CREA Settlement with the Competition Bureau.
Now that all of the knee-jerk and emotional reactions have ended, it is time for some analysis on how this change will affect the Canadian real estate landscape both in the short term (24 months) and long term. As we have observed over the past 18 years of analysis, whenever there is a regulatory change there are both intended consequences of the change as well as the unintended (and often negative) consequences. This situation will not break this pattern. This paper will answer:
First the good:
- KEEPS INTEGRITY OF MLS.CA DATA: The settlement does deal with the information integrity issue of MLS. Any situation that would have allowed any unlicensed person to post any property on MLS would have had the potential of lowering the integrity and accuracy of the information on the site, a big concern for Canadians as we have come to rely upon certain standards. The agreement states that the listing must still flow through a licensed real estate agent and because they are licensed they must live up to the standards or risk their livelihood.
- NEW BUSINESS MODELS: The settlement will now allow the many real estate entrepreneurs sitting on the sidelines to build a business model based on this new reality. This should work in the Canadian consumer’s favour as new models are developed that will allow differing levels of costs and services to be provided. As with any major market game-changer, we will witness many models being touted over the coming 18 to 24 months with only a few surviving to become permanent models.
- PROS WILL PROSPER: Professional, full-service realtors who run their business like a true business and have built that business on the qualities of their added service, strategic marketing and overall market and negotiations knowledge will continue to do very well under this model. Realtors who haven’t taken the industry as seriously or whose main business model has been to list as many properties as possible, and wait for another realtor to call, will feel the pinch unless they change their business model. These changes will end up lowering the number of licensed realtors over the coming years.
- INCREAE IN SELLER’S REMORSE: Today’s market conditions have shifted to favour the buyer. That means it takes a lot more knowledge and marketing strategies to sell a property than it did during the boom, when the Competition Bureau initially brought this matter up. That means now, more than ever, is the time where you need the support of a professional to move your property but due to these changes more people will opt to ‘go it alone’ than in the past. During a boom it is simple to sell a property; during regular or slow market conditions the transaction becomes more complex and costly.
- PROLONGING MARKET SOFTNESS: The option of low ‘barrier to entry’ for potential sellers will bring an increase number of active listings by unmotivated sellers. These will be sellers not really inclined to sell, but will if they get a high enough price. This will lead to an increased number of listings, which will make the sales-to-listing ratios look worse than they actually are when they are compared to historic numbers. This increase in listings, and some sellers selling for less than market value due to perceived commission savings, will also keep average sale prices down for longer than would be expected under normal conditions.
- MARKET STATISTICS COMPARISONS NOT ACCURATE MEASUREMENT – Many people and pundits use housing market statistics to comment on the health of a housing market. This is like trying to drive across Canada while staring into your rear-view mirror – you just can’t be accurate. GDP & Job Numbers and in-migration are the underpinnings of any property market – without these you will have stagnation or drops in values. This being said, those who do continue to use the housing stats will find their data to be even less accurate due to this new CREA agreement. Due to low barrier of entry for listings on MLS, there will be more listing coming on, so even if sales begin to increase or even stay flat the market will look like it is underperforming. Key housing market ratios will be skewed and will be an inaccurate indicator of market health if compared to statistics from ‘pre settlement.’ Sales-to-Listing ratio will decrease even as sales increase, average days on market will slowly increase (as unsophisticated sellers leave their properties on for long periods of time).
- SELLER UP FRONT FINANCIAL RISKS: Under the old system, sellers had no up-front financial risk when putting their property on the market (no marketing costs, no listing fees, etc.) Now, when they choose the a la carte selling option, the seller will have to pay the fees (listing fees, lock-box fees, signage fees, advertising, etc) whether their property sells or not. So, if the property doesn’t sell, the seller will be out these expenses. Under the old model, the realtor took this financial risk in most cases.
- BUYER’S COMMISSIONS STILL PAYABLE: Sellers will still have to offer a buyer’s realtor commission if a buyer is brought to them by a real estate professional. If the seller is saving commissions by not using a realtor on their side, that doesn’t mean that they can get away with not paying a potential buyer’s realtor commission. The seller will dramatically reduce their number of potential buyers, if the seller is not offering a payment to a realtor who brings a buyer to the table.
- CROSS PROVINCIAL BORDER CONFUSION: Cross provincial border issues will occur in the first stage of these changes. The most common issue will be when a consumer who owns a property in one province pays a zero commission company, who happens to be located and licensed in another province, to list their property on MLS.ca. This will contravene the regulatory boards of both provinces and will cause confusion and a potential loss of seller’s money.
- INCREASE IN CLOSING COSTS: Although this will not happen immediately, an increase in the number of a la carte sellers will lead to an increased demand on the closing lawyer’s time. This will occur due to the seller’s questions previously answered and situations previously solved by the realtor now landing on the desk of the sellers’ lawyer and increasing the overall legal time required to close the deal reliably and legally. These questions often start at the offer stage and flow right through to closing. The answering was shared by the realtor and lawyer in the past, but now that there isn’t a seller’s realtor the questions will still need to be addressed and disputes resolved, now by a lawyer.
- INCREASE IN PREDATORY BUYERS: Unfortunately some unscrupulous predatory buyers will be flooding the a la carte type sellers with low-ball offers hoping to capture one unsophisticated seller with fancy negotiations tactics. In fact, the initial offer may be at close to asking price but as it gets closer to condition removal time some of these unethical buyers will start to put additional pressure on an unsophisticated seller to lower the price using many different excuses. Which will lead to…
- “HOMEOWNER TAKEN ADVANTAGE OF” HEADLINES: The unfortunate result of some unsophisticated sellers not understanding the full and legal selling process and contract commitments will be sellers signing documents they don’t truly understand or believe to mean something else. This, combined with a few predatory buyers, will lead to an increase in the number of stories detailing how sellers are being taken advantage of. Stories of manipulation, losing the family home and fraudulent transactions will be trending and will unfortunately paint buyers with a bad brush. This will then lead to putting sellers on too much of an alert, thus slowing down the number of legitimate transactions, which over the following years will lead to more Canadians choosing the full service route again, as we go back full circle.
Overall, the changes will lead to a more ‘competitive market’ which will help provide choice to Canadians; however, the cheapest option in many cases in life is not the best choice.
All sellers need to ensure that they have weighed all of the hidden costs (both financial and emotional) of a real estate transaction before they choose their option. It will be up to the full-service realtors and other real estate entrepreneurs to clearly describe the benefits of their model so that Canadians can make a clear choice.
The next 24 months will bring some turmoil as the industry deals with these changes; however, at the end of the day, this change can be good for the market as long as all players are monitored and play within the rules and ethics.