How Real Estate Commissions Work
Real estate professionals earn a commission as compensation for their work in either helping a homebuyer purchase or sell a property.
These professionals are referred to as real estate agents, realtors, or brokers.
While there are clear distinctions between them, they can all support individuals looking to buy or sell a property.
In Canada, real estate commission fees are structured in various ways:
- Fixed percentage: This is the most common commission structure. Agents receive a certain percentage based on the home’s selling price.
- Flat fee: Under this model, agents earn the same fee regardless of the home’s selling price.
- Split percentage: This is where the fee drops as the price of the home increases. For example, an agent might earn 3.5% on the first $400,000 and 1.5% on any amount higher than this price.
- Fee for service: Under this arrangement, the agent charges the client a flat fee for their services or bills them hourly. As a result, the cost can vary based on clients’ needs.
Commissions are generally contingent on the successful close of the transaction.
Once both parties finalize the deal, the selling agent collects their commission, which they share with the buying agent.
Did You Know?
Some real estate brokers offer a Guaranteed Sales Agreement, which means they’ll purchase the property from you if they fail to sell it within a predetermined time frame.
Who Pays the Real Estate Commission?
When it comes to real estate transactions, the buyer doesn’t pay their agent, nor the seller’s agent, any commission.
It’s the seller who pays the commission to both agents.
The fee is ultimately an expense that reduces the amount the sellers receive from the sale of their property.
While it doesn’t seem like the buyer has any out-of-pocket costs, there is a cost that is charged indirectly.
Since the commission is embedded in the sale price of the home, it can be argued that the buyer is paying a higher price to acquire the property than if no agents were involved in the transaction.
Here’s an Example
Suppose that you’ve hired an agent to assist you in selling your home in Ottawa.
This agent charges a 5% commission based on the property’s closing price.
After a couple of weeks, the right buyer comes along with their agent.
After negotiating with them, you settle on a price of $425,000.
As the seller, you would receive $400,987.50 in net proceeds from the sale, or close to 95% of the selling price.
You’d pay your agent a commission of $24,012.50 ($425,000 x 5% + 13% HST), who, in turn, would split it equally with the buyer’s agent.
So in essence, the selling agent receives 2.5% and the buying agent receives 2.5% of the initial 5% commission charged to you as the seller.
Now, let’s assume you’re the buyer in the above scenario.
In that case, you would pay the seller the full negotiated price of $425,000 – you do not pay your agent who helped to purchase the home a commission on top of this amount.
Double-binding is a practice where a single agent acts on behalf of the seller and the buyer. It’s legal everywhere in Canada except British Columbia.
How Much are Real Estate Commission Fees?
Estimating commission fees can be tricky.
Rates vary based on numerous factors, such as the real estate brokerage you potentially hire, the amount of time and resources your agent devotes to marketing your home, and your location.
However, the more comprehensive the level of service you request, the more you can expect to pay.
There aren’t any set industry or government standards that regulate commission fees.
As a result, real estate professionals are free to charge what they deem reasonable, based on the level and quality of services they provide.
This sentiment is embodied in the Canadian Real Estate Association’s (CREA) Pledge of Competition.
That being said, it’s not uncommon to expect a commission fee of 5% – 7% of the property’s selling price, especially if you live in one of Canada’s major cities.
In Alberta, real estate professionals typically structure their commission fees using a split percentage method: 7% for the first $100,000 of a home’s price and 3% on anything above.
Wally Fakhreddine, an Edmonton-based realtor, explains this commission structure in detail here.
Real estate agents in British Columbia utilize similar split percentage models.
For example, Mike Stewart charges a 7% commission on the first $100,000 and 2.5% on the remaining amount.
In Ontario, it’s common for sellers to pay, on average, a 5% commission on the successful sale of their home.
If you’re not inclined to pay the above rates, you might want to consider a low-fee real estate brokerage.
For example, One Percent Realty charges a $7,950 flat-fee for homes under $700,000 and 1% plus $950 for homes over $700,000.
Did You Know?
Some real estate agents offer part of their commission as a cashback rebate to the homebuyer to build their reputation and acquire more clients.
Are the Fees Negotiable?
As a seller, you can negotiate the amount of the commission fee with your agent.
It’s wise to determine precisely what level of service from the agent will suffice in getting your home sold and factor that into your total cost.
There might be expenses you can avoid.
Be sure to also account for the agent’s depth of experience.
If they’re highly skilled at what they do, with an extensive client base, whittling down the fee could be a challenge.
Frequently Asked Questions
- Do Realtors split the 6% commission?
In Canada, it’s standard practice for the buying and selling agent to split the 6% commission (or any commission) equally. However, the agents might agree to an alternative arrangement in some instances. For example, the selling agent could offer a higher percentage to the buying agent as an incentive to find a potential buyer quickly.
In cases where there’s no buying agent, the selling agent will keep the entire commission.
- Why are real estate commissions so high?
Real estate commissions can be costly for two reasons.
Firstly, they incur considerable costs in marketing your home to prospective buyers. These include marketing and advertising the property, arranging professional photography, spending time holding open houses, negotiating offers, facilitating meetings with potential buyers, and completing documentation. Their clients don’t directly reimburse them for these expenses should their property fail to sell.
Secondly, real estate agents must cover a wide range of operating costs, such as office rent, general advertising, insurance, and professional association fees. Hence, the commissions they charge need to sustain their entire business.