Opinion Vancouver Courier July 7, 2015 Time to reconsider how realtors charge for services

While I normally provide The Courier with photos to accompany my columns, this week they used a file photo, not knowing that it is of Oak Gardens, one of my projects at Oak at West 42nd. I'm sure it was easy to sell!

Last week, I looked at new legislation in Ontario that now makes it illegal for real estate agents to use fictional or phantom bids to encourage someone to pay more for a property. I also promised to look at outdated real estate commissions, alternative approaches to buying and selling homes, and what I learned about real estate agents from the 2005 book Freakonomics.

 

Just the reference to “outdated real estate commissions” prompted an email from a Vancouver agent who claimed that in the Lower Mainland we have the lowest commissions in North America. He added that while the public sees large and easy commission cheques, they forget about the brokerage and licensing fees, commission-splitting and absence of any cushy benefits.

Not knowing the agent, I looked at his website. This is what he had to write about his industry: “I tell it like it is, and that is a rare commodity in the real estate business. It’s a part of what differentiates me from the rest in a business where most are focused on getting the next commission cheque rather than doing only what’s in the best interest of their client.”

 

Hmmm.

Given the price of housing, and the impact of the Internet on how we buy and sell things, I think it’s time to reconsider how real estate agents charge for their services. The current recommended fee structure is typically seven per cent on the first $100,000 and 2.5 per cent to 3.5 per cent on the balance. I should emphasize that this is a recommended structure and agents can charge more or less.

A number of things intrigue me about this. The first is the $100,000 benchmark. Surely it dates back to a time when the average home sold in the hundreds of thousands, not in the millions.

However, rather than revise the benchmark, I would suggest it’s time to rethink the entire fee structure. After all, why should the first $100,000 or $1,000,000 be at a higher rate? Why isn’t it the other way around?

 

We now have in British Columbia a comprehensive Property Assessment System. If you go online at evaluebc.bcassessment.ca you can find the assessed value of your property, your neighbour’s properties and every other property in the province. While assessments do not take into account the latest sales or whether a property had a kitchen or bathroom renovation, they usually provide a good basis for property evaluation.

 

This prompts me to question why real estate commissions are not perhaps tied to property assessments. For a sales price up to assessed value, the commission might be quite low. As higher prices are achieved, the commission rate would increase. While this may not bring down the price of housing, it might more equitably reward agents who work harder to achieve higher prices.

This brings me to what Steven Levitt and Stephen J. Dubner, the authors of Freakonomics, wrote about real estate agents. They looked at real estate commissions and the amount of time properties were on the market. They concluded that while a small increase in a sales price benefits a seller, it does not significantly benefit the real estate agent. They examined the sale of nearly 100,000 houses in suburban Chicago and discovered that more than 3,000 of those houses were owned by the agents themselves.

Using the data from the sales of those homes, and controlling for any number of variables, it turned out that real-estate agents kept their homes on the market an average of 10 days longer and sold their properties for an extra three-plus per cent.

Recently, Toronto realty service the Red Pin also looked at real estate commissions and the time properties were on the market. It argued that while selling commissions have ballooned along with Toronto housing prices, the effort required to sell a house has not. To make its point, the Red Pin calculated that for 8,477 home sales last year that were on the market for three days or less, Toronto realtors made an average of $1,000 an hour. This study concluded that we all know many homes take much longer to sell; however, it doesn’t seem right that many agents make on a sale what the rest of us earn in a year.

Hmmm.