Why do (Toronto) realtors have a 2.5% expectation?

Are realtors really worth 1/20th of your home value?

If you are a bit older and have been around the block, you may have actually seen realtors do a lot of work. Before the era of mass market computing, super easy advertising and consolidation that has led to the great advances we see in the world, realtors used to have a tough job. Nowadays, with the amount of automation available, it is hard to critically reason as to why a realtor (in Toronto) would get paid (on average) 2.5% of your home sale (and possibly more if you agree to it).

Average GTA commissions in 2017

Based on average GTA home prices in 2017 and a standard commission rate of 2.5%, 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

If you factor in the fact that the total commission outlay for each transaction is typically 5%, that number doubles to:

• Detached Home – $58,204
• Semi-Detached – $41,002
• Freehold Townhouse – $37,120
• Condo Townhouse – $28,986
• Condo Apartment – $25,608

This may not be a huge surprise to some, however it's a bit disturbing that they are basically profiting (hugely) from your sale at a rate unrivaled in other industries (except maybe Financial Engineering).

What the boards, organizations and companies push through realtors

[dt_quote type="blockquote" font_size="big" animation="none" background="plain"]As a buyer, you are on the hook for whatever commission you signed up for with your Sales Representative or Broker.[/dt_quote]

This graphic below, borrowed from a prominent brokerage in Toronto displays the full on propaganda and misinformation that realtors (as a group) try to push to you.

We can pull up Buyer Representation Agreements to show you the truth, however we're certain that the board itself would send us a cease and desist complaint, so here is the gist of why this half truth keeps living on.

As a buyer, you are on the hook for whatever commission you signed up for with your Sales Representative or Broker. If you want to buy a house that is not offering the usual 2.5% co-operating commission to a co-operating broker (i.e. your buying agent), then you will be on the hook for the shortfall. Moreover, the commission itself comes out of what you will be paying for the acquisition of this house, so make sure you are aware that you are indeed on the hook for a commission payout, just possibly indirectly.

An alarming stat we came across while researching this post is the nasty collusion that realtors have been guilty of (especially vs discount brokerages and/or for sale by owner - FSBOs)

Consistent with real estate agents steering buyers to properties with high commissions, we find that if a property has a buying commission rate less than 2.5%, it is 5% less likely to be sold and takes 12% longer to sell.

The historical reason for 2.5%

So finally, here it is, the historical reason for realtors wanting (or actually, mostly demanding) 2.5% to work with you.

Before the advent of the MLS (and more specifically the internet version), real estate agents were unaware of all available properties for sale. This hurt home sellers because many buyers who may have been interested in their property were unaware it was on the market for sale. This hurt home buyers because some might have missed out on their dream house or paid more for their home than for a comparable property they would have found on the MLS.

This all changed in the late 1800's. Real estate brokers started forming local real estate associations. Members regularly met at the offices of the associations to share information about the properties they had for sale. They agreed to compensate other member brokers who helped sell their properties. Thus, the early MLSs were born and based on a fundamental principal that's still applicable today: Help me sell my inventory and I'll help you sell yours.

How Did the MLS Change Over Time?

Fast forward to today, ...you have those same realtors grossing closer to $250,000 (per year).

From those early days in the late 1800's, the MLS has evolved. Members paid annual dues and other fees to pay for the MLS staff and any required materials and resources. Real estate agents submitted property listings to their MLS and the MLS staff compiled all the information into a book. About once a week, MLS members received the book that showed what was available and what had been sold.

Computers made it easier to create virtual MLS books. The advent of modems eventually made the printed books obsolete. All real estate agents had to do was "dial in" to a centralized computer which stored the MLS listing in a database.

Soon after, the Internet ushered in the Information Age. Some property information from the MLS started appearing on the Internet in 1996. The information was not as current as what was available in the MLS, but it still benefited buyers and sellers because they were able to see what's available in their price range and desired location. Property sellers gained more exposure for their listed properties and increased their chances of a quick sale at higher prices.

How does this relate to the 2.5%?

Well, back in those days (any time before 1996), real estate agents really had to be in the know and aware of everything in their trading area. This made it so that the realtors were your Sherpa in your quest to find a new home (or sell your current home). Also, at this time, home prices (in Toronto specifically) tended to be reasonable and made it so that a very good real estate agent (one who is closing one deal per month) would gross approximately $75,000 (before any commission splitting with their brokerage).

Fast forward to today, where the average home price has gone the way of global temperature (i.e. sky-rocketing and gaining momentum) and you have those same realtors grossing closer to $250,000.

Of course, not all realtors are making this level of commission, these are the better (not best) ones - in an average trading area, which is non-existent. If you look at the top 1% of producers, those raking in 100+ deals per year, and you have a gross commission payout north of $2,125,000.

I don't know about all of you, but no profession other than financial technologies and CEOs of large organizations has seen anywhere near this sort of salary growth in the last 20 years. Looking below, you can see that the average worker has seen their wages fluctuate up and down through the 2 decades, nearly netting out to zero, whereas realtors have seen (of course, due to escalating home prices) at an average yearly growth of 7.5%.

How many of you have received those type of wage increases over the past 20 years?

Just a little bit more to piss you off

In researching this post, we found the following, leaving it here for you to read (even though it was not a Canadian editorial).

Ever wonder why there are nearly  no Realtor blogs discussing commission structures openly? (probably not, but for the other 3 of you…) It all has to do with an AntiTrust price fixing case against a few Realtor brokers decades ago. (I just covered it in my AntiTrust Law class, this is my last semester at AU! for those that are curious followers.)

These brokers got together for a dinner at Congressional County Club in MD. The organizer was F0LEY, the then President of the Local Board of Realtors. He got up and said he was changing his firms  rates to 7% from 6%. (insert tons of  details here). 

His excuse was the market was horrible and tons of homes were listing, but nothing was selling, so they were in  dire straits. Ultimately, several were  found guilty of conspiracy to raise commission rates in violation of the Sherman Act, an Antitrust law.

Fast forward 30 years, the Realtor community is still terrorized and instructed to  NOT TALK ABOUT COMMISSIONS publicly with other agents. And to even get up and leave a room if somebody talks commissions. I have seen it, it is pretty funny when the word commission is mentioned and everyone freaks out and becomes a lawyer “You can’t talk about that!”

It got so bad that the Virginia Assoc. of Realtors’ legal counsel didn’t want to say “6% commissions” when teaching agents, so he referenced a number of hypothetical  “chickens” instead of using actual percentages. He happened to use the number 600 chickens. Hum, if that isn’t a wink wink to the number  6, then I don’t know what is. (see  Blog post on topic or  video see minute 11:20) Gimme a break.

In my opinion, in the end, this  chill effect & gag order has the opposite result. Instead of colluding to increase prices, the new silence solidifies what the consumers (and press) think is the “Normal” Realtor Commission. And the press make it worse with headlines like: “ Chipping Away At Realtors’ Six Percent” ( link). Or Wikipedia’s  “The median real estate commission charged… 6%”. This is WRONG. With misinformation like this, what is the consumer to think? Keep them in the dark, and they are worse off. So I’m gonna spill the beans on what is “normal.”