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Understanding Real Estate Commission


Not that long ago when you wanted to sell your home you basically had 2 options; use traditional real estate (and pay the high commission fees) or sell For Sale by Owner (FSBO). Today, you have many more options when selling your home. There are more "discount commission" brokers offering lower rates and with changes in industry regulation, you can list your home on the MLS (Realtor.ca) without having a realtor represent you.

In the majority of real estate deals the buyer and the seller each have their own realtor. When the property sells the commission paid by the seller is split 50:50 between the two realtors involved in the sale. The commission you pay is specified in the contract you sign when you list your property with the realtor. Note that you also pay tax (GST) on the commission you pay. Many realtors say that commission is "negotiable" but generally speaking each real estate company (brokerage) has it's "standard" commission agreement.

Things have changed, you have more options today... but more options generally results in more complexity so it is important that you understand your options and the costs involved. Below is a general description of the different scenarios and a few charts to help you approximate the costs involved.

Scenario 1: The Traditional Commission Real Estate Deal

Ten years ago if you wanted to sell with a realtor this was the dominant option. Generally speaking the commission rate is 7% on the first $100,000 and 3.5% on the remainder. This obviously puts more weight on the first 100K (and the $7,000 in commission) since the majority of sales are considerably more than 100k. Most of the large/traditional brokerages still use this model (or something close to it).

Scenario 2: Discount Commission Brokerages

This model is growing in popularity. There have always been "discount brokers" but they have started to make a dent in the traditional model recently. Consumers feel that the commission rates are far too high and are looking for alternatives... this is forcing a shift in the industry. The commission structure is simplified and varies by percent, there are 1%, 2% and 3% options. These percentages are applied to the entire sale price and don't take a bigger chunk of commission on the first 100k. The most popular currently is the 3% realtors. The 3% companies are putting a lot of pressure on the "traditional" companies and it may be that a flat 3% will become the new standard in the industry.

Scenario 3: For Sale by Owner (FSBO)

You can avoid the whole realtor/commission/etc all together by selling FSBO. The internet dominates all the advertising tools available so if you can get your property on the internet and get potential buyers viewing your property you have a good chance of selling without having realtors involved and without paying any commission.

This is OKHomeseller's main business... selling FSBO works... see our stats and testimonials.

Scenario 4: FSBO on the MLS

OKHomeseller offers this option as an "add-on" to our existing packages. See this page for more info....

In this scenario you pay a flat fee to have your property listed on the MLS (this is also called a "Mere Posting"). The brokerage/realtor that lists your property on the MLS does not represent you as the "selling realtor". Anyone interested in more information about your property or would like a showing deals with you directly. Your listing is shown on the MLS/Realtor.ca just like all the other listings.

Note that a licensed brokerage/realtor is the only person allowed to add listings to the MLS (neither OKHomeseller or the general public are allowed to update the MLS directly). Most real estate brokerages you are familiar with will not offer the flat fee MLS option since it undermines their business.

There are really two options when you list FSBO on the MLS. The first is where you just want the exposure of the MLS but are not willing to offer any commission to a realtor that brings a buyer. The second is where you play the commission game and are willing to get a realtor involved (the buyer's realtor). Each has their benefits and drawbacks.

Scenario 4.1 - Flat Fee MLS with no commission offered

In this scenario you decide to offer no commission to a realtor that brings you a buyer (technically, you are required to specify a minimum commission of one dollar). Most people use a realtor when buying a home but because there is no commission offered, a realtor would have no reason to show his buyer your home. Therefore you are hoping that someone that is not using a realtor will find your home on the MLS/Realtor.ca and contact you. That is the situation that works best in this scenario, you avoid paying commission. The drawback is that you are limiting yourself to buyers that aren't using a realtor.

There are some caveats to this explanation; some buyers using realtors will pay the realtor themselves if they really want your home, also it does depend on the amount of the offer compared to your bottom line. It's up to you but it might make sense to specify that you are willing to work with realtors with legitimate buyers.

Scenario 4.2 - Flat Fee MLS with commission offered

In this scenario you are attracting buyers that are using realtors (and buyers that aren't using a realtor). There is no rule about what that commission amount has to be (except that it has to be at least one dollar). You can make the commission a flat amount (1000, 2000, 5000, 10000 dollars) or you can make it a percent of the selling price (.5%, 1%, 1.5%, etc). If you try to save money and offer a very low commission the realtor won't be interested and you'll end up in practically the same scenario (4.1) discussed above.

Recall that in scenarios 1 and 2 the total commission is split between the buying and selling realtors. You are substituting for the selling realtor, if the buying realtor gets what they consider "normal" commission then they will be more willing to show your property to their interested buyers. Don't forget that the realtor has considerable influence over the buyers choice.

It would then make sense that half of 3% or 1.5% of the selling price would be a reasonable commission to offer a buyer's realtor if you want to attract buyers using a realtor (but you can offer less).

Note: the charts below show the cost of the MLS Flat Fee option to be 599.00, our current price is 499.00.

200,000 Selling Price (approximate costs involved)

Real Estate Commission Charts

450,000 Selling Price (approximate costs involved)

Real Estate Commission Charts

700,000 Selling Price (approximate costs involved)

Real Estate Commission Charts

Summary:

In today's market there are many options for selling your house, like most businesses that provide a service the real estate industry is changing. Being aware of your possible choices and the trade-offs helps you to decide which option works best for you. If the 3% "discount" realtors continue as they are the industry standard may change... but as you can see 3% is still a significant amount of money when you compare it to selling FSBO. The nice thing is that you have flexibility - for example - you may decide to go FSBO Only and see how that goes, knowing that you could add the MLS option later if needed.

This document discusses your options and can be used for reference to understand the possible choices, it is written in general terms and is not "gospel". Whatever your choice be sure to enlist the services of a real estate lawyer or notary to help you through the selling process.



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The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA.



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