How commissions are calculated
Nova Scotia real estate industry members are required to disclose to their clients how they will be paid for their services. Obviously, this information is of relevance to clients and may affect how they decide to proceed in a transaction. Consumers should ensure they fully understand what compensation they will be required to pay—you never want to be surprised by an unexpected expense!
While consumers will most often work with one industry member, all industry members are employed by a brokerage and authorized to represent the brokerage in fulfilling its duties to clients. Therefore, all contractual agreements are between the brokerage and the client, not the individual industry member. The agreement will provide for the client to pay a fee to the brokerage and the brokerage will pay the industry member in accordance with their employment agreement.
For example: Industry member Bill is employed by XYZ Atlantic Realty, and is authorized to represent the brokerage in its transactions with consumers. As a representative of XYZ Atlantic Realty, Bill has entered into a Buyer Brokerage Agreement with buyer Barbara. Under the agreement, XYZ Atlantic Realty, through its industry member Bill, has agreed to locate a suitable property for Barbara to purchase. If successful, Barbara will pay a fee to the brokerage for their assistance in the search. When Barbara’s payment is received, XYZ Atlantic Realty will pay Bill his share as indicated in his employment agreement.
Attention: Never pay an industry member directly (for example, make a cheque payable to a salesperson). Individual industry members cannot receive payment as a result of a real estate transaction from anyone other than their brokerage. Should an industry member request a direct payment, you should refuse and call the industry member’s broker or the Commission.
HOW FEES ARE EARNED
The payment of fees is outlined in a contract for service between a consumer and a brokerage. The most common types of service agreements are Seller Brokerage Agreements and Buyer Brokerage Agreements. The consumer and brokerage will agree to the details of the fee payment in the contract.
HOW FEES ARE CALCULATED
A brokerage’s fee is most often calculated in the following ways:
- By a percentage of the sale price (for real estate)
- A flat fee
- A fee for service
- A combination of any of these
Note: Real estate brokering is a “service” and therefore Harmonized Sales Tax (HST) is applicable to all fees.
REAL ESTATE BROKERAGE FEES
A real estate brokerage and client may negotiate any terms agreeable to them for the services provided. Any of the following calculations are possible:
1. Percentage of the sale price
For example: An industry member charges 5% commission on the sold price of a property. The commission is calculated:
200,000 × 0.05 = $10,000 + HST
Another percentage example shows a split percentage, with one amount of percentage charged on part of the purchase price and another on the balance of the purchase price. Therefore, as an example on a $200,000 sale, a commission of 6% on the first $100,000 and 2% on the remaining balance, would calculate as:
(100,000 × 0.06) + (100,000 × 0.02) = (6,000 + 2,000) = $8,000 + HST
2. Flat fee
The fee is a flat fee of an agreed upon amount regardless of the purchase price, such as $10,000 + HST.
3. Fee for service
All the individual services provided will be compensated for. The client and the brokerage should agree prior to entering into an agreement of what the service fees will be. The fee for service could be based on an hourly rate, specific amount for each service provided, or in the case of property management, a monthly service fee for specified services performed each month. The number of services provided may require an addendum to the service contract.
4. A combination of fee calculations
For example: A flat fee plus a fee for service based on an agreed list of services. Assume the property sells for $200,000.
($5,000 flat fee) + ($5,000.00 total service fees) = ($5,000 + $5,000) = $10,000 + HST
Attention: You need to find out if fees are refundable or not. Do not sign any agreement until you have read and understood it—and only then, if you agree to it.
OTHER TYPES OF FEES
1. Payment of a bonus
A bonus is a payment over and above the usual fee and may be offered under certain circumstances to encourage activity on a property. You are entitled to know about any payments the industry member might receive as a result of your transaction to decide if the industry member is truly acting in the your best interests.
For example: A seller, who needs to sell quickly, is offering buyer’s representatives a “bonus” so they will notice this listing. Before accepting this payment, the buyer’s representative must advise their buyer-client of the bonus and obtain written consent that they may receive it. As with all fees, this bonus would first be paid to the brokerage and then to the industry member. The payment and receipt of such monies may seem like an innocent action. However, an unscrupulous industry member might deliberately encourage a buyer toward a property offering a bonus, without regard for whether it is a suitable property for the buyer. In this case, the action is not so innocent.
2. Referral fees
Often an industry member will refer a client to another industry member for services he or she is not able to supply, for example:
- A residential real estate industry member may have a client requiring commercial services and may refer the client to an appropriate brokerage
- A client may be moving to a community where his current industry member has no experience. The client can be referred to a qualified person in that community.
Before accepting a referral payment, the industry member must disclose in writing to the individual being referred that their information is being forwarded and that the industry member may receive a referral fee. Industry members must take reasonable steps to ensure the person to whom they make a referral is authorized for the activities for which the referral is made. As with all fees, referral fees are paid to the brokerage and the brokerage pays the industry members.
HOW FEES CANNOT BE CALCULATED
The Real Estate Trading Act prohibits a real estate brokerage from calculating a fee based on difference between what a property is listed for and what it sells for. This situation may occur when a poorly informed seller underestimates the value of a property and a dishonest industry member fails to offer proper advice and takes advantage of the situation.
For example: A seller tells his industry member he thinks his property might sell for about $150,000 because another property in the neighbourhood sold for that amount. The industry member already knows of the neighbourhood sale. In fact, she has been in the property and knows her seller’s property is far superior. Rather than $150,000, the industry member thinks her seller’s house can sell for $170,000 or more!
The industry member realizes the seller is unaware of the true value of his property. If she is unscrupulous (and willing to violate the Real Estate Trading Act), she may tell the seller, “If you’re happy with $150,000, I’ll try to sell your property for that and keep anything above that as my commission."
The uninformed seller may think this is a fine arrangement; after all, his neighbour got $150,000, but then had to subtract the commission costs and his industry member is offering to get him $150,000 and will only keep what he might get over that amount. However, the seller is unaware of the value of the property. Should the property sell for $170,000, the industry member would collect $20,000 as her commission—far more than she would typically earn on a sale of this value.
COMMISSIONS ARE NEGOTIABLE
When discussing fees, industry members must be honest in advising their clients as to the “typical” or “usual” rates charged in their area. The amount of commission or fee that might be charged is not regulated or set at any standard rate, therefore they cannot indicate these fees are set or not negotiable.
Commissions are negotiable. However, wise consumers will know that the cheapest deal is not always the best deal. The old adage, “you get what you pay for,” can apply to real estate services too. Therefore, shopping for an agreeable mix of services offered at a fair commission is recommended. Every brokerage will have its own policy on its services and fees and consumers are free to negotiate their own agreement with the brokerage of their choice.
Before entering into a contract, it is wise to compare the services and fees of a few brokerages by interviewing industry members. The interviews will help you understand what range of commission rates is common in the marketplace and what types of services each brokerage offers. This will help you work out a fair arrangement with your brokerage of choice.