CREA at War with Competition Bureau

Let’s wade into one of the biggest fights to affect Canadians in some time.  I’m talking about the current war between Canada’s real estate agents and the federal Competition Bureau over fees.

If there’s ever an issue to galvanize real-estate mad BC bigger than compensation to agents regarding house sales, I’d like to know about it. Buying and selling homes is our provincial sport, the basis on which the BC economy was founded (sure, some will say it was lumber, but most of us know better).

The Competition Bureau says the Canadian Real Estate Association (CREA) makes it impossible for competitors to offer innovative services to consumers, such as flat-fee listings or individual services based on minimal levels of service, largely because it owns the Multiple Listing Service through which most residential real estate sales take place. The system forces home buyers and sellers to pay for services, such as conducting open houses, that they may not necessarily want, the  Bureau says.

CREA says it’s changed its rules to allow consumers to post their homes on the MLS, and that agents are allowed to set their own commission rates.

But I think what we have here is a misunderstanding of the fee-for-service model.  

The Bureau is saying that Canadians should have access to the listing service whether they want a real estate agent or not — essentially to have the ability to buy or sell homes themselves. CREA, which started the MLS and controls it, says that’s not really fair and it provides a much needed information service.

So, as in so many other cases, we’re fighting here over access to information. Yet another case of disintermediation — or eliminating the gatekeeper to information, and therefore, knowledge.

Like most people, my first thought was that the Bureau had a pretty good case. When houses are in the $600,000 range, real estate commissions can be pretty hefty.  I know when I’ve sold or bought a home, I probably felt a twinge of jealousy that my agent was earning such a chunk for what was essentially taking an order.

But that wasn’t always the case. There have been times when it was a lot tougher than that. Like when the market wasn’t so hot and my agent waived a part of the fee so she could make a deal work, and convinced the buyer’s agent to do so as well.

And that makes me think, hmmm, how much money do they make after all?

Well, let’s break it down.

Let’s say the commission is $13,000 on a sale, which I gather is pretty average. That means an agent who sells 5 to 10 homes a year (they’re not all Bob Rennie) earns $65,000 to $130,000 gross per year. Out of that comes probably up to half for sharing with other agents, paying for brokerage services — most agents are aligned with one broker or another — and, of course all the costs that come from being an independent entrepreneur, including such seeming trivia as “uniforms”, i.e. appropriate clothing, transportation, etc.

Since I’m an independent as well, I should point out that most independents put in long hours to earn fairly modest incomes.  For example, to earn the equivalent of a $60,000 a year salary — modest in today’s world — an independent agent, consultant, or any other kind of service entrepreneur has to charge a minimum of $80 an hour in fees. This covers such things as health care payments, EI, CPP, vacation, sick time, and many of the other things that wage-earners take for granted. It also covers much of the time spent in administration, marketing and many of the other non-paying tasks that are taken care of for the wage-earner by employers. And it presumes you’re working pretty steadily.

But many buyers of services, especially those used to earning wages,  don’t understand this. When they hear someone ask for $80 an hour for services, they presume that service provider is getting $80 an hour, 40 hours a week, day in and day out. And they think “that’s outrageous. I don’t earn that”.

But they do earn that, and much more. Earning $40 an hour in a job is the equivalent of about $75,000 a year in wages and benefits.

Of course, everybody would like to pay lower fees for everything. It’s part of this whole new world of low-cost or free that we live in today.

The reality though is that nothing’s free or cheap,  and when you accept those low or non-existent prices, you’re usually paying in some other way, perhaps with your information, or an inflated cost on an upsell, which you’ll inevitably have to get  because the “free” item is usually so inadequate that you upgrade.

It’s called the “freemium” model of business.
Free as a lure, then a premium price put on the real sale.

To bring it back to the original point, let’s now look at the alternative to the current real-estate fee system that everybody is so hot to change.

Real estate agents can charge you lower commission fees. And consequently they’ll do less for the money.

Or they’ll let you sell your $600,000 house yourself, and deal with all the  low-ballers and price-takers who appear at your door, or the far-too-high belief you have in the value of your home, which is going to guarantee that it sits on the market forever.

It’s a simple equation:  If you want lower fees, you’re going to get less service. Period.