There is much ado about the growth of discount brokerages like PurpleBricks, Zillow, and Redfin to name a few. To be frank, discount brokerages have been present in Ontario for years and even longer in the United States without shaking up the real estate industry as initially anticipated. Discount brokerages are also referred to as limited service, a la carte service agreement, and flat-fee. There are a variety of novel home selling methods currently present in the Canadian marketplace and in this entry, we compare discount brokerage services with full-service brokerages like HomeLife/ROMANO Realty Ltd.
In most real estate boards, there are generally two types of listing agreements. The first and most common is called a Multiple Listing Service (MLS) Agreement, whereby the seller will pay a commission when their property is sold through their listing agent or another real estate agent representing a buyer. In an MLS Listing Agreement, the listing agent gets the commission specified in the listing agreement regardless of who actually finds the buyer and pays the co-operating brokerage with those proceeds when there is one involved in a transaction. The second type of listing agreement is called an Exclusive Listing Agreement. This form of agreement gives the listing agent the exclusive right to sell the property through channels other than the MLS, such as professional networks or social media.
Occasionally, a homeowner may elect to have a collateral agreement with the listing agent that enables the homeowner to find their own buyer and entirely avoid paying a commission to the listing agent. It is this collateral agreement that forms the basis for many a la carte service agreements. A flat-fee listing on the Multiple Listings Service provides the seller with a listing that appears to the public on Realtor.ca. The difference between a traditional listing on MLS with one completed by a discount brokerage is that the latter has the homeowner retain the responsibility of handling inquiries as they arrive, to sell the property on their own, and ensure that the contract is carried through and completed on closing. Essentially, flat-fee service listing agreements have progressed from reduced-cost selling alternatives for property owners who are comfortable with managing all or part of the selling process, who believe the MLS will provide sufficient advertising of their property, and who are willing to pay a buyer's agent a commission, since the majority of buyers are represented by a broker or salesperson.
Traditional real estate brokerage services in Canada have been delivered as part of a bundled package. The following services are typically included:
(i) assisting the seller in setting a list price for the property,
(ii) marketing and advertising a property for sale, including listing the property on the MLS;
(iii) handling buyer inquiries and subsequently scheduling showings of the property to prospective home buyers;
(iv) holding open houses to allow the public to preview a property for sale;
(v) handling contract preparation and negotiation on behalf of the seller; and
(vi) management of the real estate transaction to completion. The fee structure for this bundled package of services in Canada has generally been to pay a commission on the gross sales price of the property of around five per cent plus the Harmonized Sales Tax (HST).
Prior to the spread of the Internet, the flat-fee model existed for many years. Over twenty years ago it was commonplace for the listing brokerage to contract a sub-agent (i.e., another brokerage) to locate a buyer for a specific property in exchange for a fee or commission. Because the sub-agent would owe fiduciary duties to the seller, this model offered little-to-no protection for the buyer and is now all but dead in Canada.
Within the realm of a la carte real estate services, there are multiple programs offered to sellers that share the common objective of saving the consumer money by reducing the overall expense of selling real estate. Listing fees for limited service brokerages cover a wide range of options in most cases, but generally include two components: the flat-fee paid to the listing agent and the commission the property owner agrees to pay a buyer’s agent. Remember to note that the co-operating commission to the buyer’s agent is part of the marketing and advertising of a listing. The flat-fee for services rendered by a real estate brokerage is paid in advance by the seller regardless of whether or not the property sells, unlike full-service brokerages that charge a commission of the gross sale price only when the property sells, which is negotiated at the time the listing agreement is signed. Similar to an MLS listing with a full-service brokerage, a flat-fee MLS listing agreement between a limited service brokerage and the property owner typically requires the listing brokerage to enter the property into the MLS and provide other contracted services through a broker or sales representative.
In recent years, with the Internet as the catalyst, the unbundling of services has accelerated and a plethora of brokerage models have developed to cater to the For Sale By Owner (FSBO) segment of the real estate market by providing services on an a la carte basis. The bundle of services is segmented to enable the property owner to select only the services they want. For instance, a seller may opt to purchase a three-dimensional virtual tour, floor plans, open house signs in addition to an MLS listing. Brokerages like One Percent Realty, for example, charge a flat-fee of $7,950 for listings sold up to $700,000 and a commission of one per cent of the gross sales price of listings over $700,000 including an additional fee of $950. Others brokerages, such as BestFlatFee.ca charge $99 plus applicable taxes for an MLS listing spanning three months. With this you receive an open house notice (open house conducted by you), ten photos (twenty photos are the maximum allowable on MLS), one change to the listing (further changes will come at an additional cost), and a charge of $75 plus taxes to cancel a listing.
As the industry has continued to evolve, brokerages initiating property sales through an auction model have also emerged. In this scenario, an offer date is set and buyers have an allotted amount of time to view the property and conduct their due diligence. Others have opted to attract buyers and sellers with cash back incentives. Lastly, companies have commenced buyer programs that rely on an automated valuation model (known as an AVM) to make cash offers on homes quickly. For Zillow, this is known as the iBuyer and is primarily for homeowners that require a quick sale. Zillow charges a fee to cover their associated costs and risks. Companies then clean and fix your home and relist it on the market for sale.
There are, however, several drawbacks to the discount method of providing real estate services. In addition to the difference in payment structures for brokerage services, further drawbacks include: (a) less exposure, (b) client-customer differentiation, (c) inadequate information, and (d) greater time and effort from you in the role of a salesperson. Firstly, (a) unless you as a seller is willing to pay for further a la carte services, you will typically receive less marketing services and, consequently, less exposure. Included in listings, services provided by full-service sales representatives like us at HomeLife/ROMANO Realty Ltd., is a suite of print advertising, such as newsletters and postcards both within your neighbourhood and to the surroundings areas or regions. The largest segment of Canada’s population are baby boomers and their parents. These generations of people continue to provide a significant base for print advertising. Additionally, our various commission programs are attached to a plethora of value-added services including but not limited to digital advertising, telemarketing, as well as a pre-listing inspection, a home warranty, or coverage for other costs associated with closing. Secondly, (b) it is important to understand whether or not a real estate brokerage considers you a client or a customer and what happens when a buyer purchases your property through the same brokerage. Fiduciary duties are given to clients, whereas, customers are to be given a limited level of service. Because you have contracted specific services from a discount brokerage, the extent to which they advise you on your sale may be restricted and, thus, consider you a customer. This is unlike sales representatives and brokers from a full-service brokerage that offer a bundle of traditional services from the beginning to the end of a transaction. Thirdly, (c) discount brokerages may apply their services to various markets, whether it be condos to freehold or Toronto to the GTA, but their education is typically general and not always adequate since real estate is localized and nuanced. Lastly, (d) a significant factor to the long withstanding prevalence of the full-service brokerage model exists because contracting specific services will generally require you to fill in the gaps, meaning it will involve more time and effort from you in the role of a salesperson – responding to inquiries in a timely manner, negotiating the terms and conditions of your transaction, conducting showings, etc.
There has been some volatility among limited service brokerages. Most recently, TheRedPin was placed into receivership in 2018. The lack of capital to fuel growth mixed with declining sales lead to their inability to meet their contractual arrangement with lenders. As a consumer, you should take into consideration the amount of industry experience, knowledge, and quality of service and professionalism for the amount of money you will pay as a commission or a flat-fee. In all circumstances, the consumer should thoroughly understand the structure of remuneration and services being provided.