Price fixing has sent Realtor commissions soaring in an already hot market, lawsuit alleges

Much of the discussion about the Canadian housing market has been dominated by the meteoric rise in housing costs.

But what’s often missing from this conversation is the parallel surge in real estate commissions Canadians pay nearly every time a home is bought or sold.

For example, an agent representing a Greater Toronto Area buyer in 2005 would have earned a commission of about $8,795 for an average single-family home — while the buyer’s agent made about $36,230, or four times that, in December 2021 would earn same house, so Dr. Panle Jia Barwick, a leading economist on the commission structure of the real estate industry.

To put this jump in perspective, median household income increased by just 14 percent between 2005 and 2019, adjusted for inflation.

This discrepancy is just one of the issues raised in a recent court case alleging price fixing and anti-competitive behavior in the Canadian real estate market.

In the greater Toronto area, the average pre-tax real estate commission exceeds $62,000. (Patrick Morrell/CBC)

The class action lawsuit, filed on April 9, 2021 on behalf of Toronto resident Mark Sunderland, alleges that some of the country’s largest brokerage companies, including ReMax, Century 21 and IproRealty Ltd, among others. and the Canadian Real Estate Association and the Toronto Regional Real Estate Board, have “conspired, agreed or arranged to establish, maintain, increase or control the price of buyer matchmaking services in the GTA.”

Commission structures vary across the country, but typically real estate agents and their agents charge a percentage commission of the selling price of a home. In Alberta and BC, it’s 7 percent on the first $100,000 and 3 percent on the balance. In other parts of the country, commissions are between four and five percent.

The accusations

While the seller pays full commission, it is split between the agent representing them and the one representing the buyer.

Sunderland’s lawsuit argues that the agreement known as the Buyer’s Finding Commission Rule, created by the Toronto Residential Real Estate Board and the Canadian Real Estate Association, effectively compels sellers of residential properties listed on the Multiple Listing Service (MLS) to take the Commission to be paid real estate brokerage of the buyer.

Similar practices exist in many other property management companies across the country.

That agreement thwarted competition in the marketplace by forcing sellers to pay for something they wouldn’t pay for without the agreement, the lawsuit argues — and it negates the possibility of price or quality of service to negotiate

Stephen Brobeck is a Fellow of the Consumer Federation of America. He says the real estate industry works like a cartel when it comes to commissions. (CBC)

“It’s not your typical smoke-filled conspiracy; it’s open,” said Garth Myers, a partner at Kalloghlian Myers LLP, the law firm that brought the case on behalf of Sunderland and everyone who has sold a home in the GTA since 2010.

The impact of this alleged price-fixing can be felt by those who don’t offer the standard commission rate, said Barwick, the economist who focuses on the real estate industry’s commission structure.

The buyer’s finder’s commission rule “creates the incentive and opportunity for buyer’s finders’ to steer buyers away from residential properties where sellers are offering lower than usual buyer’s finder’s commissions,” she wrote as part of an investigation into the case, commissioned by Kalloghlian Myers LLP.

The mere fear that this might happen is enough to pressure sellers to offer the standard commission, she writes.

The practice of control is further enabled by Realtor.ca, which allows real estate agents and brokers to see the level of commissions being offered, but hides the information from the public.

Similar lawsuit approved in the US

Sutherland’s lawsuit is similar to a class action lawsuit pending in the United States against the National Association of Realtors and America’s largest real estate agents.

The US class action lawsuit, upheld last month, also alleges that anti-competitive behavior has taken place in the real estate industry, resulting in US home sellers being forced to pay inflated commissions.

Using hidden cameras, Marketplace producers found some real estate agents distracting potential buyers from homes with low commissions, a practice against the law. (CBC)

“Dozens of billions of dollars are at stake,” said Stephen Brobeck, senior fellow and former executive director of the Consumer Federation of America, a Washington, DC-based nonprofit whose research helped inform the US case.

“In terms of commissions, the industry is looking to maintain a price cartel,” Brobeck said, noting that this is happening in the US and Canada.

For the sale of an average Canadian home, now priced at $746,000, the full commission – split between buying and selling agents – is between $26,330 and $37,300 before taxes. In a market like Toronto, the average commission exceeds $62,000 before tax.

When Sunderland sold his home, he paid “the standard 2.5 percent commission” to the buyer’s agent and their agent, his attorney said.

“His view and the view put forward in the case is why he had to pay [the 2.5 per cent] was a conspiracy between the various brokers in the GTA because of this price fixing,” Myers said.

“It’s the market that sets the course, not MLS rules or collusion between brokers.”​​​​​​– Rui Alves, CEO of iPro Realty Ltd.

In March 2022, the Canadian Real Estate Association and the Toronto Regional Real Estate Board moved to dismiss the entire lawsuit as “not a valid cause of action.” This application will be negotiated in the autumn.

Another defendant in the lawsuit said he believes the case has no merit.

“Our business is very competitive,” Rui Alves, chairman and CEO of iPro Realty, said in a statement to CBC News. “It’s the market that sets the course, not MLS rules or collusion between brokers.”

iPro Realty encourages sellers to offer the prevailing rate for the area — or may suggest offering the buyer’s agent a higher commission rate in a slower market, he said.

“This proves that our fees are in no way fixed, but simply react to the fees of competitors in the region, just like any other competing company would.”

CBC News contacted ReMax and Century 21; While Century 21 Canada said it did not believe the claim was substantiated, it would not comment further.

ReMax said it would not comment given the ongoing litigation.

Steering and real estate commissions

A 2021 marketplace Research into real estate agent governance has shown that consumer concerns about the issue are not unfounded.

To test whether real estate agents would actually deter buyers from a home with low commissions, marketplace Producers went undercover posing as homebuyers looking for a home in Vaughan, Ontario. As potential buyers, the team asked three local real estate agents to book viewings of three properties on the market, including one that offers buyers just a 1 percent commission instead of the 2.5 percent that’s standard for the area.

While one agent was open about the low commission and offered to negotiate the purchase anyway, the other two agents didn’t tell buyers about the commission – discouraging or preventing them from viewing the home.

CLOCK | Market study on the “control” of real estate:

The investigation catches real estate agents breaking the law to keep commissions high, stifle competition and block private sellers.

One of the realtors steered buyers by telling them the house was overpriced by $200,000 and saying the owners wouldn’t budge on the price, which wasn’t the case. The other agent told buyers she couldn’t book a showing and suggested the property could have tenants, a turnoff for many people wanting to move in themselves. This was announced by the owners of the property marketplace You have not received a view request from this agent.

Following that test, the producers called 25 real estate agents across the country while posing as sellers interested in listing a home. When agents were asked to lower the commission rate for buyer referrals, 88 percent of agents warned against doing so.

“While they’re not supposed to, some realtors may be very conscious of what they’re getting paid and push their buyer to another home,” said a Halifax realtor.

“I’ve been told by realtors, ‘You know, we’re looking at two houses and they’re both a good match, but I’m definitely massaging them to yours because there’s more in it for the realtor,'” said another agent in Winnipeg.

The Canadian Real Estate Association (CREA) and Ontario’s regulator, the Real Estate Council of Ontario (RECO), would not speak to them marketplace about the investigation. Shortly after learning of the findings, however, RECO issued a statement on its governance of the more than 93,000 real estate agents, brokers and brokerage firms then under its jurisdiction, noting that such conduct violated its code of ethics.

“The behavior is not only illegal, but also undermines consumer protection, consumer confidence and the reputation of the real estate industry as a whole,” the statement said.

Still, it’s rare for sellers to offer prices lower than the standard buyer’s commission. According to Toronto real estate agent Alan Spivak, sellers offering buyers’ agents in the Toronto area commissions of less than 2.5 percent accounted for less than 1 percent of all listings at the time of his review.

“This is consistent with my experience for all residential properties in the GTA since at least 2010,” he wrote in an affidavit included with Sunderland’s filing.

How to increase competition

If there were no commission rules for buyer brokers, Barwick writes, prices for services would become more competitive – buyers would pay for their own agency and could negotiate prices or forgo the service altogether.

This is already the case in Great Britain and Australia. There, buyers and sellers pay for their own representation and commission rates are lower.

In Australia and the UK, buyers and sellers pay for their own representation in property transactions, leading to more competition. (Norm Arnold/CBC)

“It would also encourage sellers to negotiate more vigorously with their listing agents, and those commission rates would most likely go down as well,” Brobeck said.

Brobeck’s own research has found that such a “decoupling” of real estate commissions could lower standard rates by one to two percent over a couple of years.

The Canadian Real Estate Association told CBC News that it would not comment on the Sunderland case as it is pending trial.

The Toronto Regional Real Estate Board, another plaintiff in the case, said it has “no interest in, and does not contemplate or discuss, REALTOR® commissions.”

Leave a Comment