I hope I’m not opening a can of worms here, but I think the Realtor-haters will have a field day with this one.
I’ve always thought pre-construction condo sales commissions represent a conflict of interest when they pay more money for less work…
Sometimes I just know when a blog post is going to create controversy.
I’d be lying if I said I didn’t do it by design sometimes, but other times it seems that the hot topics just seem to ruffle more feathers.
When I finished writing last Friday’s post “The Friday Rant: Keep Guessing,” I told my fiancée, “I’m going to get a lot of nasty comments on this one, and there are going to be a lot of personal attacks.”
But you know what? 50+ comments demonstrates the passion of my readers, and the interest level in what I have to say.
Even when people don’t agree with what I write, I’m still enthused. My reader with the handle Ralph Cramdown seemed to vehemently disagree with Friday’s post, but his responses were respectful, professional, well-written, and intelligent. And for that, I’m thankful.
It’s the people that have nothing to offer other than, “YOU’RE A FRIGGIN MORON YOU LOSER” that really bother me. I always approve their posts regardless, but these people just demonstrate their own ignorance, because if they were intelligent enough to actually offer something intelligent, they’d certainly do so.
It’s like having a pleasant conversation about the Toronto Maple Leafs, filled with statistics, factual and empirical evidence, and then having a Vancouver fan yell, “LEAFS SUCK, GO CANUCKS!”
But the computer age has given us the plague known as the anonymous commenter, and often you don’t know if this person is intelligent (well, actually we usually know…), if they live in their mother’s basement, or if they work for $20,000 per year cleaning toilets in St. Catharines and just hate the fact that they can’t afford to own real estate.
In any event, I have a thick skin, I believe in what I do, and I generally don’t care what people write on my blog, even when they attack me personally.
So it is with that in mind that I delve into a VERY touchy subject, and perhaps shed some light on a business practice that many consumers know nothing about. I’m fully aware that the Realtor-haters are going to have even more ammunition after this blog post, but I want to make my feelings known.
The photo above is no accident – it clearly shows the statistic: 4%.
This, for the most part, is the commission received by a Realtor when selling a pre-construction condominium.
Sometimes it’s more, and sometimes it’s less, but over the last decade, I would say that this is likely the average.
You all know how I feel about pre-construction condominiums in Toronto. In a nutshell, I think developers are crooked and they deliver an inferior product, the risks associated with purchasing are exceptionally high, and the prices no longer make any sense because pre-construction pricing is now level with that of existing, comparable resale.
So it is my contention that the reason developers offer 4% commissions is simple: they want Realtors to sell over-priced, risky investments their buyer-clients.
And with that, I can expect to endure a lot of heat from Realtors who “specialize” in pre-construction sales, but you know what? Throw it at me. I can handle it.
The typical commission paid to a Realtor upon successful sale of a residential property, be it house or condo, is 2.5%.
So why then do we get paid 4% to sell pre-construction?
And when you consider that with most new condo developments, we need to merely walk through the door (or to use business lingo “cross the threshold”) with our clients, sign them in and attach our business card to their registration, and we are “protected” and will be paid a commission, I think you’d agree that there isn’t nearly as much work involved in pre-construction condo sales as there is in resale.
Those who disagree will argue, “There’s a ton of work done before-hand. We attend previews and launches, we scout locations, and we pick only the best pre-construction properties to show to our clients.”
Sure you do. And just how are the crab-cakes and chicken-skewers at those “launch parties” you speak of? How pretty are the girls that are paid to smile and make conversation with you? It’s such a tough life…
I’m arguing on the basis of my opinion that pre construction condominium investing is a fool’s game in 2012, so I don’t understand why any experienced, reputable Realtor would sell a pre-construction condo to his clients.
King West pre-construction developments are charging $650 per square foot for a building that ‘might’ exist in 3-4 years, but you can buy a comparable one today for $590 per square. Show me where the advice, guidance, experience, and value exists in leading your client down this deliciously crab-cake-filled road.
Some of my competitors have shot back, “Some of my clients aren’t ready to buy and take possession today, and they just want a place to park their money.” So park it in the exact same condo that’s actually built, that costs 10% less, and don’t “help them” lock in that juicy 0.00% return. Or be honest and tell them they should buy a GIC, and ETF, or a REIT depending on their risk threshold, and forego the massive risk associated with an investment that you can’t sell if the market turns, like a piece of paper that promises to one day turn into a condo.
And hence the conclusion to my argument: builders offer 4% commission to entice Realtors to sell their over-priced crap.
There. I said it.
This is a massive conflict of interest, in my opinion. Realtors are being paid more to essentially do less work than they would for a comparable resale transaction.
And it doesn’t end there!
Back in 2008 or 2009, the building down the street from me on Richmond called “The Modern” was offering a whopping 6% commission to agents during a special one-day promotion. So if a Realtor sold a pre-construction condo at 320 Richmond Street instead of a resale condo across the street at 323 Richmond Street, that Realtor would receive 240% of the normal commission.
Am I going out on a limb by saying that this might entice some Realtors?
The simple truth is: many Realtors are hanging on by a thread. They might see the potential to get paid for doing 2.4 deals instead of one by simply selling a piece of the giant hole in the ground and all the risks associated with it.
I take a sh!t kicking because I’m brutally honest, and sometimes people don’t like honesty. People don’t want to know that I think their condo at 4K Spadina or 25 Telegram Mews is a pile of junk, and they respond, anonymously, by attacking me. But what’s the alternative? A glad-handing salesman who gets paid 240% of a normal commission to sell you something that isn’t a good investment and comes with a mountain of risk?
It’s no coincidence that developers pay Realtors 3%, 3.5%, 4% or 6% to sell their projects.
Do you know what the people working at the sales centre get paid? The people who actually work for the developer? How about 0.1% – 0.5%. Or a flat rate like $1,000 per unit.
So again, I ask, is it a coincidence that the developers pay cooperating agents, or “buyer agents” 4% to bring in their clients under contract and put them into pre-construction units?
I don’t think so.
I think that it’s very easy for a Realtor to be lured in by the big bucks, and developers know this.
Look, Realtors are salespeople, like any other industry. Personally, I don’t consider myself a true salesperson first. I would never sell pre-construction, whether it’s 3% or 8% because I don’t believe in it, and I intend to be successful into this business for the next thirty years so I’m going to satisfy all my clients.
But like any other industry on the planet, there are those people who are in it for the short term, and the immediate pay off. Lawyers, doctors, accountants, tradespeople – there isn’t an industry on the planet that doesn’t have somebody cutting corners and/or taking a quick buck.
I’m just pointing out what I consider to be a bit of a blight in my own industry as I continue to be unbearably honest about every facet of real estate.
Is it a “conflict of interest” by definition? Or is it just a scene from Boiler Room where Giovanni Ribisi and Vin Diesel sell shares of companies that don’t exist because they get paid ten times the commission?
Either way, some of the blame has to fall on the consumer.
So do your homework – on both your agent and the property they’re trying to sell you…