Are Real Estate Commissions Too High?

Have you ever heard that “Real estate commissions are too high and that REALTORS® are overpaid?”. Yeah, me too. So, are they?

I have been in the real estate business for about 17 years now and it wasn’t until about 8 years ago when I ran into a situation that made me stop and think about this question. It all started in a hot tub with a couple of friends. We had a mutual friend who was a Realtor and this person had just sold my buddy’s house and helped him find a new one. They gave him a break on the listing commission with the two transactions in the works, but kept the entire commission offered on the buyer’s side. After chatting about the transactions for a minute or two, my buddy says, “Pretty nice for them to make all of that money. I mean, you have to admit that Realtors are overpaid for the work they do.”

It took me a moment to respond, and I probably filled the dead space with one of my default remarks like, “Hmmm… that’s interesting…” in order to buy some time to think of something more intelligent to say. Then it hit me like a ton of bricks.

Real Estate commissions have been thrust into the spotlight again as CBC Marketplace just released a “hidden camera” report that caught Realtors in Ontario engaging in the illegal, anti-competitive practice of “Steering” their buyer clients away from homes that offered lower price commissions. In addition to this, CBC took this opportunity to try to make the case that Realtors were overpaid in Canada, compared to other marketplaces.

A little sidebar – As a Realtor®, if you have not watched this CBC Marketplace segment, then you need to stop reading this and take the 22 minutes required to watch it now. Here is a link – CBC Marketplace – Real Estate Secrets

Also, here is a video on my response and how to a Realtor can re-instill confidence in their clients mind

Now, back to the hot tub where I just had a moment of insight after my buddy has called out the industry where I have made my livelihood for almost two decades, as being “overpaid”.

What immediately occurred to me was this… Let’s pretend that the real estate industry didn’t exist and that along the same lines Realtors didn’t exist.

Someone has a house they want to sell for $500,000 and therefore, they need to find a buyer who has access to half a million dollars to purchase this home. After hearing about this person’s desire to sell their home, someone comes along and realizes they know a few people in their professional network who have access to this kind of money and may also be interested in a home like the one for sale. We will call this person “The Professional”. There is only one problem, The Professional has spent hundreds of hours and thousands of dollars to grow their network over time and build trust within it. With this in mind, The Professional contacts the seller and says something like this, “I see you have your home for sale and are looking for someone who has $500,000 to purchase this. I have a network of people with that kind of money. Would you be willing to pay me a finder’s fee if I introduce someone to your home and they purchase it successfully? You make $500,000 and I make, say, 2% of that?”

The same scenario could play out on the listing side of things. This same person desires to sell their home, but cannot be available during the day for showings, doesn’t know what disclosures are required to protect themselves legally, doesn’t have the skills or desire to prepare and market the home and much, much more. Then, along comes a different Professional who has the marketing ability, the technical knowledge of a transaction and all the other required skills, and says to the seller, “I can take over this entire process for you, pay for all the marketing costs and more, but in return, you pay me if we successfully complete the sale. You get your $500,000 and I get, say 2%”.

And just like that, the real estate industry is reborn.

This obviously leads to the next question and the title of the article, “Are real estate commissions too high?”

Given the examples above of a Professional who has a network of people with hundreds of thousands of dollars, and a Professional who can skillfully handle all the details of the listing process, there is already value established for the fees requested. However, the exact amount of these fees is always negotiable. There are no standard commission rates. There are certainly commission rates that are most common in specific marketplaces (Alberta is closer to 4% overall, Ontario is 5% and most of the USA is 6%), but you can always find Realtors or Brokerages willing to do it for less. The question is, what services and skill sets are you getting for the money charged?

This lack of a standard rate then puts the onus on the Realtor and their brokerage to define the specific value they offer and why a specific commission amount is being charged. Consumers are then empowered with the choice to hire someone, or not.

I don’t believe that Realtors, and the fees for their services, will go away in my lifetime. The fundamentals of why the services exist in the first place are too strong. The question that consumers should be asking of Realtors is not “Are real estate fees too high?”, but what services and skills are being offered for the money that is being charged? After all, almost all products and services have a range of price options that depend on the quality being provided. And believe me, there is a difference, and you often get what you pay for.

If you are a Realtor who is reading this, then it is up to you to be able to clearly articulate your value to the clients who pay your fee.