A CBC Marketplace investigation has found that some real estate agents are breaking the law by steering unwitting buyers away from low-commission homes.
Posing as homebuyers and sellers, Marketplace tested if real estate agents are engaging in this anti-competitive behaviour and found some agents deceiving the very buyers they are supposed to represent, in an effort to pad their own bottom line.
- Want to know more about our investigation? Marketplace producers will be answering your questions in the comments at noon ET.
Experts and industry insiders say what Marketplace has uncovered is indicative of an industry working for the benefit of real estate agents, at a cost to home sellers and buyers.
“There’s a huge inertia, and maintaining the status quo, it absolutely benefits existing realtors 100 per cent,” said broker and real estate agent Michael Walsh, one of the few speaking out on this issue.
The Canadian Real Estate Association (CREA) and the Real Estate Council of Ontario (RECO) would not talk to Marketplace about the investigation. However, shortly after learning about the findings, RECO issued a notice about steering to the over 93,000 real estate agents, brokers and brokerages under its purview, noting that such behaviour breaches their code of ethics.
“In addition to being illegal, the conduct undermines consumer protection, consumer confidence and the reputation of the real estate profession as a whole,” said the notice.
- Watch the full investigation tonight at 8 p.m. (8:30 NT) on CBC TV or stream anytime on CBC Gem.
Across the country, the National Realtor Code of Ethics, as well as provincial real estate laws, dictate that agents must act with honesty and promote the interests of the individual they represent. Some provincial laws, including in Alberta and Ontario, address the issue of steering specifically.
The Real Estate Brokers Act (REBBA) in Ontario states that when a buyer enters a representation agreement with a real estate agent, the agent “…shall inform the buyer of properties that meet the buyer’s criteria without having any regard to the amount of remuneration, if any, to which the brokerage might be entitled.”
Not doing so is called steering.
But those calling the practice out say RECO and other regulatory bodies are not doing enough to protect consumers and foster an industry that is fair and free from abuse.
‘It’s not fair, and I think more people have to know about it’
When Joanne Petit and her husband, Frank, put their house up for sale this spring they decided to do it without a real estate agent.
Joanne and Frank lived in Vaughan, Ont., where agents typically charge home sellers five per cent commission on the sale price of their home. In Joanne’s case, this would have amounted to over $73,000 plus 13 per cent HST.
In real estate sales, the commission paid to the listing agent by the seller is shared with the agent representing the buyer. Typically the commission is split in half.
In the industry, it’s referred to as the co-operating brokerage commission, and when a property is advertised on the Multiple Listing Service (MLS), the industry rules require that an amount of commission for co-operating brokerages must be included. This information, however, is hidden from public view and only visible to other agents and brokerages through an internal version of MLS.
To save on some of these costs, Joanne decided to skip the listing agent and instead paid a $200 flat fee to a discount brokerage that listed her house on MLS but left the rest of the work to her.
“I know there have to be people like myself looking on MLS to buy a house … and [they would] say to their agent, ‘I would like to see this house,'” she reasoned.
Joanne was still prepared to pay the real estate agents representing the buyer one per cent commission, which totalled nearly $15,000. After six weeks on the market, Joanne received zero calls from agents with interested buyers.
“They called a lot because they wanted us to sign with them, they wanted us to list with them, they wanted to be the selling agent,” said Joanne, who eventually asked one of those local agents why no buyers were interested. She says he informed her that her house had been, in the words of the agent, “blackballed.”
“Agents want to work with agents, and agents want their 2.5 per cent commission,” Joanne told Marketplace. “It’s not fair, and I think more people have to know about it.”
Marketplace producers posed as homebuyers with hidden cameras
To test if Joanne’s house was indeed being snubbed by agents avoiding the low commission, producers from Marketplace posed as homebuyers looking to purchase a home just like hers and in the same neighbourhood.
The team contacted three local real estate agents who showed up first in an online search.
Each of the agents was asked to book a showing for Joanne’s property as well as two other nearby properties listed on MLS.
Marketplace‘s test found that two out of the three agents steered the potential buyers away from Joanne’s home.
While one agent was upfront with the buyers about the low commission and offered to help the would-be buyers purchase the home anyway, the other two agents did not tell the buyers about the commission and discouraged or thwarted them from seeing the home.
One of the agents steered the buyers by telling them the house was overpriced by $200,000, and said the owners would not budge on price. The other agent told them she was unable to book a showing at all, and suggested the property might have tenants, a turnoff for many homebuyers wanting to move in themselves.
WATCH | Real estate agents found ‘steering’ on camera:
Joanne said she never received a call from the agent who said she couldn’t book a showing.
She says the other agent did call but didn’t ask if they would be willing to negotiate, even though that agent told the buyers they would not. Joanne says the agent also didn’t inquire about the price of the home, which was in line with other sales in the same area.
“Right off the bat, she wanted to know if she was getting 2.5 per cent [commission]. When we told her that there would only be a one per cent commission, she said, ‘OK, thank you, I’m not interested, I’ll keep my clients to myself.'”
The identities of the three agents have been concealed because Marketplace‘s investigation determined that this problem is industry-wide, and not isolated to these specific agents.
In a second test, Marketplace made calls to 50 real estate agents in five markets across Canada. Half the time the team called as homeowners looking to sell, and half the time as buyers. When producers asked 25 agents if they, as sellers, could lower the commission they offer to buying agents, 88 per cent warned against doing so.
“Although they’re not supposed to do it, some agents may be very cognizant of what they’re getting paid and push their buyer to another home,” said an agent in Halifax.
“I have had agents say to me, ‘You know we’re looking at two houses, they’re both a good fit but I’m definitely sort of massaging them towards yours because there’s more in it for the realtor,'” said another agent in Winnipeg.
‘It’s just completely unethical’
RECO says that commissions are negotiable and “sellers decide how much, if anything, they wish to offer to pay a buyer’s brokerage,” but when all 50 agents were asked about the commission they charge, nearly all quoted the same amount. A quarter of the agents referred to their fee as standard, and the majority said they would not negotiate. Marketplace shared what they documented with real estate lawyers including Lisa Laredo, who’s practiced real estate law in Ontario for over 15 years.
“It’s beyond steering, it’s just completely unethical,” said Laredo about the hidden camera test. “You’re not actually providing a service, you’re not servicing anyone but yourself.”
When Marketplace reached out to the two agents who steered, both denied doing so. The one also stands by her assessment the house was overpriced.
Michael Walsh, who runs an agency exclusively for buyers, is not surprised by the findings of Marketplace‘s test and says the current framework for real estate sales enables steering.
“That’s part of the inherent issue in the model where buying agents are offered compensation by listing agents. We wouldn’t be having this conversation if that wasn’t in place.”
Historically, all real estate agents only worked for home sellers and only had a fiduciary duty to them. It wasn’t until the 1990s that buyers’ agents came to exist in Ontario after some agents advocated for the change. However, the commission structure, wherein sellers incentivize agents to bring buyers, remained in place.
Walsh and researchers studying the industry agree that the only way to truly fix this problem is to change the way real estate agents are paid, so the buying agent’s commission is not paid by the home seller via the listing agent.
‘The industry functions as a cartel’
“In terms of commissions, the industry functions as a cartel. They enforce on the entire industry a certain high and relatively uniform commission level,” said Stephen Brobeck, a senior fellow and former executive director of the Consumer Federation of America, a non-profit organization based in Washington, D.C.
Brobeck’s research, which spans over 20 years, has determined that “decoupling” realtor commissions could drop the standard rate of real estate commission by one to two per cent over a couple of years, saving consumers billions of dollars a year.
“If the commissions are decoupled, for the first time buyers would be able to negotiate their commissions and they would come down. That would also encourage sellers to negotiate more vigorously with their listing agents and those would most likely come down,” Brobeck said.
“Furthermore, it would give discounters a far greater opportunity to penetrate this marketplace, because they would not have to pay the going rate for buyer agent commissions.”
Brobeck’s argument and how commissions are paid is also at the core of two large anti-trust lawsuits in the U.S against the National Association of Realtors and major brokerages including RE/MAX LLC, Keller Williams and Realty Inc. The class-action suits claim that “anticompetitive conduct causes America’s homebuyers to pay inflated commissions.” These claims are also currently under investigation by the U.S. Department of Justice.
Discount brokerages make up about 10 per cent of the market share in the U.S. There are no figures available for Canada but it’s considered to be about the same or less according to discounters in the industry.
Brobeck says it’s now up to provincial governments to make this change happen. Until then he also recommends that consumers not give up on negotiating the commission they pay
“If you’re a seller you ought to try to negotiate the commission down by a full percentage point,” he said. “Secondly, if you’re trying to sell an expensive home, or you’re working with a broker who will help you sell one home and buy another home, they may knock an additional percentage point off the home.”
Joanne and Frank, however, remained steadfast in their resolve to sell without a listing agent.
“The right person is going to come along at the right time,” said Joanne defiantly.
And in the end, patience did pay off. After five months on the market, they sold their house at full asking price to a private buyer, with no agents involved.