Real Estate Commissions 101
In the Edmonton real estate market, it’s important to understand how real estate agents are paid to help you with the sale or purchase of your home. Some of the rules and policies around real estate commission in Alberta are fixed, while others are not so it’s not always going to be the same experience - or the same commission rate - for individuals who are buying or selling their Edmonton home.
For example in the MLS® System (multiple listing service) in Canada, the remuneration being offered to a buyer’s REALTOR® cannot be zero (although it can be as low as one cent) On the hand, there is no set percentage that is required when determining the commission rate for either the seller’s or buyer’s agent. Plan for the fact that commission is always paid by the home seller, not the home buyer, and be mindful that at least some of the agent’s commission will likely go toward incidentals that were needed in the home selling process, such as staging, cleaning, or signage. Depending on the agency or brokerage being used, the seller’s agent will usually split the commission with the buyer’s agent, but there are many different ways that real estate agents work out their commission fees so this won’t always be the case.
As I mentioned above, there is no set-in-stone fee structure in Alberta, so personal experiences will differ. Having said that, we can look at how typical fees often work, to get an idea of what to look for and what to expect. The commission will either be a percentage of the sale price, or a flat/fixed fee. Most of the time, REALTOR® will ask for a split fee, meaning they will charge a percentage on the first $100,000 of the sale price, and then another established percentage on the rest of the sale price.
How the Fee Is Split
The most common commission fee structure used by real estate agents in Edmonton is a split fee structure. Typically, REALTOR® will charge %7 on the first $100,000 of your home’s selling price, and then %3 on the rest of the sale price. So, for example, if you sell your home for $500,000, that’s $7,000 for the first $100,000 and $12,000 for the other $400,000. This is a total commission of $19,000. Usually, the seller’s and buyer’s real estate agents agree to split the commission 50/50, so they would each get $9,500. At this point, a portion of the REALTOR'S® commission will go to several possible expenses, starting with income tax followed by other incidentals such as membership dues, licensing or board fees, insurance, and operating costs. Beyond that, the seller’s REALTOR® will often cover costs such as signage, photos or video, and other marketing materials (eg. paying bloggers to write up blog posts, like this one). So, after all the costs and fees are considered in our example, the seller’s agent would likely take home somewhere around $4,500 to $5,000.
Technically, there is no standard commission rate that must be paid to a real estate agent, as we have seen in our examples so far. Home owners and prospective home owners have options available for the type of real estate agency you wish to work with, and some agencies will allow room to negotiate the commission rates, while others will not. Most Edmonton real estate agencies use the more traditional commission based fee structure (i.e. %7 for the first $100,000 and %3 for the rest), but others use different structures aimed at saving you money. Some agencies may charge a flat fee for helping you sell your home, rather than charging commission to sell your home (a commission may still be payable to the buyer’s agent though). So, for example, you might pay a flat rate of $ 4,000 to the agency for the sale of your home, and the buyer’s agent would get a predetermined split fee of, say, %4 on the first $100,000 and %1 on the rest of the sale price. This can save you money in commission fees, but it also presumes that you will be more proactive in your home selling process; you will either need to be very confident in your own knowledge about the Edmonton real estate market (eg. maybe your aunt is a real estate agent and willing to coach you through the process for free), or perhaps you will lean more heavily on your legal representation for advice and action on the sale (which could end up being more expensive than paying standard commission fees). Exploring your options for a real estate agency is of course a wise place to start, keeping in mind that your commission dollars do go towards valuable supports in your home selling process, to help you get the best value for your home.
Variable Commission Plans
Basically, there are five ways that an agency may determine payment for their services to you:
- Percentage of the Sale Price - A simple percentage of the total sale price is agreed upon, eg. %5 on $425,000 would be $21,250 in commission.
- Split percentage of the Sale Price - This is the example used earlier in this post. So for example the fee would be %7 for the first $100,000 and %3 for the rest of the total sales price.
- Flat Fee - As in the example given under the heading Service Levels, where an agency may charge a flat fee of $4,000 for the sale, plus additional costs such as commission to the home buyer’s agent.
- Fee for Service - In this case the home owner and their agent agree to a specific list or ‘menu’ of services that the agency will provide to aid in the sale of the home. This should be done in writing, with a contract that explicitly states what will be provided and what will not. You may agree to an hourly rate, a flat rate for specific services like managing/marketing your listing, or even property management services.
- A Combination of Fee Calculations - This may include a flat fee for the sale, plus an agreed list of fees for services, as mentioned above.
How it's paid
The first point to remember is that it is the home seller, not the home buyer, who pays commission to the real estate agents involved. The next important detail to keep in mind is that commission should always be paid to the real estate brokerage, not to an individual licensee (REALTOR®). The brokerage will pay out the commission to your real estate agent, based on your written service agreement, which is required by the Real Estate Council of Alberta. Some other costs to keep in mind, which could be part of your selling agreement include fees to the mortgage brokerage, bonuses to the buyer’s agent (to help boost interest in the home), and referral fees. More on all of that here: Commission Calculations. The last point to consider is that any kinds of fees, commissions, or other payment agreements should be explicitly worked out in writing (i.e. in a contract) before services are rendered. Your lawyer will then help you to make the calculations and distribute the funds (including payment to your lawyer) at the time of sale.
Hopefully this review of how real estate commission structures work in Alberta will help you plan your home selling budget and think about what options will work best for you. It’s always wise to explore how you can save money, but it’s also good to consider the wisdom in the old saying, “you get what you pay for”. For more information about the real estate buying or selling process, please reach out to our team, who will be happy to help!