Let’s start with a fact: real estate commissions in Calgary are not standard.
In Calgary, the most used model is 7/3. This means a seller pays $7,000 on the first $100,000 and 3% on the balance. If a house sells for $400,000, that means $7,000 for the first $100,000 plus 3% on $300,000. That is $7,000 plus $9,000 equals $16,000. This commission will most often be split in two. Usually it is 50% for the selling agent and 50% for the buying agent.
Because every realtor is associated with a brokerage, this commission must be paid to the brokerage of the selling agent. The commission is never paid directly to the realtor. The seller pays the commission directly to the selling brokerage, and the selling brokerage pays its portion to the buying brokerage. Both brokerages deduct the commission with any brokerage and administration fee before they pay their representing agents.
Payment terms must be in writing for both buying and selling
A seller signs a listing contract. It clearly indicates the commissions owed to the selling agent (again, officially the brokerage of the selling agent). This listing contract also states the commission paid to the buying agent (and again, officially to the buying brokerage).
Buying fees are laid out in a service agreement
Buyers must sign a service agreement. This agreement can be called a buyer brokerage agreement and is mandatory since July 2014. This service agreement explains all the duties of the brokerage and its buying agent, so these are clear to the buyer. Also, the fees are clearly laid out in this agreement, so the buyer knows exactly what the buying agent charges.
In Calgary it is most common that the seller pays the fees for the buying agent. To say it in the official way: the seller pays the commission to the selling brokerage and the selling brokerage pays the commission to the buying brokerage. After that, the selling brokerage pays out the selling agent and the buying brokerage pays out to the buying agent, after deduction of brokerage fees. Money never flows between agent and agent, but always between brokerages.
In Calgary it is most common that the seller pays the fees for the buying agent
What if the seller doesn’t pay full commission?
As a buyer in Calgary, you must understand what happens if a seller does not offer the ‘full’ commission to the buying agent. For a buyer a few scenarios are possible:
- You as the buyer must pay the buying agent for the shortfall in commission.
- The buyer can ask the seller for the shortfall and write this as a term in the purchase contract.
- The buying realtor will cover the difference.
As a buyer, you must understand the intention of your buying agent when there is a shortfall in the commission. Every MLS listing states the offered commissions to a buying agent. In our opinion many buying agents skip showing those properties of sellers who don’t pay ‘full’ commission. A good buying realtor will call the selling agent before the showing to inquire if the seller is potentially prepared to pay full commissions. Our experience shows that many sellers are prepared to pay full commission once you ask. Alternatively, the agent can make that call before s/he actually puts in an offer. Either way, you as the buyer must be informed beforehand when the seller offers less commissions than what the buying agent charges.
The listing contract states the commission paid to the buying agent
Thus, in accordance with the above explanation, any seller can understand the importance of offering ‘full’ commission to a buyer’s agent. It is a fact that realtors can, (and in our opinion, many buying agents will), avoid showing a property. Officially though, buying agents are not allowed to turn down any viewings their buying client asks for. Obviously, fewer showings means fewer potential offers. Also, know that many buying agents still work with buyers who are not (yet) under contract with them and never signed a service agreement. Even though this service agreement is mandatory, some realtors may take a chance that their buyer will actually make a purchase. The buyer signs this service agreement at the time of writing the actual offer.
Negotiating your fees with your realtor
As mentioned, realtor fees are not standard, and can be negotiated. Here are four scenarios, and you can select whichever one you prefer:
- The Realtor charges full commission, which is considered 7/3 by most in Calgary, and is regarded by some as too expensive.
- The Realtor cuts fees because you negotiate them, which may mean the agent is a poor negotiator who can’t even negotiate his own fees. How will this agent negotiate on your behalf?
- The Realtor cuts commissions because s/he has a job on the side. We know many agents who work full time at another job, completing a few real estate transactions on the side. (Roughly 50% of all Calgary agents complete only 1 or 2 transactions a year!)
- The Realtor cuts his commissions, maybe because the agent is desperate and needs a paycheck. In our opinion, this is the most dangerous scenario for both buyer or seller!
All we can say about the 4th option is “RUN!”. A realtor in need of a pay-cheque rarely works out in your best interests. And here is why. Nearly all realtors will work with percentages. As an example, assume that your house is listed at $400,000. In the most common scenario of 7/3 this means you pay $16,000. Half of that commission goes to the buying agent, leaving $8,000 for your selling agent. But the $8,000 is paid only if the home sells for the full asking price of $400,000. In nearly all cases, buyers will negotiate on your asking price. (It obviously depends on the type of market).
- If your home sells for $370,000, the realtor gets $7,550.
- If your home sells for $380,000, the selling agent gets $7,700.
- And if the home sells for $390,000, the realtor gets $7,850.
Don’t pick a realtor who is desperate for a pay-cheque
The difference for the realtor is not that much, but for the seller it is a lot of money! Every $10,000 difference for the seller equals $150 for the realtor. For the realtor it is simple: take the $7,550 today, or s/he might get $0 tomorrow. There is always the chance that the home doesn’t sell.
The same goes for the buying agents. Don’t pick a realtor who is desperate for a pay-cheque. You will have to trust that your agent is working in your best interests. It is you, the buyer who determines how many homes you would like to see. Even today, we still talk to people who felt pressured to buy a home.
Some buying clients wonder how it is possible that we are paid a percentage on a purchase as well. After all, the higher the purchase price, the higher the commission. Technically that statement is correct. But percentage wise, it works the same as with selling commissions. Every $10,000 of the purchase price is $150 in commissions for the realtor. Trust in your realtor is important. With that trust comes a service agreement for a buyer to sign. Only then, do both buyer and agent know what to expect, and any surprises can be reduced.
If you would like to learn more about the service agreements when you are buying a home, feel free to contact us. We can email you a copy and explain to you how we like to work on buying a home.
Whether you think slammed real estate fees are the way to go will depend on your answers to the questions in the previous section. Agents who stand behind their fees and are not afraid to say what they are worth will never ever end up joining a discount brokerage…simply, because they don’t need to.
Many sellers don’t understand the commission structure that discount brokerages present
One thing that many sellers don’t understand is the commission structure that discount brokerages present. They advertise they only charge 1% for selling your house. However, on the buying side, you most often need to offer the full 3.5 /1.5 %. You only save a few dollars on the selling side. And the question remains: how does a discount agent work on negotiations for your home does when s/he only receives a fraction of the commission themselves?
In our experience, we did notice over time that some discounting agents tend to be busy. They have many listings because they are ‘cheap’. On several occasions we noticed that the discount agent was too busy to answer our questions. S/he simply didn’t answer the phone, our text message or email. In several instances, all our questions were answered via email and text in the middle of the night. We received responses at 1:00am, 3:30am… In real estate it is easy to make mistakes when you are constantly trying to work around the clock.
On the buying side, this discount agent will most likely ask for the ‘full’ commission of 3.5% / 1.5%. Also, the discount agent is obligated to have a service agreement in place. A smart buyer might try to negotiate on this buying commission as well, in the form of a refund on buying commissions. If the discount agent is generous on the selling side, s/he might be generous on the buying side as well.
Having said all this, without a doubt, there are people who are still happy with selling via a discount agent. Over the years, several discount brokerages have tried to get a foot on the ground in Calgary, but only a few seem to stay in business longer. The cost that realtors (and brokers) have must still be covered by commissions, otherwise there is no viable business model.
Other commission structures in real estate
The most common structure in Calgary is the 7/3 construction, but there are different options as well.
- A fixed percentage on the sale price; for example, 5% on the sale to be split between agents.
- A flat fee; the commission is one fee, for example $10,000, regardless what the home sells for
- A fixed fee per hour. Personally, we have never run into this structure, neither have we heard of agents working with this structure in Calgary.
In Calgary, we are not allowed to work with a structure where we get paid based on the difference of an asking price vs a sold price. For example, you sell your home and tell the selling agent you want $500,000 for your home. The realtor agrees to get you the $500,000 and whatever s/he sells it more for, is the agent’s commission. This is absolutely not allowed, by the Calgary Real Estate Board.