US Lawsuit Could Change Real Estate Commissions in Canada

As part of a U.S. lawsuit settlement in March 2024, the National Association of Realtors (NAR) agreed to new guidelines around real estate commissions. This has caused a great deal of uncertainty in the Canadian market and a similar class action lawsuit has now been launched in Canada. The suit alleges that an unwritten arrangement known as the “buyer brokerage commission rule,” which is customary for many real estate transactions, violates competition laws.

How real estate commissions work

When a home sale closes, the seller typically pays a broker commission fee, which is a percentage of the entire sale amount. The fee is normally then split between the representatives of the seller and the buyer and is typically split down the middle. Sometimes the listing agent will represent both the seller and the buyer and will earn the entire commission.

Who pays them?

Agent fees come out of the seller’s proceeds at closing, so it’s the buyer who ultimately pays it, just not directly to their agent: the buying and selling commission is typically rolled into the sale price.

Commissions Have Always Been Negotiable

Buyers and sellers in Canada have always been able to negotiate commissions with their agent. On the buyer side, buyer representation agreements are required in at least seven provinces in Canada including Alberta. These agreements set out terms like services and fees between an agent and their buyer. This represents more than 80 per cent of homes sold in Canada.

That being said, the buyer’s agent commission is typically determined by the seller, not by the buyer. The new rules shift that responsibility to buyers, who now will discuss compensation directly with the agents representing them.

Is this good or bad for consumers?

One storyline predicts a win for homebuyers: A price war will break out, and commissions will drop amid a new wave of competition among buyers’ agents. A competing narrative goes in the opposite direction: Under the new commission structure, buyers will realize they’re on the hook for thousands and decide not to use agents at all.  This all highlights just how intricate REALTOR® compensation is — and how much more complicated it may soon get.

What could change?

NAR’s settlement says nothing about the amount of commissions. The biggest change is that, starting in July (pending court approval), listing agents in the US will no longer offer compensation to buy-side agents on the multiple listing service (MLS®). In addition, a buyer’s agent must now have a written contract with the buyer specifying the fee. Until now, NAR encouraged but didn’t require written agreements between buy-side agents and buyers.

Compared to the old model, the new version offers a greater level of transparency —homebuyers now will be fully aware of how much they’re paying for an agent’s services.  Sellers may elect not to pay any buyer agent compensation, that doesn’t mean they will avoid the economics. Buyers may easily write into any offer a contingency requiring that the seller cover the cost, or may request other concessions, such as closing cost assistance in the dollar amount they are paying their REALTOR®.

Concerns for first-time buyers

Many in the real estate industry worry that first-time homebuyers — those who require professional guidance the most, and who are already struggling with high prices and high mortgage rates — will not be able to afford the services of a knowledgeable REALTOR®. If commissions no longer come out of the seller’s proceeds, buyers most likely will not have an additional $7,500 or $10,000 to pay an agent. Most buyers are already challenged to come up with a down payment.

For now, buyers are unable to roll commission costs into their mortgages.  It will be interesting to see how the Canadian Mortgage & Housing Corporation reacts.

Where do we go from here?

The Canadian Real Estate Association (CREA) claims its listing systems are “efficient and effective cooperative marketplaces that bring together REALTORS® acting on behalf of Canadian home sellers and buyers and are both pro-competitive and pro-consumer.”

At the end of the day, its about getting the deal across the finish line and a cooperative model continues to be the best model, whereby both parties have representation.