How the Canadian Realtor system broke and why we are stuck with it
Public opinion of Real Estate Agents and associated professionals is at an all-time low. Instead of being a profession praised for helping people with the biggest purchase of their lives, they are put on the same footing as industries with predatory sales tactics such as car salesmen and multi-level marketing schemes. Why has this happened? The system that Real Estate Agents work under in Canada is outdated and broken.
I would like to note that individual Real Estate Agents are not to blame for this system. For the most part, they are just as much victims of this system as the rest of Canadians.
So, how did the system break? Well first lets describe how the system works. In a typical deal, Realtors are paid a percentage of the sale price of the home by the seller of the home. Even if they are hired by the buyer, the seller ends up with the bill. The first problem with the system in Canada, is that this pricing system is used pretty much across the country, regardless of the massively different housing markets. These markets, being massively different, have also changed in very different ways over time. The biggest change in these markets have been housing price inflation. In markets that have not seen high housing price inflation, the system actually isn’t really broken. It is the medium and high inflation markets where the problems lie. These increases in home value resulted in increases in Realtor sales commission which started off a feedback circle (it actually looks more like a triangle) that left us with the broken system we have now.
Lets go back in time, say 20 years ago. In most places across the country, you could buy a home for under $200,000. Even in Canada’s biggest cities like Toronto and Vancouver, the average home price wasn’t much higher than that. Using the typical pay structure for Realtors of the time of 7% on the first $100,000 and 3% on the rest: on a $200,000 home that means $10,000 of commission. Splitting that with the agent representing the other party and it is down to $5,000. Take off the brokerage fees, sales costs and franchise fees, likely the agent will be left with around $3,000 or even less. A decent and reasonable amount for what I would consider a VERY inconvenient job. Jump to now. Prices of homes have gone up substantially in a lot of housing markets across the country. These markets are where the system broke. Prices inflated faster than the free market could adjust the commissions for Realtors. While discount brokerages like 2% Realty have tried to adjust commission prices, big brokerages like Re/Max have been resistant. It is still very typical for people to pay 6% on the first $100,000 and 3% for the rest. On a $500,000 home (close to the current average home price in Canada), one agents half of the commission would be $9,000. After fees, they’ll still be looking at around $6,000. That is double, substantially more than the average wage increases in Canada during the same time period. Double, and the job has been made easier since then as well. With the rise of the internet and technology like 3D cameras, buyers usually do all the work finding the homes themselves and waste less time looking at homes that would not interest them. Even the photography that used to require expensive equipment or a professional is often just done with a smart phone. Logically, you would think this leads to a lucrative, high paying profession. Not exactly.
The dreams of massive commissions and a low barrier to entry to the profession resulted in a massive inflow of people looking to become Real Estate Professionals. Instead of only hiring the amount of Realtors required and vetting them for quality, brokerages turned the Realtor profession into a straight-up pyramid scheme. The end result was a ton of agents hitting the market that were motivated by money and not a passion for Real Estate. With brokerages hiring so many people, training for these new professionals was often garbage as well. The licensing courses do not cover anywhere near everything an individual needs to know either. This is not the kind of scenario that leads to high-quality, competent professionals. Brokerages and the Real Estate Boards didn’t care that much though, because every licensed Realtor also gets to pay hundreds of dollars in fees to them each month.
So, here we are with a saturated market of Real Estate Agents who are all getting charged hundreds of dollars in monthly fees and diluting the limited quantity of sales so much that many are lucky to break even. A majority of aspiring Realtors quit by their third year, only to be replaced by another with dreams of snagging those giant $20,000 commissions. Like all pyramid schemes though, the money made from these massive commissions still funnels to the top, with brokerages, real estate boards, and a very small percentage of the most successful Realtors (or “Team leaders” which is up a level or two on the pyramid scheme) raking in the cash. I imagine you’re thinking “Well with all these realtors out there looking for work, surely you must be able to negotiate the price”, and you absolutely should try to negotiate the price.
Negotiating is not as easy as it sounds though. Again, discount brokerages like 2% Realty are trying to lower their price to take more market share, but paying a lower commission has negative effects when selling your home. There are many reported cases of Realtors avoiding showing homes with lower commissions or pushing clients towards the higher commission homes. While this is unethical and breaks the rules of the real estate boards, it definitely still happens. To help avoid this, even brokerages like 2%, it is common to only trim the commission of the realtor you are hiring and offering the normal amount to whoever represents the buyer. These brokerages have also set out on misinformation campaigns to convince sellers that using a discount brokerage will get you less services (I am not referring to the listing brokerages like purplebricks where they do advertise less services for less, usually flat, fees). The combination of mostly under-paid agents and historical set norms for pricing telling them what they can charge has made negotiating tough. With not much negotiating strength, the end result is the circle restarted as prices continue to inflate and not enough pressure to bring them down.
Prices can’t go up forever, when will consumers finally say enough is enough? Well the Real Estate system is such a genius design that it specifically resists change. That is why, at least for now, we are stuck with this broken system. The current system resists change in two ways. They have a monopoly on previous sales data and their pricing only inconveniencing one side of the deal. Forcing the entire cost on the seller and making it essentially free for the buyer is an absolutely genius way to motivate people into hiring Realtors. Essentially free, and guarding all the data for previous sales, buyers really have no reason not to hire an agent. Most buyers having a realtor puts backwards pressure for sellers to get an agent as well or it is much less likely their house will be shown.
A home purchase is extremely high stakes and one mistake can ruin a persons life. Canadians deserve better than a glorified pyramid scheme to guide them through this process. Increasing the barrier to entry would be a good place for the Real Estate Boards to start, but they won’t sacrifice profits without pressure from consumers.