs for the home seller.
- The costs of marketing a home can be a lot in terms of time and money. These are covered by the listing broker.
Real Estate Commission Disadvantages
- For a consumer, it is sometimes unclear what is included in the commission, and sellers today are more educated. Many of them do their own research and want to know what they are getting.
- Every realtor is different in the services, experience and knowledge they bring to the table.
Now that I have gone over the two most common commission structures, I am going to explain how commissions ‘normally’ work in reality.
How Real Estate Commissions Are Paid
When you hire a brokerage to sell your home, you agree to pay a commission for the successful outcome- a sale. Pretty strait forward. Sure, agents will perform tasks to market the home such as open houses, home staging and advertising, but ultimately you are paying for the result.
The Cooperating (buyer) Broker
When you list your home for sale on the MLS, you agree to allow your broker to pay a commission to any other brokerage who brings their buyer client and they purchase. This is normally included in the total commission you pay to your agent.
Out of that total amount of commission agreed to, in the listing agreement there’s a spot where you’ll have to designate how much of that your broker will pay the cooperating brokerage who brings a buyer. Again, there is no set standard on how much you have to pay.
Cooperating brokerage commissions will range from 0.01 cent all the way to 4% and beyond of the sale price. Some may choose to offer a flat fee but regardless, as a seller I’ll advise you to respect the co-operating commission the vast majority of home buyers choose to work with their own real estate agent.
So if you offer less commission to a buyer agent than the other homes in your neighbourhood, the buyer may have to make up the difference to pay their agent and you may not attract as many buyers as you hoped. On the flip side if you offer more, it can get you a lot more exposure. It’s all about supply and demand.
What is a Normal Real Estate Commission?
So now that we’ve gone over the 2 common ways real estate fees are charged, now I’ll give you an example of how they work in practice.
Here in Mississauga and the GTA, it’s common to see a scenario where the commission is split 50/50 between the listing broker and cooperating broker. For example, the seller will pay 5% commission to the listing broker, out of which half of that commission (in this example 2.5%) will be paid to the Cooperating (buyer) broker.
In the event that your agent brings their own buyer client, or an unrepresented buyer ends up purchasing the home, the whole commission amount is still payable unless other terms have been agreed on.
It’s important to note that average real estate commission rates will change based on the market and supply and demand. For example, in a slow market where there aren’t a lot of buyers you may see higher commissions being paid to buyer brokers. Common commission trends are dictated by market conditions, and not set by any organization, board or company.
Researching Real Estate Fees
What you’re doing right now is a smart first step. Do your research ahead of time because every market is different, and every agent offers different services.
While it’s important to find a company that charges fair real estate fees, when comparing different agents you have to make sure they are offering similar services. If not then you can’t make a fair comparison and that’s why you need to know what’s important ahead of time. If you can’t find enough information online, you really do need to call and/or meet some agents.
Click Here to See the Village Guru Service Packages & Rates Online.
Once you do enough research and ask the right questions, you will know if an agent’s commission sounds fair, or if the fee sounds incredibly too good to be true. Below are some pointers to help you in your search.
Research Local Real Estate Websites
Spend a few hours doing some online research. You can’t know what to ask and won’t be able to see the difference between services if you haven’t done your due diligence first, because there are vast differences. Start Learning the How to Protect your Interests as a Seller and what to look out for in your Research
What Services you Need to Sell Your House
Giving out a quote for service always feels like a game of chicken; who’s going to crack first. But most agents are trained to ask probing questions in order to tell a customer what they think they want to hear. For example, an agent who specializes in home staging will have plenty of information on this topic readily available on their website without you having to ask. However if you ask at the meeting, 100% of agents will say ‘yes, of course I do it’ regardless if they normally do or don’t in order to get your business.
Services like “home staging” and “marketing” have a lot of different costs, and can represent very different things. One agent might say they include staging for free, while another says it’s an extra 0.5%. Why? What does it include? Is it a consult or installation of art and accessories? What service level do you want and need? See Our FAQ section for sellers to learn all the things you need to know to differentiate between agents and service levels.
Ask About Listing Contract Length
There is no standard contract length, although MLS systems have minimum lengths such as a minimum of a 60 day listing on the Toronto Real Estate Board. Typical listing contracts I see are for a term of 3-6 months.
Rarely is a longer listing agreement necessary so If you’re getting an incredibly low commission but for a 2 year contract be aware. You’ll likely be stuck using that agent to buy or sell, no matter how good or bad their services are. Always review the fine print of any agreement you sign because it’s a legal document. Any agent should be able to give you the contract in plain English for you to review in advance.
Put All Promises in Writing
Eliminate assumptions & surprises by having the agent provide you a written service agreement BEFORE you sign a listing contract. Listing contracts do not outline any detail about the marketing services your agent will provide so make sure any promises made are put in writing. See the Village Guru Step-by-Step List of Services we offer, which you can customize any way you need.
Real Estate Fees & Commissions Summary
I hope I’ve shed some light on the different fee structures that are available in real estate, and how to ensure you are getting the right service that you’re expecting.
Every seller wants the best possible price, however it’s your task to do research so know exactly what level and type of services you want before you speak to anyone about real estate fees or commissions. This way, you will be able to get several specific and accurate quotes that are much easier to compare. You can then decide which agent you think will get you the best possible results, with the services you need and for the fair price you want.
Click Here to see The Village Guru Commission Structures and Included Services
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