How do real estate commissions work in Canada?

If you are planning to sell or buy a home, it is important to understand how real estate commissions work in Canada.

Real estate commissions are paid to real estate agents who are responsible for listing the property or representing the buyer in the transaction. Depending on how a transaction is executed, the commission may be split between the seller and buyer.

While it is possible to buy or sell a house without using a real estate agent, working with a realtor can help you get the right house within your budget, or even find potential buyers for your house.

Real estate agents report to brokerages, and any fees paid to the agent must pass through the brokerage. This means that the commissions for the real estate property are not paid directly to the individual agent but to the brokerage that listed the property. The brokerage is responsible for signing a listing agreement with the seller.

Real Estate Commission Rates in Canada

The commissions rates paid to real estate agents in Canada typically range from 3% to 7% of the purchase price. The commission rate varies depending on the agent and region in Canada. Generally, there is no set rate for the commission. According to the Canadian Real Estate Association, the commission rates charged for real estate services and how the fees are divided are the responsibility of the parties providing the service. If a real estate property is not sold, none of the agents or their brokerage is paid a commission.

For example, if the sale price of a house is $1 million, and the real estate commission is 5%, the total commission charged is equal to $50,000. This amount may be split between the two parties in the transaction, depending on the terms of the sale agreement. The commission is charged on the sale proceeds of the transaction. The seller is also required to pay HST or GST on top of the real estate commission, depending on their province or territory.

The following are the various ways on how real estate commissions are calculated:

  • A percentage fee and a flat fee: This method charges a percentage rate on the sale price and a flat fee. For example, a realtor can charge 2.5% + $10,000 on every transaction.
  • Fixed percentage: This method calculates the commission as a fixed percentage i.e. 3% to 7% of the sale price.
  • Split percentage of the sale price: The percentage charged on the sale price decreases with an increase in the sale price. For example, the realtor may charge 3% on the first $500,000 and 2% on the amount above $500,000.
  • Fixed fee: This method charges a flat fee for every seller regardless of the value of the real estate transaction. For example, the fixed fee can be $20,000 on every real estate transaction executed by the realtor. 

How to Save on Real Estate Commissions

If you are in the process of buying or selling a property, here are some handy tips on how to save money on real estate commissions:

Negotiate a lower commission

Many property sellers are not aware that they can negotiate a lower commission rate on the sale value of the property. When selling a home, you should discuss with your agent to see if they are flexible with the commission rate. If the agent agrees to reduce the commission rate by 1% or thereabouts, then it could save you thousands of dollars.

For example, if the agent reduces the commission rate for a $1 million property from 5% to 4%, it could save you $10,000. Alternatively, you can find an agent that charges a flat fee that is below the amount you want to pay as real estate commission.

Use an online real estate brokerage

There are various online real estate brokerages that connect home buyers and sellers to realtors in their regions. Sellers pay a flat fee, usually under $1000, to list the property on the website. The brokerage attracts buyers by offering cashbacks on their home purchases or getting discounts on selected properties. Also, there are brokerage sites that allow homes to be sold privately without charging commissions, and buyers deal directly with home sellers.

For-sale-by-owner option

You can save thousands of dollars by deciding to sell your home without using an agent. The downside with this option is that it involves a lot of work, and you will be required to find a lawyer, get an appraiser, and find listing sites. An appraiser will be needed to determine the actual value of your home, while a lawyer will help you prepare paperwork for the transaction. You will also incur costs when listing your property on the Multiple Listing Site and other listing sites.

Bottom Line

Real estate commission is one of the largest costs when selling or buying a home, accounting for tens of thousands of dollars. Understanding how the commission works and the various commission structures can help you find the most convenient option that saves you some money off your purchase price. Plus, you can negotiate the real estate commission with your agent, and save tens of thousands of money. Remember to shop around for agents with the best commissions who assure you a seamless closing process.

Frequently asked questions about real estate commissions in Canada

How does real estate commissions work?

Real estate commission is a payment made to the real estate agent for listing a property or representing the buyer in the transaction. It may be calculated as a percentage of the sale price or as a flat fee, depending on the province and sale value.

How are real estate agents paid?

Real estate agents receive a commission after the real estate transaction is closed. The commission is calculated as a percentage, usually 3 to 7%, of the sale price. The agent is only paid if the home sells.

Who is paid the real estate commission?

Real estate commission is paid to the brokerage that listed the property, and not the individual agent representing the buyer. Once the fee is paid, the brokerage will pay the agent representing the seller and the buyer’s agent.

Is real estate commission negotiable?

The real estate commission rate is set by the brokerage and individual agents since there is no predefined rate. Therefore, you can negotiate a better rate with the agent representing you in the real estate transaction.

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Josiah Mwangi

Josiah Mwangi is a freelance writer specializing in finance, business and real estate. His work has been featured on the Huffington Post, Finance Blog Zone, and other top publications