John and Urmi in Toronto Real Estate News
Like many of you, we’ve been following the Competition Bureau’s decision to challenge the Canadian Real Estate Association (CREA)’s MLS policies with great interest. Yesterday CREA approved changes to their MLS rules that they felt moved them closer to the Competition Bureau’s demands. The Bureau’s Commissioner Melanie Aitken called the changes “a step in the wrong direction”.
So what's all the commotion really about? Whether you are a buyer, seller, agent or broker, you want to understand how a ruling in favour of the Competition Bureau would impact the way people buy and sell houses in Canada.
Today, any seller who wants to post a house for sale on the MLS must hire a real estate brokerage to represent them throughout the home selling transaction. The Competition Bureau believes that CREA is forcing consumers to accept services they may not want just to get their house listed on the MLS database and on CREA’s Realtor.ca website. (MLS is individually owned by local real estate boards while CREA owns the national MLS brand.)
The Competition Bureau’s solution is to allow brokerages to charge sellers a flat fee to post houses for sale on the MLS without requiring the seller to work with an agent for the rest of the transaction. Under this option, the seller is responsible for preparing their house for sale, doing market research, holding open houses and negotiating the sale price directly with buyers and their agents.
As I have previously said (see my previous post), the industry definitely needs to be challenged about how it’s currently doing business. The status quo doesn’t work for consumers – and it barely works for agents. But I have my doubts that the specific changes being proposed by the Competition Bureau will radically change how consumers buy and sell homes for a few reasons.
How Much Could Sellers Really Save?
In response to the Competition Bureau’s actions, some analysts and media have rushed to show 5% savings from sales transactions being realized by sellers. Following the subprime meltdown, I guess we can’t really be surprised when this kind of pre-analysis isn’t adjusted for evidence of how things may actually unfold in the real world. In this case, looking to the US would be a good idea.
But first a refresher on commissions. Real estate commissions are typically split between the listing agent representing the seller and the buying agent representing the buyer. When a seller pays a 5% commission to sell their house, 2.5% typically goes to the buying agent and the other 2.5% to the listing agent.
If we look south of the border where flat fee brokerages have existed for years, we see that they tend to save sellers only the listing portion of the commission. Sellers that use flat fee brokerages still pay the buying agent a typical commission for bringing the purchaser (typically 2%-3% of the selling price).
Sellers using flat fee brokerages in the US still offer a buying agent a commission because they know it opens their house up to a larger pool as many buyers choose to work with a realtor. Many flat fee sellers are not looking to save the entire 5% commission they would have to pay, but rather just the listing portion of that commission.
Now it’s not insignificant for sellers to be saving up to 2.5% in commissions on a transaction (rather than 5%). More importantly, the change would mean that consumers are able to make the choices that are right for them. Those who don’t need a lot of help to sell their home shouldn’t be forced to pay for services they don’t value. However, the US experience shows that many buyers prefer to use agent services throughout the buying transaction.
Effective Flat Fee Brokerages are Effectively Illegal in Ontario
One positive outcome of the Competition Bureau’s actions is that it could allow brokerages to offer a service to consumers (in this case, a flat fee posting service) that CREA currently prohibits them from offering. But there are many restrictive rules that prevent brokerages from offering innovative services of value to consumers and the Competition Bureau isn’t doing anything about one that really matters.
In order for flat fee brokerages to flourish in Canada they would need to follow the lead of the US model I just described above.
Unforunately Ontario’s Real Estate and Business Brokers Act (REBBA) has a clause that effectively makes it impossible for flat free brokerages to operate this way in Ontario. Section 36 of the Act states:
All commission or other remuneration payable to a brokerage in respect of a trade in real estate shall be either an agreed amount or percentage of the sale price……but not both….
The Act does not allow a brokerage to charge a flat fee for the listing portion of the commission and at the same time offer a 2%-3% commission to the buying agent. So if the listing brokerage wants to charge a seller a flat fee to sell a home, it has to limit the buying pool for that home to buyers without an agent or those with agents who are also charging a flat fee. This is a very small pool and as such guarantees any brokerage trying to implement a flat fee model in Ontario to a prohibitively rough start.
To be effective, a brokerage needs to be able to charge a seller a flat free without prejudicing the type of buyer they are able to work with. Until the Province of Ontario reviews the Act accordingly, consumers won’t benefit from the most effective flat fee brokerage model.
Is Price Always Everything to a Seller?
I recently had coffee with a friend, a successful entrepreneur, and the topic of the Competition Bureau’s case against CREA came up. After complaining about the high commissions most agents charge my friend suggested that if Realosophy simply charged sellers a lower commission we’d easily be able to capture a significant market share.
Intrigued, I asked my friend how much he paid his agent when he recently sold his own house. He said 5%. I named several discount brokerages that would have charged him 3%-3.5% to list his house for sale and asked him why he didn’t use one of these discount brokerages. He responded that “those are not the brokerages that I see selling homes in my neighbourhood.”
When sellers are faced with the option of using a low cost brokerage they are not familiar with vs. paying a higher fee for a brokerage trusted to get them the highest price, many sellers choose the latter option.
This is consistent with trends that we see from the US market where discount models (including some neat ones we really like) have been operating for a longer time. They are making some relative gains, but their overall market share remains low.
Building a Better Brokerage
So what do we think needs to happen? Tomorrow’s brokerages first need to elevate the customer experience by doing things better than their competition. At Realosophy, we’ve focused our time and money on making big improvements to the home buying experience for consumers. Our website realosophy.com was the first to mash up data from all sources (real estate stats, school scores and transit info) and map it by over 180 Toronto neighbourhoods. This was free, useful stuff that consumers wanted.
We're really excited about the latest thing our Realosophy elves have been tinkering away on. Realosophy’s Neighbourhood Match technology is like eHarmony for Toronto neighbourhoods. If you are a young, one-income couple with a baby and an aging parent, you’ll really want to zero in on the few Toronto neighbourhoods offering three bedroom bungalows near great schools in the $400K range. For others, it’s the type of transit, distance to work and dog parks that will really matter. Within a few months, we’ll launch a scaled down realosophy.com version that will be free for consumers to use.
Only after we have satisfied ourselves with building a superb, exhilarating client experience, will we look at competing on price. And even then, for Realosophy, competing on price doesn’t mean doing less work for our clients for a lower fee. It means continuing to offer an unmatched client experience and then finding ways to deliver it faster, better and cheaper.
So while media pundits buzz over recent Competition Bureau developments and the industry does a collective chicken little, we’ll keep tinkering away, confident that the industry will change meaningfully once consumers see what true change looks like.
John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions. Email John
Urmi Desai is responsible for Realosophy’s business development and marketing. She is editor of the Move Smartly blog. Email Urmi
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