Do you know that Alberta’s real estate and mortgage industry members are required to tell you how they’ll be paid for their services?
It’s important you know this, as it could prevent unexpected expenses later and have an affect on how your transaction proceeds.
Who is my contract with?
Even though you’re working with a specific real estate and/or mortgage industry member, all members are actually employed by a brokerage.
Industry members are authorized by brokerages to represent them when working with clients.
That means all contractual agreements you enter into are between you and the brokerage, not between you and an individual industry member. These contractual agreements ensure many things, including that you - as the client- pay a fee to the brokerage, who then pays the industry member.
- Industry member Andy is employed by Apple Brokerage and is authorized to represent the brokerage in its transactions with consumers. As a representative of Apple Brokerage, Andy entered into a Buyer Brokerage agreement with Bethany Buyer. Under the agreement, Apple Brokerage, through Andy, has agreed to locate a suitable property for Bethany to purchase. If successful, Bethany pays a fee to the brokerage for their search assistance. When Bethany’s payment is received, Apple Brokerage then pays Andy.
Remember, individual industry members receive payments as a result of real estate or mortgage transactions from their broker only. Avoid any requests by an industry member for direct payment. If this happens, refuse the request and call the industry member’s brokerage to let the broker know.
About Service Agreements
Fee payments are outlined in the service agreement between you and your brokerage. The most common types of service agreements are:
- seller brokerage agreements or listing contracts
- buyer brokerage agreements
- mortgage broker service agreements
- property management agreements.
You and your brokerage will agree to the fee payment details specified in the contract.
Calculating the Fee
Brokerage fees are calculated by:
- a percentage of the sale price (for real estate)
- a flat fee or schedule of flat fees
- a fee for service
- a combination including any of these
Note that real estate and mortgage brokering is a service, making Goods and Services Tax (GST) applicable.
Brokerage Fee Calculations
You and the real estate brokerage can negotiate any terms agreeable for services provided. Any of the following calculations are possible:
- Percentage of the Sale Price – For example, a property sells for $200,000. The commission is based on a percentage of the sale price, in our example, five (5) percent. The commission will be $200,000 X 5% = $10,000 plus GST.
Another percentage example shows a split percentage, with one amount of percentage charged on a portion of the sale price and a different percentage charged on the balance of the sale price, in our example, seven (7) percent on the first $100,000 and three (3) percent on the balance. If this property sells for $250,000, then the commission will be $100,000 X 7% + $150,000 (the balance) X 3%, or $7,000 + $4,500 = $11,500 + GST.
- Flat Fee – The fee will be a fixed or flat fee regardless of the sale price. The amount will be any amount agreed to by the client and the brokerage represented by the industry member. For example, a property may be listed at an initial asking price of $250,000 and sells 45 days later for $239,750. The client and the brokerage have agreed on a flat fee of $10,000 + GST that is not a percentage of the asking price or final sale price.
- Fee for Service – For example, a client may agree to compensate the brokerage for all services provided. The client and the brokerage should agree on the services and the amount to be paid for the services prior to entering into an agreement. The fee for service(s) 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 to be performed each month. Depending on the number of services provided, you may require an addendum to the service contract.
- A Combination of Fee Calculations – For example, a flat fee plus a fee for services based on an agreed list of extraordinary services to be provided during the agreement period. The client and the brokerage agree that the fee will consist of two components, neither of which will be a percentage of the asking price or final sale price. The total fee includes a $5,000 flat fee for listing and marketing the property and a total of $5,000 more for three extraordinary services consisting of $2,500 for open house marketing, $1,500 for preparation and distribution of a unique property brochure and $1,000 for development and maintenance of a single property website for a total of $5,000 + $2,500 + $1,500 + $1,000 = $10,000 plus GST.
Mortgage Broker Fees
A mortgage broker’s fee varies depending on how it’s calculated. Fees can be paid by the financial institution or by the borrower.
Residential mortgage brokerages usually don’t request fee payments prior to certain events occurring – like an accepted mortgage commitment and the lender supplying a disclosure statement. However, this only applies to personal, family or household mortgages. If your purchase requires mortgage financing for commercial, manufacturing or professional property usage, the mortgage broker will send proposals to various lenders looking for one that approves your application.
Despite this work, lenders may turn down your application because it didn’t meet their qualifications – not because your broker failed in their efforts. To cover this service expense, the brokerage may charge a non-refundable fee, ensuring compensation whether your application is accepted or not.
Keep in mind the mortgage industry member must disclose to you in writing that the fee is non-refundable before accepting it from you. Again, this isn’t a requirement for personal, family or household mortgages.
Make sure you know whether the fees are refundable, and don’t sign any agreement until you’ve read, understood and agreed to it.
Other types of fees
Payment of a Bonus
A bonus is a payment over and above the usual fee. It’s sometimes offered to encourage activity on a property. You’re entitled to know about any payments an industry member might receive as a result of your transaction. Knowing this information allows you to determine if the industry member is acting in your best interest.
For example, a seller looking to sell quickly is offering buyer’s representatives a “bonus” so they notice his listing. Before accepting this payment, the buyer’s representative must advise his buyer client of the bonus, and obtain written consent from them to receive it. As with all fees, the bonus is first paid to the brokerage, then to the industry member. This payment and receipt of money may seem innocent enough, but keep in mind that unscrupulous industry members might deliberately encourage you to buy a property offering a bonus, whether it’s suitable for you or not. Under these circumstances, the action is not so innocent.
Industry members will often refer you to other industry members for services. For example:
- A real estate industry member can refer a client to a mortgage broker for their financing needs.
- A mortgage broker might refer a client who has discussed mortgages with them to a real estate industry member to purchase a property.
- A residential real estate industry member may have a client requiring commercial or property management 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, industry members must disclose to you in writing that your information is being forwarded, and that they may receive a referral fee. They must take reasonable steps to ensure the person they refer you to is authorized to perform the activities. As with all fees, referral fees are paid to the brokerage, with the brokerage in turn paying the industry member.
The Real Estate Act prohibits a real estate brokerage from calculating a fee based on the difference between the gross sale proceeds and the net sale proceeds deemed acceptable by the seller. This situation may occur when a poorly informed seller under-estimates the value of a property and a dishonest practitioner 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 neighborhood sold for that amount. The industry member already knows of the neighborhood sale. In fact, he has been in the property and knows his seller’s property is far superior. Rather than $150,000, the industry member thinks his 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 he is unscrupulous and willing to contravene the Real Estate Act, he 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 neighbor got $150,000, but then had to subtract the commission costs and his agent 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 agent would collect $20,000 as his commission – far more than he 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 officially set out by any industry body. So industry members may not indicate these fees are set and /or not negotiable.
Wise consumers know that the cheapest deal isn’t always the best deal. The old adage of, “you get what you pay for” applies to real estate services too. Shopping around for an agreeable mix of services offered at a reasonable commission is recommended. Every brokerage will have its own policy on services and fees. Consumers are free to negotiate their own agreement with the brokerage of their choice.
Before entering into a contract, you’ll want to compare services and fees of a few brokerages by interviewing industry members. The interviews help you understand the range of commission rates available and the different types of services provided at the various rates. This assists consumers in working out a fair and equitable arrangement with their brokerage of choice.