Why realtor commissions don’t need to change

In June 2015, Toronto’s housing prices made headlines when the average price of a detached home passed the $1-million mark. This new standard fuelled discussions about affordability and housing bubbles and prompted more than a few remarks about how much realtors earn in commissions.

It’s a discussion I’ve heard before—often with comments about how little work a realtor actually does or the outrageous fees a realtor is paid. But before I buy a ticket on this bandwagon, I wanted to examine the numbers.

Realtor commission splits

There is no data on real estate commission rates in Canada. In Ontario, the general rule is 5% of the sale price, which is split between two realtors (at 2.5% each). In B.C. and a few other provinces there is a sliding scale with realtors earning as much as 3% on the first few hundred thousand of the sale price, and as little as 1% on the remaining portion of the sale price.

For that Toronto realtor who sold a detached home in June 2015 at the average price of $1,051,912, this means a commission of just under $26,300. Not bad, eh?

But wait, there’s more.

According to Toronto Real Estate Board statistics, only 68% of the homes listed for sale in June actually sold (2,191 homes were listed for sale and only 1,488 sold). That means, 32% of the realtors that listed a home for sale didn’t see a paycheque. Of those that did sell, the homes were on the market for an average of 16 days before a buyer was found. In purely mathematical terms, then, that same realtor would’ve earned $13,150 for a week’s worth of work.

But wait, there’s more.

What a realtor really earns

On a $26,300 commission cheque, a realtor would also get an additional $2,570 of HST money that’s paid directly to the government and will owe another $7,890 in taxes (assuming a 30% tax bracket). That drops the take-home pay to just over $18,410.

Then there’s the office split. Some agents pay higher monthly fees to their brokerage so they don’t have to split their commission, but some agents pay as much as 20% of their commission to their brokerage. In our case, let’s assume our realtor has an 80/20 split—further reducing their earnings by $5,260 (it’s 20% of the gross commission, not the net commission).

So, when the dust settles, our realtor with the outrageous commission from the $1-million+ house sale actually takes home $13,150.

Since most realtors work a 40-hour work week and the standard number of sales in a year is six, this translates into an annual paycheque of $78,900—and we still haven’t taken into account the cost of doing business, such as gas, marketing costs, cell and internet costs, educational fees, professional fees, insurance or office expenses.

It’s easy to point fingers at realtors and say they earn too much…but higher transactional fees are a reflection of higher home prices and that also means more money in the pocket of a home seller.

Oh, and full disclosure: I’m a licensed realtor. But I’m not trying to line my pockets with big-fat commissions (actually, my pockets get lined from my salaried job at MoneySense). To fully appreciate how important it is to hold realtors accountable, read Tricks Realtors Use to Sell Homes.  For those that don’t read that article, please note: My sole aim is to provide a bit of insight into real estate commissions. It’s easy to grab headlines with big numbers, it’s harder to provide some context to those numbers.

Added:
A reader aptly pointed out that tax is charged on income earned after expenses are deducted. Since part of my explanation was to provide some insight into the expenses realtors pay, I worked out the earnings to reflect income tax after deductions (but, obviously, had to include more detail in the deductions):  

*Earned commission of $26,300
*Office split, which reduces the commission by 20%, to $20,680
*Insurance and professional fees reduces these fees another $3,000 per year (on the average 6 transactions that works out to a $500 deduction), reducing the in-pocket earnings to $20,180
*Professional fees (educational courses, accountant/bookkeeper, cell phone, gas) at an estimated $12,000 (divided by 6 transactions, another $2,000 deduction), reducing the in-pocket earnings to $18,180
*Per transaction marketing fees (photography, staging, flyers, etc.) is another $3,o00 cost, further reducing the commission to $15,180
*Assuming all six transactions were for homes selling for $1-million, the realtor’s before-tax income would be $91,080
*After tax (assuming the realtor worked in Ontario) annual earnings would be $68,827

To put these earnings in perspective, I sought out the average earnings by profession in Canada. According to a Workopolis report, the average Canadian wage by industry sector is as follows**:

Mining, quarrying, and oil and gas extraction – $109,844   ($79,445)
Utilities – $96,279  ($71,769)
Construction – $64,240  ($51,233)
Manufacturing – $54,256  ($44,359)
Retail – $28,136  ($24,692)
Transportation and warehousing – $55,305  ($45,081)
Information and cultural industries – $61,373  ($49,259)
Finance and insurance – $60,011  ($48,322)
Real estate and rental and leasing – $50,226  ($41,612)
Professional, scientific and technical services – $70,310  ($55,412)
Educational services – $51,305  ($42,327)
Health care and social assistance – $44,863  ($37,892)
Arts, entertainment and recreation – $30,186  ($26,331)
Accommodation and food services – $19,656  ($17,912)

**Because a few of the comments posted were from people angry that I had compared a realtor’s gross earnings to the annual (assumed) after-tax earnings of other professions,  I just wanted to clarify: The wages listed above are based on StatsCan survey of hourly and salary employees and reflect gross pay, not net pay. To allow you to compare apples to apples, I’ve added the after-tax annual income in brackets (assuming the earnings were in Ontario).

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