Last week, a Kansas jury found a national realtors association and some large real estate brokers guilty of illegally inflating real estate commissions. The decision is expected to shake up real estate broker fees in America.
Canada’s real estate market needs a shake-up as well.
Real estate broker commissions are generally calculated as a fixed percentage of the value of a home, while real estate prices have climbed far faster than inflation. This fee structure has allowed real estate brokers to walk away with ever larger commissions in absolute terms, while technology has decreased the broker’s workload for each transaction.
It is now possible for home buyers to handle much of the home shopping process themselves. They can use platforms like the Multiple Listing Service (MLS) to set their own search parameters, receive house alerts and browse home photos — all tasks that used to fall to the buyer’s agent to complete.
In a well-functioning market, you would have expected these changes to have led to decreases in real estate brokers’ fees. The fact that they haven’t suggests there are anti-competitive dynamics at play. Indeed, this was the crux of the US lawsuit’s claim.
One such dynamic is that the home seller pays the buyer’s broker, with the commission carved out of the home’s sale price. Since buyers aren’t paying the commission themselves, they have little incentive to negotiate a lower rate or find agents who are willing to take a lower cut.
Furthermore, the buyer’s commission is often pre-specified in a listing.
For example, the real estate brokerage RE/MAX notes in an April blog post: “The commission is pre-determined by the seller, the seller’s agent, and their brokerage. This means that the buyer can not negotiate real estate commissions.”
If a home seller did attempt to offer a lower commission, they run the risk that the buyer’s agent would steer the client to a house with a higher commission.
Another problem is disclosure, or lack thereof. While some may be familiar with agents’ commission structure, the absolute cost of the commission and the myriad other fees in a real estate transaction are not presented on online home listing sites. This lack of transparency further reduces shoppers’ ability to engage in price shopping and evaluate the true cost of a transaction.
These dynamics make a case for legislators to act. If they fail to, the courts may force their hands.
In September, a federal court ruled that a class action against the Toronto Regional Real Estate Board (TRREB), the Canadian Real Estate Association (CREA) and some of Toronto’s largest real estate brokerages could proceed to the certification phase.
Like the US class action, this Canadian claim alleges that the rules created by TRREB and the CREA “control” buyer commissions in violation of Canada’s competition laws.
The next step is for a court to rule on whether to certify a class of victims. The lawsuit seeks to have anyone in the Toronto region who paid a buyer commission when they sold their home in the past decade included in the action.
Of course, if successful, the case will have implications far beyond this class of sellers. It has the potential to make the home-buying transaction — the most expensive transaction most Canadians will ever make — more affordable for all Canadians.