6%

That’s the commission being offered to cooperating agents at developments like Post House Condos.

Let’s discuss the “merits” of paying agents 240% of their normal rate all in the name of selling a hole in the ground…

The discussion we had on Tuesday surrounding Trump Towers was more about representation (or lack thereof) in pre-construction sales-centres than anything else, but today I’d like to focus the topic on compensation.

The reader comments on Tuesday’s blog seemed a bit mixed: some people truly believe in “buyer beware,” and others feel as though representation and disclosure should be at the forefront of our business.

But let me throw another log onto the fire here…

What about compensation?

I have a serious problem with the fact that many on-site salespeople aren’t required by law to disclose the nature of their relationship to the builder, and to the buyer.  But that’s all hidden, and swept under the carpet.  I think we spun our wheels with this on Tuesday.

When it comes to compensation, however, it’s all out in the open!

I received an email this week from Post House Condos whereby they are offering a whopping 6% commission.

I’ve written about this subject before, but here we can actually apply it to a real life situation!

As you all know, the ‘typical’ commission received by a buyer’s agent or “cooperating agent” in a transaction is 2.5%.  Sometimes it’s slightly less, sometimes it’s slightly more, but 99% of the time, it’s 2.5%.

So what does it say about a condominium project that they’re offering cooperating agents 6%?

It’s normal for developers to offer more than 2.5%.  It’s ‘usually’ between 2.5% – 3.5%, but often we’ll see some whopping 4% commissions!

Once in a blue moon, we’ll see 5% commissions, and they cause a stir.

But 6%?  What’s next?

“Six minute abs?  You can’t do abs in six-minutes!  You need SEVEN minutes to do abs!  Not six minutes – that crap will never work!”

I suppose 7% is just around the corner, followed by 8%, but for now – let’s just work with what we’re given.

When I wrote my first blog post about 6% commissions last year, I had every pre-construction salesperson coming out of the woodworks telling me how hard they work, and how much they deserve their precious 6% commissions.  I’m not going to get into a conversation about the effort and work put into selling magic beans, that somehow justifies 240% of a normal commission.  That conversation could go on forever, and I’m not looking for justification on how much these salespeople know about magic beans, and how Magic Bean University tuition was expensive.

My issue is with the advertising of 6% commissions themselves, and what kind of signal this sends to the marketplace.

There are likely more than one-hundred pre-construction condominiums offering units for sale in the downtown core at the moment, and some of them are offering 2.5%, and selling like hot-cakes.

So draw your own conclusion here: what does it say about the project that is offering 6% instead of 2.5%?

Does it say that they’re having a tough time selling, and that they’re willing to pay 240% of a normal commission to entice buyer agents that currently have buyers under contract?

Feel free to come up with your own answer.

So when I received an email blast the other day from Post House Condos advertising two years of free maintenance fees, only 10% deposit, a 2% cash back incentive to the buyer, and of course, a 6% commission, I said to myself, “I wonder how these units are selling.”

For the record – I love this project!  It’s an awesome location in the St. Lawrence Market area, a very cool building design, and above all, they’re working to keep the two historical buildings on the current site (the red-brick post house and the yellow-brick De La Salle College).

I don’t want to talk about Post House directly, as that might be construed as picking on their development.  So let’s talk about a fictional development called ABC Condos whereby the developer is offering 6%.  Now, I can tell you how I really feel…

I think the “incentives” that ABC Condos are offering right now are cause for concern.  You’d be naive to think that a developer is simply offering up discounts and freebies out of the goodness of his or her heart.

If ABC Condos was selling easily, they’d offer the standard 2.5% commission, and they’d offer very few, if any, incentives.

So what would lead ABC Condos to offer almost 2 1/2 times the standard rate as compensation for a successful sale?  Well, I’d guess that the units aren’t selling!

Now take that a step further: if units aren’t selling well at all, then perhaps it’s a poor project.  So the developer, by offering 2 1/2 times the normal commission, is banking on Realtors to bring their clients to the project and endorse it, all in the name of a juicy 6% rip!

Am I going out on a limb here?  Or am I just connecting the dots?

I want to make two assumptions, and tell me if I’m wrong:

1) A development that is selling well would likely only need to offer a 2.5% commission.
2) A development that is selling poorly would be more apt to offer a 6% commission.

Is that fair?

So a message to all the active buyers out there: if your Realtor brings you to a sales centre that is offering a 6% commission, you have cause for concern.  You should ask all the right questions, and do a lot of research on the developer, the construction company, the engineers, the architect, and all the principals involved.  Find out if they’ve had projects fall through before, and above all – find out exactly how many units in the building are sold FIRM.

Now that leaves me with a burning question: if you decide not to have a Realtor represent you, and you walk into the sales centre by yourself, and purchase through the developer, why can’t YOU get a 6% discount on the price of the property?

Because I can absolutely, positively, guarantee that if you walked into a sale centre and said, “Tell you what, I’m not using Bob Smith as my Realtor for this transaction, but since you’re offering 6% commissions to cooperating agents, I’d like to see that same 6% taken off the sale price,” the developer and the in-house salesperson would collectively say “no.”

Do you know why?

Because they’ve already got you sitting in their sales centre.

That’s all they’re after.

A developer needs to bring buyers into his sales centre, and that can be accomplished in an infinite number of ways.

Sometimes, the brand itself brings people in, ie. “Trump.”

sometimes, it’s partnerships with existing brands, like what Festival Tower did with T.I.F.F. and Bell, and like what DNA3 did with Fashion Week.

Sometimes, it’s good old fashioned marketing and advertising!

And sometimes, not matter what you do, right or wrong, you just can’t seem to get people into your sales centre!

So when all else fails, offer a fat 6% commission, and the bottom-feeding Realtors who are only after their next commission will sell out their naive buyers by bringing them right into the wolf’s lair.

I have a feeling I’m going to take a lot of heat for this post – from the bottom-feeding Realtors, that is, but so be it.

I speak the truth, even if it’s tough to stomach.

These cronies that are “experts” in pre-construction condo sales are nothing but magic bean salesmen.

Ask a teenage drug-dealer why he sells drugs for $1,000 per day instead of working behind the deep-fryer at McDonalds for $11 per hour.  Aren’t you answering your own question?

15 Comments

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  1. I believe that is one of the more significant information and facts to me. That i’m happy learning your own content. Nevertheless desire to opinion on many common issues, The web page preference is best, your content articles is definitely fantastic : N. Excellent career, many thanks

  2. Brad says:

    The reality of the comission rate is not just about a poor project. It’s about running for the hills in a market that we all know is about to have a serious correction…and getting the few buyers that are in the market now. The supply coming on stream is so topping over demand and they know that and are trying to not be the last on left standing! 6% is about compromising the integrity of the broker and having them influence buyers based on personal gain….and NOTHING else!

    The real estate industry is one of the only major industries that allow those that benefit directly provide the “facts” to the consumer. The things I see coming from agants is borderline criminal sometimes. If an employee of a bank or trader created the opinion the RE agents do and directly benefited they would be charged by their governing body.

    Agents have a duty to provide sound advice that has nothing to do with compensation and a 6% comission is something EVERY agent should be concerned with.

    The consumer will stop using agents the second they have an option that they feel comfortable with and technology is going to provide that….and things like those invcentives only push the consumer closer to seeking that other option.

  3. Andrew says:

    It should be mentioned that commissions are based on “net of HST”, which means that lets say the price is 300000, they subtract the HST which would be be 39000, and pay the agent the commission.

    In this case the commission would be based on 261000.

  4. Mark Brisebois says:

    Went to the Post House Condos website and I see that the vast majority of the units are SOLD. Seems to me like the project is a huge success, and not in any trouble as intimated in your story.

    1. IanC says:

      SOLD Says who? What’s their definition of “SOLD”.

      SOLD units may include units that the developer holds off the market for the time being… or reserved for other agents to sell.

      They could have zero actual sales, but advertise 90% “SOLD”.

      1. Mark Brisebois says:

        IanC, why are you calling the owners of the project liars? They say they’ve SOLD 85%, and there’s nothing out there to contradict that. Put up or shut up, as they say…

        1. ScottyP says:

          If the Internet says it, it has to be true!

  5. JS says:

    Its unfortunate that its come to this. The fact of the matter is that in pre-construction condo sales in Toronto 90% of the sales are done through outside agents. The builders feel that these agents will basically tell their clients where to buy end of story and the increased commissions will justify this. The reality is that money is FAR better spent by the builders on incentives for their purchasers! Whether they reduce the overall purchase price, offer better standard finishes, no occupancy fees for a period of time etc. There are very few brokerages who profess to be both sales and marketing professionals and act on behalf of these builders. They (and you know who you are) need to explain to their builder clients that at the end of the day they should NEVER pay over 4% (which is still high but the time frame for the agent to get paid at least somewhat justifies this amount.) and to rethink marketing strategies to benefit the PURCHASER not the Realtor selling it to them.

    These Brokerages supply sales staff for the condo sites, who unfortunately in the most part are no more than order takers and rely on outside Realtors to do their work. This has to end, until the Realtors in the sales offices know their product inside and out, and understand all of the intricacies of selling the looser in all of this will continue to be the Purchaser. Its a sad statement on our industry…

    1. Ralph Cramdown says:

      The benefit to the developer of greasing the agent’s palm in this manner is that buyers from the “grand opening” don’t find out that remaining units are now effectively reduced. He’s sold some at full price and some at a markdown, without the stink of failed/unpopular development reaching the general public.

      And not all buyer agents have to be crooked for their gambit to work, just a few of them.

      But hey, it’s all spelled out in OREA’s standard BRA, right? Clause 2, commission: “The seller might bribe your agent with a higher commission, which he gets to keep.”

      1. Appraiser says:

        Poor Ralphy – so naive it makes me cringe. You think the nasty Realtor is only motivated by the commish and is going to keep it all himself? Yikes.

        The builder is far more savvy than you think – Mr.too clever by half. The builder is looking to attract “qualified buyers” (i.e already working with a realtor) not joe blow discount hunters on their own who are totally flakey at best.

        Here’s how it works Mr. amateur: The realtor entices his client to the project by offering a good portion of the excess commish as a discount / kick-back to his client. Get it?

        Presto! No more need for comments from goofs named Ralph.

        1. Ralph Cramdown says:

          What about the Mercedes, does the client get to drive it one month a year? And why would a realtor ‘entice’ a client to one project over another if his payday is the same? Sorry Appraiser, you’re all wet. 6%, if the agent keeps it all, is a 140% bonus over his customary commission, but if he refunds it all to his client, it’s a whopping 3.5% discount. Some enticement!

          You sound a lot grumpier than usual. Been hitting the sauce?

          1. Appraiser says:

            How’s that market timing going for ‘ya Ralphy?

            P.S. Found any new non-existent listings that you pretend to be watching closely?

  6. Kim says:

    First off, I’m a newish reader and I love your blog. I used to read one by another realtor but that one is absolute garbage now, whereas yours is entertaining and informative!

    I wish I had known about yours last year when I bought my pre-con, though I don’t think it would’ve changed much. With every post that you write about how some developers are doing business (badly/unfairly to buyers?), I feel like mine went the opposite way and it’s weird.

    I had registered for my condo and when I stopped by the sales centre to find out the prices, the sales rep asked if I had an agent and to come back with one if I was serious about purchasing. Strange, since I thought they usually try to deter buyers from bringing agents but whatever. They were giving 4% and so my agent and I are splitting it 50/50, though I was the one who brought the project to them. Better than nothing I suppose and I felt a little bit better that they were there to look at the contract as well. I still have no idea if this is normal practice or not though.

  7. AsianSensation says:

    Total conflict of interest.
    If a buyer goes sans-agent will they get a 6% reduction right off the top?

    FRANKS AND BEANS!!!!

  8. Pen says:

    An 8% offer landed in my junk mail folder earlier this year along with a free Mercedes, bonuses in increments of $5,000 depending on the number of units sold – 2,4,10 – all on the A list roster of buildings.

    An online new projects site which this year became a registered brokerage advertises a cash back to buyers claiming they do this because it’s not fair to buyers that more expensive properties pay REALTORS bigger commissions. But,they exclude from that cash back any of the above or any amount offered via VIP access. When asked why their official response was no longer about bigger commissions but that some builders may only offer a few hundred dollars.

    There is logic in that answer somewhere, I just don’t know where.

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