When working for a company, your compensation can be hourly, salaried or on commission. Money makes the world go around, and unless you plan to live off the grid and grow all your food, you will have to earn money.
As a real estate agent, your income depends on performance. That means you need to assist clients with buying and selling homes to earn a commission from the transaction. It can be complicated to understand as a deal has many different pricing structures. Still, a set percentage is typically given to the buying and selling agents.
Let’s dig deeper into how real estate commissions work.
Who Pays the Commission?
Real estate agents are self-employed business people who must be affiliated with a broker to work in the industry. The money they make for their efforts comes from the sale of the home, which is a percentage of the selling price. This means the seller pays for all of it.
A buyer purchases a home for the agreed-upon price, and that’s it, besides standard closing costs. Their agent needs to be paid, though, but not by them. They also get paid a percentage of the sale. For a buyer, it makes sense to use a realtor because it is a free service for them.
As an example, a home sells for $100,000. The buyer pays that amount and nothing more, but the buyer doesn’t get all of it. First, the agent’s fees come off, and they get the rest.
Some people selling their homes can save the fees by marketing the home themselves. The only problem is that they will not have their home listed through the power of a broker and MLS and won’t have help with negotiations or contracts, not to mention someone promoting your home and having open houses.
What Is the Commission?
Here are the most common payment and commissions structures in Canada.
- Fixed Percentage: Where the percentage rate stays the same for the entire sales price
- Split Percentage: The percentage scales back after the first $100,000
- Flat Fee: A fixed commission fee, regardless of the sales price
- Fee For Service: This is fee-based on the agent’s work, like listing, marketing, and having an open house. It can be a percentage or flat fee.
In Canada, commissions vary depending on the province you live. It also depends on the agent. The standard rates are between 3% and 7%, and both agents will usually split this equally. This is for the first $100,000. For the rest of the purchase price, the amount is between 1% and 3%.
These rates are not fixed, but most realtors stick to them in hot markets. Some brokerages market themselves as 5% realty or 2% realty, etc. This is a way to attract more business, but as with most things in life, you get what you pay for. You may not get all the services of a higher-rate company, and because of the lower pay structure, real estate agents want faster turnover. This means the potential to rush sales. Also, they won’t attract as many buyers because most agents want a bigger commission than 50% of 3%.
A home selling for $1,000,000 in Vancouver or Toronto will have a commission of $30,000 to $70,000. It adds up quickly in these popular markets, so going with a cut rate broker can be more attractive.
You can also negotiate a lower commission rate with your realtor, but again, it is up to them and in a hot market, they aren’t desperate for listing. They also prefer not to reduce their fees while providing the same level of service. They can stabilize their income through a real estate commission advance, ensuring their month-to-month earnings are consistent.
Other Options
Besides a for-sale-by-owner transaction, there are other ways to buy and sell the property. Online brokerages use two different models;
- Buy Before You Sell
- Fixed Fee
Buy Before You Sell
With this model, There is an agreed-upon sales price, and the seller pays a service fee to the broker. This percentage is around the same as traditional agent fees but covers extras like:
- Staging
- Cleaning
- Home inspection
- Photography
But it doesn’t stop there. They list it for sale, and if it doesn’t sell within 90 days, they buy it themselves. This takes the worry over whether you will sell and allows you to proceed with finding a new place, knowing what equity you will have. The only downside is the potential lower set price. In a hot market, you may be able to negotiate a better price.
Fixed Fee
A fixed fee is exactly how it sounds. The brokerage charges a flat amount, regardless of the listing or final sale price, and they assign a realtor for both the buyer and the seller that is local and knows the market. It is a more cost-effective model and saves everyone money, and the rate is the same regardless of how inflated the market gets.
Now you understand how real estate commissions work. Agents make good money but work for it, and their trade is very competitive. And because of the great work they do for us, we realize our dreams of home ownership.
