On Sunday, the Canadian Real Estate Association (CREA) voted in favour of a deal reached with the federal Competition Bureau which will open up the Multiple Listing Service (MLS) by allowing brokerages to charge consumers a minimal fee to post property listings on the website without having to use any agent services.
Over the past few days, I’ve been talking to the media and consumers wondering what this means. Here are a few early thoughts on the impact of this agreement. There’s a lot to unpack so I’ll expand on these thoughts in future posts.
Real Estate Commissions
While it’s the most talked about outcome, the magnitude of the anticipated downward pressure on commissions is probably overblown. News stories claim that sellers taking advantage of these new rules will save 5% in commissions if they don’t use any agent services. 5% is too high.
For Sale By Owner (FSBO) sellers who list their property on the MLS will still have to offer buying agents a typical 2.5% commission if they want to sell their home at a good price. (This is what happens in the US where the Flat Fee model is older – I’ll write more about this in a future post.)
So sellers realistically stand to save the listing portion of the commission. The media normally states this is 2.5% ,but there are plenty of discount brokerages and agents that are listing homes for 1%. (This means a total of 1% if the listing agent finds the buyer and 3.5% if another agent brings the buyer.)
Now 1% and 3.5% are still huge sums for agent services especially when compared to the $100-1,000 flat fees brokerages can now charge just to advertise home listings to the MLS. So the downward pressure on commissions will depend on what a seller believes she needs and gets at these different rates.
(Some media stories are stating that home prices could go lower because a FSBO seller will pass on all potential savings. This doesn’t make sense. FSBO sellers are self-motivated and price sensitive and will understandably try to pocket as much as they can in exchange for selling themselves.)
The Rise of FSBOs
There is no doubt that the FSBO model and consumers are clear winners. Being able to list on the MLS makes FSBO a more viable option for sellers. Buyers also win – the MLS clearly shows how long a home has been on the market, unlike many FSBO websites, which leave out key info like this.
But the FSBO model also faces some challenges.
If the FSBO seller believes that saving 1% in agent commission is worth self-managing the marketing and sale of her home, she has two options to advertise her home online – one, using a FSBO website firm or two, using a discount brokerage.
The value add of FSBO websites (PropertyGuys.com and ByTheOwner.ca are big ones in Canada) who charge a flat fee to list properties on their websites has been reduced now that FSBO sellers can list directly on the MLS. Expect fierce competition as many brokerages advertise “just post on MLS” flat fee services. All firms charging flat fees will need to offer something the seller is willing to pay for to remain viable.
Regardless of what option they choose, FSBOs will need to demonstrate that they can price their home effectively, disclose all necessary issues and negotiate in good faith. Where they wish to avoid paying for any agent services, including buyer agent services, buyers will expect to share these savings in the form of a reduced sale price. Buyers will also expect sellers to commit to a high level of transparency and due diligence or they will lose confidence in the transaction. (I recently had to explain to a FSBO who wanted to work with my buyer’s offer that he couldn’t sell a home without notifying and getting approval from the other co-owners of the property!)
Pressure on Agents
FSBOs are currently a small part of the listing market meaning that most sellers choose to pay for agent services. But the industry needs to take responsibility for providing such terrible service that some consumers think they can do it better themselves. With the rise of FSBOs, we need to do some serious soul searching.
The hardest hit agents are going to be those that offer a minimal level of service to their clients, but still charge a full 5% to list properties on the MLS. These agents need to be forced to change or forced out.
Brokerages and agents that do offer competitive services need to be completely transparent about the value of the services they offer and how much they cost.
From my chats with clients and consumers, I believe the most important of these services is getting you the best price for your home.
We know from running our own “zero percent listing commission offer” when we opened our new Realosophy Leslieville office that saving on commissions isn’t everything to consumers. Many consumers still choose more expensive agent services: “I sold with that agent because I see his sign on front lawns on my street – I figure he knows my neighbourhood and can get me the best price.” This motivation explains why the traditional commission model exists in the first place – as a consumer, I expect a more expensive agent to get me a better price than I could get on my own or with a discount agent, even after I factor in the 5% for both agents. (More on this in a future post.)
Above all, this agreement makes it very clear to the public that real estate boards and associations go out of their way to restrict competition, hurting consumers and progressive brokerages and agents who are trying to respond to what today’s consumers want.
In 2006, there were a few upstart brokerages charging a flat fee to post properties on the MLS without offering any additional services to the seller. CREA’s response was to introduce new rules that effectively made it impossible for these brokerages to operate. They also made it impossible for brokerages and agents to tackle the question of whether 2.5% is the right price to charge for listing services or whether other pricing options would be more appealing to today’s consumers.
CREA’s attempt to crush a few innovative brokerages completely backfired. They understandably pissed off consumers, created a media frenzy and in the end made it even easier for FSBO sellers to list their property for sale on the MLS without using additional services. (At least one of those crushed brokerages is now suing CREA and TREB.)
It must have been obvious to the CREA board in 2006 that their new rules were anti-competitive, and thus against the law, but they probably thought that their decision would go unchallenged. But they don’t know consumers very well. Apparently they don’t know the Commissioner of the Competition Bureau that well either.
This approach to introduce new restrictive rules in the face of competition and innovation is a common strategy used by real estate boards and associations in Canada and in the US. Instead of helping their members ask hard questions of themselves and innovate (a.k.a. leadership), they encourage them to hide behind a barricade, only to be swept away when things fall apart. Expect progressive brokerages and agents to get out -and stay- in front.
Urmi Desai is editor of the Move Smartly blog and is responsible for Realosophy’s business development and marketing. Realosophy Realty Inc. Brokerage focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions. Email Urmi
October 29, 2010Market |