A settlement in a U.S. lawsuit could upend the cornerstone of real estate industry: commissions
The cost of selling a home in the United States may be about to change dramatically.
A real estate trade group has agreed to a landmark deal to drop what was once a cornerstone of the industry: the six per cent sales commission paid to agents.
In Canada, two lawsuits filed against various real estate bodies want the courts to come to the same conclusion and force wholesale change in the way Realtors charge their fees when a home is sold.
“We got here by a cartel of brokerages and real estate associations that control the rules, and they’ve done it for a very long time,” said Garth Myers, a litigator with Toronto law firm Kalloghlian Myers.
He filed the proposed class-action lawsuits in Federal Court on behalf of plaintiffs who allege that the Canadian Real Estate Association, the Toronto Regional Real Estate Board and several local brokerages and franchisors conspired to set fees and illegally drive up the price of real estate commissions.
At the heart of both the U.S. and Canadian cases is the opaque way in which real estate agents charge their fees.
Lawsuits revolve around Competition Act
In Canada, there are different fee structures in different jurisdictions. In Ontario, for example, a commission of five per cent of a home’s sale price is split between the buyer’s and seller’s agents.
With the average price of a Toronto home at $1,225,000 last month, Realtor fees would amount to $61,250.
In Vancouver, Realtors charge seven per cent on the first $100,000 of the sale price, and between 2.5 and three per cent on the balance. So agents would split between $29,500 and $34,000 in fees on a $1-million home.
In the U.S., agents generally charge a commission of five or six per cent.
But what is common among those different jurisdictions is that the fee paid to the buyer’s agent is baked into the price of the home, while a seller can negotiate with their agent and get a better fee.
A potential buyer can look up the details of a home on something called the Multiple Listing Service (MLS). The listing includes everything they would want to know about a property — from size and taxes to upgrades and amenities — but it doesn’t disclose the amount a buyer will pay in Realtor fees.
Myers said the existing system enables agents to steer clients away from homes that aren’t paying the full commission.
“It’s clear to us that consumers are being ripped off, it’s clear to us that the rules elevate the cost of buyer brokerage commissions,” he said. “Now the open question that the court is going to have to resolve is whether this is criminal conduct under the Competition Act. And that’s what we’re fighting about in court.”
It will likely take years before the cases are resolved.
A landmark legal settlement is upending the U.S. real estate market. CBC’s Peter Armstrong breaks down the possible ripple effects for home buyers and sellers in Canada.
U.S. industry pushes back
In the U.S., there is already fierce disagreement over what the court settlement — which ends legal claims from home sellers over real estate commissions — actually means.
On March 15, the day the $418-million US settlement was announced, the National Association of Realtors said fees have always been set by the market, not by collusion among agents. Besides, the group said, those fees have always been negotiable.
“Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers,” the association said in a statement outlining the broad points of the agreement.
Since then, high-profile brokerages have pushed back against the notion that the industry will be forced to change as a result.
“Since the settlement announcement, there have been numerous articles and stories in the media on what this means for buyers and sellers,” Budge Huskey, president and CEO of Premier Sotheby’s International Realty in Naples, Fla., said in a statement released on Tuesday.
“Regrettably, most reflect a profound lack of understanding of the real estate business as well as mistaken claims.”
Huskey said the notion that sellers will no longer pay a fee to the buyer’s agent is simply false.
“There has never been any obligation for a seller to pay buyer agent compensation at any time, yet it has been a historical practice that’s worked exceedingly well since the advent of modern residential real estate,” he said.
Realtors in Canada, such as ReMax, aren’t saying much publicly while the cases work their way through the courts. A spokesperson for the organization would only say that “we do not comment on ongoing litigation.”
U.S. reaction watched closely here
“It’s important to note the litigations in Canada and the U.S. occur in different legal and factual contexts, and the litigations are at a much earlier stage here in Canada,” the Canadian Real Estate Association said in a statement to CBC News, adding that “we’ll continue to review U.S. developments.”
The statement goes on to say that buyers and sellers in Canada “have always been able to negotiate commissions with their agent…. On the buyer side, buyer representation agreements are required in at least seven provinces in Canada. These agreements set out terms like services and fees between an agent and their buyer. This represents more than 80 per cent of homes sold in Canada.”
Real estate experts on this side of the border have been watching the U.S. reaction very closely.
Murtaza Haider, a professor of real estate management at Toronto Metropolitan University, said the two systems are so similar that he believes the court cases here will lead to the same outcome as those in the U.S.
But, he said, people should temper their expectations.
“We won’t have a system blow up. It’s basically giving the buyer the rights to negotiate with the agent, a commission for the services they may or may not use,” Haider said.
Down the road, he imagines a system where some buyers pay an agent a full commission to help them find a home, figure out a price and close the sale, while others will simply need someone to help them file the paperwork.
Haider warned that there may be some unintended consequences to changing the system. Currently, he said, the fee paid to both the buyer’s and seller’s agents is essentially included in the price of the home. Fees are not an extra closing cost outside the home price.
“Right now it’s baked into the mortgage amount, so you don’t have an out-of-pocket policy. But [if you] have the flexibility and freedom to negotiate, that amount [may be] coming out of your own pocket right away,” Haider said.
