Buying a home is likely going to be the largest purchase in your life. And when you sell, the real estate commission is likely going to be the biggest fee you’ll ever pay in your lifetime.
The Canadian Real Estate Association (CREA) reported that there were 58,645 homes sold in August—an increase of 33.5% vs. a year ago. That was close to July’s 62,355 sales, which was the highest level of sales in history, driven partially due to a jump in demand that would have happened earlier in the year had it not been for the COVID-19 pandemic.
The average selling price of a resale property in August jumped 18.5% over the last 12 months to $586,000, which was also a record. However, keep in mind that the average is heavily influenced by prices in the Greater Vancouver Area and the Greater Toronto Area (GTA). Still, the commission you’ll have to pay when you sell is significant.
What are commissions and who pays them?
A commission is a fee you typically pay to a real estate agent to list the property as well as to the agent who represents the buyer. That commission may or may not be split evenly between both agents.
But you don’t always have to pay all of the commission. For example, the Real Estate Council of Ontario notes that buyers should confirm the arrangement with their own agent before making an offer.
If the home isn’t sold, neither agent gets paid. The real estate brokerages they work for won’t get a cut either since agents typically have to share a percentage of the commission with their brokerage.
Commission rates in Canada
Real estate commissions vary between 3% and 7% of the sale price, but there’s really no set rate. According to CREA, members adhere to a code of conduct that states: “Commission rates or fees members charge for services offered to the public, and the division of those fees among cooperating members, are solely the choice of those providing the services.”
Here are a variety of ways that commissions are calculated:
- Fixed percentage of the sale price—This is the most common type of commission you pay.
- Split percentage of the sale price—This is where the percentage decreases as the sale price rises. For example, the commission for your agent may be 2.5% on the first $500,000 and 2% on anything above that rate. For example, in Ontario, the percentage rate isn’t allowed to increase if the sale price also increases. It’s only allowed to stay fixed or decline.
- Flat fee—The fee is the same for every seller, even if one home sells for $300,000 while another sells for $3 million.
- Fee for service—You might agree to pay a flat or hourly fee for listing and marketing the property, holding open houses, and having brochures printed.
- Combination of fees—You may pay a flat fee plus additional fees for other services.
The commission comes out of the proceeds of the sale and isn’t added to the final sale price. Since the sale of real estate is considered a service, commissions also subject to GST or HST—depending on your province or territory.
While you typically pay the commission, you could argue that the buyer is also contributing because they’re the one purchasing the home.
To calculate a commission, let’s use the GTA as an example. In August, the Toronto Regional Real Estate Board (TRREB) reported that the average sale price of a home in the GTA was $951,404.
If the commission is a fixed percentage of the sale price, a 5% commission (2.5% for each agent) on a $951,404 home is $47,570.20. Including HST, the total is $53,754.33.
Remember that the commission isn’t the only expense when selling a home. There are also legal fees and possibly a mortgage discharge penalty. However, the buyer typically has a greater variety of hidden costs they have to pay.
The power of negotiation
What many sellers don’t know is that commissions are up for negotiation. A reduction of one percentage point can save you thousands of dollars. Remember that $951,404 home? A 4% commission is $38,056.16 or $43,003.46 including HST. That’s a savings of more than $10,750.
You should discuss with every agent you meet if they’re flexible with their commission, but don’t expect them to work for free since they also have to give a portion to the brokerage. Not all agents will want to negotiate, but you won’t know unless you try.
Many agents will charge a percentage of the sale price as their commission. If you choose an agent from a traditional real estate brokerage, you will usually pay a fixed percentage. However, you can ask to reduce certain services, such as marketing or home staging, to help lower your overall costs.
There are also discount real estate brokerages that will charge a flat fee. You can shop around for the best rate that suits your budget.
The “for-sale-by-owner” route
Another alternative is to sell the home on your own. By choosing this option, you can save tens of thousands of dollars by not paying a commission, but you also have to do a lot more work.
If you decide to go this route, you should get an appraiser to help you value your home and pay a flat fee to a broker to get your property listed on the Multiple Listing Service (MLS), a database of properties available for sale. You will also need a lawyer to help you with the paperwork.
Instead of paying a huge commission, you can use the money saved to help fund your retirement, renovate your next home or even buy an expensive car.
The final say
The number one cost of selling your home is the commission. Negotiating with your agent can save you thousands or tens of thousands of dollars. There’s also the option to find a brokerage that charges a flat fee, or you can sell the home yourself. There are pros and cons to each, but the choice is yours.
This post has been updated.