Are real estate agents ripping you off? - Macleans.ca

Are real estate agents ripping you off?

High fees. Hidden data. It’s the realtor racket.

by
The Realtor Racket
Photographs by Deddeda

From the moment Robert Peden chose to sell his Victoria home, he was adamant not one penny would go to a full-service real estate agent. Instead, Peden is doing what a small but growing number of Canadian homeowners have opted to do—handle the sale on his own. “I’m not prepared to pay full-service real estate commissions because they’re totally out of whack,” he says. “No realtor is worth that kind of money.”

Tough words. But Peden isn’t just any aggrieved home seller. Thirty years ago he worked as a real estate agent himself. And he’s disturbed by what he’s seen happen over that time. Then, as now, commissions amounted to about five to seven per cent of a home’s sale price. But because the typical 1970s house sold at a fraction of today’s eye-popping levels, real estate commissions were around $2,500. Today, with Peden’s home worth an estimated $460,000, the commissions might easily hit $25,000. Even after factoring in inflation, realtor’s fees have exploded in size, and it’s left him wondering: what exactly do real estate agents do now that they didn’t 30 years ago to warrant such a staggering increase in pay? “The problem with realtors today is they’re more order takers than salesmen,” he says. “Honest to God, I think a used car salesman works harder at selling a car and earns a fifth of what these people make.”

When it comes to Canada’s other favourite pastime, real estate, griping about realtors is right up there with gossiping about house prices at cocktail parties and picking out marble countertops. But in recent weeks, the backlash against real estate commissions has taken on a more urgent tone. The Canadian Competition Bureau has set its sights on the way realtors have, for decades, operated and charged for their services, and in February it filed charges with the Competition Tribunal claiming realtors are engaged in anti-competitive behaviour. The Canadian Real Estate Association (CREA) has fought back, labelling the accusations “fundamentally misconceived.” But however the battle plays out, don’t expect realtors to give up the outdated and expensive system for buying and selling homes without a fight. Critics call it a monopoly, and it’s made many in the industry very well off.

The crux of the competition bureau’s argument is simple, even if the process of untang­ling the alleged real estate monopoly is not. The dispute revolves around the control real estate boards exert over the multiple listing service, or MLS, the vast national storehouse of available properties. The system is owned and operated by CREA, and by some estimates 90 per cent of all home sales go through the MLS system, a stripped-down version of which is available to prospective home buyers on the Web. As it stands, only registered agents can list homes on the service, and because of that iron lock, the bureau says sellers are forced to pay for services they don’t need. The agency says the rules have also prevented agents from offering alternative pricing options to consumers based on lower levels of service.

CREA has attempted to head off a court battle with the bureau. Last month, its members voted to tweak some of its rules. Under the new terms, sellers can pay agents a flat fee of a few hundred dollars to list their homes on MLS, without having to hire the agent for the entire sale process. The group also modified rules that blocked sellers from posting their phone numbers alongside their listings. The new measures haven’t satisfied the competition watchdog, though, which is reportedly concerned that local real estate boards have also been granted powers to enact their own sets of regulations down the road. The worry is local boards could erect new roadblocks to competition from discount real estate brokers, and the bureau would then have to go after each board separately.

While the competition bureau has had an eye on the industry for decades, the current dispute stems in large part from the efforts of one man, Lawrence Dale, a Toronto real estate lawyer. Eight years ago, Dale and his cousin, Stephen Moranis, whose mother was the first female president of the Toronto Real Estate Board, launched Realtysellers after seeing the business potential for a discount brokerage. The idea was to allow clients to choose from a menu of different à la carte services, including flat-fee listings on MLS. “I saw the opportunity to be the Charles Schwab of the industry,” says Dale, who previously headed the company that bought the Toronto Blue Jays’ SkyDome stadium (now Rogers Centre) in 1999, and is the former owner of Toronto’s Chestnut Park Real Estate.

While Dale says he expected to encounter resistance from the industry, he claims he was not prepared for the all-out battle that followed. He is currently suing CREA and the Toronto Real Estate Board for implementing new rules that ultimately forced Realtysellers out of business in 2006 by requiring an agent who lists a home on MLS to remain the agent of the seller throughout the entire process. He says his case finally attracted the attention of the competition bureau, which argued in its application to the tribunal that the restrictions placed on the use of MLS “have virtually eliminated suppliers of fee-for-service real estate brokerage services in Canada.” For its part CREA said in court filings Realtysellers suspended operations because of impending disciplinary proceedings by the Real Estate Council of Ontario.

CREA declined to make anyone available to be interviewed, citing its ongoing legal battle. But the primary defence put forth by realtors who don’t want others gaining access to the rich store of data in the MLS system is: we built it, it’s ours. The database was established nearly half a century ago, and over the years the realtors’ association has spent tens of millions maintaining it.

The Realtor Racket
Photographs by Deddeda

The glaring problem with that argument is realtors paid for the MLS system with commissions the bureau now alleges were kept artificially high through realtors’ control of that very system. What’s more, there’s nothing proprietary about the raw data contained within the MLS, which is made up of information about homes that sellers themselves own.

One might have expected the real estate industry to suffer the same upheaval travel agencies have over the last decade. With the Internet making it easier to gather and disseminate airline and hotel information, sites like Expedia have made it fast and easy to book travel online, driving down the cost of travel for consumers. Many travel agents have closed shop. But the real estate industry has shielded itself from advances in technology. Over the last 10 years the number of agents represented by CREA has jumped from 66,000 to nearly 100,000.

Carolyne Lederer is an agent in Burlington, Ont., just west of Toronto, who has been selling homes for nearly 30 years. She says the industry has a poor track record when it comes to educating the public about the sale process and how agents earn their commissions. “In order to move from start to finish, there’s a long, drawn-out process that goes on behind the scenes,” she says, adding that agents’ experience and knowledge of the market can make all the difference for buyers and sellers alike. “You don’t pay me for what I do, you pay me for what I know.” In fact, she has taken the unusual step of writing lengthy explanations about the business on her agency’s website, including one article titled, “Commissions (or where does all the money go?),” in which she goes into detail—often excruciatingly—about realtor expenses. They include, according to Lederer, everything from the cost of owning a car and camera to “printer ink and toner cartridges, often by the case.” Needless to say, such explanations do little to convince critics the hefty commissions are deserved. After all, much of the supposed expertise realtors claim to offer clients comes from their stranglehold on market data.

In the U.S., the question over whether MLS amounts to a monopoly has already been debated, and the answer was yes. In 2005 the Department of Justice filed an anti-trust lawsuit against the National Association of Realtors. The case was settled three years later when the NAR changed its rules to no longer discriminate against discount brokers who use a flat-fee model. The battle still rages, though. Unlike Canada, America’s MLS systems are regional and run by local boards. Several states have imposed legislation to make it difficult for discount brokers to operate. Despite those hurdles, several alternative listing sites have sprung up, such as Zillow.com and online broker Redfin.com. One look at the wealth of data available on Redfin hints at where the Canadian market could eventually head. Among the features are historical sales data, analysis of recent transactions by neighbourhood, property tax information, and charts of local housing markets broken down by listing price and final sales price.

Before buyers and sellers get too excited about all the money they’ll save on lower commissions, take a closer look at the U.S. experience. Despite the rapid growth of alternative listing sites and discount brokers, rates have yet to budge. In 2005 the median commission in America was five per cent, according to DOJ data. By last year, that rate had actually inched up to 5.3 per cent. And that’s something Canadian realtors should keep in mind as they wage war against the competition bureau. Just because people have the choice of bypassing a full-service broker to go it alone while still enjoying the benefits of an MLS listing, when it comes to making a $500,000 decision, many will still be willing to pay for quality service. It’s just that under the existing scenario, consumers are denied that choice.