Real Estate Commissions: Everything You Need To Know

Home prices across Canada are skyrocketing.
According to the Canadian Real Estate Association (CREA), the national average home
sale reached $661,788 in July 2021. With homes selling in larger volumes and at
higher prices across the country, homeowners considering buying or selling are curious
about fees associated with this expensive transaction. In home sales, the
largest fee is the real estate commission cost. Know how much you are really
paying real estate agents, how their fees work and how to negotiate lower fees
by the end of this article.

What are real
estate commissions?

Real estate commissions are the fees
sellers of property in Canada pay to their real estate agents. The fee is paid
to the agent used to list the property and the agent used by the buyers of the
property. How this commission is split between the sale agent and buying agent
can vary but is often split evenly. Commissions can be a percentage of the
sale, a flat fee, fees for services, or some combination of fees. Sellers and
buyers of property should always confirm the commission arrangements with there
agents prior to placing an offer or listing a property. Commissions are costly
fees. They go towards the agents and then a cut goes to the brokerages each
agent works with. Luckily if a property does not sell, no commission fees are
paid out.

How does real
estate commission work in Canada?

Most commonly in Canada, real estate agents
earn a commission percentage rate of the total sale of a property. This can
vary widely by each agent and in each province. Commission rates of 3% to 7%
can be common. In Canada, real estate agents and brokerages set their own commission
rates. More recently, some agents and agencies are offering flat fees or fees
for services, to reduce the cost to homeowners.

While it is the property seller who pays
the commission fees to both the buying and selling agent, the money is coming
from the buyer. Both the seller and the buyer should be informed on
commissions.

Once a sale is finalized, commissions come
out of the sale and are not added on as an additional charge. Any associated
tax for the services provided would also come out of the sale of the property
on top of the commission itself. This tax depends on which province the sale
has occurred in.

As an example, a property in Ontario is
sold for $871,606. If there is a fixed commission of 6% (3% to each agent), the
commission would be $52,296.36. When you add 13% HST, it becomes $59,094.89.

It is important to be aware of other costs
associated with buying or selling a home. There are legal fees, mortgage fees, inspection
fees, and other fees to be aware of. Sellers generally have less fees than buyers,
but both should be informed. Commissions are easily the largest fees.

These are the common commissions and
payment structures for real estate agents in Canada:

Ø A
fixed percentage of home sale: This percentage can be
anywhere from 3% to 7%. It would stay the same if a property sold for $100,000
or $1 million. This is the most common commission structure agents use.

Ø A
split percentage of home sale:
The percentage of commission will change depending on the sale price of a
property. Agents will offer a 3% commission on the first $600,000 and take a
lower 2.5% on anything over $600,000. This would result in lower overall fees
to the seller.

Ø A
flat fee: An agent who offers a flat fee commission
will work for a fixed price to sell a home regardless if it sells for $350,000
or $3.5 million.

Ø A
fee for service: With this payment structure, agents
are paid for the work they do directly. This could be a flat fee or an hourly
rate. Some of the work could be listing and marketing, hosting open houses, and
designing and printing brochures.

Ø Any
combination of the above: Real estate agent fees
can be costly. As a result, new payment structures are constantly emerging to
save sellers money while ensuring agents get paid for their work.

How much is
real estate commission?

Real estate commissions can be a costly fee
for the sale of a home. In Canada, there is not a fixed structure or commission
rate. There are common practices of fixed commission rates of 3% to 7%, however
these are not set. Each agent and brokerage choose their own rate and
commission structure. As prices rise, flat rates are becoming more popular with
sellers. They offer more transparent and upfront costs while minimizing the actual
fees paid out. If you are selling your home, real estate agents want your business,
and you need their services. If one agents commission seems too high for you,
ask for a discount. Not every agent will offer a lower rate, but you are free
to take your business to another agent who offers you services you need at a
cost you feel is reasonable.

British Columbia and Ontario are currently
the hottest markets in Canadian real estate. Keep reading for the common practices
for real estate commission in each of these real estate hotspots.

How much is
real estate commission in BC?

British Columbia is a hotspot for real
estate, especially the Greater Vancouver area, which has homes selling on
average at $1,175,500. Commissions vary across the province and average around
3% to 7%. BC has long used a split percentage of home sale commission rate.
In other words, the buying and selling agent agree to share approximately 6% to
8% commission off the first $100,000 and between 1% to 4% commission on
anything over $100,000. Split percentage commissions will be more common in the
Greater Vancouver Area and Kelowna but are not surprising to see across the province.
Another thing unique to BC is the selling agent generally earns more of the
commission than the buying agent. While commissions and splits are always
different, a 55%/45% split between the two agents is not uncommon. Sales tax in
BC are at 12%, so do not forget to add that to the commission and subtract it
from your total sale price.

How much is
real estate commission in Ontario?

Ontario is another hotspot for real estate,
especially in the Greater Toronto Area which has homes selling on average at
$1,054,300. Commissions vary across the province and average around 3% to 7%.
Like the rest of Canada, each agent still sets their own commission rates and
commission structure. Ontario real estate agents typically use the fixed
percentage of home sale commission rate. If they do a split commission rate,
they can only offer decreasing percentages after the initial tier. Buying and
selling agents typically split commissions evenly at 50%/50%. Harmonized sale
tax in Ontario is 13%, so do not forget to add that to the commission and
subtract it from your total sale.

Selling your
home

It is a big decision to sell your home, and
you typically come to the decision because you want access to your equity or a
different lifestyle. Maximize your earnings on the sale of your home by
negotiating commission rates and shopping around for agents.