Proposed Change to the Act governing Real Estate Agent Listing Commission
I am spearheading a proposal to change the Ontario Real Estate and Business Brokers Act and this proposal will be presented to both the Ontario Minister of Government and Consumer Services, The Honorable David Orazietti, as he deals with changes to this legislation, and also the Competition Bureau of Canada, who also deal with these matters.
The reason is that currently one has to pay a listing agent a % of the sale price of a property or a flat rate or both. In the last 9 years the average price of a Toronto detached home has increased 100% while inflation has only increased 16%. At the same time the commission paid to agents to list and sell a home has also increased 100%, as it is almost always a % of the listing price, yet the work done is the same (or arguably less these days with lockboxes and new technology). I want to list my property and offered the agent a % of the price I 'would get anyway' (the price at which the home would sell instantly with an MLS listing as it was such an attractive price) and the actual sale price. Guess what the agent told me? It was illegal! I checked. It is!
I was absolutely and totally shocked! Read on:
Currently the section dealing with commission in the Ontario Real Estate and Business Brokers Act, 2002, as amended, reads (key prohibition sentence underlined):
Commission and remuneration
36. (1) All commission or other remuneration payable to a brokerage in respect of a trade in real estate shall be an agreed amount or percentage of the sale price or rental price, as the case may be, or a combination of both. 2013, c. 13, Sched. 3, s. 2.
If no agreement
(1.1) If there is no agreement as to the amount of the commission or other remuneration, the rate of it or other basis for determining it shall be that generally prevailing in the community where the real estate is located. 2013, c. 13, Sched. 3, s. 2.
(2) If the commission payable in respect of a trade in real estate is expressed as a percentage of the sale price or rental price, the percentage does not have to be fixed but may be expressed as a series of percentages that decrease at specified amounts as the sale price or rental price increases. 2002, c. 30, Sched. C, s. 36 (2).
(3) No registrant shall request or enter into an arrangement for the payment of a commission or any other remuneration based on the difference between the price at which real estate is listed for sale or rental and the actual sale price or rental price, as the case may be, of the real estate, nor is a registrant entitled to retain any commission or other remuneration computed upon any such basis. 2002, c. 30, Sched. C, s. 36 (3).
Through extensive research today I found that S36(3) is there as a consumer protection measure. However, it seems whomever drafted this legislation killed a fly with a hammer in the way they implemented the prohibition. The prohibition prevents an unscrupulous RE agent from convincing a client to 'under list' their house, ie set a listing price way below what a reasonable listing price is and then charge them a high commission rate in order to earn a higher commission than they would have earned if they simply charged the standard 2.5% on the sale price. The problem is it bans all incentive-based commission structures. However, my amendment allows this commission structure while preserving consumer protection. A win-win for everyone.
My proposal is to have S36(3) removed completely, S.36(1.1) & S.36(3) to remain the same, but to have S.36(1) amended to read as follows (changes and addition are in bold underlined):
Commission and remuneration
36. (1) All commission or other remuneration payable to a brokerage in respect of a trade in real estate shall be either:
(a) an agreed amount or percentage of the sale price or rental price, as the case may be, or a combination of both. 2013, c. 13, Sched. 3, s. 2.
(b) an agreed amount or percentage of the difference between the price at which real estate is listed for sale or rental or any sale or rental price less than this and the actual sale price or rental price, as the case may be, or a combination of both, but in no case shall the percentage commission exceed two and one-half percent.
The 2.5% cap I included totally removes the possibility of any unscrupulous agent convincing a client to under list a house in order to obtain a greater commission than the current standard 2.5%. That would only be possible if there was no 2.5% cap. Even if the agent was able to convince the client to list their property at $0 the maximum they could earn in commission would still only be that which they could earn under the standard 2.5% commission under S36(1) as it stands now.
Some may argue that my proposed S36(1)(b) would encourage agents to under list homes but they do that all the time now and homes never sell for what they list for anyway, especially those that are under listed. Furthermore, and much more important, is now the agent has a real incentive to try to get the highest possible price for the property because the higher it sells for the more commission they make but they get nothing, other than any flat rate non-refundable listing fee agreed to, if they sell the home for what the property owner 'would get anyway' or some other lower price that you choose that you want to have the commission starting to be paid at.
Some examples with Listing Price = $1.0M & Sale Price = 1.3M (flat rate non-refundable listing fee also an added option)
1. S(36)(1)(b) Incentive Based. Agreed that 2.5% commission paid on any amount over $1.0M. Commission = $1.3M-$1.0M = $0.3K x 2.5% = $7,500
2. S(36)(1)(b) Incentive Based. Agreed that 2.5% commission paid on any amount over $0.8M. Commission = $1.3M-$0.8M = $0.5K x 2.5% = $12,500
3. S(36)(1)(b) Incentive Based. Agreed that 2.5% commission paid on any amount over $0.5M. Commission = $1.3M-$0.5M = $0.8K x 2.5% = $20,000
4. S(36)(1)(b) Incentive Based. Agreed that 2.5% commission paid on any amount over $0.0M. Commission = $1.3M-$0.0M = $1.3K x 2.5% = $32,500
5. S(36)(1)(a) Conventional. Agreed that 2.5% commission paid on sale price = $1.3M x 2.5% = $32,500 - ie same as 4.
Note that one can choose any other commission rate for the S(36)(1)(b) incentive based method but there is a cap of 2.5%. The commission rate under S(36)(1)(a) has no cap but typically it is always 2.5% or less.
I've been racking my brains to try to shoot some holes through this amendment, have circulated it amongst friends including some lawyers and accountants (I'm a lawyer but have not practised in years) and no one can up with anything negative about it, only positive. If I do say so myself I think it is a brilliantly simple amendment that preserves consumer protection while increasing the choice of commission structures, remunerates only for value added (but perhaps a bit more if a lower than listing price is chosen) and will serve to reduce prices paid for commission. At the same time it is a positive for agents as it will still allow successful ones enjoy a good income by forcing out the many low-producing agents out there who currently can sell just a few houses a year and stay in business. Lastly, it is not being forced on anyone. Agents are free to decline this commission structure and let competition decide.
I would like to hear any thoughts, comments or any other constructive criticism on my proposed amendment and allowing incentive-based RE agent commission.
NOTE: I WOULD REALLY LIKE THIS TO NOT TO BE A FORUM TO DEBATE THE MERITS OF USING REAL ESTATE AGENTS OR TO DEBATE WHETHER OR NOT REAL ESTATE AGENTS ARE 'WORTH IT' OR WORTH BEING PAID 2.5% BUT MERELY A FORUM TO DEBATE MY PROPOSED CHANGE TO THE ACT TO ALLOW INCENTIVE-BASED COMMISSION FOR THOSE WHO WANT IT. THANK YOU.