If you’re in the market to buy or sell a property (or purchase a pre-construction condominium) chances are you’re not going at it alone and you plan on working with a real estate professional.
From complete access to homes on the Multiple Listings Service (MLS) to having the experience of a professional who can help with paperwork, bidding war negotiations and general neighbourhood advice, the benefits of a full-service agent run the gamut.
In the hierarchy of exciting house hunting topics, however, real estate commissions and how they are paid barely ranks higher than discussions around monthly maintenance fees. But it is important to know the facts about real estate commissions before you dive head-first into the housing market.
Below we’ve broken down the ins-and-outs of how agents are paid for the simple fact that it can get complicated, especially in a market as red-hot as Toronto’s.
How much should I pay in real estate commission?
As a buyer, you’re not on the hook to pay any commission.
Your realtor, known as a buying agent, is paid through the proceeds of the final price of the seller’s home (so effectively, your agent’s commission comes out of the seller’s pocket). This means when buying a home you can enjoy the full benefits of an agent without having to pay.
As a seller, the standard commission is five per cent, but this figure is negotiable. There are a number of factors to consider when negotiating a commission with your selling agent and the market should help you determine a fair commission. Of course, this is also dependent on whether you get a full-service agent who will walk you through every step of the real estate process, or a so-called “discount agent,” who will take a more bare-bones approach.
While it’s important to weigh the market against your agent’s commission, remember that a good real estate professional can take the anxiety out of what could otherwise be a stressful transaction by doing the legwork for you from handling the paperwork to navigating a bidding war.
What our Youtube video on real estate commission below:
Real estate commissions are built into a home’s price tag and directly come out of the final closing price. Real estate agent fees are never an additional expense tacked on top of a sale.
How are real estate agents paid and what is the standard commission rate in Ontario?
In the business of real estate, agents only get paid when a sale or purchase is successful. What they are paid is a percentage of the final selling price.
The standard in Ontario is a five per cent commission, which is usually divided in half between the selling and buying agents so that each party gets a 2.5 per cent cut of the property’s final selling price.
Before agreeing to work with a listing agent, the seller negotiates the terms of the commission, which are outlined in the listing agreement. The commission is not always divided equally between the two agents. While a buying agent’s commission is rarely negotiated and stays at 2.5 per cent, the seller’s side of the commission can be reduced after negotiations. Whether or not this happens is dependent upon a number of factors, including the market and the degree of service provided by each agent.
Can I negotiate real estate commissions?
Yes, as the client of a real estate agent you’re entitled to a negotiation of your agent’s commission. Taking into consideration the market as well as the services provided by your agent (such as professional staging and photography of your listing), you should approach this discussion based on a list of factors, such as your home’s value relative to the market and whether you’re enlisting the professional services of a full-service or discount agent. For example, some discount agents will charge you a small fixed fee for simply listing your home on the MLS, whereas full-service agents will do almost everything for you.
The commission is negotiated on the selling side, with the final commission structure outlined in the listing agreement between the seller and their agent. Usually, it’s the selling agent compromising on their commission. A buying agent’s commission tends to be fixed at 2.5 per cent, with their commission outlined in a buyer representation agreement.
It’s not out of the ordinary to work out a different commission than what’s considered standard. Given today’s housing market, as well as public awareness of the rise in house prices, many listing agents are prepared to sit down with their clients and discuss their commission before proceeding.
Average real estate commissions – by the numbers
Based on average GTA home prices in 2017 and a standard commission rate of 2.5 per cent, we calculated the average real estate commission of a buyer’s agent by all major home types below:
- Detached Home – $29,102
- Semi-Detached – $20,501
- Freehold Townhouse – $18,560
- Condo Townhouse – $14,493
- Condo Apartment – $12,804
Note: figures are only reflective of a buyer’s agent commission.*
How much commission do I pay if my home doesn’t sell?
In short, nothing. Agents are only paid if the real estate transaction is successful. In other words, if a buyer doesn’t sign on the dotted line and purchase a home, or a seller doesn’t find a buyer with a winning bid, the agent leaves empty handed. This provides agents with the incentive they need to get the job done and find you a buyer that agrees to your terms or a property that’s within your budget, in the neighbourhood you like, the square footage you need and access to amenities you want.
However, depending on the agreement you signed with your agent, you might be expected to pay a commission if you back out of a sale or if you sell your home beyond the timeframe of your agreement and that buyer was originally found by your agent. Always read the fine print.
How are commissions structured for pre-construction condos?
When it comes to pre-construction condos, buying agents (who are known as VIP agents) are paid by the developer and not the buyer. The developer pays for these VIP agents to get the word out about their development, find buyers and seal the deal during different phases of the project. It’s important to note that not all realtors have access to pre-construction developments, only VIP agents will.
In a city like Toronto, where new developments are constantly breaking ground, potential buyers have many options. You can choose to go through a particular development’s sales office, which will show you all there is to know about that condo and that neighbourhood.
However, there are many benefits to going through a professional real estate agent when considering a pre-construction purchase. VIP agents can get you access to a project before it’s open to the general public and earlier access often translates to a better price and even special incentives such as discounted parking.
Moreover, a VIP agent can expose you to other developments and will know exactly what you’re looking for, so they can cater a list of options that meet your search criteria. VIP agents will also connect you with a lawyer and guide you through the challenges of what to expect when buying a pre-construction unit.
How to save money on agent commissions with TheRedPin
TheRedPin gave the commission structure a much-needed refresh with the TheRedPin One program. Put simply: the program waives the 2.5 per cent selling commission when a client purchases a home and puts their property on the market with the TheRedPin Brokerage.
For clients of TheRedPin, the elimination of the selling agent’s commission isn’t just about creating a more efficient process, it’s about saving money, while still enjoying the perks of working alongside a full-service agent.
If you’re selling your home and buying a new property, you could stand to save thousands of dollars depending on the final selling value of your home. If your home sells for $500,000, and a 2.5 per cent seller’s commission stays in your pocket, you will save $12,000. This could go towards the cost of your new home, a vacation, new appliances or investments. It’s up to you what you do with your hard-earned money.
If you’re only looking to sell your home, you won’t be eligible for TheRedPinOne program, however, you will pay less than the standard five percent commission when you work with a RedPin agent.
Is there HST on real estate fees?
Simply put, yes. While resale home sales are exempt from HST, taxes must be paid on several services involved in a property transaction, which does include real estate agents and consequently, their fees.
Therefore, an additional 13 per cent in taxes on agent commissions are owed. Lawyer fees, home inspections and other real estate related services also require HST to be paid.
One per cent commission and flat-rate fees
The Toronto Real Estate Board (TREB), or any other major real estate body in Canada, does not regulate the amount in commissions real estate agents must be paid.
It’s up to the discretion of agents and their respective brokerages to choose how they are compensated. So while a five per cent rate in Ontario is, broadly speaking, the standard, as a seller you can work with discount agents who charge less.
Below, we highlight some facts about non-traditional commission structures and what to look out for before signing a listing agreement.
- One Per Cent Commissions
Many real estate agents advertise commission rates as low as one per cent. It’s important for sellers to recognize that in the majority of cases, this figure is only reflective of one side of a transaction (the seller’s agent commission or listing fee) and you will still be required to pay 2.5 per cent to the buyer’s agent.
So while it’s true you’re paying one per cent for the seller’s agent, in total, commissions will add up to 3.5 per cent when factoring in the co-operating brokerage. When working with an agent, it’s critical to discuss how much your total fees will add up to and how commissions will be split with the buyer’s agent.
- Flat-Rate Commissions
While the huge majority of realtors are compensated based on a percentage of a home’s selling price, a handful of real estate companies offer to sell properties for a flat-rate that doesn’t fluctuate based on a home’s value.
In most home transactions involving a flat-rate commission structure, you won’t directly deal with a full-service agent who will guide you through every step of a sale. Rather, you will either work with a discount agent who will help you from the sidelines or no agent at all (you’re simply paying for a spot to advertise your listing on the MLS). Therefore, a sale will likely take considerably longer and may fetch less money.
A major drawback with flat rate real estate companies is they operate outside the norms of typical realtor practices and don’t offer a buyer’s agent their full 2.5 per cent commission (usually built into the home price). Given almost every buyer approaching you will have an agent representing them, the following may occur:
- The prospective buyer may be required to cover their agent’s 2.5 per cent commission and therefore negotiate a lower selling price to offset the added expense
- You may be asked by the prospective buyer to cover the 2.5 per cent commission owed out of your own pocket
The old adage “you get what you pay for” often comes up in discussions about discount or flat-fee brokerages, as these organizations provide a lower degree of service that will require you to handle a lot of the responsibilities involved in successfully closing a deal on your own.
That being said, given the height of prices in today’s market, many full-service agents are also offering competitive commissions below the widely accepted five percent rate. For example, TheRedPin’s full-time and full-service agents charge a total of 2.5 per cent in commissions when you buy and sell at time same time.
Real estate commissions in Ontario vs British Columbia
Real estate commission structures in Ontario and British Columbia are similar in that home sellers in both provinces typically pay a percentage of their property’s final closing price to both the buyer’s and seller’s agents.
Where they differ is in how the percentage is calculated.
Unlike Ontario, BC commissions are typically calculated in two steps. Seven per cent is charged on the first $100,000 of a home’s price along with an additional 2.5 per cent on the rest (anything over the initial $100,000).
Commissions are usually split in half between both the buyer’s and seller’s agents and any fees directly come out of a property’s final selling price rather than as a separate expense. In BC, commissions can also be negotiated, with any changes usually occurring on the amount owed to the seller’s agent. It’s important to note that the structure outlined above is the typical commission structure of a full-service agent and does not represent a regulated rate from any real estate boards.
- Home prices cover the time period from January to July 2017.