There is a big misconception in the real estate industry that when you are searching for a home, working with a real estate agent is free of charge. While there are many benefits to working with a Realtor during your home search, these professionals are getting paid and although this payment flows through the proceeds of the home’s sale, this payment ultimately comes out of the buyer’s pocket.
Now, there’s nothing wrong with the fact that you are paying for a service that you’ve requested. In fact, it’s common sense that you would pay for this service, right? In fact, in other markets such as Australia, there two different types of brokerages – those that sell homes and those that assist buyers in purchasing homes. This eliminates the risk of double ending (when the same agent represents both buyer and seller) and is a concept that might be worth further exploration in our own market.
In Ontario, the commission system is set up as follows: a seller hires a real estate agent to assist in selling their home. A commission is negotiated between the seller and real estate agent, which traditionally amounts to 5% plus HST. This amount is split between the selling agent (2.5%) and the agent who represents the buyer (2.5%). The seller may negotiate the selling agent’s portion of the commission to be lower, however the buyer’s commission is rarely (if ever) touched. Many selling agents will offer a lower rate from the get go in order to their foot in your door.
Technically, if a buyer has a Buyer Representation Agreement signed with his or her real estate agent, a commission rate is agreed upon (typically 2.5%) and should a seller not offer a commission to a buying agent, this amount would need to be paid by the buyer directly. While it is uncommon to see a listing offering less than the standard 2.5% commission to the buying agent, the industry has started to see some buyers negotiating this standardized amount with their agent and it’s something that should be explored further based on the services provided by that particular agent.
If a buyer chooses to work without a Realtor, they should expect a discount on the selling price as the seller only needs to pay his or her Realtor their side of the commission. A buyer has the choice to hire a real estate agent. Educating buyers on how the system works is a great first step as many buyers enter the home search process unaware of how the industry is set up. If you are getting into the market soon, consider the following:
- Speak to friends and colleague about their experiences in purchasing a home and ask if they would recommend a real estate agent to assist you with the process. Don’t go with the first real estate agent you meet at an open house. You need to interview many people to ensure you will be on the same page throughout the home buying journey.
- A Realtor can be a valuable part of the home search process and their services, understandably, come at a cost. Ensure you review the Buyer Representation Agreement that you sign with your Realtor in detail and understand the commission rate they will be earning.
- While you may not pay commission to your agent directly, this commission is paid by you in the form of a higher selling price that you end up paying for a home
- If you are working without a real estate agent, ensure you understand how the commission is structured with any home on which you are making an offer. Make it known to the selling agent that you do not need any sort of representation and you plan to work everything out on your own with the assistance of a lawyer.
Although the real estate industry seems to have a set of conventions that are ‘the way it is’, it doesn’t mean that is the way it needs to be. As a consumer, you have a choice, and it is important that you understand the options available to you, even if one of those options is to buy on your own. Once people are aware of the true cost of representation, and Realtors are transparent enough to ensure that buyers understand it as well, the buying process will be considerably more comfortable.