When you sell a house, both your agent and the buyer’s agent get a slice of the pie. But just how big of a slice is a question snaking its way through the courts.
Real eState
How real estate commissions work and why they might get lower
A jury in Kansas City this week found that the National Association of Realtors and a number of real estate brokerages conspired to keep home sale commissions artificially high. Defendants, who have pledged to appeal, are on the hook to pay nearly $1.8 billion in damages to about a half-million Missouri home sellers, and that amount might grow. The outcome could totally upend how real estate agents get paid, and how homes are sold.
But to understand how things may change, we first need to clarify just how the system works.
How do real estate commissions work?
Most real estate agents make their money from commissions. In the United States, there’s generally an agent representing the seller and one representing the buyer. The seller pays the commission to both of them. This has been standard practice for more than 50 years, according to Christy Reap, spokesperson for Bright MLS, the database of homes for sale in the Mid-Atlantic.
Generally, commissions are 5 to 6 percent of the home-sale price. The buyer’s and seller’s agents split that money. So if a home sells for $500,000 with a commission of 6 percent, the agents on both sides of the deal will split about $30,000 from the proceeds of the sale.
What’s the problem with the status quo for agent commissions?
A seller and their agent cannot cut the buyer’s agent out of the commission without facing big consequences. This requirement to “couple” the commissions — or else — is one of the standards under fire in the lawsuit. The seller-defendants claim it amounts to forcing them, unfairly, to pay both commissions.
So, what’s the penalty if you don’t comply? In most parts of the country, in order to get a property on the multiple listing service (MLS) — the essential database of homes for sale that also populates other platforms such as Zillow and Redfin — a selling agent must agree to share their commission (common practice is 50/50). If a home is barred from being listed on the MLS, it becomes nearly invisible to potential buyers.
Some industry watchers identify other problems with the commission structure, too, even though these issues aren’t part of the lawsuit.
First, the way that people shop for homes has changed dramatically, thanks to the amount of information available on the internet. You don’t need a real estate agent to show you which houses in your town are for sale, or to see a list of comparable sales. In other words, the work required of real estate agents has arguably decreased, yet commissions have not changed to reflect that.
“When we look at the data on commissions, what we see is that they’ve remained remarkably stable in a range of 5 to 6 percent, even though the role of the buyer agents in particular has changed significantly over this period,” says Sam Chandan, the director of the NYU Stern Chao-Hon Chen Institute for Global Real Estate Finance.
Secondly, industry watchers question the one-size-fits-all approach to commissions.
“Economists think it’s very odd that the commission is the same for every deal because objectively, some deals are harder than others,” says Jenny Schuetz, a senior fellow at the Brookings Institution focused on housing. “Some customers are harder to deal with, or some houses take longer, or the negotiations are more complicated, and that’s not reflected in the commission.”
What would be the downside of changing the status quo?
Reap, the spokesperson for Bright MLS, contends that the practice of splitting commissions prevents favoritism and unfairness among agents. Without adhering to it as an industry-wide standard, she predicts agents will be incentivized to do more deals and refer more business to their peers who continue to split commissions, and ice out those who don’t. Buyers or sellers represented by an agent in the latter camp would then also be disadvantaged.
Reap also points out that forcing buyers to pitch in with commissions would put them “at a significant disadvantage.” Adding that expense on top of the down payment and other closing costs already required of buyers, she says, raises the question: “How is a buyer going to be able to pay for quality representation on the most expensive transaction of their lives?”
Even though the standard is about 6 percent, can a seller negotiate a lower commission with their agent?
Technically, yes. You can negotiate an agent’s commission before you enter into an agreement to have them sell your home. However, most people don’t.
“A lot of people just don’t question it,” Schuetz says. “[Selling a home] is a big transaction. People don’t do it very often. It’s going to be super expensive whatever you do, and a whole bunch of people you’ve never heard of before are going to get a piece of the action.”
It’s precisely this level of complication that compels many people to use real estate agents in the first place.
And some sellers worry that lowering the commission will make buyers’ agents less likely to bring around their clients. Think about it: If every other listing promises the buyer’s agent half of 6 percent, but your home only offers half of 4 percent, that agent has less incentive to convince their client to buy your place.
This fear among sellers is well-founded. “There’s a considerable body of evidence to show that buyers’ agents are more likely to present properties to buyers that offer a higher commission rate,” Chandan says. (The recent lawsuit focuses on how the large institutions in the marketplace, such as the National Association of Realtors and larger brokerages, facilitate this behavior.)
Some brokerages, like Redfin, offer lower commissions. How do they do that?
Redfin works differently than many traditional brokerages because it directly employs its agents and offers them a base salary on top of their transaction bonuses. So, people who sell a home through Redfin don’t pay their agent a commission — instead, they pay a “listing fee” between 1 and 1.5 percent.
But many other brokerages that pledged lower commissions had a difficult time breaking into the market. According to a study from the Wharton School, new companies paying lower commissions grew more slowly than ones that offered higher commissions.
Will anything change for home sellers right now because of this verdict?
No. The lawsuit itself will face appeals before its outcome is clear. But that doesn’t mean the industry will remain the same until all of the legal matters are settled, either. For one thing, given the risk of getting roped into a similar lawsuit, some brokerages may make proactive changes to their commission structure.
Redfin CEO Glenn Kelman said in a statement that the lawsuit will “ensure major change” comes to the real estate industry, including, potentially, that buyers will start to pay their own agents’ commission, or that buyers and sellers could more commonly share the same agent, as they do in Great Britain, Australia and New Zealand.
Chandan believes that decoupling buyer and seller commissions could create more competition and variety in the market. “There’s research to suggest or show that we will see more competitive house prices … and more competition among buyer’s agents,” he says, along with the emergence of technology and platforms that could support buyers who forgo a traditional agent.
It could cause real estate agents to change their scope of work, rather than offering one blanket service at the same fee, Schuetz says. “You could have agents who specialize in sort of higher and lower service levels and price accordingly,” she says. For example, a buyer who doesn’t need help finding a house but wants assistance crafting an offer could, in this hypothetical, pay less than a buyer who needs both services.
While this could save people money, it could also lead to discrimination, Schuetz notes. “You could wind up having a specialization where some agents choose only to work in some neighborhoods, or at some price points, or with certain kinds of customers.”
But really, she says, there are a lot of unknowns: “There could be a bunch of changes to the industry and we won’t know what those are going to look like until they happen.”
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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.
Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.
Average residential home price in B.C.: $938,500
Average price in greater Vancouver (2024 year to date): $1,304,438
Average price in greater Victoria (2024 year to date): $979,103
Average price in the Okanagan (2024 year to date): $748,015
Average two-bedroom purpose-built rental in Vancouver: $2,181
Average two-bedroom purpose-built rental in Victoria: $1,839
Average two-bedroom purpose-built rental in Canada: $1,359
Rental vacancy rate in Vancouver: 0.9 per cent
How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent
This report by The Canadian Press was first published Oct. 17, 2024.
The Canadian Press. All rights reserved.
VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.
Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.
The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.
Wednesday was the last day for advance voting, which started on Oct. 10.
More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.
Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.
An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.
This report by The Canadian Press was first published Oct. 17, 2024.
The Canadian Press. All rights reserved.
British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.
David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.
But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.
“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.
Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.
But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.
Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.
Yet a host of other factors are at play, rates in particular, Yan said.
“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.
Rustad, meanwhile, is running on a “deregulation” platform.
He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.
Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.
Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.
If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.
“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.
Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.
“Who do you believe will deliver a better tomorrow?”
Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.
The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”
IS HOUSING THE ‘GOVERNMENT’S JOB’?
Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.
“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.
Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.
“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”
The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.
The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.
Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.
They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.
Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.
Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.
Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.
“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.
The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.
The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.
At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”
A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.
Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.
“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.
Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.
“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.
Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.
Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.
The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.
A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.
Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”
The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.
Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”
Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.
Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.
“It diminishes us as a society, but then also as an economy.”
This report by The Canadian Press was first published Oct. 17, 2024.
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