Real Estate Commission Explained
Updated: Dec 7, 2022
Wondering how real estate commission works? Below, answers to Ontario home Sellers’ most frequently asked questions
Q: How do real estate agents get paid?Real estate agents in Ontario, like many other sales professionals, get paid commission – typically a set percentage of the price of a home, paid upon the successful completion of the sale. When an agent works with a Seller and lists a home for sale, they take on the risk – they only get compensated for their time and out-of-pocket expenses if the home sells. If a home doesn’t sell, the REALTOR doesn’t get paid. Commission is the truest form of pay-for-performance: agents who work hard and hustle make more than those who put in minimal effort. Unlike most workers in Ontario, real estate agents don’t get paid a salary or for the hours they work. They don’t get paid if they’re sick or take a vacation; they don’t get paid overtime or for working on a statutory holiday; they don’t insurance benefits or qualify for EI or CPP Q: How does real estate commission work?Usually, real estate commissions are paid by the Seller and are split between the agent who represents the Seller (the ‘listing agent’) and the agent who represents the Buyer (the ‘buyer’s agent’). In Ontario, we see three different types of real estate commission: 1. A percentage of the sales price – eg 5% 2. A fixed or flat fee – $20,000 3. A combination of a % and a flat fee – eg $4.5% + $5,000 Real estate commission is contingent on a home selling – if a home is listed for sale and doesn’t sell, no commission is paid. Q: Are there any restrictions on how real estate commission is structured in Ontario?The Real Estate Council of Ontario (RECO) does not allow a sliding commission scale where the percentage increases as the price increases. Allowed: 3% of the first $300,000 and 2.5% of the remainder Not allowed: 2.5% of the first $300,000 and 3% of the remainder It’s also not permitted to base commission on the difference between the listing price and the sale price. For example, a home is listed for $800,000 and sells for $850,000: Allowed: 2.5% on the sold price of $850,000
Q: Who do I pay commission to?In Ontario, real estate commissions are paid directly to the real estate brokerage that listed a home for sale (the ‘listing brokerage’) – not the individual agent you are working with. A REALTOR should never ask you to pay them directly. In most cases, the seller’s real estate lawyer subtracts the amount of commission owed from the money received from the Buyer on closing, and pays the listing brokerage directly. Once received, the brokerage pays the listing agent and the buyer’s agent. Q: What is the standard commission in Toronto?There is no standard real estate commission – in fact it’s illegal in Ontario for REALTORS or brokerages to work together and ‘fix’ commissions. We’re not even allowed to imply there is anything such as a “standard” commission. There are many real estate commission models in Ontario, each with their own benefits and drawbacks. Commissions vary depending on the services and inclusions offered by the agent or team, as well as the experience and expertise of the REALTOR. Q: Who pays a REALTOR’s commission?In the GTA, it’s almost always the Seller who pays the commission to both the listing agent and the buyer’s agent. In rare circumstances, the Buyer is required to pay their agent (though this is usually reflected in a lower sales price offered to the Seller). Q: Is real estate commission negotiable?Individual agents and their brokerages set their own commission so it is often negotiable. Some agents offer different commission packages, with various levels of inclusions and service, and may reward a client with lower commission options for repeat clients or multiple transactions. Q: Do I have to pay HST on commission in Ontario?Like most other professional services, HST must be paid on real estate commission. Q: When do I pay a REALTOR commission?Real estate commission is paid by the Seller when the property closes, in other words, when the new owner takes legal possession of the property. If a Seller agrees to sell a home on October 15th with a closing date of December 30th, the Seller will pay commission (along with the rest of the purchase, less any deposit) on December 30th. It can take a few weeks for the commission to reach the agents who sold the house, as the money transfers from the Seller to the Seller’s lawyer and then to the listing agent’s brokerage, who then pays out the agents who represented the Seller and Buyer. Q: How much is the Buyer’s Agent’s commission?The Seller decides how much commission to offer the agent who represents the Buyer; this is referred to as the ‘cooperating commission’. The amount of the cooperating commission is set out in advance and is used to encourage or entice other agents to sell the home. Pro Tip: If the goal of offering a cooperating commission is to persuade buyer agents to show and sell your home, it makes sense to set the commission amount in line with what other Sellers are offering. If you really want to encourage other REALTORS, you may want to offer higher than what the other sellers near you are offering. Offering less might mean agents are less motivated to sell your home. If commission is a carrot, do you want to offer the smallest one? Q: Do I pay less commission if my home sells quickly?The percentage of commission you pay is not dependent on how long it takes your home to sell – you pay the same if the home sells in 8 hours, 8 days, 8 weeks or 8 months. You’re paying your REALTOR to sell your home and if they do a great job and sell it quickly at the price you want, it wouldn’t really make sense to penalize them for doing a great job. That would be like paying your dentist less because your root canal went more smoothly than expected. Likewise, it wouldn’t make sense for your agent to ask you to pay more if it takes them a long time to sell your home. If you’re more inconvenienced by a long sale or they aren’t doing everything they can to sell it, you shouldn’t have to pay more commission. That would be like paying your dentist more if you have complications during surgery, get an infection and it takes you longer to heal. Commission is true pay for performance. Q: How can I save money on real estate commission?With so many commission models in Ontario, there are many ways to save on real estate commission, but it’s important to keep the bigger goal in mind: how much money will you walk away with after your sale? If a Seller ‘saves’ $5,000 on commission by hiring a discount agent, but could have sold their home for $25,000 more if it had been staged, marketed beyond the MLS and expertly negotiated, did the Seller really ‘save’ anything? Or did they lose out on $20,000? The easiest way to save on commission is to sell your home yourself – but that comes with real financial and time-related costs too. We looked at Selling Your Home Without a REALTOR here. Q: I want my agent to be motivated to sell my home for as much money as possible. What can I do?By definition, when commission is set as a percentage of the sales price, an agent is motivated to sell a home for as much money as possible – the higher the price, the more money the agent makes. Real estate agents who are serious about their profession know that their reputation – and a long list of happy clients – is crucial to their long term success. They want their Sellers to leave them 5-star reviews online and want to be recommended to their clients’ friends and family. For most top REALTORS, that’s the best kind of motivation of all.
Q: Does a Buyer have to
in Ontario?In Ontario, commissions are typically paid by the Seller, but in recent years, as Toronto’s Multiple Listing Service (MLS) has been opened up to include For-Sale-By-Owner (FSBO) listings and other discount brokerage commission models, occasionally, a Buyer has to pay their agent directly. For example: An owner selling their own home themselves is offering to pay the agent who brings the Buyer $1 in commission. I don’t know anybody who works for $1! In these situations, one of three things usually happens: 1 – The Buyer’s agent negotiates for the Seller to pay them (even though it wasn’t initially offered); or 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; o
3 – The Buyer’s agent negotiates a sale price that is proportionately lower, when compared to the similar properties where both agents were paid commission, to account for the difference. For example: – A home is listed on the MLS by the Seller, for $850,000 and they are offering $1 commission to the Buyer’s agent. – Nearby, similar properties have sold in the $850K price range and offered 2.5% commission to the Buyer’s agent. It’s important to remember that the sold prices of the comparable properties include the commission paid for the work of both the Buyer’s agent and the Seller’s agent. – While a For-Sale-By-Owner may have done the work of the listing agent themselves, 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 + 2.5% directly to their agent, thereby paying in total, the same as the comparable homes.