One of the biggest concerns for buyers and sellers working with residential real estate brokers is negotiating and establishing commissions. Recent developments in the industry, including a notable lawsuit in the United States, have underscored the importance of transparency and ethical conduct in dealing with real estate commissions. As brokers and agents, it is not just our duty but also our responsibility to ensure that our clients are well-informed and treated with fairness and integrity throughout the process.

We’re often asked the question: “Are real estate fees negotiable?” The answer is: “Yes, they are.”

As self-employed, autonomous agents, working as real estate brokers, we have the discretion to charge whatever rate of commission we choose, as long as it's agreeable to the seller. There are certain industry standards, which usually fall between 4-6% of the sale price (plus applicable GST/QST). There will always be brokers who are willing to work for less, sometimes as low as 2-3%, just as there are brokers who may charge as much as 6-7%. But like most things in life, you tend to get what you pay for.

How Commissions are Established 

Real estate commissions are negotiated between the seller and their broker at the time the seller signs an Exclusive Brokerage Contract for the sale of their property. When a property is listed, the total commission is typically split with the collaborating broker who represents the buyer in the transaction. For example, if the agreed-upon commission is 5%, the listing agent will collect 2.5%, and the collaborating agent will collect the other 2.5%. Once an offer to purchase is firm and final, the invoices for real estate fees are sent to the acting notary, who then pays the invoices from the proceeds of the sale at the time of the signing. This protectionary measure ensures that brokers get paid and aren’t left chasing after their clients for unpaid invoices long after a sale has closed. 

After years of experience, we have learned that different sellers have different priorities, and that commission structures are not one-size-fits-all. Therefore, the Broady team offers a couple of options, depending on the level of service and marketing a seller chooses. Added features that would result in a higher commission might include things like 3D virtual tours, video production, drone and aerial shots, home staging services, and more.

I’ve met with sellers who believed that listing commissions are fixed at 5% and were surprised to learn that this isn’t the case. What’s important is that the client is aware of their options, and that they feel empowered to make an informed decision based on facts. 

Recent NAR Lawsuit Settlement: A Turning Point for Commission Transparency

The real estate industry in the U.S. experienced a significant turning point with the recent $418 million settlement of a lawsuit against the National Association of Realtors (NAR). The ground-breaking suit, brought forth by class-action plaintiffs, focused on the lack of transparency and consumer choice in real estate commissions. One of the core issues highlighted in the settlement was the practice of requiring homebuyers to pay the commissions of both their agent and the seller's agent, often without the buyers’ full understanding or consent.

This case underscores the growing demand for transparency and fairness in real estate transactions. Homebuyers, like all consumers, deserve the right to be able to make informed decisions about the costs associated with purchasing a property, including real estate commissions. The agreement reached in the lawsuit aims to empower buyers by providing them with more transparency and options when it comes to commission structures.

In light of this settlement, real estate professionals across the industry are re-evaluating their practices and emphasizing the importance of clear communication and ethical conduct. Brokers and agents have a responsibility to ensure that their clients fully understand the commission structures involved in their transactions and have the opportunity to discuss and negotiate terms that are in their best interests.

Brokerage Contracts for Buyers

Thankfully, here in Quebec, legislation has been put in place over the past several years to encourage transparency in commission discussions between brokers and buyers. The introduction of a buyer contract, now known as the "Brokerage Contract to Purchase," allows for open and honest conversations about commissions, ensuring that both parties understand and agree on fair compensation before embarking on the real estate journey together.

The Brokerage Contract to Purchase allows a buyer and their broker to negotiate and agree upon a commission for the broker, should they be successful in helping the buyer secure a property. Once again, the industry standard for this in our current market is about 2% of the purchase price.

Most properties listed for sale with a broker already have this 2% commission for the buyer’s broker built into the asking price of the property. Therefore, if a broker has the buyer’s contract in place at 2% commission, and the property purchased is offering that broker 2%, then it has no effect on the purchase price.

However, if a seller and their broker agree in their listing contract to offer only 1% to the buyer’s broker, then the buyer’s contract stipulates that the buyer must add an additional 1% to the purchase price when they make an offer to compensate their broker the 2% that was agreed upon in their Brokerage Contract to Purchase.

One of the risks associated with commission structures is the potential for lack of transparency. Some brokers may not fully disclose or explain the intricacies of commissions to their clients, leading to misunderstandings or even feelings of being misled or deceived. Buyers need to be vigilant and ensure that they are not taken advantage of in commission negotiations.

As previously stated, the industry standard for the commission offered to the buyer's broker is typically 2% of the sale price of the property. This standard serves as a reference point for fair compensation for the broker representing a residential buyer, but the argument that the buyer ought to be aware of their right to negotiate this rate is a reasonable one. 

To illustrate the impact of commission structures on real estate transactions, let's delve into a recent experience Team Broady had when representing a seller who received two competing offers for their property. The first was slightly below the asking price and the would-be buyer was under contract with their broker for a 2% commission. Because this was the amount already being offered by the seller, and which was clearly indicated in the MLS listing, there was no additional impact on the amount of the offer. The second offer, however, while almost $15,000 higher, included a 4% commission for the buyer's broker, stipulated in their Brokerage Contract to Purchase.

Upon careful consideration, the seller realized that despite the higher offer, they would not significantly increase their net profit due to the higher commission. The extra $15,000 being offered was going to pay their broker who was commanding a commission from them that was double the industry standard. They refused this offer, even though it may have netted them a few hundred dollars more in their pocket, and accepted the other offer which they perceived as much more reasonable. This experience shed light on the ethical considerations surrounding commission negotiations. The seller perceived the buyer's broker's approach as "greedy" due to the higher commission, and they were completely turned off by it.

My own conversations with the broker left me astonished. During one of my phone calls with her, she casually said to me: “Hey Mark, I get all my buyers to agree to 4%. It's a little trick I have. Want me to show you how?” This revelation was both shocking and eye-opening to me. She was offering to “teach” me strategies that seemed to manipulate buyers into accepting higher fees without clear benefits. I find the mere thought of deceiving clients in such a way unethical and deceitful. This experience underscores the importance of honesty and transparency in real estate transactions.

As brokers, our focus should always be on serving our clients' best interests with integrity, rather than resorting to tactics that compromise trust and fairness in exchange for higher commissions. 

Open and honest discussions about commissions empower clients to make informed decisions, ensuring a positive and mutually beneficial experience for all parties involved. If you or anyone you know is thinking of buying or selling real estate, please don’t hesitate to reach out to us at 514-613-2988, or by email at info@teambroady.ca.