The buying and selling of homes in the United States could undergo massive changes this year — but what about in Canada?
The National Association of Realtors in the U.S. settled a US$418-million lawsuit, which means that the standard six per cent commission for Realtors could be on its way out.
With the spring housing market heating up, a Toronto law firm wants to see those changes come to Canada too, says Garth Myers with the Toronto-based law firm Kalloghlian Myers.
“We believe that the rules agreed to between real estate brokerages relating to the payment of commissions to buyer brokers were anti-competitive and inflated the price of these commissions and had a negative impact for seller of houses,” said Myers, whose firm has brought a proposed class-action lawsuit before the Federal Court to change the rules along similar lines in Canada.
Not everyone agrees that changes in Canada are needed, though, and the way commissions are handled has some big differences compared with the U.S.
Here’s what to know.
What did the U.S. case do?
Earlier this month, the U.S. association agreed to do away with policies that for decades helped set agent commissions, moving to resolve lawsuits that claim the rules have forced people to pay artificially inflated costs to sell their homes.
As part of the settlement, the U.S. National Association of Realtors agreed to no longer require a broker advertising a home for sale on a Multiple Listing Service (MLS) to offer any upfront compensation to a buyer’s agent.
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The rule change leaves it open for individual home sellers to negotiate such offers with a buyer’s agent outside of the MLS platforms, though the home seller’s broker has to disclose any such compensation arrangements.
The rule changes, which are set to take effect in mid-July, represent a major change to the way real estate agents have operated going back to the 1990s, and could potentially lead to homebuyers and sellers negotiating lower agent commissions.
Currently, agents working with a buyer and seller typically split a commission of around five to six per cent that’s paid by the seller. This practice essentially became customary as home listings included built-in offers of “co-operative compensation” between agents on both sides of the transaction.
Myers said when a seller lists their house on the MLS, real estate associations and the brokerages require sellers to make an offer of commission to buyer brokerages.
“When buyer brokerages are showing houses to their clients, they can see how much is offered by each seller. And the concern is that if sellers don’t put the standard commission, fewer buyer brokerages will show their house to their clients, and sellers will get fewer bids on their house,” he said.
Along the lines of the U.S. suit, Myers said his firm is also seeking compensation for sellers who have been affected by these norms that he alleges amount to price fixing under the federal Competition Act.
The Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB) are among dozens of real estate groups that have been named in the lawsuit.
TRREB CEO John DiMichele told Global News: “The litigation in Canada involves different legal and factual circumstances. TRREB continues to seek a dismissal of the case against it. Considering that the matter is still before the courts, we will not be commenting further at this time.”
CREA did not respond to a request for comment.
How could it affect sellers and Realtors?
David Dale-Johnson, executive professor of real estate at the Alberta School of Business with the University of Alberta, said in Canada, there are “unwritten rules” around how rates of commission are decided.
“In B.C. and Alberta, it’s seven per cent on the first $100,000 and three per cent on amounts thereafter,” he said, adding that in Ontario it is generally a five per cent flat fee.
John Pasalis, Realtor and broker at Realosophy Realty, said the rules work differently in Canada than in the U.S.
“In Canada, there is no mandatory commission. Commission is negotiable,” he said.
“Over 10 years ago in Canada, the Competition Bureau effectively kind of forced all of the MLS (services) in Canada to allow sellers to post their properties on the MLS without using a Realtor.”
However, Myers said few sellers deviate from the industry norm.
“In 99 per cent of the cases, the sellers are offering 2.5 per cent (each to seller and buyer brokers). There’s major consequences from potentially deviating from this rule,” he said. “Brokers just don’t show houses to their clients if they’re not getting the standard 2.5 per cent.”
Dale-Johnson said commissions in Canada are just kind of accepted by buyers and sellers by convention. This has meant big earnings for Realtors.
“If we look at what’s happened to housing prices over the last, 15 to 20 years, that six per cent reflects a ridiculous amount of money compared to what that same agent would have been paid 15 years ago.”
He added the lawsuit could lead to a cultural shift in how Canadians negotiate with Realtors — and potentially even reduce the number who work in the industry.
In particular, the change in commission structure in the U.S. could reduce the number of agents, Dale-Johnson said, by anywhere from 20 to 40 per cent there.
“So if the same adjustment were to occur here, we would probably expect the industry to perhaps reduce by 30 per cent,” he added.
— with files from The Associated Press
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