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Curious about how real estate commissions work? Here are answers to some of the most common questions Ontario home Sellers ask:
Q: How do real estate agents get paid? Real estate agents in Ontario earn commission, typically a percentage of the home's sale price, paid upon successful sale completion. If the home doesn't sell, the agent isn't paid, reflecting a true pay-for-performance model.
Q: How does real estate commission function? Commissions in Ontario are usually paid by Sellers, split between the listing agent (representing the Seller) and the buyer's agent (representing the Buyer). Commission structures vary, including percentage-based, fixed fees, or a combination. In Ontario, we see three different types of real estate commission:
- A portion of the sale price, such as 5%.
- A set amount, like a flat fee of $20,000.
- A blend of a percentage (e.g., 4.5%) and a fixed fee (e.g., $5,000).
Q: Are there restrictions on commission structures? Ontario's Real Estate Council prohibits sliding scale commissions based on sale price differences, ensuring fairness and transparency.
Permitted: Charging 3% on the initial $300,000 and 2.5% on any amount exceeding that. Not permitted: Charging 2.5% on the initial $300,000 and 3% on the remainder.
Additionally, basing commission on the difference between the listing price and the sale price is not allowed. For instance, if a home is listed for $800,000 and sells for $850,000:
Permitted: Charging 2.5% on the sold price of $850,000 Not permitted: Charging 2.5% on the listing price of $800,000 and 3% on the additional $50,000
Q: Who receives the commission? Commissions go to the listing brokerage, not directly to the agent. Legal procedures handle payment from Seller proceeds at closing. A real estate agent should never request payment directly from you.
Typically, the seller’s real estate lawyer deducts the commission from the funds received from the Buyer upon closing and pays the listing brokerage directly. The brokerage then distributes the appropriate shares to both the listing agent and the buyer’s agent.
Q: Is commission negotiable? Commission rates are negotiable, often offering different packages or incentives based on service levels and client needs.
Q: Do Sellers pay HST on commission? Yes, like other professional services, real estate commission is subject to HST.
Q: When is commission paid? Commission is due at property closing, transferring from Seller to brokerage to agents involved.
Q: How can Sellers save on commission? Various commission models exist, but consider overall sale outcome when opting for discounted services.
Q: I want my agent to be motivated to sell my home for as much as possible. What can I do? When commission is based on a percentage of the sales price, an agent is naturally motivated to sell the home for the highest possible amount—the higher the price, the more the agent earns.
Dedicated real estate agents understand that their long-term success depends on their reputation and a satisfied client base. They aim for 5-star reviews and referrals from happy clients. For top REALTORS®, this is the best motivation to ensure they work hard to get the best price for your home.
Q: How much is the Buyer's Agent's commission? The Seller determines the commission amount offered to the agent representing the Buyer, known as the ‘cooperating commission.’ This commission is pre-determined to motivate other agents to sell the home.
Pro Tip: To attract buyer agents to show and sell your home, it's wise to align the cooperating commission with what other Sellers are offering. To further incentivize REALTORS, consider offering a higher commission than nearby Sellers. Offering a lower commission might result in agents being less motivated to sell your home. If the commission is a carrot, do you want to offer the smallest one?
Q: Do Buyers pay commission? Typically, Sellers cover commissions, but exceptions occur in FSBO or discount brokerage scenarios, where Buyers may negotiate or adjust sale prices accordingly. For example with a FSBO:
1 – The Buyer’s agent negotiates for the Seller to pay them, even if it wasn’t initially offered.
2 – The Buyer pays a commission to the agent directly. The amount of any commission that might be owed in this situation is outlined in the Buyer’s Representation Agreement.
3 – The Buyer’s agent negotiates a sale price that is proportionately lower compared to similar properties where both agents were paid commission. For example, if a home is listed on the MLS by the Seller for $850,000 and they are offering $1 commission to the Buyer’s agent, while nearby comparable properties have sold in the $850,000 price range and offered 2.5% commission to the Buyer’s agent, adjustments will be made. It's important to remember that the sold prices of comparable properties include the commission paid for both agents' work. While a For-Sale-By-Owner may have done the work of the listing agent, they didn't do the work of the Buyer’s agent. A savvy Buyer’s agent will adjust the prices of the comparable homes (by 2.5% in this example) to reflect that and negotiate a lower price. The Buyer pays a 2.5% lower price for the home to the Seller plus 2.5% directly to their agent, thereby paying in total the same as the comparable homes.
Got more questions? Contact The Durham Life for expert advice on real estate commissions!
