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One of the biggest and most expensive purchases many people make in their life is buying a house. While the final Canadian Real Estate Association (CREA) report isn't available just yet, it has been estimated that there were just under 500,000 real estate transactions through MLS (Multiple Listing Service) across Canada. While this isn't the highest number of transactions, it is still quite high.
Because this is a big and important purchase for many people, it's often recommended that you work with a real estate agent. Real estate agents are professional salespeople who specialize in the buying and selling of property. Realtors are agents who have their real estate license and are a member of the National Association of Realtors (NAR).
A real estate agent can represent the home buyer - called the buyer's agent - or the seller - called the seller's agent or listing agent.
When it comes to buying and selling real estate, many people don't actually know how a real estate agent gets paid or believe that they are an extra expense on the big purchase.
Let's break down how real estate agents make their money, what fair commissions are across Canada, and why you should consider using a real estate agent when you buy or sell a property.
As we've stated above, a real estate agent represents buyers and sellers and is a professional salesperson who specializes in the buying and selling of property.
As with other salespeople, real estate agents make their salaries off commissions from sales.
A real estate commission, also known as realtor fees or agent rates, is the payment to your real estate agent for the services rendered after the transaction has been completed, or "closed" in realtor terms. For home buyers, a real estate agent's services are technically free unless your house gets sold. The commission is calculated based on the percentage of the property’s sold price, the percentage of which can be negotiated.
Commissions are usually 5% and are split between the seller's agent and buyer's agent - which comes out to 2.5% each. However, agents can negotiate the split commission.
For example, a selling agent might offer a 3% commission to a buying agent in order to incentive more showings with potential buyers at a particular property.
While many home buyers may believe that they have to pay their real estate agent's commission out of pocket, the commission is technically paid by the seller as part of the final purchase price.
The home seller pays the real estate fees, along with HST on the commission, and legal fees which are included as part of the final price.
There are a few different types of real estate commission structures that real estate agents may use. When you work with a real estate agent, you can talk to them about what the commission will look like and how it works.
As well, the type and rate of commission or the amount of real estate agent fees should be included in the listing agreement The best and most experienced agents are extremely transparent about the commissions and associated fees.
Here are five of the most common commission structures in real estate.
This is the most common type of real estate agent commission in Canada and is used by most real estate agents. As the name suggests, this type of real estate agent commission is a fixed percentage of the final sale price of the house. For example, with a 5% fixed price split between the two agents on a $100,000 home, each agent will take $2,500 ($5000 total commission).
For this type of real estate commission fee, the commission rate decreases as the property price increases, usually working in thresholds. For example, the real estate commission might be at 5% for selling the house at $450,000 and will go down if the price increases.
A flat fee is similar to a fixed rate, except that the commission isn't based on a percentage of the home's sale price. Instead, these real estate agent commissions are an agreed-upon fee that is set before the house is even put on the real estate market.
For example, if the flat fee is $5,000, it will stay that amount whether the property is sold for $200,000 or $700,000.
The flat fee type of real estate agent commissions does not include any other fees, so this would have to be included in any final costs or payments.
A more flexible type of real estate agent commission is a service fee. This type allows the home sellers to choose which services they pay for.
A service fee type of real estate commission involves the agents receiving a fixed or hourly rate for things like staging, finding professional photography agencies, conducting open houses, and other miscellaneous tasks needed throughout the real estate process.
Finally, the fee combination commission structure means that the home sellers pay additional fees on top of a commission based on the sales price. This is usually the type of real estate commission used in selling unique properties or requiring services outside of the general agent's responsibilities.
When it comes to commissions, it's hard to determine what is considered a fair commission. This is because every house and real estate transaction is different.
For example, you could have a house sell for $200,000 with an agreed-upon fixed percentage commission of 5% that takes months to sell. When it finally does, the listing agent and buyer's agent commission is about $5,000 each. On the other hand, there could be a house with the same fixed percentage rate of 5% that sells for $750,000 in less than a week meaning that each agent receives $18,750.
While a 5% fixed rate is considered a fair agent commission amongst many agents, it can vary depending on the sale price, time on the market, and amount of work done to complete the sale.
This is also why negotiating agent commission is a vital part of many real estate transactions. Many buyers and sellers may not know that the commission rate is up for negotiation and real estate professionals should be willing and ready to decide on a rate that both parties agree on. In fact, even a one percent change to the commission can usually mean thousands of dollars.
If you're hoping to buy or sell a house, you might interview agents and talk to them about the realtor commission they expect. In these interviews, you can shop around or negotiate the best commission rate for you and your budget.
Because some buyers or homeowners believe that they are paying for realtor fees out of pocket and want to save money, they decide to proceed with a "For Sale By Owner" (FSBO) transaction.
While both the buyer and the seller may save money selling and buying on their own without an experienced agent, it also requires a lot more work. Where a listing agent will set their own property price, set up showings with potential buyers, do marketing for your property, set up stagings and home inspections, etc, this will all have to be done by the FSBO sellers or outsourced by the seller.
Or, for a buyer on their own, they will have to research properties, negotiate the home sale prices, and finalize sales without the help of a buyer's agent.
So, while for sale by owner, properties will skip the realtor fees that come with using a buyer's agent or listing agent, there are still many fees that will have to be paid out of pocket.
Understanding fair real estate commissions will vary from home to home, city to city, and province to province (or territory). Here are some of the average realtor fees or real estate salaries in each province and territory across Canada.
Ontario is home to big cities and small farm towns. The rest estate market across Ontario varies dramatically with apartments in Toronto costing more than a home in other small towns. Because of this, the average realtor commission is harder to calculate as it often depends on the region in which the realtor works.
However, the average salary for a real estate agent in Ontario currently sits at just over $120,000. As said above, this can be more or less depending on your local market.
British Columbia is similar to Ontario in that home sales can vary dramatically in price with big cities like Vancouver and Victoria being more expensive than a small cities like Williams Lake. In B.C. average realtor commissions and salaries add up to around $88,000.
Alberta is known for its mountains and beautiful scenery. Home to Lake Louise and the Rocky Mountains, Alberta is a popular tourist attraction for many travelers, including fellow Canadians. As well, Alberta's housing market and general cost of living have been known for being quite a bit cheaper than those of other provinces. That being said, average real estate commissions and salaries add up to over $85,000 in Alberta.
While the flat prairie province isn't necessarily the most booming housing market in Canada, agents in the province have reported making an average of over $50,000.
Manitoba is a quieter Canadian province, but Winnipeg is still a fairly big city. A real estate transaction closer to the capital city will often be higher than those outside the city. Similarly to agents or real estate brokerages in Saskatchewan, the average salary for agents is around $50,000.
Quebec is a larger Canadian province and has a few major cities like Montreal and Quebec City. As well, its proximity to Parliament makes it an attractive location for individuals interested in politics. Quebec realtors can make an average of $85,000 a year.
While the Maritime provinces are all different and attract different buyers, they have a similar average salary for selling and buyer agents. Currently, the average salary is sitting between $85-95,000 for the Maritime provinces.
Finally, we have the territories. While it may not seem like there are tons of home sale transactions happening in the colder territories, agents can actually make a decent salary up north. The average salary between the three territories is about $75-90,000.
As we've seen above, both the seller and the buyer could choose to work independently without using top real estate agents to avoid the commission fees. While for some this can be the right decision, there are many benefits of working with professional agents who have the experience and network needed to sell a property or help a buyer find one.
A buyer agent will have a network of agents representing sellers with their homes on the market and can help buyers find what they're looking for within their budget. When a listing agent sells a home, they are there throughout the entire selling process and can find buyers who are willing to pay the property prices.
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