Real eState

Why are real estate commissions 6%? – and why that may be changing

Published

9 months ago

December 4, 2023

Washington, DC
CNN
—

Here’s how paying for a real estate agent to sell your home has long been done: A seller hands a percentage of the sale price to their broker, who then splits it with the broker who brought the buyer.

The commission is typically between 5% and 6%, which is usually tens of thousands of dollars out of the seller’s proceeds. But the seller also factored that cost into what they listed their home for, so indirectly, the buyer is paying the cost, too.

How did that become the standard? And will this process continue?

Changes may soon be on the horizon for real estate commission rates after a Kansas City jury determined – in a $1.8 billion judgement in October – that commissions had been inflated and that brokerages and industry groups conspired to keep them that way. This landmark antitrust court case, along with similar lawsuits like it, could overhaul the standard 6% commission and who pays it.

A shift could allow home buyers and sellers to negotiate not only commission rates with brokers, but also who is responsible for paying them — the buyer or the seller. It’s already happening in New York City, where the fee structure is set to change on January 1.

Many thought the internet would eventually kill the 6% real estate commission. But it has yet to put much of a dent into the share home sellers pay, which is about double the percentage that is paid in other countries, according to a report on commissions from the Brookings Institution. Even as the ranks of stockbrokers and travel agents have dropped in recent years as commissions petered out, the number of real estate agents has grown and their typical commissions are bigger than ever as home prices have risen. That is largely because of the power of the National Association of Realtors, an influential lobbying group that represents 1.5 million real estate agents.

While the NAR is appealing the recent decision and emphasizes that its members’ commissions are always negotiable, there appear to be some emerging cracks in the current way a home is sold.

How real estate commissions work

Home sellers are usually on the hook for their real estate agent’s commission as well as for paying the agent that represents the buyer. Brokers typically split the commission, which, depending on the market, is usually between 5% and 6%.

A $500,000 home sale with a 6% commission means the seller pays their broker $30,000 upon settlement, which that agent splits with the buyer’s broker, so each side earns $15,000 on the sale. (There is an additional split on each side with the participating brokers sharing their cuts with the agents who inked the deal, so an agent’s actual pay is less than their side’s share of the the total commission.)

Real estate agents will tell you commissions are negotiable — and they are. And there are other models to sell a home including using flat-fee or discount brokers. But there are strong structural forces at play in the industry that keep many sellers from offering less than the typical 6%. Agents’ compensation is included when the home is listed on a regional database known as a multiple listing service, or MLS. Some MLSs will not allow a seller’s agent to list a property that offers nothing to the buyer’s agent.

Sellers may worry agents will “steer” them away from a home that will earn the agent less. And that fear is not unfounded.

A recent academic study of properties listed on Redfin found that agents who offered commissions that were less than the market rate for an area had less traffic and took much longer to sell.

“The people who are most hurt by this are sellers who offer going-rate commissions because they are worried about steering,” said Jordan Barry, a professor of law and taxation at the University of Southern California, and a co-author of the study. “For most homeowners, their house is by far their largest asset. Giving up 6% of the sale price in commissions is a real burden.”

A historic practice

The shared commission structure was set up in 1913 and appeared in the first Code of Ethics of the National Association of Real Estate Exchanges, which had been established five years earlier and later became the NAR.

A section of the code, entitled “Duties to Other Brokers,” stipulated that an agent should “always be ready and willing to divide the regular commission equally with any member of the Association who can produce a buyer for any client.”

The NAR’s current Code of Ethics (Article 3) allows commission sharing but does not require it.

Prospective buyers attend an open house at a home for sale in Larchmont, New York, on Sunday, Jan. 22, 2023.

Tiffany Hagler-Geard/Bloomberg/Getty Images

Until the Supreme Court put a stop to it in 1950, commission rates were set in a schedule by regional boards of realtors. Boards specifically forbade undercutting the prevailing rate, which was climbing.

In the 1920s in the Boston area, for example, the typical commission rate was 2.5%, but by the 1940s it had reached 5%, according to a study published in November 2015.

Agents argued the commission rate was fair because they held access to the listings unavailable to the public on the MLS. Agents put their listings in the MLS databases where only other agents could see them. These databases were — and sometimes still are — managed by NAR member organizations.

In an update to members following the recent verdict, NAR said the possibility of commission sharing has “always has been in place to protect and serve the best interests of consumers, support market-driven pricing and advance business competition.”

A history of litigation

Tension over NAR’s gatekeeping for listings would again spill into more litigation in 2005, when the Department of Justice filed a civil antitrust lawsuit against NAR challenging policies and related rules that obstructed real estate brokers who used “innovative internet-based tools” to offer better services and lower costs. In a 2008 settlement with the DOJ, NAR-affiliated MLS were no longer allowed to withhold listings from brokers who serve customers online.

Broadening access to the MLS would later allow online property listing behemoths like Zillow and Redfin to flourish. But as the internet became a critical part of home shopping, the commission rate stayed constant even while home prices surged.

The median priced home in 1950 was $7,354 (about $93,000 adjusted for inflation), according to the US Census, making a 6% commission $441 (about $5,500 in 2023). By 2000, the median home price was $119,600 (about $215,000 in 2023), allowing agents to split a fee of $7,176 (about $12,800 in 2023.) In October, the median home price was $391,800, according to the NAR, and the 6% commission paid by a typical seller was $23,500.

Up next for NAR is an appeal of the $1.8 billion lawsuit from October, which won’t be decided anytime soon.

“Typically antitrust cases like this take about a decade,” said June Babiracki Barlow, the general counsel for the California Association of Realtors. But, she added, that “we’ve never seen a damage award this big.”

If the commission structure shifts to separating the commissions, it could mean big savings for home sellers because they’d only have to pay for their own agent. But it could make buying a home even more expensive because buyers would either have to pay out of pocket for representation or go without a broker, if they didn’t negotiate for the seller to pay the fee.

The rash of cases brought recently against the NAR and other brokerage firms may result in separating seller commissions, said Vasi Yiannoulis-Riva, a partner at the New York real estate team of international law firm Withersworldwide. She added that the changes could create more competition amongst agents, as well as having “a profound effect on how brokerage commissions are paid across the country.”

Changes already

Some incremental changes have already taken place in the way residential real estate is done, with some of the MLSs allowing a wider variety of commission arrangements to be represented in listings even before the verdict.

In August, Bright MLS, which covers markets in the Mid-Atlantic, changed its requirements so that listings could offer compensation of any percentage or amount for a buyer’s broker — including $0.

In October, the NAR said it is neither requiring nor encouraging MLSs to change their data fields to permit $0 fees, but they were advising that doing so would now comply with the NAR’s MLS policy, which was a change from prior policy.

In an indication of what may be coming for the rest of the country, the Real Estate Board of New York — New York City’s leading trade association — rolled out a new policy it called the “future of how residential real estate is transacted” that will decouple agents’ commissions and require any compensation for the buyer’s broker that is coming from the seller to come directly from that seller, not another broker.

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Real eState

Canada’s Best Cities for Renters in 2024: A Comprehensive Analysis

Published

1 month ago

July 24, 2024

Harry Miller

In the quest to find cities where renters can enjoy the best of all worlds, a recent study analyzed 24 metrics across three key categories—Housing & Economy, Quality of Life, and Community. The study ranked the 100 largest cities in Canada to determine which ones offer the most to their renters.

Here are the top 10 cities that emerged as the best for renters in 2024:

St. John’s, NL

St. John’s, Newfoundland and Labrador, stand out as the top city for renters in Canada for 2024. Known for its vibrant cultural scene, stunning natural beauty, and welcoming community, St. John’s offers an exceptional quality of life. The city boasts affordable housing, a robust economy, and low unemployment rates, making it an attractive option for those seeking a balanced and enriching living experience. Its rich history, picturesque harbour, and dynamic arts scene further enhance its appeal, ensuring that renters can enjoy both comfort and excitement in this charming coastal city.

Sherbrooke, QC

Sherbrooke, Quebec, emerges as a leading city for renters in Canada for 2024, offering a blend of affordability and quality of life. Nestled in the heart of the Eastern Townships, Sherbrooke is known for its picturesque landscapes, vibrant cultural scene, and strong community spirit. The city provides affordable rental options, low living costs, and a thriving local economy, making it an ideal destination for those seeking both comfort and economic stability. With its rich history, numerous parks, and dynamic arts and education sectors, Sherbrooke presents an inviting environment for renters looking for a well-rounded lifestyle.

Québec City, QC

Québec City, the capital of Quebec, stands out as a premier destination for renters in Canada for 2024. Known for its rich history, stunning architecture, and vibrant cultural heritage, this city offers an exceptional quality of life. Renters benefit from affordable housing, excellent public services, and a robust economy. The city’s charming streets, historic sites, and diverse culinary scene provide a unique living experience. With top-notch education institutions, numerous parks, and a strong sense of community, Québec City is an ideal choice for those seeking a dynamic and fulfilling lifestyle.

Trois-Rivières, QC

Trois-Rivières, nestled between Montreal and Quebec City, emerges as a top choice for renters in Canada. This historic city, known for its picturesque riverside views and rich cultural scene, offers an appealing blend of affordability and quality of life. Renters in Trois-Rivières enjoy reasonable housing costs, a low unemployment rate, and a vibrant community atmosphere. The city’s well-preserved historic sites, bustling arts community, and excellent educational institutions make it an attractive destination for those seeking a balanced and enriching lifestyle.

Saguenay, QC

Saguenay, located in the stunning Saguenay–Lac-Saint-Jean region of Quebec, is a prime destination for renters seeking affordable living amidst breathtaking natural beauty. Known for its picturesque fjords and vibrant cultural scene, Saguenay offers residents a high quality of life with lower housing costs compared to major urban centers. The city boasts a strong sense of community, excellent recreational opportunities, and a growing economy. For those looking to combine affordability with a rich cultural and natural environment, Saguenay stands out as an ideal choice.

Granby, QC

Granby, nestled in the heart of Quebec’s Eastern Townships, offers renters a delightful blend of small-town charm and ample opportunities. Known for its beautiful parks, vibrant cultural scene, and family-friendly environment, Granby provides an exceptional quality of life. The city’s affordable housing market and strong sense of community make it an attractive option for those seeking a peaceful yet dynamic place to live. With its renowned zoo, bustling downtown, and numerous outdoor activities, Granby is a hidden gem that caters to a diverse range of lifestyles.

Fredericton, NB

Fredericton, the capital city of New Brunswick, offers renters a harmonious blend of historical charm and modern amenities. Known for its vibrant arts scene, beautiful riverfront, and welcoming community, Fredericton provides an excellent quality of life. The city boasts affordable housing options, scenic parks, and a strong educational presence with institutions like the University of New Brunswick. Its rich cultural heritage, coupled with a thriving local economy, makes Fredericton an attractive destination for those seeking a balanced and fulfilling lifestyle.

Saint John, NB

Saint John, New Brunswick’s largest city, is a coastal gem known for its stunning waterfront and rich heritage. Nestled on the Bay of Fundy, it offers renters an affordable cost of living with a unique blend of historic architecture and modern conveniences. The city’s vibrant uptown area is bustling with shops, restaurants, and cultural attractions, while its scenic parks and outdoor spaces provide ample opportunities for recreation. Saint John’s strong sense of community and economic growth make it an inviting place for those looking to enjoy both urban and natural beauty.

Saint-Hyacinthe, QC

Saint-Hyacinthe, located in the Montérégie region of Quebec, is a vibrant city known for its strong agricultural roots and innovative spirit. Often referred to as the “Agricultural Technopolis,” it is home to numerous research centers and educational institutions. Renters in Saint-Hyacinthe benefit from a high quality of life with access to excellent local amenities, including parks, cultural events, and a thriving local food scene. The city’s affordable housing and close-knit community atmosphere make it an attractive option for those seeking a balanced and enriching lifestyle.

Lévis, QC

Lévis, located on the southern shore of the St. Lawrence River across from Quebec City, offers a unique blend of historical charm and modern conveniences. Known for its picturesque views and well-preserved heritage sites, Lévis is a city where history meets contemporary living. Residents enjoy a high quality of life with excellent public services, green spaces, and cultural activities. The city’s affordable housing options and strong sense of community make it a desirable place for renters looking for both tranquility and easy access to urban amenities.

This category looked at factors such as average rent, housing costs, rental availability, and unemployment rates. Québec stood out with 10 cities ranking at the top, demonstrating strong economic stability and affordable housing options, which are critical for renters looking for cost-effective living conditions.

Québec again led the pack in this category, with five cities in the top 10. Ontario followed closely with three cities. British Columbia excelled in walkability, with four cities achieving the highest walk scores, while Caledon topped the list for its extensive green spaces. These factors contribute significantly to the overall quality of life, making these cities attractive for renters.

Victoria, BC, emerged as the leader in this category due to its rich array of restaurants, museums, and educational institutions, offering a vibrant community life. St. John’s, NL, and Vancouver, BC, also ranked highly. Québec City, QC, and Lévis, QC, scored the highest in life satisfaction, reflecting a strong sense of community and well-being. Additionally, Saskatoon, SK, and Oshawa, ON, were noted for having residents with lower stress levels.

For a comprehensive view of the rankings and detailed interactive visuals, you can visit the full study by Point2Homes.

While no city can provide a perfect living experience for every renter, the cities highlighted in this study come remarkably close by excelling in key areas such as housing affordability, quality of life, and community engagement. These findings offer valuable insights for renters seeking the best places to live in Canada in 2024.

Real eState

Former B.C. Realtor has licence cancelled, $130K in penalties for role in mortgage fraud

Published

1 month ago

July 14, 2024

Harry Miller

The provincial regulator responsible for policing B.C.’s real estate industry has ordered a former Realtor to pay $130,000 and cancelled her licence after determining that she committed a variety of professional misconduct.

Rashin Rohani surrendered her licence in December 2023, but the BC Financial Services Authority’s chief hearing officer Andrew Pendray determined that it should nevertheless be cancelled as a signal to other licensees that “repetitive participation in deceptive schemes” will result in “significant” punishment.

He also ordered her to pay a $40,000 administrative penalty and $90,000 in enforcement expenses. Pendray explained his rationale for the penalties in a sanctions decision issued on May 17. The decision was published on the BCFSA website Wednesday.

Rohani’s misconduct occurred over a period of several years, and came in two distinct flavours, according to the decision.

Pendray found she had submitted mortgage applications for five different properties that she either owned or was purchasing, providing falsified income information on each one.

Each of these applications was submitted using a person referred to in the decision as “Individual 1” as a mortgage broker. Individual 1 was not a registered mortgage broker and – by the later applications – Rohani either knew or ought to have known this was the case, according to the decision.

All of that constituted “conduct unbecoming” under B.C.’s Real Estate Services Act, Pendray concluded.

Separately, Rohani also referred six clients to Individual 1 when she knew or ought to have known he wasn’t a registered mortgage broker, and she received or anticipated receiving a referral fee from Individual 1 for doing so, according to the decision. Rohani did not disclose this financial interest in the referrals to her clients.

Pendray found all of that to constitute professional misconduct under the act.

‘Deceptive’ scheme

The penalties the chief hearing officer chose to impose for this behaviour were less severe than those sought by the BCFSA in the case, but more significant than those Rohani argued she should face.

Rohani submitted that the appropriate penalty for her conduct would be a six-month licence suspension or a $15,000 discipline penalty, plus $20,000 in enforcement expenses.

For its part, the BCFSA asked Pendray to cancel Rohani’s licence and impose a $100,000 discipline penalty plus more than $116,000 in enforcement expenses.

Pendray’s ultimate decision to cancel the licence and impose penalties and expenses totalling $130,000 reflected his assessment of the severity of Rohani’s misconduct.

Unlike other cases referenced by the parties in their submissions, Rohani’s misconduct was not limited to a single transaction involving falsified documents or a series of such transactions during a brief period of time, according to the decision.

“Rather, in this case Ms. Rohani repetitively, over the course of a number of years, elected to personally participate in a deceptive mortgage application scheme for her own benefit, and subsequently, arranged for her clients to participate in the same deceptive mortgage application scheme,” the decision reads.

Pendray further noted that, although Rohani had been licensed for “a significant period of time,” she had only completed a small handful of transactions, according to records from her brokerage.

There were just six transactions on which her brokerage recorded earnings for her between December 2015 and February 2020, according to the decision. Of those six, four were transactions that were found to have involved misconduct or conduct unbecoming.

“In sum, Ms. Rohani’s minimal participation in the real estate industry as a licensee has, for the majority of that minimal participation, involved her engaging in conduct unbecoming involving deceptive practices and professional misconduct,” the decision reads.

According to the decision, Rohani must pay the $40,000 discipline penalty within 90 days of the date it was issued.

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Real eState

Should you wait to buy or sell your home?

Published

1 month ago

July 13, 2024

Harry Miller

The Bank of Canada is expected to announce its key interest rate decision in less than two weeks. Last month, the bank lowered its key interest rate to 4.7 per cent, marking its first rate cut since March 2020.

CTV Morning Live asked Jason Pilon, broker of Record Pilon Group, whether now is the right time to buy or sell your home.

When it comes to the next interest rate announcement, Pilon says the bank might either lower it further, or just keep it as is.

“The best case scenario we’re seeing is obviously a quarter point. I think more just because of the job numbers that just came out, I think more people are just leading on the fact that they probably just gonna do it in September,” he said. “Either way, what we saw in June, didn’t make a big difference.”

Here are the pros of buying/ selling now:

Pilon suggests locking in the rate right now, if you don’t want to take a risk with interest rates going up in the future.

He says the environment is more predictable right now, noting that the home values are transparent, which is one of the benefits for home sellers.

“Do you want to risk looking at what that looks like down the road? Or do you want to have the comfort in knowing what your house is worth right now?” Pilon said.

And when it comes to buyers, he notes, the competition is not so fierce right now, noting that there are options to choose from.

“You’re in the driver seat right now,” he said while noting the benefits for buyers.

Here are the cons of buying/ selling now:

He says one of the cons would be locking in the rate right now, then seeing a rate cut in the future.

The competition could potentially become fierce, if the bank decides to cut the rate further more, he explained.

He notes that if that happens, the housing crisis will become even worse, as Canada is still dealing with low housing inventory.

An increase in competition would increase the prices of houses, he adds.

Selling or buying too quickly isn’t the best practice, he notes, suggesting that you should take your time and put some thought into it.

Despite all the pros and cons, Pilon says, real estate remains a good investment.

According to the latest Royal LePage House Price Survey for the second quarter of this year, the average home price in Canada is $824,300. That’s up 1.9 per cent from the same time last year, and up 1.5 per cent from the first quarter of 2024.

In the Ottawa Housing Market Report for June 2024, the average price of a home was up 2.4 per cent from this time last year to $686,535, but down 0.6 per cent from May 2024.

Experts believe many potential buyers are still hesitant of jumping into the housing market and waiting for another interest rate cut of 50 to 100 basis points.

“I don’t think it’s going to be the rush that we see in the past, because people are used to more of a conservative approach right now,” said Curtis Fillier, president of the Ottawa Real Estate Board. “I think there’s still a bit of a hold back, but I definitely do think with another rate cut, we’ll probably see a very positive fall market.”

With files from CTV News Ottawa’s Kimberly Fowler

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