Is the real estate industry about to fundamentally shift?

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Jordan: Buying a home, even if you somehow have the money to afford it right now is stressful. It’s expensive. The process is confusing, and most first time buyers are relying on their real estate agent to walk ’em through it. But many of those buyers don’t even know how much money that agent is making from the sale. The internet has made basically every part of the real estate industry more transparent. You can now see all the listings everywhere in real time. You can see what they once sold for, what they’re projected to sell for now, you can see every single detail of the home, everything except the agent’s commission, but a lawsuit settled this spring in the United States is about to change that down south and similar suits are right now working their way through Canadian courts. So today we’ll take a fascinating trip into perhaps the last hidden part of the real estate world, how agents make their money, how that might change, and what the current system means for so many buyers who may not understand the way these more opaque parts of the process influence the choices they make when they’re making the biggest purchase of their lives. I’m Jordan Heath-Rawlings. This is The Big Story. Murtaza Haider is a professor of real estate management at Toronto Metropolitan University. Hello Murtaza.

Murtaza Haider: Hi.

Jordan: Thank you for finding some time for us.

Murtaza Haider: Always a pleasure.

Jordan: Why don’t you begin just by telling us how realtors in Canada are currently paid. Is there a universal standard? Does it vary by province? How do they get their money?

Murtaza Haider: There is slight differences between provinces, but very minor. What happens is that the seller, he or she engages and real estate agent who would then negotiate a commission, which could be on average 5%. And that commission covers both the buyer and the seller’s agent’s commissions. And then the property is listed on the multiple listing service and is sold subsequently or withdrawn or whatever.

Jordan: And when we talk about those commissions, how transparent are the fees to people buying and selling? How often do those fees really get negotiated? Because I was thinking about it here and I don’t think I could even tell you how much our realtors made from us, if I’m being honest.

Murtaza Haider: Yes. Well, from a sort of a strict definition of transparency, yes, the seller knows the agent’s commission because they had advised them saying, well, here’s the commission that we’ll be charging you five or 6%. So it’s not that the seller is unaware of what the agent’s commission will be. They are aware of it. Now the question is how knowledgeable are they to even know that the suggested 5% or 6% commission is actually negotiable. That’s not clear in Canada where almost 50% of the homes are bought by first time home buyers, and if they’re not being coached or mentored by their friends or family members, they would not even know. These commissions are up for negotiation. So most of the time I would say people end up signing on to whatever the commission is suggested by the listing agent on, and that becomes usually the 5%. Now, people who are smart enough, we bought a home sold homes multiple times, they know that this is negotiable and they know how to the extent it is negotiable, and they can negotiate based on the services they would expect or negotiate with the listing agent. For example, they would ask say, okay, I’ll agree to a 5% commission, but you have to stage the house, you have to do these many open houses, you have to provide the staging furniture. So much so that at one point we found out that there’s an agent who would rent A BMW for open houses and park it in the driveway. Luxury vehicles are parked at the driveway to give the impression that it’s a higher end property. So all of those costs are incurred by agents and that is negotiated. But when I say 5% of the homes are bought by first time home buyers, they would not know any of this. They would also not know that the commission that they are agreeing to also contains the commission for the buyer’s agent.

Jordan: I definitely did not know that when I made my purchase for the record.

Murtaza Haider: Usually in fairness, the agents in Canada would disclose that we are promising 2.5% or sometimes even more. So if it’s a 5% commission, and depending upon how eager the client is willing to sell, they can promise the client say, okay, I’ll take 2% as your listing agent, but we have to give 3% to the buyer’s agents. And that’s an incentive for the buyer’s agents to show them the properties because there’s this challenge, which is not very documented in the literature, nor in the professional documents or by the regulators, as to will a buyer’s agent be willing to show you a property that is available for sale that may meet the criterion set by the prospective buyer, but the property is not offering the two and a half or 3% commission. Maybe it’s offering 1% of no commission. Will your agent be as enthused and motivated to show you those properties that offered less or no commission to the buyer? So that’s a big challenge. We don’t know the answer to it. We can see what the first principles will conclude that if I’m an agent and I have five properties that I can show to my client, I’ll be tempted not to show the property or promote the property that offers me no commission. When you look at the listings on the multiple listing services, which is realtor.ca, you see all sorts of details about the house, how many bedrooms, washroom, if there’s the fireplace, indoor pool, outdoor pool, furnace type of furnishing, everything. Every structural detail possible is listed there, but what’s not listed for the buyer to know is what is the commission being promised to the buyer’s agent? Like if I’m buying a house, I need to know out of the price that I pay, how much of that price is the commission that will be going to my agent? And if I don’t have control over this, if this commission is baked into the price, then as a buyer I lose agency. I lose control over deciding how much should I reward my agent for the services I have received. Now imagine two scenarios. Imagine one scenario that you want to buy a house, you get an agent and the agent tells you that, well, listen, you don’t owe me anything. The seller’s sale price would include the sellers and buyer’s agent’s commission. So you don’t have to worry about it. Now you walk in with your agent to the first viewing and you fall in love with that house and you buy that, right? So your agent has spent half an hour an hour of work, and if it’s a $2 million home or a million dollar home, it’s $25,000 commission. If it’s a $2 million home, it’s $50,000 in commission and they are entitled to it because that’s what you agreed to. And on the other side of it is an agent who takes on a client, a buyer, prospective buyer, and ends up showing them not 10, not 50, not a hundred, maybe 200 homes, it still is unable to satisfy. So there’s a lot of time, effort, energy that the agent is putting in. Maybe they are entitled to three or 4% of the commission given that they have spent so much time helping the client. But the thing is, the client, the buyer who’s paying the amount for the house has no control over deciding how much commission he or she should pay to their agent because it’s already committed into the sales agreement. And the seller on the other hand says, well, wait a second, why am I paying buyer’s agent’s commission so that they can negotiate the price down again? So I’m paying someone to negotiate the price of the property down.

Jordan: They’re paying to cost themselves money.

Murtaza Haider: Exactly. It’ll cost them to lose money. So these are the challenges in the current system.

Jordan: That sounds incredibly convoluted. I’m glad I asked these questions now. I probably should have asked them a few years ago, but we’re talking to you today because this maybe might be changing. There is a big movement towards it and some action in the United States. Can you explain what’s happened there this spring?

Murtaza Haider: Yes. So in I think March of 2024 this year, the National Association of Realtors in the United States, they were sued for multi-billion dollars, but they agreed to pay $418 million. And the lawsuit was brought for these very reasons that the people were saying, why am I paying buyer’s agent’s commission or why there’s no transparency or why the buyer is unable to negotiate a commission for the agent they are hiring or retaining. And right now it’s not a done deal. There’s a federal government agency in the United States that is actually reviewing the contents of this settlement to see if the settlement has gone far enough to protect consumer rights. If it gets the clearance to go ahead, then there will be a little bit more transparency in the US going forward with what the buyers and the sellers end up paying their agents.

Jordan: What would that transparency look like in your opinion? How would it actually change the way realtors operate in the United States?

Murtaza Haider: It’s difficult to say because there’s one thing settling in the code. And then the other thing is how much and how it’s complied. Ideally, the seller should be told that this is the commission that the listing agent will charge, and the seller should be told that this is not a fixed rate. They’re given the impression sometimes that this is the industry standard. There is no industry standard, there’s no such thing as a 5% commission. That’s sort of an industry standard. No, you can say, well, I’ll pay you 1%. Right? And if the agent doesn’t want that, you say, well, no, this is too much work and I will be spending a lot of time, effort, energy, and my own money in promoting your property. And I don’t think 1% commission will cover it. But that kind of conversation should be transparently held. And at the same time, the seller should have explicit idea and knowledge that they can refuse paying any commission to the listing agent, and it would be to their detriment. I must say that if you list a property and say that the listing agent will get nothing, you’re relying on the curb appeal of your house. And actually, okay, so let me take a step back. If you think about these agent commissions, these precedents were set decades, early, maybe 50, 60, 70 years ago, and there was no internet back then. If you were selling a house and I was buying a house in 1960s,

Jordan: I would need you to do everything for me. Even find the houses, right?

Murtaza Haider: Yes. So if I’m your agent, I have to actually go around and collect that information, and mostly the homes I will show you as your agent in the sixties are the homes that were listed to sell with my brokerage. I would not have ready access to what other homes are been listed to be sold by other brokerages, and therefore there was a humongous information barrier. As a buyer, you would not know which home. I mean you can drive around and you see those for sale signs, and that was a very big marketing tool in the past. Now people don’t drive around in the neighborhoods looking for those signs, they just go on the internet. So now many buyers, if not most buyers end up looking, searching for the house based on their criteria by themselves and then call their agent and say, Hey, by the way, we found these three or four homes. Could you call? So agents, buyers, agents are mostly scheduling appointments, right? You don’t usually have to be a real estate agent, a licensed agent, if your job is just to schedule these appointments for you, one to go and visit the place. And now because of the way it’s structured, you can’t show up and see the place by yourself. You have to be accompanied by a real estate agent, a licensed agent. So again, there’s a need for it, but I don’t know why you have to be there, but maybe because I would say there’s value in having a buyer’s agent accompanied, because you don’t necessarily want strangers, complete strangers going through your house as they come and inspect it. But the point is that buyers can find these properties by themselves now. And so this whole notion of providing that service of creating information for you, that information gap is not there. This properties are not sold in a vacuum. I know exactly what properties are being listed in any part in North America. May that be Vancouver in Canada or Seattle in the United States, right? And I’m sitting in the east coast, but the buyers are still required to pay the same percentage in commission as they did some 50 years ago when they don’t have access to any information. Where they were not the primary individuals involved in searching for homes. So a lot has changed in terms of technology that should have, I would say, facilitated a lowering of commissions or more on the negotiations of commissions. But that didn’t happen.

Jordan: And you were about to tell me how this suit might change it further going forward. And I gather we don’t know exactly how that’ll happen, but what is the optimal outcome?

Murtaza Haider: The optimal outcome is that the buyers should be able to negotiate the commission with their agent, and smart buyers still do. For example, even if the buyer agent is promised in the listing, 2.5% commission, smart buyers would say, look, I know you’re getting 2.5%, but you have to earn it. If we end up buying the fifth or 10th house, we see you will have to give me a cashback. And that too happens. People actually negotiate a cashback. So the buyer’s agent gets, let’s say a $2 million home. They get $50,000 in commission, but the buyer’s agent fortunately didn’t have to do much work because they found the house quickly, the fifth or 10th house they saw, then the buyer can say, look, if that happens, you give me back $20,000 from the commission or $10,000. And usually these kind of negotiations happen and only happen when you are an experienced buyer. So I want the system to be so much transparent that it doesn’t matter how experienced one is with buying or selling a house, they know that they can negotiate. I think most agents do a very good job of serving their clients. I earnestly believe this, the kind of effort time they put in serving the seller or the buyer, it’s commendable. It’s a lot of work, and they do deserve the commission, but it should be based on my ability as a buyer saying, I believe my agent deserves 2.5%. It shouldn’t be the case. That doesn’t matter what your agent does. It doesn’t matter what you believe in, the agent’s buyer agent’s commission is baked into the price, you can’t do anything and that’s not fair.

Jordan: So this is how the US suit might change transparency down there. Is there a similar movement in Canada? Are there similar suits out there and where are they in the process?

Murtaza Haider: There are two lawsuits, class actions in Canada at the moment, very similar in nature. They’ve crossed the initial hurdles because these lawsuits have to be maintainable in the first place. So the courts have decided that they are, and so therefore the courts are going to hear these cases. I’m not a lawyer, so I would not make any legal comment here, but the way the US legal system is so similar to the Canadian and the way these lawsuits are so similar, I do not expect a different outcome in Canada any different from the one in US.

Jordan: Is this kind of update, this change inevitable either way, just based on the nature of how available information is? I know some people right now choose to go very minimal and do most of their house hunting or even most of the house selling themselves.

Murtaza Haider: Yes. Well look at the finance industry. You go on Yahoo Finance or you go on other web portals and you get the day-to-day, minute to minute stock prices online for free. There was a time that the people who would collect this information were sending that information, right? So with the advances in information and communication technologies, first the price became less and less, and then eventually people realized that you can make more money by giving that information away for free. So the real estate industry has been a bit slow in adopting and accepting advances in technology. So they have taken a long time to come up with MLS, and now even with MLS, in case of multiple bids, the bidders are doing blind bidding. They would not know how much are they bidding higher than the second highest or the last highest bid. And the industry is quite reluctant to disclose the existing offers to the bidders who are there. You can’t use the industry data to do research in Canada. If you do research, God forbid, with real estate data and you’re not a realtor or a broker, you may end up facing a lawsuit as to using the data for any other purpose but to sell a house. So I think there’s been a resistance to a large extent with data with the of new technology in Canada. But the change is inevitable. And as the cost of creating these portals and information exchanges become cheaper and cheaper. Before you know it, someone will come in like homes.com, will come in Canada and create another alternative portal, and then that’s the end of everything. Then people can find the homes they want to buy and people can sell the homes that they want to sell. And all is left is the job of the legal experts, lawyers to facilitate that transaction, right? So the agent business can become obsolete if it continues to resist. And I think that would not be in the interest of anyone because agents do provide valuable service. Half of the buyers and first time home buyers, and a lot of them are immigrants, so they don’t have their parents to go to, and new immigrant cannot go to call their parents in India or China or elsewhere saying, Hey, I’m buying a house. Any advice for me in Toronto, that’s not going to happen. So the real estate agents do provide this valuable service of mentoring buyers and sellers, especially those who are doing it for the first time. It’s just that they have to be mindful that the industry and the technology has changed, and it is in their interest to embrace the change rather than to resist it.

Jordan: How much of a blow would the change that we are actually talking about, not the implosion of the industry if a competitor comes along, but the actual change of displaying commission percentages and allowing people to more transparently negotiate that or even steer clear of properties where the percentage is too high, how much would that impact the real estate’s industry itself and people like agents who make a living from it?

Murtaza Haider: As an outsider, I don’t see much of an impact, an adverse impact on the industry. I only see a positive impact for the industry because it’ll bring more transparency in the way the industry operates, and that more transparency will win the trust of buyers and sellers because they wouldn’t be operating in the information vacuum. I have thought about it, and I cannot think of an adverse outcome for the industry. If commissions are listed and are disclosed, I mean, this is a legal document. A seller has entered a contract and in that contract that seller has disclosed that I will be paying X percentage to the buyer’s agent. And in fact, the MLS system has that information. That field is visible to every agent who is buying or selling. It’s not visible to the buyer or seller. So I’m saying why withhold that information? If it’s visible to my agent, it should also be visible to me because I would not know if I’m being shown homes that offer high commission versus homes that may not offer commission, and I want to have a house that meets my needs more so than a house that meets the needs of my agent.

Jordan: I want to thank you so much for walking us through this because it is a really complex world, and I feel like I understand it a lot better. But also because you’ve mentioned it a few times, just how many people are first time home buyers. Maybe you could leave us with a few things that you would urge someone to bring up with their agent as things currently stand now that most first time home buyers don’t know.

Murtaza Haider: Sure. So let’s start with buyers. When you retain an agent, tell them that there is a certain expectation of services and you retain them for a specific time. Most of the time people don’t look at it, even at the time that they’re retaining the three months or six months. I’ve seen people sign off on one year representation. No, just retain an agent for 30 days and if within 30 days you find the house and good. If you don’t find the house and you’re still happy with the services you’re receiving from your agent, then continue for another month. Don’t sign a one year contract. And if the agent says, no, I’m not comfortable with a 30 day or a 60 day contract, then find another agent. The second thing is you also identify, think, look based on the amount of effort you make. If we are able to find a house in 30 days, then I expect a $20,000 cashback or $10,000 cashback. If this search draws out to three months or more, then you can keep the commission, have those conversations right away. And secondly, if you are a seller, make sure that you are not under the impression that there’s a standard 5 or 6% industry standard commission. You just negotiate what you’re comfortable with. And if you are a seller who’s not in a hurry, you have time on your side, then negotiate a lower commission. But if you have to sell a house in 30 days, then I would say offer as high a commission as you can to the buyer’s agents in the contract, because that would incentivize them. When you have a home listed home and people come and see, usually the buyer’s agents leave their visiting card on the kitchen counter, and that’s a standard practice. So you walk in and you see there’s five cards or 10 cards, but if you see 40 cards there, you know that the seller’s agent is promising three or 4% commission because every agent is trying to show that house and sell that one. So obviously, we are incentivized, right? People work for cents. I wouldn’t do something if I’m not incentivized for it. So it’s not a bad thing. I don’t see commissions as bad. I see commissions as the incentive for people to work hard and sell a house for you or help you buy a house, but that commission should be transparent, should be negotiable, and people should know that they can negotiate.

Jordan: Murtaza, thank you so much for this.

Murtaza Haider: My pleasure.

Jordan: Murtaza Haider, professor of Real Estate Management at Toronto Metropolitan University. That was The Big Story. For more from us, you can head to TheBigStorypodcast.ca. If you like this kind of geeky policy story that takes you inside who makes money off you, you might want to check out our other podcast In This Economy. In case you haven’t seen it every Saturday in this feed. It’s also got its own feed where we occasionally do extra stuff. So check it out there and follow or subscribe or whatever you like. If you like this kind of real estate stuff, if you do like this kind of real estate stuff or if you hate it, we want to know about it, you can send us feedback to hello@TheBigStorypodcast.ca. Or you can leave us a voicemail by calling 416-935-5935. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow. Back to top of page