Real estate rules protect agents instead of clients
It's time for serious overhaul of system, says
Canada's residential real estate industry is broken. Case in point? A B.C. couple is on the hook for $52,500 in real estate commission fees for a home sale that never even happened.
When did the industry lose sight of why it exists in the first place?
Unfortunately, the situation the Armstrong family find themselves in is a blatant example of the inflated and hidden fees real estate agents charge in B.C. and elsewhere in Canada. It's also a reflection of an industry that is clinging to outdated regulations that protect agents instead of their clients.
In this case, it makes absolutely no sense that the trigger for the Armstrongs to pay the selling agent's commissions is tied to a binding agreement instead of an actual sale, exchange of money and title transfer.
It is time for a major overhaul of the real estate commission structure in Canada.
Let's not waste our time debating weak policies that have no substance. The federal government's proposed policy to end blind bidding is good in theory, but doesn't work when, as we've seen in Ontario, agents are allowed to choose if and when they reveal multiple competing offers.
At the heart of the matter are two major issues the real estate industry needs to address: transparency of how fees are collected, and the misalignment of incentives for real estate agents.
The current percentage-based commission structure incentivizes buyer agents to only show homes with a high price tag and encourages buyers to bid higher. And yet, most consumers are under the impression hiring a buy agent is free.
Having seller agents collect and pay buyers' agents' fees is archaic, opaque, confusing, and is contributing to the spiralling cost of real estate in Vancouver and many other Canadian cities.
We need Canada's real estate industry to step up and admit our system is in desperate need of modernization and alignment with consumer interests. Canada has the highest house price to income ratio of the G7 and our expensive and inefficient transaction system is a key contributor.
A good start would be adjusting regulations so that buyers pay buy agents directly for their understood services and let market forces and competition dictate the rates offered to buyers.
I also think the time has come for a flat fee versus a percentage-based commission for buy agents.
This would eliminate the misalignment of incentives, where an agent is paid more for persuading a buyer to pay more for a property. A flat fee isn't tied to the price of home, but rather, services rendered.
The prop tech industry in Canada is growing and agents are under significant pressure to evolve. Innovative Canadian companies are designing tech solutions that empower, rather than manipulate, consumers.
These apps and platforms provide more transparency, more data and easy online tools to facilitate the transaction. A significant and growing number of Canadians are ready, willing and able to fully control their home transaction experience, without an agent, while saving money in the process.
Consider this example:
Two competing offers on a $1-million listed property with five per cent paid in commissions, 2.5 per cent to the buy agent and 2.5 per cent to the sell agent.
Offer A, $1 million to the seller from an agent-represented buyer: $1 million — $25,000 sell agent fee and $25,000 buyer agent fee equals $950,000 net proceeds to the seller.
Offer B, $975,000 to the seller from a buyer without an agent: $1 million — $25,000 sell agent fee and $0 buyer agent fee means $950,000 net proceeds to the seller.
Which offer is better for the buyer? Both offers represent the same net proceeds to the seller, while the buyer presenting Offer B saves $25,000.
Other industries have modernized, applying thoughtful technology to automate the value of middlemen and their associated fees. Let's think about how travel, banking and investments have evolved. The real estate industry needs to catch up.
Changing the commission structure is a start. It would help provide transparency into how agent fees are paid and instil confidence and integrity in the home transaction process while improving home affordability for Canadians.