The Sales Commissions You Pay in Various Real Estate Transactions

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By David Franklin

How many times have you been approached by a salesperson who is trying to sell you on a great investment? Have you ever asked, “How much are you going to be paid if I invest?”

As with most investments there is a risk of loss, as well as what you wanted to gain. The salesperson gets paid upfront and he is entitled to his commission, whereas you have to wait for your gain.

There is no denying that many sales people work very hard at what they do, have integrity, and sell good products, but it is important for the consumer to know that sales industries are rarely philanthropic. It is important to understand, what is in it for the different types of vendor.

Exempt Market Dealers
The commissions and fees are around six percent for securities, and issues sold by way of prospectus that will trade or are trading on the stock market by the large securities firms, including those owned by the banks. The exempt market dealers (EMD) who sell by way of Offering Memorandum (OM) (which contains basically the same information as the prospectus), may have fees that can be higher depending on whether the EMD believes the investment will be easily sold and is large enough. For these types of deals, the fee can be six percent, the same as the large securities firms, or eight to ten percent because it is harder to sell and is for a smaller amount of money to be raised. For those deals that have a limited appeal to investors or the investors need to have knowledge of the industry, the fees can go up to 15 percent. The EMD can also earn a participation interest in the investment.

The client who becomes the client of the EMD will be required to invest around $25,000 -$100,000, depending on the size of the deal, for the professional fees starting with the legal fees to prepare the OM and including accounting fees, valuation fees and other professional fees. In addition to these fees, is the cost of preparing all of the marketing materials, printing costs and travel, promotion and entertainment costs. If the EMD cannot raise the money for the deal, the client has lost a lot of money, so the client has to be satisfied that the EMD can sell the deal. The EMD may also charge fees to assist in the preparation of the OM and also for the due diligence the EMD is required to perform before the offering can be sold.

If you are interested in proceeding with this type of investment, you have to satisfy yourself that you can make money from the investment. These types of deals are typically in the early stages and carry a lot of risk in being completed. You have to basically rely on the skills, connections and abilities of EMD management so you should check out their track record and meet with them so you can satisfy yourself that they can perform. Remember, the salesmen and EMD get paid whether the deal works or not. They want you to invest and may give you answers to questions that are not always the complete truth, since they want you to invest.

The OM that EMDs provide you is required by securities law and usually contains many pages and is complicated. It’s supposed to provide full disclosure. What most investors do not realize is that the OM, as well as the prospectus, protects the issuer from being sued because of its wording. If there was no OM, and there were misrepresentations, you can sue all the parties. Under securities law if you learn of misrepresentations within about six months, you have the right of rescission, which entitles you to get your money back; however, that may be a meaningless right if there is no money to repay you.  You can also sue the EMD but then the costs of legal fees may not make it worthwhile to claim your money back, as that cost can start at $5,000 and then go up to hundreds of thousands. You could also file a complaint with the securities commission, but if the company is out of money is it worth your time? The regulators, if they will take on your case, often take a long time to get to a resolution.

Real Estate Agents
Commissions for residential real estate are five to six percent and for larger residential deals the commissions can be lower, since the realtor is getting in absolute dollars a high amount. The commissions for commercial properties can be lower, especially if the purchase price is high. The realtors are regulated as well so in the event there are problems, you can register a complaint with the regulator. If you have been involved in buying or selling real estate, like any industry, you know there are good agents and bad ones, and therefore, you have to make sure you are dealing with one who has experience and knowledge. Remember, agents get paid regardless of what happens to your investment.

Financial Planners
There have been large land syndications where the salespeople get financial planners to bring in their clients and the fees paid to the financial planners can be up to 13 percent. The salespeople get their commission, which can be four percent on top of the amount paid to the financial planner. One must consider whose interest the financial planner looking after in such occasions?

Mortgage Brokers
Private mortgage brokers charge fees ranging between two and five percent. If the fees are higher, then the borrower knows the mortgage broker will have trouble raising the money. In those cases, the fees can be up to ten percent. This could be the case where the borrower is in default on his existing mortgage, has creditors coming after him, the loan to value is high, or the borrower needs to close quickly. If the fees are above ten percent the question to ask is “Why is the borrower willing to pay such large fees?” Remember the borrower has to be making enough money to repay your principal, as your fees were deducted and paid to the salesmen to get you to invest. If something goes wrong with the investment, you could lose all or a part of your money. Once again, the salesperson has made his money, so whose interest is he really looking after?

Insurance Salespeople
On a different note, have you ever wondered why insurance salespeople discourage you from buying term insurance and want you to buy whole life? The reason is simple – the commissions on term insurance are around 65 percent and the premiums for whole life can be 225 percent of the first year premium. That’s right, 2.25 times your premium. There are often commissions paid on the consecutive years as well. Not all of this commission goes to the salesperson, as the managing general agent is included in this commission.

So remember, when you are approached by a salesperson to invest, ask how much the commissions are in total.  If they are on the high side, you can then decide if you want to take the time to listen to the sales pitch.

David Franklin, B.Comm, JD, has been practicing law in Ontario for over three decades, specializing in securities, mortgages, tax and real estate, and overseeing and transacting millions of dollars of transactions. Contact David at david@reincanada.com.

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