Is it Time to Pop the Hood on Real Estate Commissions?

What is it about Real Estate that encourages such a firestorm when it comes down to payment for services rendered? Why is it that REALTORS® face such scrutiny for charging commissions? Is it about the amount? Is it about the service? Is it that consumers feel that there is an inequitable gap between value and dollars paid?

Commerce, in its most basic form, comes down to providing a product or service in exchange

for some sort of compensation. In virtually every industry designed for profit, this is a common

practice, easily accepted and done both by consumers and providers of said service.

What is it though, about Real Estate that encourages such a firestorm when it comes down to payment for services rendered? Why is it that REALTORS® face such scrutiny for charging commissions? Is it about the amount? Is it about the service? Is it that consumers feel that there is an inequitable gap between value and dollars paid? Herein may lie the problem. The problem with concept of value in a transaction is that it is subjective and that varies depending on the context. There has been a concerted campaign on behalf of REALTORS® to help to articulate the value that they bring to the table, but perhaps this needs to go further, to help the public both understand the concept of value as it applies to

REALTOR® commissions, and how the mechanics of the industry themselves work.

With the introduction of more For Sale by Owner operations and private seller opportunities in the market place, it seems that now, more than ever, it makes sense to look at an industry from the inside out- and perhaps even raise the hood so that the public can look inside and see how the engine works. It doesn’t work in every instance, but usually the best way to correct misperception is through open communication and concerted re-education in light of the facts.

Optics are Everything
There could be many possible explanations as to why Real Estate, as an industry receives such scrutiny about commissions, but much can be tracked back to misinformation and consumer misperception about how the industry actually works, operationally. The truth is, there is much work done by REALTORS® without actually realizing a dime, and one could argue that it is this kind of work that keeps the machine running.
Robert J.Morrow, Editor: www.HamiltonHomeReview.com,Sales Rep, Chase Realty Inc, Brokerage says, “Commissions are a sore spot because perception is that REALTORS®are paid too much. Consumers see the "big" numbers when a house is sold and assume this is happening on a daily or weekly basis. In fact, the average agent sells only 8 houses a year,meaning all the rest of the time he/she is dealing with people who either don't buy, or is dealingwith houses that don't sell. When a house is sold, that commission often has to last weeks if not months.”

“Sure there are a few who close more deals than that but they are an elite few. Of course, it is these few that are focused upon when anyone decides to attack the industry. REALTORS®driving expensive cars, buying large houses, and travelling a lot seems to be frowned upon. Meanwhile, literally every lawyer worth his salt drives a minimum $60,000 car, lives in luxury, and travels extensively. The difference is that lawyers are seen as a necessity, whereas real estate agents are not.”

Nick Gewarges, Sales Representative, Right At Home Realty Inc agrees. He believes that many focus on “big picture” numbers without actually knowing how they really work in “the big picture”. The most common misperception about commission is the way that a consumer believes it is calculated. If a REALTOR®makes “2.5%” commission, they really only see a small portion of that for themselves. Commissions are quickly diminished once we factor in our marketing fees, cover the listing expenses we incurred, give our broker their portion, pay our National, Provincial, and local board fees, maintain our licences through continuing education, and so on.

”Seemingly, there is a fundamental misunderstanding and disconnect between consumer perception and reality, Laurin Jeffrey, Real Estate Salesperson, Century 21 Regal Realty says all dollars are not equal, in the sense that REALTORS®are not simply lining their pockets with the compensation that they receive- in fact far from it. “People think we are paid too much for what we do. But they only see the tip of the iceberg. They never see anything that goes on behind the scenes. They also do not realize that we are essentially self-employed and have to pay for all of our own costs. From advertising to business cards, flyers, signs, websites, feature sheets, mailings, cars, insurance, association fees, brokerage cuts and more. This is what you are paying for with the commission.”

Is There Such a Thing as a Free Lunch?

It’s not indelicate to suggest that you are in business to make money. You have a living to make and expenses to pay, in much the same way as the consuming public does, and in addition, many expenses fall on your own shoulders, as a self-employed individual.

Going back to the concept of applying context to value, if consumers had a better understanding of the operational side of Real Estate, the conversation may be less contentious, Says Karen Filice, Broker of Record/Owner, Cirrius Realty Inc., Brokerage: “People forget that nothing is free. If they were employed and their employer said we'll talk about money later and pay you only if we sell something; what do you think their reaction would be? But sellers and buyers feel that we as REALTORS®should "work" for them, do computer work, marketing, flyers, commit hours to showing them homes, driving them in our cars, using our gas and wear and tear, hours of open houses for zero dollars?

”Furthermore, there are several benefits that the general public receives as a by-product from REALTOR®commissions. REALTORS®pay into provincial, national and local bodies that lobby on behalf of the industry- and the public on matters of housing (e.g. lobbying to keep capital gains on a home tax-free, TREB lobbying to remove the municipal Land Transfer Tax etc). REALTORS® through commissions, have paid for, and set up much of the infrastructure for the distribution and access for information for real estate websites etc. So then, there is much to benefit from in theory, by the average consumer, without actually paying out anything all in commission.

Another common misperception is that groups like CREA and OREA are government bodies, funded by taxpayer dollars, which of course is not true.

The Future of Commission

With the marketplace evolving and private sellers taking their place in the market, and with continued threats from the Competition Bureau, what are the implications when REALTOR® commissions begin to erode- not just to an individual’s bottom line, but to the industry as a whole

Jeffrey says, “If the Competition Bureau succeeds in their witch hunt and persecution of us, then we have a problem. As the internet continues to intrude into our lives, people may feel they need us less and less. We need to make ourselves useful and as integral as possible. All of our associations need to wake up and get out there on the offensive. Once we are on the defensive, it will be too late.”

Morrow says that it is not just the commissions themselves that are eroding, it is the public perception of the necessity of the REALTOR®: ”Private sale franchises have something to do with this perception. By providing a forum for wannabe private sellers, they have eroded the perception of necessity. Everyone thinks they can sell a house themselves, and because it occasionally works, the theory is that agents are redundant.”
“Unfortunately, as statistics show, a very small percentage of homes sell this way, but the industry is not very quick to substantiate this, and private selling companies don't have to prove the statistics they throw around. Therefore, the misconception is that private selling is growing when in fact, it isn't. More people are trying it, yes. But, eventually, most them turn to organized real estate to get the house sold. For Buyers, organized real estate is leaps and bounds ahead of private search engines; access to data and ability to analyze it being primary reasons.”

Filice says that this is the new economic order in Real Estate, “This (Private Sellers) are a piece of constantly changing landscape. There will always be private sellers; there will always be REALTORS® The real question is how will they interact and how many will be left standing at the end of the day.” Essentially, if commissions continue to erode, the revenue will have to come from somewhere to fund the infrastructure and mechanics of the real estate industry in this country, and some have suggested that the industry may have to shift in the future to adopt things like paying for an open house, or paying to view a property online, many of which may be very poorly received

by consumers.

Solutions?

Again, and again, the refrain from REALTORS® is that there is a lack of understanding that has created a misperception, which has in turn cast a spectre over an industry.The option, if not to educate, comes down to discounting to stay competitive, which may work for the deal in hand, but has long term implications for the face of the industry.

Gewarges says,“We (REALTORS® are not doing a good job explaining these benefits and associated costs to our clients. Therefore, we often find ourselves in a position where we simply concede to a commission discount in order to not lose a deal. The natural repercussion of that is the fact that our services become a commodity, and as with any commodity, we have to sell more (at a discounted rate) in order to make any money. That ultimately leads to an immediate decrease in quality and will negatively impact the overall service we give to our clients. “

Morrow says too, that it is not enough to provide education to consumers about the industry.They have to actually answer the questions that the consumers are asking, not what they think they may want to know: “If the industry seems to be lacking in any area, it is in its inability to educate the consumer properly. We are so focused on rules and legal compliance that we didn't realize the consumer wasn't as interested in all that as we were. What they wanted was to save money, and we, as an industry, never seem to address that. We try to justify commission (rightly so) but fail to do it in a way that engages consumers en masse. I believe the future will bring a single commission--either to the selling or buying agent-for a single transaction. Our job will not be to sell a house but to put a buyer and a property together (a completely different angle to achieve the same goal). Laws may have to change to accommodate such a model but clearly the current one is not working well.” It comes down to education about the facts, and opening up the hood to show what’s inside the industry, not for the sake of transparency, or for the sake of justification, or for the sake of standing up for commissions. It is for the sake of understanding value as it pertains to commission made. Literally, helping people understand and apply the “bang for the buck”, beyond the intrinsic quality communicated through a theoretic communication of value.