Ask A Realtor: Understanding Real Estate Commissions

Whether you are setting out to buy or sell a home, an important factor worth considering are the fees associated with using a licensed real estate sales representative. However, it seems most people are primarily interested in how much these costs are, rather than understanding how real estate commissions actually work and the value that they provide.

So let’s help clarify the whole process…

What is a real estate commission?working

A real estate commission is the money deducted from the seller’s proceeds when a deal closes, which is then ultimately paid out to the listing and cooperating agents.

Do agents get paid a real estate commission no matter what?

Absolutely not. Perhaps more than any other sales industry, real estate is one predicated on successful results. If the sale doesn’t close, your sales representative doesn’t get paid. Simple as that. (Now you know why we work so damn hard!)

How much is a real estate commission?

The commissions that get paid to real estate agents are negotiable. As a result, they vary. The industry standard in Ontario traditionally hovers at 5%. Now, that number is of course a percentage of the total sale price, so the precise amount cannot be known until after an offer’s been accepted and the home gets sold.

How is the real estate commission split?

The commission that each agent receives from a transaction is determined ahead of time in the contracts that the buyer and seller sign with them. The rate of percentage is traditionally divided down the middle between the buyer’s and seller’s agent. That said, it’s not at all unheard of for a contract to stipulate that one agent receive a higher commission than the other. Offering a buyer’s agent an increased commission (say 3% instead of 2.5%) is a great incentive.

How is the real estate commission paid?

After a sale closes, the lawyers that are involved in the transaction are tasked with taking out the commission and releasing it according to the contracts signed by the real estate agents. It should be noted though that this fee doesn’t go straight to the agents. Rather, it goes to their brokers, who then usually take a cut for themselves (the amount of which depends on their own agreement with the sales representative) before paying the balance out. Additionally, a brokerage holding a deposit can pay out commissions owed. And, if the deposit covers the entire amount owed, lawyers are not involved for the commission to be paid.

bizWho pays the real estate commission?

This right here is the magic question and it’s all a matter of perspective. While the commonly accepted outlook is that the seller is the one paying the commission out, you could definitely make a case that it’s the buyer who actually pays it. Here’s an example. Say a buyer and seller—each of whom are using an agent—make a deal on a home for $770,480, which was October’s average sale price in Toronto. Presuming the seller has agreed to the standard 5%, that means the overall commission on the sale is $38,524. While that amount is coming out of the seller’s haul, technically you can say the buyer is the one covering the commission because they are paying for the cost of the house. Like we said, it’s all about your perspective.

Can an agent double-end a real estate commission?

Yes they can, but they are required to make full disclosures to you if they are involved in multiple representation. As for whether you can reduce their fee in the case of multiple representation, this will be hard, especially if there are competing offers. Your agent will have to be very upfront in that regard as well.

Will a flat fee substitute for a real estate commission?$$

Sure, if the listing agent will accept one. And hey, it may benefit the seller in regards saving some money. The disadvantage here though is you’ll likely get restricted representation back from the agent. The whole concept of percentage-based commissions in real estate help keep the system in check. It’s something of an insurance policy that protects the agents and their clients, be they buyer or seller.

Should I ever neglect to pay a real estate commission?

We can’t give you the most objective answer here since commissions are our livelihood. But yes, there are services which connect frugal sellers with real estate agents eager to score new listings for as low as 0.5% commission on their side. But in life, we believe you get what you pay for. Sometimes the cost of using an experienced, high-level professional isn’t cheap. However when you’re approaching one of the biggest financial transactions you will ever make in your life, don’t you want to be confident in the results? More often than not, you’ll agree it was worth every penny.

Title image featuring artwork by Stephen Lambert.