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Pre-Registration Segment

REAL ESTATE
AS A PROFESSIONAL CAREER
ii

Real Estate As A Professional Career


© 2017 Real Estate Council of Ontario

All rights reserved. No part of this publication may be reproduced, transmitted or stored in any material form (including photocopying
or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication)
without the prior written consent of The Real Estate Council of Ontario (“RECO”) except as permitted by, and in accordance with, the
Copyright Act.
Care has been taken to trace and acknowledge ownership of third party copyrighted material contained in this publication. A general
copyright acknowledgement is included under Acknowledgements, along with references inserted within appropriate text or placed in
illustrations, as applicable. RECO will gladly accept information that will rectify any reference or omission in subsequent editions of this
publication. All references to proper names are fictional, and any similarity to actual persons living or deceased is entirely coincidental.

DISCLAIMERS
This publication, including all third party material and all schedules, appendices, pre-printed forms, standard clauses, processes, facts,
information and any other material contained therein (the “Publication”), is summary in nature and not intended to replace direct research
of original source documents and expert advice. Real estate registrants and consumers should seek appropriate counsel in matters relating
to real estate. At all times, diligence and prudence should be uppermost as all real estate transactions are unique. This Publication is
strictly intended for educational purposes only. RECO reserves the right to change or revise this Publication without notice, and will not
be liable for any loss or damage incurred by you as a result of such changes or revisions.
RECO, the Ontario Real Estate Association (Designate), service providers and others associated with this Publication and offering of
this program (collectively referred to as the “Program Providers”) are not responsible for any deficiencies, defects, errors, omissions, or for
the adequacy, sufficiency, completeness, suitability, accuracy, currency or applicability of the contents of this Publication. This disclaimer,
and all that follow, applies regardless of whether this Publication is made available to you in paper or electronic form.
In the event that you access this Publication by means of the internet or other electronic transmission, you expressly agree that the
Program Providers are not responsible for any damage to hardware or software, loss or corruption of data, or any other loss or damage,
that may result from your use of this Publication or from your accessing any web site related to this Publication or utilizing any other
means of electronic transmission owned or operated by, or on behalf of, the Program Providers. The Program Providers make no warranty
or representation that any such web site, electronic document or electronic transmission will meet your requirements, will be uninterrupted,
timely, secure or error-free or that defects, if any, will be corrected.
The Program Providers disclaim all warranties of any kind, whether express or implied, including without limitation any warranties
of merchantability or fitness for a particular purpose, related to this Publication. Further, the Program Providers are not liable for loss or
damage, whether direct, indirect or consequential, and whether or not it was foreseeable, arising from the utilization of this Publication.

This Course Has Been Approved By The Registrar Under The Real Estate And Business Brokers Act, 2002.

Real Estate Council of Ontario


3300 Bloor Street West
Suite 1200, West Tower
Toronto, ON M8X 2X2

International Standard Book Number: 978-0-9780344-1-2


Content Development: Ontario Real Estate Association and Acronamic Learning Systems Inc.
Design and Graphics: Automation Plus Ltd.

Printing and Binding: MediaLinx Printing Group Reprint: June, 2017

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
iii

ROLE OF THE REGISTRAR UNDER REBBA 2002 IN EDUCATION


The Registrar under the Real Estate and Business Brokers Act, 2002 (REBBA 2002) is responsible for setting the educational
requirements for individuals who wish to obtain and maintain registration as a real estate broker or salesperson. In order to
trade in real estate in Ontario, real estate brokerages, brokers and salespersons must be registered with the Real Estate Council
of Ontario (RECO) under REBBA 2002. Before beginning a career as a real estate salesperson, individuals are required to com-
plete the required pre-registration courses.
The Registrar, through an Educational Services Agreement, had designated the Ontario Real Estate Association as the
organization authorized to provide the pre-registration, articling and broker educational program. All registration-related
courses of study, including associated course content, must be approved by the Registrar prior to being offered to students.

DESIGNATE ACKNOWLEDGEMENTS
The Ontario Real Estate Association, through its OREA Real A course of this scope is only possible with the assistance
Estate College, takes great pleasure in delivering this program of many dedicated professionals committed to the advance-
on behalf of the Registrar pursuant to an Educational ment of real estate skills and knowledge. A special note of
Services Agreement between the Real Estate Council of thanks is owed to the Ontario Real Estate Association for
Ontario and the Ontario Real Estate Association. its ongoing forty-year commitment to excellence in real
The course curriculum supports the Real Estate Council estate education.
of Ontario’s mandate to protect the public interest through A further debt of gratitude is owed to various govern-
the development of skilled and educated real estate pro- ment departments and agencies who assisted with informa-
fessionals by providing students with timely, comprehensive, tion and published materials. Appropriate references are
accurate and up-to-date education that will allow them to included within text materials.
succeed in the real estate marketplace. The OREA Real The terms REALTOR® and MLS® are identified as
Estate College fulfills many of its responsibilities to the design marks in this publication. No attempt has been made
Registrar, the public of Ontario and the real estate pro- to designate all words or terms in which proprietary rights
fession by providing learning opportunities so that indivi- might exist. The inclusion, definition, or description of a
duals, either contemplating registration or currently holding word or term is provided for general information pur-
registration, can receive appropriate and timely training. poses only and is not intended to affect any legal status
The real estate profession makes a valuable contribution associated with the word or term as a trademark, service
to the economy of Canada and the welfare of its people. mark or proprietary item.
Congratulations on taking the first step towards real estate
registration in Ontario. The Real Estate Council of Ontario
and the Ontario Real Estate Association hope that the
successful completion of this Real Estate as a Professional
Career course will inspire and motivate you to pursue
advanced educational offerings throughout your new career.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
iv Introduction

BEFORE YOU BEGIN…


Course Materials
Check that all required course materials are included. Contents vary based on course
delivery selection.

CORRESPONDENCE CLASSROOM ONLINE

Carrying Case

Real Estate as a
Professional Career Text

If any materials are missing, call Course Administration Services at (416) 391-6732 or
(866) 411-6732.

The Hewlett Packard 10BII


Real Estate as a Professional Career, Land, Structures and Real Estate Trading, The
Residential Real Estate Transaction and The Commercial Real Estate Transaction, as well
as various advanced programs, require detailed financial calculations. Calculations are
illustrated using HP 10BII keystrokes. The use of the HP 10BII is not an endorsement of
the product, but a practical decision for consistent content presentation. Students may
select other calculators, but no assistance or support is provided. Students using such
calculators are well advised to compare computational capabilities with required course
calculations.

Examination
An examination follows completion of Real Estate as a Professional Career. See Things You
Should Know in the Student Handbook for full details regarding examination locations,
rules, policies and procedures.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction v

MY PORTFOLIO
WHAT is My Portfolio and WHY Do I Need It?
All students are issued a ‘My Portfolio’ account when their OREA student file is created.
The OREA Real Estate College uses this to communicate with students on academic and
administrative matters. My Portfolio is your personal, confidential section of the OREA
website that contains information about your courses. It’s a tool used to:
• Enrol for courses online
• Reschedule examination dates and locations
• Access online courses
• Retrieve marks and transcripts upon course completion
• Download tax receipts and other official documents
• Access course resources, including Education Forums, eBooks, ePub and PDFs
• Update contact information
• iew history of courses completed
• Initiate transfers between courses and or methods of delivery
• rder a variety of College products

Everyone who communicates with REA Real Estate College needs to check his her
confidential My Portfolio Account with frequency, to ensure that they are as up-to-date
as possible concerning their OREA Real Estate College transactions.

HOW Do I Access My Portfolio?


Open your web browser (Internet Explorer,
Firefox or any other) and go to www.orea.com.
Select Student and then enter your Student ID
and password. Click Login To My Portfolio.

ENTER YOUR OREA STUDENT ID NUMBER


Enter the eight-digit number assigned when your
OREA student file was created.

ENTER PASSWORD
First-time users will be required to reset their
password.
If you know your password, just click “Login
To My Portfolio” after both boxes have been correctly typed in.

If you have forgotten your secret password AND you gave OREA an email address, then
click “Forgot Your Password?” and follow instructions displayed.

Each time you log in to My Portfolio, you will have access to the Dashboard which
provides quick access to the most frequently used sections of My Portfolio.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
vi Introduction

WHAT Can I Do in My Portfolio?


MESSAGE CENTRE
Logging on to My Portfolio will take you to your Inbox where new mail from OREA College
is stored. Click on any item to read.

DOCUMENT CENTRE
The Document Centre contains every official document about a course. From here you
can print:
• Enrolment Contract
• Enrolment Confirmations which include the exam date, location and time
• Examination Confirmations and examination feedback
• Payment Receipts
• Tax Receipts
• Transcripts

Official documents will be in your My Portfolio Document Centre, permanently—


communication found in your Document Centre cannot be deleted by you, even
accidentally, so you can no longer misplace course confirmations, transcripts,
certificates or tax receipts.

COURSE CENTRE

My Timeline Keeps track of the timeline for completion of your Pre-Registration


segment.

Current Lists courses in which you are currently enrolled. Access an e-Learning
Courses course by clicking the underlined hyperlink in the course description.
Reschedule upcoming examinations from here.

Completed Lists courses which you have completed, along with applicable credits
Courses and or marks.

Course Upon enrolment in a course, students are provided access to an eBook,


Resources ePub and PDF of the course. A PDF is a reproduction of the course
textbook. The eBook is an electronic workbook similar to the online
version of the course. The ePub is a version of the textbook designed
to run on mobile devices. It is optimized for an iPad but will work
across all other platforms.

Course Updates Course curriculum is updated on an ongoing basis to ensure students


have access to course materials which are current and accurate. Students
are able to access updates for the course in which they are enrolled.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction vii

SUPPORT CENTRE

Shipping Status When a product is ordered from the College, students are provided
with the ability to track the status of their order through Shipment
Tracking Details. A tracking number and contact information are
provided to assist in determining the location of the shipment.

MY PROFILE INFO
Shows you your personal information. Information can be updated simply by clicking
on the Edit link at the end of the line that you want to change.

MY OREA COMMUNITY (DISCUSSION FORUM FOR COURSES)


A content related support system for students in all courses. See below for more details.

LOGOUT
Click Logout to ensure that your private information is kept confidential.

WHEN Should I Check My Portfolio?


• After you have enrolled, transferred or withdrawn from a course the confirmation
of this transaction (and any payment receipts) are sent to your Documents Centre.
• After you have completed a course and written your examination, your marks and
tax receipt will be sent to Course Centre. An official transcript is sent to your Document
Centre for Registration Education courses after your marks have been displayed. In addi-
tion to the final mark, you will receive feedback listing topic areas that were answered
incorrectly on the examination. This will be provided for question(s) answered
incorrectly irrespective of the final mark awarded for the course.
• After you have made a change to your previously scheduled exam date, the new date
will be displayed in your Inbox as a message.

WHERE Can I Get Help With Course Content?


MY OREA COMMUNITY—EDUCATION FORUMS
OREA encourages the use of the Education Forums as a learning tool. This can be found
on our website at www.orea.com. Log in to “My Portfolio” using your student ID and
password. Once logged in, click on the My OREA Community (Discussion Forum For
Courses) link. If you do not already have a “My Portfolio” password, please contact the
College Education Centre. This positive exchange of content information with an expert
who will answer posted questions can be practical and extensive. Participation in the forum
is specific to each course and fellow students are encouraged to join the discussions. A
useful tool in the forum is the Search function in the upper right hand corner. By entering
a topic, you can access previously asked and answered questions. Privacy is protected.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
viii Introduction

INSTRUCTOR SUPPORT LINE (866) 444-5557


An instructor is available Monday to Friday to provide clarification for course content.

OTHER RESOURCES
Missing Course Materials (416) 391-6732 (866) 411-6732

Course Administration Services


College Education Centre (866) 411-6732 (Toronto)

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction ix

REAL ESTATE AS A
PROFESSIONAL CAREER
CONTENTS AT A GLANCE

INTRODUCTION xvii

SECTION I Introduction to the Real Estate Profession 1


Chapter 1: A Career in Real Estate 2
Chapter 2: Real Estate—A Regulated Profession 46

SECTION II Real Estate and Society 81


Chapter 3: Economics and the Real Estate Market 82
Chapter 4: Ontario Profiles, Trends and 114
Real Estate Values

SECTION III The Consumer and Marketing Fundamentals 153


Chapter 5: Consumer Behaviour and 154
Consumer Protection
Chapter 6: Marketing and Customer Service 190

SECTION IV Introduction to Math Skills 225


Chapter 7: Mathematics, Measurements and 226
Metric/Imperial Conversions
Chapter 8: Mortgage Mathematics 258
Chapter 9: Capitalization, Taxation and 286
Closing Adjustments

APPENDIX Glossary 321


Solutions 333

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
x Introduction

TABLE OF CONTENTS

INTRODUCTION xvii Franchise vs. Independent


Full Service vs. Limited Service
15
15
ABOUT THIS TEXT xvii Listing vs. Selling 15
Learning Features xvii Organized Real Estate vs. Non-Organized 15
Study Aids xviii Curiosity: Questions To Ask 16
Additional Resources xviii
ORGANIZED REAL ESTATE IN ONTARIO 16
Tips & Guidelines xviii
National Association 16
How To Maximize Learning xix
Provincial/Territorial Associations 17
Real Estate Boards 17
SECTION I 1 Historical Focus: Ontario Beginnings— 18
Real Estate Boards
Introduction To The Real Estate
Profession PROFESSIONAL ORGANIZATIONS 19
The Canadian Real Estate Association 19
CHAPTER 1 Ontario Real Estate Association 19
A Career in Real Estate 2 OREA Real Estate College 20
Education Update: Registration Education— 20
Introduction 2 Changes Effective April 1, 2016
Learning Outcomes 3 The Appraisal Institute of Canada 21
Real Estate Institute of Canada 21
THE IMPORTANCE OF REAL ESTATE 4 The CCIM Institute 22
A Brief Ontario Profile 4 Society of Industrial and Office REALTORS® 22
Market Memo: The Greater Golden Horseshoe 4
Market Memo: Ontario Building Activity 5 REAL ESTATE BROKERAGE: ROLES AND
AUTHORITIES 22
Housing Focus: The Ripple Effect: Real Estate 5
and the Ontario Economy Brokerage as an Agent 23
Representing Others 23
A REAL ESTATE SALES CAREER 6 Brokerages, Brokers and Salespersons 23
Necessary Skills 6 Types of Brokerages 23
Career Expectations 7 Brokers of Record and Managers 24
Time Management 7 Employees vs. Independent Contractors 24
Market Memo: A Juggling Act 8 Focus on ICI Status: Applying Common 26
Income/Budgeting 8 Law Principles
Market Memo: Time Lag 8
UNDERSTANDING THE LISTING/SELLING
Other Costs 8
PROCESS 26
Career Building 9
Listing 26
CAREER PATH CHOICES 9 Prospecting 27
Market Opportunities 10 Qualifying and Showing 27
Residential Resale 10 Offer Preparation 27
New Homes 10 Offer Presentation 28
Condominium 10 Follow-Up 28
Rural, Recreational and Agricultural Sales 11
SALESPERSON REMUNERATION 28
Commercial 12
The Commission Sales Model 29
Appraisal 13
Commission Sharing 29
Mortgage Financing 13
Commission Splits 29
Property Management 13
Commission Plans 31
CHOOSING A BROKERAGE 14
KNOWLEDGE INTEGRATION 33
Brokerage Services and Features 14

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction xi

TABLE OF CONTENTS (continued)

CHAPTER 2 Claims and Potential Claims 63


New Application and Renewal Processes 63
Real Estate—A Regulated Profession 46
COMPLAINTS AND ENFORCEMENT 64
Introduction 46
RCI Process 65
Learning Outcomes 46
Possible Outcomes 65
THE REAL ESTATE COUNCIL OF ONTARIO 47 Public Information 67
Role and Responsibilities 47
BROKERAGE INSPECTIONS AND INVESTIGATIONS 67
Protecting the Public Interest 48
Types of Inspections 68
Operating Structure 49
Routine Inspections 68
REGISTRATION STANDARDS 50 Complaint-Initiated Inspections 68
Obtaining Registration 50 Courtesy Inspections 68
Disclosure 51 Reconciliation Inspections 68
Fitness for Registration 51 Investigations 69
Bankruptcy 52
RESOURCES FOR CONSUMERS AND REGISTRANTS 70
Criminal Charges and Convictions 52
RECO Website 70
Work Permit 52
MyWeb 71
Education Requirements 52
Outreach 73
The Salesperson Registration Education Program 52
(Pre-Registration) KNOWLEDGE INTEGRATION 74
Pre-Registration Education Program— 54
Enrolment On Or After April 1, 2016
Ontario Labour Mobility Act 54
Processing the Application 54 SECTION II 81
Registrar’s Options: New Application and Renewals 55 Real Estate and Society
Registration Approval 55
Registration Refusal 56 CHAPTER 3
Statutory Exemptions to Registration 56
Economics and the 82
MAINTAINING REGISTRATION 57 Real Estate Market
Articling Segment—Enrolment in Pre-Registration 58
Education Program Prior to April 1, 2016 Introduction 82
Articling Segment—Enrolment in Pre-Registration 58 Learning Outcomes 83
Education Program on or after April 1, 2016
Continuing Education 58 ECONOMICS: AN OVERVIEW 84
Changes to Registration Information 59 Basic Elements and Markets 84
Registration Renewals 59 Factors of Production 84
Insurance Renewals 59
ECONOMIC PRINCIPLES AND PRIMARY
EDUCATION STANDARDS 59
INDICATORS 85
Resource Markets 85
Pre-Registration, Articling and Broker Education 60
Segments Labour 85
Course Completion 60 Capital 86
Enrolment in Pre-Registration Education Program 60 Businesses 86
Prior to April 1, 2016 National Production 86
Examinations 61 Manufacturing Activity 86
Enrolment and Pass Rates—Enrolment in 61 Utilization Rates 86
Pre-Registration Program Prior to April 1, 2016 Consumers 86
INSURANCE REQUIREMENTS 62 Retail Sales—Selected Retailers 86
Coverages 62 Consumer Confidence and Spending 87

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
xii Introduction

TABLE OF CONTENTS (continued)

Consumer Disposable Income/Debt 87 TRACKING THE ONTARIO RESIDENTIAL 101


The Consumer Price Index (CPI) 87 MARKET
CPI Focus: Consumer Price Index 87 Market Trends 102
Perspective: The Newspaper Article 103
STATISTICAL ANALYSIS 88
Indexes 88 TRACKING THE ONTARIO COMMERCIAL 104
Seasonally Adjusted 88 MARKET
Three Month Moving Average 88 Ontario Commercial Focus: Building 104
Construction Price Index
Weighted Average 89
Perspective: The Practical Applications 105
Graphs/Charts 89

UNDERSTANDING THE MARKETPLACE 90


KNOWLEDGE INTEGRATION 106

Supply/Demand Forces 90
Market Equilibrium 90
Market Bubbles/Corrections 91 CHAPTER 4
Business Cycles 91 Ontario Profiles, Trends and 114
Government Intervention 92 Real Estate Values
Spending Policies 92
Crown Corporations 92 Introduction 114
Taxation 92 Learning Outcomes 115
Statutes/Regulations 92
ONTARIO PROFILES 115
ANALYZING THE REAL ESTATE MARKET 93 Economic 115
Characteristics 93 Sector Overviews 115
No Standard Product 93 Growth/Prosperity 116
Local Real Estate Market 93 Workforce/Employment 116
Fixed Location 94 Other Factors/Considerations 116
Market Not Standardized 94 Demographic 117
Slow Supply/Demand Adjustment 94 Population/Immigration 117
Private Transactions 95 Growth Patterns 118
Influencing Factors 95 Age Distribution/Dependency 118
Demographic Changes 95 Geographic 118
Employment Conditions and Wage Levels 95 Size/Boundaries 118
Labour Force Focus: Labour Force Statistics 96 Climate 118
as an Influencing Factor Cities/Towns 119
Mortgage Volume and Interest Rates 96 Geographic Regions vs. Municipal Boundaries 120
Curiosity: Interest Rates and the Bank of Canada 97 Perspective: The Bigger Picture: 121
Building Activity 98 Urban Economics
Types of Markets 98
DEMOGRAPHICS AND THE REAL ESTATE
Seller’s Market 98 MARKET 124
Buyer’s Market 98 Population Size/Growth 124
Balanced Market 98 Real Estate Market Implications 126
Real Estate Market Cycles 98 Population Distribution 127
Long vs. Short Cycles 98 Real Estate Market Implications 128
Real Estate Cycle vs. Business Cycle 99 Population Composition 128
Real Estate Market Corrections 100 Real Estate Market Implications 129
Curiosity: Interest Rates and Market Corrections 101 Demographics and Value 129
Market Profile: Residential Prices and Volumes 130

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction xiii

TABLE OF CONTENTS (continued)

UNDERSTANDING VALUE 132 Market Niches 157


Differing Perspectives 132 Market Memo: The Growing Second 157
Property Market
Value in Exchange vs. Value in Use 133
Culture 157
Housing Focus: Value in Use—A Matter 133
of Perspective Brand Loyalty 158
Subjective vs. Objective Value 134 Product Appeal 159
Market Price vs. Market Value 134 The Electronic World Beyond 159
Market Value Defined 135 Perspective: Understanding Today’s Real 160
Estate Consumer
Investment Value—Commercial Properties 135

VALUE PRINCIPLES 136


CONSUMER NEEDS AND WANTS 160
Curiosity: The Battle of Needs and Wants 160
Anticipation 136
Hierarchy of Needs 161
Balance 137
Physiological Needs 161
Change 137
Security Needs 161
Competition 138
Social Needs 162
Conformity 138
Ego Needs 162
Consistent Use 138
Self Actualization 162
Contribution 139
Real Estate and Maslow’s Hierarchy 162
External Factors 139
Application and Limitations 163
Highest and Best Use 139
Increasing and Decreasing Returns 140 CONSUMER VULNERABILITIES 163
Progression 141 Confusion Regarding Who Represents Who 164
Regression 142 Caution When Inspecting Properties 164
Substitution 142 Due Care When Signing Documents 164
Supply and Demand 143 Lack of a Cooling Off Period 165
Surplus Productivity 143 Failure to Include Conditions 165
Market Memo: Cost vs. Payback 144 Not Respecting Deadlines 166
Perspective: How “Beyond The Lot Line” 144 Not Getting Finances in Order 166
Factors Can Affect Value
Perspective: A Matter of Professionalism 167
KNOWLEDGE INTEGRATION 146
ETHICS AND THE CONSUMER 167
Morals vs. Ethics 168
Business Ethics and Professional Standards 168
SECTION III 153 Ethics and the Law 168
The Consumer and Marketing Market Memo: The Evolution of Business Ethics 169
Ethical Dilemmas 169
Fundamentals
Caution: More Than Your Good Name Is 170
At Stake
CHAPTER 5 Market Memo: Everyday Ethical Choices 170
Consumer Behaviour and 154
CONSUMER PROTECTION LEGISLATION 171
Consumer Protection Consumer Protection Act 171
The CPA and Real Estate Transactions 171
Introduction 154
The Competition Act 172
Learning Outcomes 155
Misleading Advertising 172
CONSUMER BEHAVIOUR BASICS 155 Ontario Human Rights Code 173
Personal Traits and Psychographics 156 Accommodation Provisions 173
What Others Think 156 Employment Provisions 174
Market Memo: Real Estate Fraud 174

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
xiv Introduction

TABLE OF CONTENTS (continued)

PRIVACY LEGISLATION 175 MARKET RESEARCH 201


Personal Information Protection and Electronic 175 Surveys 201
Documents Act (PIPEDA) Focus Groups 202
Personal Information 175 Personal Research 203
Consumer Consent 175 Accessing Secondary Sources 203
Safeguarding Information 176
Privacy Focus: The Salesperson’s Records 176 MARKETING TO THE SELLER 203
Marketing Plan 203
PROFESSIONALS AND THE CONSUMER 177 The Commercial Marketing Proposal 204
Lawyers 177 The Residential Listing Presentation 205
Appraisers 177 Structured Presentations 206
Surveyors 178 Market Memo: Be Well Prepared For The 206
Lenders 179 Presentation
Mortgage Brokers 180
MARKETING TO THE BUYER 207
Insurance Agents and Brokers 180
Home Inspectors 181 MARKETING METHODS 208
Advertising 208
KNOWLEDGE INTEGRATION 182
RECO Focus: Advertising Definition 209
Standards 209
Institutional Advertising 209
CHAPTER 6 Specific Advertising 210
Marketing and Customer Service 190 Market Memo: Checklist For Classified Ads 211
For Sale Signs 211
Introduction 190
Open Houses 212
Learning Outcomes 191
Guidelines 212
MARKETING BASICS 191 Direct Marketing 213
Direct Mail 213
THE ROLE OF MARKETING 192
Curiosity: Bulk Mailings and Postal Codes 214
Marketing Products vs. Services 193
E-Mail 214
The Four P’s 193
Internet 215
SERVICE-BASED MARKETING 194 Push/Pull Technology 215
Customer Service as a Competitive Force 195 Co-ordinating Print and Electronic Marketing 215
Defining Moments and Customer Satisfaction 195 Lead Generation/Customer Contact Software 215
Market Memo: Customer Satisfaction and 196 Market Memo: Sources of Internet Leads 216
Your Career Multiple Listing Service® 216
Value Added Services 196 MLS® Rules and Regulations 216
Curiosity: The Value Added Team 197 realtor.ca 217
Best Practices 197
KNOWLEDGE INTEGRATION 218
MARKETING STRATEGIES 197
Marketing Plan vs. Marketing Strategy 198
Selecting Target Markets 198
Creating a Market Position 199
Market Memo: Positioning The New 200
Branch Office
Broadening Competitive Advantage 200

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction xv

TABLE OF CONTENTS (continued)

SECTION IV 225 METRIC/IMPERIAL CONVERSION FACTORS 254


Hectare/Acre Conversion 254
Introduction to Math Skills Metre/Foot Conversion 255
Square Metre/Square Foot Conversion 256
CHAPTER 7
Mathematics, Measurements and 226
Metric/Imperial Conversions CHAPTER 8
Mortgage Mathematics 258
Introduction 226
Learning Outcomes 226 Introduction 258
Learning Outcomes 258
BASIC MATH SKILLS 227
Fractions, Decimals and Percentages 227 THE RESIDENTIAL MORTGAGE FINANCING 259
Rounding 228 PROCESS
Working with Percentages 228 Application 259
Calculating Unknowns 228 Appraisal and Credit Check 259
Percentage Change 229 Commitment 260
Curiosity: The Pre-Approved Buyer 260
USING A CALCULATOR 229
The HP 10BII 230 THE COMMERCIAL MORTGAGE FINANCING 260
PROCESS
MEASUREMENTS 231
Area Measurement 231 MORTGAGE QUALIFICATION 261
Metric/Imperial Conversions 231 Downpayment 261
Rectangular 232 Housing Focus: Affordability Index 261
Curiosity: Describing Lot Size 233 Debt Service Ratios 262
Non-Rectangular 233 Gross Debt Service (GDS) Ratio 262
Right Angle Triangle 233 GDS Ratio—Condominium 262
Irregular 234 Total Debt Service (TDS) Ratio 263
Parallelogram 234 Expanded Calculations 263
Trapezoid 234
CALCULATING MAXIMUM MORTGAGE 264
Building Volume 235
Market Memo: Interest Rates, Debt Service 264
Volume Measurements 235 Ratios and the Market
Cube or Box Shape 235 Perspective: Surfing The Net 265

BUILDING AREA MEASUREMENTS 235 MORTGAGE INTEREST 265


ACRE Guidelines Terminology—Residential 236 Calculating Simple Interest 265
ACRE Measurements Guidelines—Residential 236 Calculating Compound Interest 265
Measuring a Residential Condominium 240 Curiosity: For The Inquisitive Mathematician 267
Typical High-Rise Measurement Criteria 240 Nominal vs. Effective Interest Rate 267
Technology Focus: Laser vs. Tape 240 Effective Rates and Canadian Mortgages 267
Measuring a Commercial Building (Office) 240 Mortgage Payments 267
Usable Area 241 Mortgage Payment Factors 268
Rentable Area 241 Amortization 268
RECO Focus: Wrong Measurements Prove Costly 242 Fully vs. Partially Amortized 269
Using the HP 10BII 269
KNOWLEDGE INTEGRATION 243
Mortgage Averaging 272

KNOWLEDGE INTEGRATION 273

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
xvi Introduction

TABLE OF CONTENTS (continued)

MORTGAGE PAYMENT FACTORS 282 Tax Notice 300


Weekly Payment Factors 282 Local Improvements 300
Bi-Weekly Payment Factors 283
CLOSING ADJUSTMENTS 302
Semi-Monthly Payment Factors 284
The Sale Transaction 302
Monthly Payment Factors 285
Adjustments 302
Statement of Adjustments 306
Closing Costs 307
CHAPTER 9 Caution: Let The Experts Estimate Closing Costs 307
Capitalization, Taxation and 286 The Mortgage Transaction 308
Closing Adjustments Process 308
Costs/Adjustments 308
Introduction 286 Interest Adjustment Date (IAD) 308
Learning Outcomes 287
KNOWLEDGE INTEGRATION 309
CAPITALIZATION 287
Direct vs. Yield Capitalization 288
Establishing an Overall Cap Rate 288
1. Investor Analysis 289
2. Market Research 289
APPENDIX
Applying the Overall Cap Rate 290
The Reconstructed Operating Statement 290 GLOSSARY 321
Working with the Cap Formula 290
Cap Focus: Trends in Anycity Rental Apartments 291

INCOME MULTIPLIERS 292 SOLUTIONS 333


Gross Income Multiplier (GIM) 292
Monthly Rental Factor (MRF) 293
Market Focus: Tread Carefully With Rules 293
of Thumb

PROVINCIAL LAND TRANSFER TAX 294


Real Property Registration 294
Disposition of Unregistered Interests 294
Exemption for Life Leases 294
Value of the Consideration 295
Tax Calculation 295
First Time Buyers Refund (New Houses) 296
First Time Buyers Refund (Resale Homes) 296
Sale of Chattels 297
Municipal Land Transfer Tax (Toronto) 297

REAL PROPERTY TAXATION 298


According to Value (Ad Valorem) 298
Municipal Tax Base 298
Tax Rate 298
Tax Ratios 299
Realty Tax Classes 299
Realty Tax Qualifiers 300
School Tax Direction Codes 300

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction xvii

INTRODUCTION

ABOUT THIS TEXT


Real Estate as a Professional Career is designed to give prospective registrants an apprecia-
tion of the demands involved in a real estate career along with a knowledge of the market-
place dynamics, consumer behavior, marketing fundamentals and essential math skills.
arious text features and study aids are included to make this a rewarding learning expe­
rience, while building a solid foundation for subsequent courses in the pre-registration
and articling segments.

Learning Features
Chapter content summaries and learning outcomes detail the learning journey in each
chapter.

Key terms are boldfaced with the most significant glossary terms highlighted in page
margins. All glossary terms and associated definitions are found in the Appendix: Glossary.

Illustrations simplify and summarize complex topics. A picture is worth a thousand words.
Detailed subject matter often requires visual enhancements to ensure complete understanding.

Curiosities offer novel ideas or explanatory details, while satisfying the inquisitive nature
in us all. The element of discovery can expand awareness and consolidate subject matter.

Market Memos are interspersed to bring reality to the subject matter. If a topic involves
value, the memo may address new technologies that are revolutionizing the valuation
process. If the topic details economic trends, the memo may highlight a specific indicator
together with statistical data.

Perspectives bring fresh outlooks and consolidate complex topics, usually using a story
line. Everyday occurrences of registrants often complement the subject matter.

Cautions identify special concerns including situations where prudence is required and practices
that can lead to dire consequences if pursued.

Each Focus concentrates on additional details for a particular topic. These informative
descriptions bridge the gap between academic discussions and today’s realities.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
xviii Introduction

Study Aids
Notables highlight key topics in each chapter to assist students with review and study
efforts, along with a summary of key glossary terms.

Strategic Thinking questions are included to assist in preparing for a new sales career.

A Chapter Mini-Review is provided with each chapter for personal review and assessment.
The mini-review is a warm up for active learning exercises.

Active Learning Exercises are included at the end of each chapter. arious testing formats
are used including multiple choice, fill-in-the-blanks, matching, short answer and form
completion exercises.

The Appendix contains the Glossary as well as all solutions (including solutions for chapter
mini-reviews and active learning exercises).

Additional Resources
Web Links are provided for general interest regarding selected chapter topics.
Knowledge of website content is not required for examination purposes.

Tips & Guidelines


Registration courses emphasize learning by doing through the mastery of practical real
estate skills and knowledge. The course combines formal instruction, self evaluation and
problem-solving with fictional characters and scenarios. Students must evaluate circum-
stances, make suggestions, correct errors and learn important lessons in preparation for
the marketplace. Questions are posed that require introspection, strategic thinking,
application of techniques and explanation of procedures.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
Introduction xix

HOW TO MAXIMIZE LEARNING

Make the Text Priority One • Carefully review each chapter including every topic,
illustration and example.

Follow the Learning Path • Topics are logically sequenced by section and topics within
chapters.
• While creativity is encouraged, most students are advised
to follow the pre-set order.

Access Additional • The Web Links can be very helpful in clarifying and expanding
Resources chapter topics. These resources are not required for examination
purposes.

Study Key Terms • Clearly understand all boldfaced terms included in the
primary text. These are also summarized at the end of
each chapter and detailed in Appendix: Glossary.

Complete all Questions/ • Practice makes perfect. Complete all chapter mini­reviews
Exercises and exercises. Solutions are provided in the Appendix.
• Suggestion: Use a blank sheet of paper as an answer sheet
where feasible, leaving the chapter mini-reviews and
exercises blank for follow-up review.

Continuously Review • When in doubt, review. Repeat readings, mini­reviews


and active learning exercises as often as required.
• Don’t move forward without fully understanding all content.
• Learning has a lot in common with building blocks. Start
with a good foundation and a sound structure will emerge.
• Remember, knowledge is cumulative. Don’t skip any chapters.

Prepare for the Exam • The examination tests subject matter covered in the primary
text. No surprises…if you diligently study the materials.
• Exam questions vary, but not the underlying purpose.
Emphasis is on understanding concepts, techniques and
procedures.
• Don’t expect a mere recital of facts.

R E A L E S TAT E A S A P R O F E S S I O N A L C A R E E R
SECTION I
INTRODUCTION TO THE
REAL ESTATE PROFESSION
Section I provides an introduction to real estate and procedures to become
registered as a real estate salesperson. Chapter 1 offers an overview of required
skills, career path choices and opportunities for growth, what to expect in terms
of hours and personal commitment and professional organizations that assist in
developing a real estate career. Lastly, the chapter addresses how real estate
brokerages operate in Ontario and, more specifically, the role of brokerages,
brokers and salespersons. The distribution of
commission between brokerages, salesperson
remuneration and commission splits are also
detailed.
Chapter 2 focuses on the role and responsi-
bilities of the Real Estate Council of Ontario,
the process of becoming registered as a real
estate salesperson in Ontario, registration
requirements, exemptions, education and insur-
ance requirements and ongoing regulatory
compliance.
2

CHAPTER 1

A Career in Real Estate


Introduction
Property ownership has been a part of society for thousands of years. Real estate trans-
actions occurred as early as 3000 B.C. Property advertisements were found in the ruins of
Pompeii. Well established property ownership, taxation and legal principles are known to
have existed in ancient Greek and Roman times. However, the destruction of the Roman
Empire led to the decentralization of governments and laws concerning land usage. For
North Americans, the story begins in England where decentralization resulted in land
being divided into shires and counties, each controlled in large part by semi-autonomous
governments under a king. However, gradually a centralized legal system took form and
along with it a rise in individual property rights, including the transfer of those rights.
By the seventeenth century, English legal principles and
practices generated expanded property rights under the
now formalized common law of England. Colonies
established under the British Empire adopted these
principles and practices, as set down in English common
law. At the same time, the province of Quebec developed a
civil code that was originally based on the French civil
code. This code generally sets out similar principles to
those found under common law within other provinces.
Interestingly, civil codes originated in Roman times and, as
with common law, contained key principles relating to
property rights and procedures for the transfer of such
rights dating back to antiquity.
The development of real estate brokerage in Canada
parallels the growth of the nation. Brokers were active at
Annapolis Royal in Nova Scotia in 1604–05. The French, at
Quebec City and Montreal, were the first to apportion
land for permanent holdings in Canada. Early colonial
governments of both Upper and Lower Canada appointed
brokers to distribute land for permanent settlement. The
Hudson Bay Company employed qualified persons in
what today could be identified as truly Canadian real estate
transactions.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
3

As Canada grew, so did real estate ownership and the brokerage tradition. Territorial
governments of what are now the prairie provinces named brokers in the late 1800’s to
assist migrants seeking new western opportunities. Soon, real estate brokers and
salespersons were pursuing their livelihood throughout the nation. Larger urban centres
enjoyed very active real estate activity well over one hundred years ago. In Toronto, for
example, the total population in 1851 was 30,775, but mushroomed to 181,200 by 1881
amidst extensive property development and the active real estate trading.
In 1930, the Government of Ontario passed legislation to bring the Real Estate Brokers
Act into law. The post-war years witnessed the dramatic growth of real estate ownership
and the associated expansion of career opportunities for those in real estate brokerages.
By the 1970’s, total registrants exceeded 20,000 with current totals now over three times
that number. Today, as in past centuries, real estate property holdings and development
are vital to the growth and prosperity of this province. Registrants in Ontario have, and
continue to make, an important contribution in this integral and important part of
Ontario society.

Learning Outcomes
At the conclusion of this chapter, students will be able to:
• Briefly outline the importance of real estate activity in relation to broader economic
and social parameters within our society.
• Discuss the necessary skills and expectations associated with a career in real estate
sales.
• utline career path choices including major market segments, choosing a brokerage
and understanding how organized real estate operates in Ontario.
• Describe services provided by various professional organizations which contribute to
the professionalism of registrants.
• utline how real estate brokerages operate from legal and business perspectives,
including brokerage and salesperson roles/responsibilities, types of brokerages and
related factors such as pursuing independent contractor status.
• Describe types of remuneration offered to brokers and salespersons with particular
emphasis on the commission sales model and commission plans including calculations
when one or more brokerages are involved in a transaction.

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4 Chapter 1 A Career In Real Estate

THE IMPORTANCE OF REAL ESTATE


Land ownership is of paramount economic, social and political importance in Canadian
Real Estate society. A real estate purchase is a significant lifestyle decision that typically constitutes the
Land and any improvement
largest single component of most people’s personal wealth. From a business perspective,
located thereon. corporate acquisitions reach into the billions, as companies acquire large retail commercial
and industrial facilities, utilities consume countless miles of rights-of-way, farming
involves thousands of hectares of agricultural land, and residential developers routinely
construct thousands of homes annually.
Real estate is also integral to social and political order. Common law enshrines real
property ownership rights, while federal and provincial statutes reaffirm and regulate
such rights. Owners of real property enjoy advantages over the non-owner; e.g., credit is
often more freely granted to those who own their own property.
Most important of all, shelter is a necessity for all Canadians. How real estate is develop-
ed and what shape new communities take directly affects the very fabric of society and the
quality of life enjoyed both in Ontario and throughout Canada. Within these dynamics,
registrants prudently go about their business. Few things happen without real estate.
Little wonder that many seek the opportunity to guide others in its purchase and sale.

A Brief Ontario Profile


Real estate is big business in Ontario. New and existing housing units are needed to
accommodate the province’s expanding population that now exceeds 13 million. Industrial
lands provide much needed space for enterprises that currently boast a 40% share in
national gross domestic product and more than 50% of all manufacturing shipments in
Canada. Projected strong job creation, output forecasts and rising incomes indicate the
growth will continue with real estate as a significant factor within that expansion. Clearly, a
robust, active market exists for anyone willing to work toward a successful real estate career.
While overall national statistics of real estate sales volume are not available, The
Canadian Real Estate Association (CREA), representing a substantial portion of those
involved with residential sales across Canada, recorded more than 450,000 residential
units transacted through the Multiple Listing Service® in 2012 with approximately 41%
of that activity in Ontario. The province also has expanding commercial and industrial
markets, particularly in larger urban centres. Opportunities continuously unfold for those
who want to professionally service these active market segments.
Real estate brokerages, brokers and salespersons play a significant role in the province’s
economy. In 2014, more than 68,000 registrants were registered with the Real Estate
Council of Ontario. The diligent work of those registrants helps build vibrant communities,
advance strong economic growth and fulfill the needs of buyers and sellers as consumers
in the Ontario real estate marketplace.

The Greater Golden Horseshoe MARKET MEMO

Approximately two-thirds of Ontario’s total residents now live in the Greater Golden Horseshoe (GGH) reaching from
Oshawa to Niagara Falls, including areas north to Richmond Hill and west to Kitchener-Waterloo. By 2031, the popula-
tion in that area could swell to a projected 11.5 million, according to government planning documents.
Formal growth plans are now being put in place by the provincial government to ensure that the GGH can attract
new businesses, support a high quality of life for residents and ensure that prudent planning is introduced regarding all
real estate development.

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A Career In Real Estate Chapter 1 5

Ontario Building Activity MARKET MEMO

Real estate is typically in the foreground when evaluating economic performance. Market analysts constantly track the
ups and downs of building permit volume, given its widely accepted status as a key economic/market indicator.

Rising numbers typically point to increased capital Ontario Building Permits: Total Value
$(billions)
flowing to construction, reflecting economic growth
3.5 July 2013
and business confidence. Those same numbers also ($3,476,571,000)
foretell of improving job prospects, heightened demand
3.0
for services (including real estate brokerages, brokers
and salespersons) and broad community-based
economic benefits. 2.5
The Greater Toronto Home Builders Association has
estimated that every residential single-family housing 2.0
start creates the equivalent of 2.8 jobs for a full year. But,
be careful in interpreting building permit information
1.5
in a sales career. Remember, several months may pass
before actual construction and cash flows begin. Also,
one large project may distort overall trends. Regardless, 1.0

the impact of real estate is massive particularly when


resales are added to the equation. 0.5
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Statistics Canada, CANSIM II Table 026–0003

The Ripple Effect: Real Estate and the Ontario Economy HOUSING FOCUS

Salesperson Lane meets Mr. and Mrs. Smith at the open house in Windfield Crossing, scant yards from framers, plumbers
and other trades busily completing new homes. Three months ago, vacant land and neatly spaced survey stakes were
all that greeted passers-by. With a simple yes and signing on the dotted line, the Smiths have unwittingly fired the
economic engine, as so many others have done before. The ripple effect begins:

• Building tradespeople are hired to construct the home.


• Future tax revenues are generated for the municipality.
• rofits and return of capital flow to the developer.
• rofits and cash flow are created for the builder.
• Additional consumers are introduced into the local marketplace.
• ommissions are paid to the real estate brokerage and brokers/salespersons employed by the brokerage.
• Fees for lawyers, mortgagees and others involved in the sale/closing are paid.
• Fees for other experts (inspectors, appraisers and surveyors) are paid.

But the story doesn’t end there. Research suggests that the housing sector accounts for a significant component of
the economy. New home buyers typically spend an additional 20–40 cents for every dollar invested in a home. For
example, a new home selling for $300,000 could generate an additional $60,000–120,000 in needed services (landscapers,
decorating, draperies, furniture and outside improvements (e.g., patios, pools, appliances, etc.)).
The ripple extends even further. Ongoing maintenance is an economic fact of life. That same property will necessi-
tate continuing home-related services over the years, as it forms part of the resale housing stock. The most popular
include carpet cleaning, painting, plumbers, electricians, cleaning services and roof repairs.
Real estate salespersons help make the economy happen. Just a simple signature begins a ripple effect that lasts for
years and years.

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6 Chapter 1 A Career In Real Estate

A REAL ESTATE SALES CAREER


Both challenges and rewards await those who enter this profession. Personal determination
and commitment are vital in an increasingly refined and complex consumer marketplace.
Further, individual sacrifices are a reality in a business well known for long hours. Real
estate is a 24/7 event driven by consumers and the unending ebb and flow of market
negotiations.
Today’s professional is more tech-savvy than his/her counterparts of the last decade.
Sophisticated property databases, electronic transactions and the power of the Internet
have enveloped the marketplace. But, success is more than just technology. Successful real
estate salespersons are people-oriented and their impact is far reaching; i.e., assisting families
seeking the ideal neighbourhood to investors uncovering hidden cash flow opportunities.
Effort typically brings financial rewards, but caution is emphasized. Money management
is key as earnings can vary dramatically. Self discipline is a must and personal growth
essential. Learn as much as possible because information is power in today’s marketplace.
Successful salespeople keep in step with the newest ideas and techniques, the latest market
data and the most up-to-date information on changing trends, legislation, and market-
place dynamics. In Ontario, real estate is a happening that never ends.

Necessary Skills
Experience suggests that certain talents, qualities and personal traits improve the odds
of building a worthwhile career.

Math A basic grounding in math fundamentals with proficiency in multi-


plication, division, fractions, decimals and percentages is very
important. These skills are required when measuring structures and
land, as well as appraising property and arranging mortgage financing.

Research A practical knowledge of how to locate, read and understand legal


documents involving property ownership is important.

Organization and Registrants typically have an ability to organize personal affairs as


Planning well as conduct business activity in a logical, efficient manner; e.g.,
obtaining listings, showing properties, handling offers and conduct-
ing negotiations.

Confidence and A confident attitude and firm grasp of personal goals is a definite
Persistence asset. Real estate sales do not always go smoothly and registrants
must routinely deal with set-backs and disappointments, as well as
successes.

Problem-Solving An ability to address difficulties and arrive at plausible, practical


solutions given conflicting interests of parties involved can be a real
asset. This attribute is particularly useful in listing and selling
activities.

English Language This is an essential skill. Salespeople must understand, draft and
Comprehension explain real estate agreements, listings and other related forms.
and Proficiency Registrants must ensure that documents are correctly prepared and
properly reflect the wishes of the parties.

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A Career In Real Estate Chapter 1 7

Computer A basic understanding of computer hardware and software is very


Knowledge helpful. Computers and other electronic devices are mainstays in
today's real estate brokerages.

Negotiating Skill This skill is a fundamental part of any real estate transaction. Salespeople
routinely negotiate on behalf of buyers and sellers to arrive at mutually
agreeable terms.

Interview A basic understanding of questioning methods is useful. Real estate


Techniques success often depends on asking the right question at the right time.
This skill is particularly valued when helping buyers determine their
purchasing needs.

People Skills An ability to gain the trust and respect of buyers and sellers is an asset.
Rapport comes easily to those who enjoy working with people, genuinely
take interest in their well-being, and understand needs and wants.

Self Discipline Those with the ability to work independently to get the job done
have a definite advantage. Real estate sales demands self-motivation,
discipline and personal commitment.

Career Expectations Skills For A Real Estate Career


A real estate career offers many rewards and oppor-
tunities, but personal sacrifices are also a reality. In
the heat of negotiations, most buyers and sellers have
little regard for time of day, or day of week. Critics
point to long hours, high stress levels and reduced
social life. Advocates insist that it is all a matter of
perspective and balance. No one questions that trade-
offs are necessary, but personal freedom and a fulfill-
ing and satisfying career are well worth the effort.

TIME MANAGEMENT
Anyone considering a real estate career should be
prepared to manage daily activities with a positive,
proactive mind set. A career in real estate is anything
but routine. Sales representatives are constantly in
and out of the office making contacts, procuring
listings, showing homes and negotiating agreements.
To compound matters, no two transactions or homes
are ever exactly the same. Successful salespeople make
things happen. They thrive on the opportunities and
challenges presented each day.
Expect long hours, as most buyers want to inspect
various houses prior to making a decision. Obviously,
the time spent searching for that ideal property is usually
dictated by market dynamics. Greater property
availability can translate into additional thinking time.
Conversely, seller markets with limited listings make
for motivated buyers and more hurried decisions.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
8 Chapter 1 A Career In Real Estate

A Juggling Act MARKET MEMO

Few days are typical for the active real estate salesperson. Each morning presents new situations, challenges and rewards.
Every day has its own momentum.
Morning routines involve time to organize, prepare advertisements, check out new listings and sales, tour new proper-
ties for sale and contact prospective buyers and sellers. Early risers sift through the latest details from listings that were
obtained and sales that occurred on the previous evening. Remember, the real estate market never ends and no stock
market bell announces the close of business.
Active residential and commercial salespeople have sellers and buyers in different stages of decision-making. Time
management and organizational skills are a must. How much time is needed for this afternoon’s buyer? Will the right
management person be available to sign the listing? What information is required for tonight’s appointment? What
about the out-of-town relocation prospect? Can we see three properties and still make it to a scheduled open house?
As the day unfolds, plans turn into action. Listings are prepared and offers drafted—time consuming detailed work
demanding legal accuracy. Often, buyers and sellers wrestle with decision-making well beyond the afternoon into
evening hours.

INCOME/BUDGETING
Predicting personal income is always a difficult task. Earnings are typically related to
individual sales ability and people skills. Typically, several years' experience are often
necessary before accurately predicting income. Many real estate professionals earn six-
digit incomes, while others may work for months or years with little financial success.
Prudent budgeting both now and in the future is vital. Course costs leading to initial
registration are just part of the total investment required for salespersons in Ontario.
Students are reminded that they cannot earn any commission until registered with the
Real Estate Council of Ontario (RECO). Time delays must be considered. Once students
complete the pre-registration courses, several months may elapse before commissions are
earned and subsequently received. Further, a two-year salesperson registration fee must
be paid to RECO, along with the mandatory insurance program premium. Additional
details are provided in a later chapter.

Time Lag MARKET MEMO

How long does it take to receive a commission? First the property is listed, offered at a reasonable price, shown to
interested buyers and ultimately an agreement is drafted and accepted. Typically, conditions must be fulfilled and
notifications made. The closing date is normally set 60 to 90 days in the future. From start to finish, the time lag can
be four, six, or even eight months to get paid and much longer with commercial property. lan your finances care­
fully and resist the urge to spend tomorrow’s dollars today.

OTHER COSTS
Approximately 85 percent of registrants in this province (i.e., brokerages, brokers and
salespersons) in Ontario are also members of local real estate boards. Real estate board
dues vary throughout the province. Salespeople may also be responsible for other fees
based on board services being provided. Contact the local board for more information.
All Ontario boards are listed on the Ontario Real Estate Association (OREA) website. Go
to www.orea.com.

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A Career In Real Estate Chapter 1 9

Brokerages may also hold salespeople accountable for advertising and/or other costs
associated with the real estate profession; e.g., telephone calls, paging services, administra-
tion fees relating to listings and transactions, and photocopy/fax services. Again, students
are encouraged to investigate costs and services of different real estate brokerages. Other
expenses to be considered include vehicle operation and maintenance, personal attire,
computer equipment and electronic communication devices.

CAREER BUILDING
Where do listings and sales come from? For new salespersons, a sphere of influence is key.
Research suggests that more than 50% of sellers select a salesperson given prior contact
with that individual or a personal referral to that person from a friend, acquaintance or
relative who was highly satisfied with the service provided.
Becoming known and respected are long-term goals of every successful salesperson.
Advertising is an essential component. For sale signs, newspaper advertising and the
Internet are the most widely used marketing tools. As emphasized earlier, expect long
hours as many sellers will want to carefully select the right brokerages to market their
homes and most buyers want to inspect various houses prior to making a decision.

As a final note, a real estate career has tremendous potential, but also considerable risk.
Lack of listings and available buyers and sellers translates into little or no income. Further,
even for the best salespeople, the volume of listing and sales activity is dramatically affect-
ed by market conditions. Self-discipline and good work habits are essential, but not a
guarantee. Real estate is not a structured work environment wherein activities and object-
ives are provided and assignments are given and directly supervised on a regular basis.
The brokerage and management may be capable of providing the best tools and ongoing
training, but it’s up to the salesperson to effectively organize systems for generating leads
and contacts, and then spend time productively to achieve career goals.

CAREER PATH CHOICES


While residential sales constitute the bulk of Ontario real estate activity, other market
niches provide abundant challenges and opportunities. Eight popular areas of expertise
are highlighted, but the demand for specialized knowledge extends into many other areas
such as government services/consulting (ministries, agencies and municipalities), large
corporations (banks, trust companies, insurance companies and utilities), developers with
extensive land holdings, real estate franchises, investment syndicates, real estate invest-
ment trusts and multi-residential and commercial landlords.
Registrants are free to pursue particular niches in the marketplace, however, if a bro-
kerage or a registrant claims expertise or specialization in a particular area, they should
be prepared to substantiate it, if challenged.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
10 Chapter 1 A Career In Real Estate

Market Opportunities
Resid
erty en
RESIDENTIAL RESALE op
Pr gement Resa tial
a le
Residential resales involve extensive work an
M

Ne
with consumers and their changing

Finan age

w
g
ci n

H om
g
needs and wants. Typical clients are

Mort
sellers who are selling the family home

es
CAREER
due to employment, monetary or family OPPORTUNITIES

inium
changes. Typical prospects are buyers

App

om
relocating due to the same motivating

rai

nd
sa
factors as those of sellers. In both cases,

Co
l
Co al/ al
emotional issues are involved and people mm Rur tion
e rc i a c r e a
l R e
skills become paramount.
Residential resale work also calls for
irregular hours, since most activities are dictated
by the availability of both sellers and buyers. Open
houses are routinely scheduled on weekends to maximize market exposure. Offer pres-
entations and showings often involve very late hours. Phone calls at home at all hours
are the norm for residential salespersons and very seldom is it possible to totally get
away from the job.

NEW HOMES
Unlike resale homes, salespeople selling in larger new home residential developments
typically have little direct involvement with the listing function or the offer presentation.
The function more closely resembles a retailing situation involving qualifying the buyers
and closing the sale. Usually fixed hours of floor duty time are established during which a
salesperson will be on site in a model home or other site office. Showing may consist of
furnishing information, demonstrating diagrams and plans (if no models are yet constructed),
providing specifics and answering buyers’ questions.
Salespeople qualify buyers financially, as well as in terms of needs and desires.
Prepackaged financing is usually available. Ultimately, counselling and discussions centre
on the prepara tion of an agreement of purchase and sale. Details of possession date,
financial terms, conditions and such matters as colours and upgrades must be determined
and documented.
At present, no universally accepted standard agreement exists for the purchase of new
homes. Registrants sometimes use standard agreements designed for resale homes.
However, substantial amendments and additional schedules are required, as several issues
unique to new home construction must be addressed.

CONDOMINIUM
Registrants are sometimes involved with resale condominiums. In fact, brokers and
salespersons in larger urban centres often focus their attention on this market segment.
Condominium refers to a system of land ownership where each individual owner holds
title to a specific unit as well as owning a share of common property (typically referred
to as the common elements). The common elements are owned by the unit owners as
tenants in common—a legal term referring to a type of ownership involving two or
more persons.
The legal structure of the condominium is set out in the declaration and description.
These documents, upon registration in a land registry office, create a condominium

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A Career In Real Estate Chapter 1 11

corporation. The unit owners are personally liable for the debts of that condominium
corporation. Many types of condominium units are found in the marketplace such as
apartment suites in high rise complexes, townhouses, detached or semi-detached houses,
or even vacant lots. Leasehold, as well as freehold, condominiums can also be found in
Ontario.
The characteristic that binds these diverse forms of ownership is that, in each, the
owners of the condominium units also own an undivided interest in the common elements.
Such elements might include hallways, elevators, parking structures or lots, landscaped
areas, recreational facilities, roadways and any other property owned in common by all
unit owners within a specific condominium project.
Interestingly, even that fundamental distinction is now disappearing with the intro-
duction of common element condominiums in which projects have no units but only
common property (e.g., a golf course). The term unit under such legislation refers to the
common interest held by an individual and not a specific unit beyond the common
elements. The proportionate share of ownership is typically registered to property located
outside of the condominium project.

RURAL, RECREATIONAL AND AGRICULTURAL SALES


Focusing one’s efforts in one or more areas encompassing the broad category of rural,
recreational and agricultural sales can be an enormous challenge. Depending on local
economics and prevalent land uses, registrants may isolate their activities to listing and
selling recreational properties, or concentrate solely on farm operations. However, for
most, a mixture of rural residential, recreational and agricultural sales is required to
build a worthwhile career.
Salespeople may be involved in the sale of farmland not only for farming purposes
but also for redevelopment and hobby/recreational uses. Although most workable land is
used for agriculture, the demand for commercial, industrial and residential development
of this land is increasing, especially in heavily populated areas of the province.
Selling land for redevelopment can be lucrative, but requires considerable knowledge.
Redevelopment of agricultural land usually takes place close to, or inside, the boundaries
of urban centres. It is crucial to know the value of land and the permitted uses. To provide
good service to clients, the sales representatives must be familiar with official plans and
zoning by-laws. In addition, the sales representative must typically be aware of other
factors impacting the saleability and market demand for the product; e.g., what demand
exists for residential building lots, high-density residential uses, or commercial and
industrial purposes.
Recreational properties represent a significant portion of activity for many registrants
located in vacation areas. Detailed knowledge of zoning by­laws and restrictions is
critical for persons concentrating in this field. Cottage and recreational properties fall
under many legislative or related government requirements, ranging from regulations
regarding the installation of wells and septic systems to required permits for construction
of waterfront improvements; e.g., wharfs, docks, boathouses and shoreline alterations.
Further, many cottage properties are only accessible by private easements and a knowledge
of limitations and potential problems arising from such access must be known.
Rural specialists are commonly involved in property types ranging from single-family
residential to recreational businesses. As well, in many areas of the province, the rural
economy requires knowledge of different types of business operations. The veteran urban
salesperson can be bewildered by the unique local customs and practices required by the
rural registrant. Most have little experience in the marketing of worm farms, retreats,

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marinas, horse farms and a host of other unique properties. An added difficulty is the
sparse availability of comparables when establishing value for such enterprises. Lastly,
distances are greater, access is sometimes limited and weather conditions are a consideration.

COMMERCIAL
Commercial brokerages generally involves the sale of retail, office, industrial, multi-
residential and similar types of properties. Traditionally, the term ICI (Industrial, Commercial
and Investment) referred to the sale of such properties. However, the generic term
commercial is now more frequently used. Registrants will encounter both terminologies
in the marketplace. In smaller centres, it is usual for residential real estate brokerages to
have one or two individuals focused on commercial activities. In larger urban centres,
the business is more specialized, with brokerages focusing on selected market segments
(or sub-groups of these segments) as detailed below:

Industrial Primarily involves the sale or lease of warehousing and manufacturing


Real Estate space to users. Industrial property and associated structures are generally
categorized under three main types: general purpose, special purpose
and single purpose.

Retail/Office The focus is on the sale or leasing of all forms of retail or office facilities.
Real Estate Sales of businesses, with or without ownership of land, are typically
included under this category.

Investment Investment real estate concentrates on the sale of industrial, office/retail


Real Estate or residential income producing real estate to institutional or private
investors (including syndicates), domestic or overseas. Investors are
essentially buying an income stream, with the land and building often
being a secondary consideration. Investors, although concerned about
the condition of physical property (as it will affect the stability and
longevity of the income stream), are more focused on long-term,
income-producing potential.

Since commercial registrants deal with business people, work hours are normally
matched to theirs. However, this does not preclude some degree of evening or weekend
work. Part of the commercial lure is the prestige and opportunities offered for involve-
ment with high-profile projects and correspondingly high commissions. While these
opportunities exist, transactions take longer to develop, are subject to extensive research
and negotiations, and require lengthy periods to point of closing compared with most
residential transactions. The rewards, although larger, are less frequent. Loss of an individ-
ual transaction is far more damaging both mentally and financially.
What is it that draws someone into the commercial field? Certainly potential monetary
rewards are always a driving force, but most successful industrial, commercial and
investment registrants suggest they derive their motivation from the excitement and
gratification that comes from involvement in large and important projects. Registrants
are typically individuals who thrive on challenge and the ongoing demands for more
knowledge, skill and specialized education.

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APPRAISAL
While registrants routinely face the challenges of assisting sellers with the establishment
of realistic listing prices and discussing market values with buyers and sellers, formal
appraising requires detailed knowledge of techniques and procedures to be applied in
estimates of value for different property types. The process of evaluating or appraising is
complex due to many physical, political, economic and social factors that affect the value
of any parcel of real estate. A true appraisal specialist is a professional who has dedicated
years to study, has combined this knowledge with extensive practical experience and is
typically engaged full time in the practice of appraisal.
Professional appraisers are often referred to as fee appraisers who market services on
the basis of cost for time, expertise and effort required to arrive at a value estimate. Other
appraisers may work for large corporations engaged in the development of properties for
various levels of government. Unlike real estate sales, the appraisal profession involves
relatively set work hours for inspection of properties and preparation of reports. Many
professional appraisers have earned some form of designation from a creditable institution.

MORTGAGE FINANCING
Opportunities in mortgage financing have expanded significantly in recent years.
Historically, the lending business was relatively limited and rigidly structured. Banks,
trust companies, insurance companies and credit unions largely controlled the mortgage
market, with a limited variety of financing alternatives. Times have changed. More lenders
have entered the marketplace and competition has increased. With this competition has
come a myriad of financing alternatives and services. The fixed-term five-year mortgage,
with payments amortized over 25 years, which was the mainstay of residential financing,
is no longer the norm.
The complexities of today’s mortgage market has caught the interest of many seeking
a worthwhile career as a full-time mortgage professional, whether as a representative of
a lending institution or as an agent for a mortgage brokerage. Mortgage brokerages, as
well as mortgage brokers and mortgage agents working for brokerages, are registered
under provincial legislation. While the majority of mortgage brokerage activity centres on
the residential market, some specialize in arranging interim financing for large projects,
industrial or commercial lending and the sale of mortgages as investment vehicles.

PROPERTY MANAGEMENT
Property management offers worthwhile possibilities for registrants who seek a more
structured career than typically possible in residential or commercial resale activity.
Property management is often mistakenly confused with the narrow scope of activities
of rental agencies or even building superintendents. Under property management, the
manager not only acts as administrator for the owner, but typically assumes all executive
functions necessary to carry out agreed objectives on behalf of the owner, thus relieving
the owner of the burdens normally associated with the operation of an income-producing
property. Responsibilities and activities vary from contracting for labour and services
necessary for property upkeep to matters as extensive as major renovations or redevelop-
ment projects and initial renting related thereto.

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The duties of a property manager basically fall into four areas:


• eeping the property leased;
• Collecting property income;
• Paying the property expenses; and
• Maintaining the physical integrity or soundness of the property.

Property management is a people-oriented business that requires better than average


people skills. Property managers are frequently required to communicate at widely differing
levels. Personnel management and the settling of disputes is a commonplace activity, as is
the negotiation of contracts. With respect to residential properties, statutory requirements
govern many aspects of landlord/tenant rights and the regulation of rents. Property
management has developed into a highly specialized branch of the real estate profession
with ample career opportunities.

CHOOSING A BROKERAGE
Salespeople in Ontario must be employed by a real estate brokerage. Compensation is
usually based on a commission structure, but other methods of remuneration are possible.
Commission plans vary and personal research is necessary within the local marketplace.
Potential earnings can also be impacted by the particular market area, average prices
within specific locales, size and type of property available, local economic conditions
and specific brokerage policies.
Differing compensation plans are found in the marketplace. Some brokerages pay an
extremely high percentage of the total commission to the salesperson. However, that
salesperson(s) typically must pay monthly fees to the brokerage regardless of whether
commissions are earned or not. Those seeking a real estate sales career are well advised
to do their homework and choose a brokerage that best supports personal career goals.

Brokerage Services and Features


Make certain that you clearly understand what features are being offered that best suit
your needs. Here’s a partial list of services/features found in various sized brokerages to
assist in your search:
• Sales and Management Training Programs
• Technology Training (e.g., Internet Marketing)
• Dynamic Websites and Salesperson Branding (Custom Personal Websites)
• Desk Top Publishing
• Strong Brokerage Support and Teamwork
• ew Salesperson Support Systems
• Mentoring Coaching
• Profit Sharing and Residuals
• Competitive Commission Plans

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Franchise vs. Independent


As with most decisions about a future employer, prospective salespersons should care-
fully weigh out the matter of franchise vs. independent brokerage. This decision rests
largely with your specific needs and matching those to the brokerages under consideration.
eep in mind that a brokerage, regardless of whether it is affiliated with a franchise or
not, may have specific advantages that suit your particular career aspirations.
For example, an independent brokerage or franchise may have a strong market presence
within a particular market segment. Alternatively, a franchise or independent may offer
some specific training tools that you perceive as a key benefit when developing your sales
skills. A franchise may have wide public awareness both locally and nationally, while an
independent may have a strong local presence with a service affiliation that provides
important access to relocating sellers and buyers.
Most brokerages provide detailed information on specific features offered to salespeople.
Take the time to carefully review these from your personal perspective. Lastly, you may
discover, as many do, that the decision rests more with the management, staff and sales
force within a particular brokerage regardless of its affiliations.

Full Service vs. Limited Service


Full service brokerages dominate the Ontario marketplace at present, but a growing trend
in limited service operations warrants mention. The full service brokerage provides all
services to the buyer or seller client during the listing and selling process to the point of
closing. Limited service brokerages typically charge a reduced commission or a flat rate
to provide specified services. Certain costs may be paid by the client rather than the
brokerage. For example, the brokerage may pay for limited advertising with any additional
costs borne by the seller.

Listing vs. Selling


Brokerages can differ in terms of whether their revenue is generated primarily by internal
listings versus relying on selling properties listed by other brokerages. Brokerages with
larger market shares tend to have greater incomes generated through the sale of internal
listings. Further, individual brokerages may have a particular strength in dealing with
sellers as opposed to buyers, or vice versa.
The issue for a new salesperson is not whether one approach is better than the other,
but rather how that brokerage’s strategy aligns with personal preferences. Are you
interested primarily in working with sellers in listing property or do you feel that your
success will be with buyers seeking out appropriate properties?
Multiple Listing Service®
Organized Real Estate vs. Non-Organized (MLS®)
An arrangement among
While the vast majority of brokerages are part of organized real estate, various brokerages
brokerages who are real estate
elect not to utilize the services provided by real estate boards for a variety of reasons. For board members, whereby each
example, a brokerage may operate in a very distinct market niche that does not normally brokerage shares information
regarding listings with the other
require access to the Multiple Listing Service® (MLS®) or other benefits arising from
members, who may negotiate
real estate board affiliation. A detailed profile of organized real estate is included to assist the transaction. Multiple Listing
in assessing overall benefits and features as they relate to your new career. Service® is a trademark of The
Canadian Real Estate Association.

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Questions To Ask CURIOSITY

The reality in selecting a brokerage is that making the right choice can be key to a successful career. You want to build
a solid relationship with a brokerage and other salespersons that fit with your personality and aspirations. Take a close
look at office atmosphere. Is it professional? What will my future clients think when visiting the brokerage? Is it a healthy
business where things are happening? Is there opportunity for me and does the pace of business suit my style?
Don’t rely solely on personal impressions. Get input from other salespeople. Find out what they think of your short
list of potential brokerages. Find out what they felt were the most important factors when they chose their brokerage.
When meeting with the brokerage, have specific questions ready. For example:

• o you have an office policy that I can review • ow many salespersons are employed by the brokerage
• hat market share does the brokerage have and and what are their experience levels and areas of
what are its particular market strengths? expertise?

• hat training programs are available for new sales­ • hat Internet presence does the brokerage have and
persons and at what cost? what software and/or products are available for sales-
people to improve productivity?
• hat is the commission split arrangement and what
expenses are paid by the brokerage and salesperson? • hat special services do you provide that are unique
from other brokerages that will help in building my
• ill I have an office, a desk in a common area or a
real estate sales career?
shared desk?

ORGANIZED REAL ESTATE IN ONTARIO


When selecting a brokerage, one possible factor to consider is whether or not to be
Organized Real Estate involved with organized real estate. Approximately 85% of all registrants in the province
Voluntary membership organiza- are currently members of organized real estate. It is important to emphasize that if the
tions consisting of local real brokerage is a member of organized real estate, then all brokers and salespersons within
estate boards, provincial associa-
tions and The Canadian Real
its employ must also be members.
Estate Association. Organized real estate is structured based on a three-way relationship involving the
Canadian Real Estate Association (CREA), provincial/territorial associations (the
Ontario Real Estate Association in the case of Ontario) and real estate boards.

National Association
CREA
The Canadian Real Estate Association (CREA), located in Ottawa, concen-
National Activities
trates on federal issues and associated lobbying, as well as international
International Activities representation. Often referred to as the voice of Canadian real estate, CREA
Trademarks
is responsible for various trade marks and certification marks associated
with member services, the most notable of which are REALTOR® and
Multiple Listing Service® (MLS®). MLS® is described in more detail
PROVINCIAL/TERRITORIAL
under real estate boards. The term REALTOR® can only be used by
10 Provincial Associations
1 Territorial Association members of The Canadian Real Estate Association. Additional
Roles Vary by Province information about CREA is provided later in this chapter. See
Professional Organizations
Organizations.
REAL ESTATE BOARDS
Over 100 Real Estate Boards
MLS® Service
Various Member Services

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Provincial/Territorial Associations
The Ontario Real Estate Association is one of ten provincial associations and one
territorial association that are members of organized real estate by way of the three-way
agreement and who serve members and provide various products and services within
their applicable jurisdictions. Typically, as is the case with OREA, provincial associations
provide education and various member-related services. Additional information about
OREA is provided later in this chapter. See Professional Organizations.

Real Estate Boards


Real estate boards operate in defined jurisdictional areas within provinces or the one Real Estate Boards
territory typically offering MLS® services and other member services. Members pay A non-profit corporation
dues to be affiliated with the respective board, as well as OREA and CREA. The scope of established for the benefit of its
activities varies based on overall provincial association structure and the size of board members and forming one com-
ponent of organized real estate,
memberships. Thirty-nine real estate boards are currently operating in the province, the the others being provincial/
largest in membership being the Toronto Real Estate Board. territorial associations and The
Canadian Real Estate Association.

Ontario Regions and Boards

Bancroft and Area Association of REALTORS® NORTHERN


Barrie & District Association of REALTORS® (See Inset)
Kawartha Lakes Real Estate Association Inc.
Muskoka Haliburton Orillia—
The Lakelands Association of REALTORS®
Northumberland Hills Association of REALTORS® NORTHEASTERN
Parry Sound and Area Association of REALTORS®
Peterborough and the Kawarthas Association
of REALTORS® Inc.
Quinte & District Association of REALTORS® Inc.
Southern Georgian Bay Association of REALTORS®

EASTERN
Cornwall and District Real Estate Board
WESTERN Kingston and Area Real Estate Association
Chatham-Kent Association of REALTORS® Ottawa Real Estate Board
Huron Perth Association of REALTORS® Renfrew County Real Estate Board
London and St. Thomas Association of REALTORS® Rideau-St. Lawrence Real Estate Board
REALTORS® Association of Grey Bruce Owen Sound
Sarnia-Lambton Real Estate Board CENTRAL
Tillsonburg District Real Estate Board
Brampton Real Estate Board
Windsor-Essex County Association of REALTORS®
Durham Region Association of REALTORS®
Woodstock-Ingersoll & District Real Estate Board
Mississauga Real Estate Board
The Oakville, Milton and District Real Estate Board
Toronto Real Estate Board

SOUTHERN
Brantford Regional Real Estate Association Inc.
Cambridge Association of REALTORS® Inc.
Guelph & District Association of REALTORS®
Kitchener-Waterloo Association of REALTORS®
Niagara Association of REALTORS®
REALTORS® Association of Hamilton-Burlington
Simcoe and District Real Estate Board NORTHERN
North Bay Real Estate Board
Sault Ste. Marie Real Estate Board
Sudbury Real Estate Board
Thunder Bay Real Estate Board
Timmins, Cochrane & Timiskaming Districts
Association of REALTORS®

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Individual members of organized real estate (e.g., brokers and salespersons) have most
frequent contact with the local board. Real estate boards in Ontario are non-profit cor-
porations operating in towns, cities and other administrative districts and provide services
as set out in the by-laws, rules and regulations established by that particular board. A
major attraction of board affiliation is the Multiple Listing Service®. Originally, this mar-
keting service appeared in Ontario as the CO-OP (or PHOTO CO-OP), but was renamed
the Multiple Listing Service®. MLS® has grown steadily since its inception in the 1950’s.
MLS® is best described as a system for the orderly co-operating and dissemination of
listing information to members.
The goals and objectives of real estate boards are set out by way of board by-laws and
these by-laws form the basis of all activities and actions taken by the board. All members
must abide by rules and regulations established by the board including those associated with
offering MLS® services in the marketplace. Members must also abide by the REALTOR®
Code of Ethics and Standards of Business Practice. Typically, boards offer various types
of membership classes including those for brokers and salespersons, as well as affiliate
members (e.g., persons affiliated with some aspect of real estate) and other categories
including honorary memberships for meritorious achievement.
Real estate boards are authorized by The Canadian Real Estate Association to use certain
certification marks owned by CREA for purposes of operating the Multiple Listing Service®
and related databases. CREA sets out various requirements to boards concerning how
MLS® is to be administered; e.g., type of listing information needed and required notifica-
tion to the board when properties are sold. The Ontario Real Estate Association is also
involved by providing advice and clarification on issues concerning MLS® Rules and
Regulations.
Organized real estate also extends to the international scene through an alliance network
with the National Association of REALTORS®, which is the largest trade organization in
the world. This network now spans the globe with more than 50 national and regional
co-operating associations, including The Canadian Real Estate Association.

Ontario Beginnings—Real Estate Boards HISTORICAL FOCUS

The first real estate board was formed during 1918 in Ontario. Debate continues to this day as to whether the Thunder
Bay Real Estate Board or the Windsor-Essex County Real Estate Board holds claim to that achievement. The Toronto
Real Estate Board was formed in 1920, with the Ontario Association of Real Estate Boards (OAREB) following two years
later on Dec. 7, 1922. The Association actively lobbied for the first Real Estate Brokers Act, which was passed in 1930.
In the early 1950’s, a regional structure (five regions in total) was set out as part of a major reorganization involving
both the real estate boards and OAREB. By the early 1970’s, the membership had swelled to 20,000, with OAREB
renamed as the Ontario Real Estate Association (OREA) in 1972. Ten years later, OREA welcomed the 48th real estate
board into organized real estate in Ontario. In 2006, the Association reported a total membership exceeding 40,000.
In 1997, a long-held OREA commitment to self-regulation was realized with the formation of the Real Estate Council
of Ontario (RECO). RECO oversees all regulatory matters regarding the Real Estate and Business Brokers Act, 2002 as well
as registration processes, professional standards enforcement and consumer protection programs. Another milestone
was reached in 2003 with the formation of the OREA Real Estate College. The College is the latest innovation in OREA’s
continuing education role, which began with the introduction of formal real estate education courses in 1965.

NOTE For a detailed listing of real estate boards in Ontario, go to the OREA website (www.orea.com).

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PROFESSIONAL ORGANIZATIONS
Selected provincial, national and international organizations are highlighted given their
significant presence in real estate brokerage and related fields, and their notable contribu-
tion to the professional development of brokers and salespersons either through real
estate brokerage or related specialty areas. Note: The Real Estate Council of Ontario is
fully profiled, including all significant activities and programs, in Chapter 2: Real
Estate—A Regulated Profession.

The Canadian Real Estate Association


The Canadian Real Estate Association (CREA) is the national organization for REALTORS® REALTORS®
throughout Canada, with offices located in Ottawa. CREA focuses on national and A registered trademark that may
international representation of the profession with liaison to such organizations as the only be used by an active
Appraisal Institute of Canada, the National Association of REALTORS®, the Canadian member of a real estate board
affiliated with The Canadian Real
Construction Association, the Urban Development Institute and the Canada Mortgage Estate Association.
and Housing Corporation.
Founded in 1943, CREA has become a major player in the daily activities of organized
real estate. The association was born during the postwar period from the desire to have a
national voice for all real estate salespersons in the legislative process. From that purpose,
it has grown and prospered into a full-fledged national organization impacting daily on
its members’ activities.
The Canadian Real Estate Association’s mission statement outlines its primary purpose
to represent and promote the interests of the members, enhance members’ professionalism and
ability to succeed, and advocate policies that ensure real estate property rights and ownership.
CREA is administered by a board of directors consisting of regional directors, directors-
at-large and selected appointments from across Canada. CREA has responsibility for
national/international representation of the industry, various codes including the REALTOR®
Code of Ethics and Standards of Business Practice, the Privacy Code, the Pledge of
Competition and the Principles of Competition, the overseeing of certain trademarks
and certification marks (most notably REALTOR® and MLS®), assistance to real estate
boards and associations, and arbitration between provincial associations and between
members from different provinces.
CREA also operates the realtor.ca website providing consumer access to selected property
information for both residential and commercial property listings. This website is not
an MLS® system, but instead is an advertising vehicle provided by REALTORS® across
Canada to help market properties. Consumers need to contact a REALTOR® for complete
details about properties listed on this site.

WEB LINKS
CREA Websites The CREA website (www.crea.ca) provides interesting background information
concerning organized real estate in Canada and specifics about trademarks and certification marks.
See also www.realtor.ca for information about residential and commercial properties offered by
REALTORS® throughout Canada.

Ontario Real Estate Association


The Ontario Real Estate Association (OREA) represents more than 70,000 brokers and
salespeople who are members of the province’s real estate boards. The Association’s many
functions include administering pre-registration, articling and broker courses within

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20 Chapter 1 A Career In Real Estate

the registration curriculum (as designate for the Real Estate Council of Ontario), main-
taining a strong lobbying voice for REALTORS®, offering savings programs and
informing members of real estate news.
OREA continually strives to improve the image of REALTORS® by enhancing education-
al and professional standards. The Association also handles ethics and arbitration appeals
involving board members, develops, publishes and provides downloadable standard forms
and clauses, and supports educational and charitable causes through the REALTORS Care
Foundation. Every real estate professional who joins an Ontario real estate board auto-
matically becomes a member of OREA and The Canadian Real Estate Association (CREA).
OREA’s goal is to help Ontario’s REALTORS® succeed through many activities:
• Monitoring government legislation that affects real estate.
• Providing a strong lobbying voice.
• Maintaining high­calibre education and professional development programs.
• Developing a positive image of REALTORS®.
• Forming affinity partnerships to provide discount programs for members.
• Reporting and analyzing industry news and trends.

OREA REAL ESTATE COLLEGE


OREA, as designate of the Real Estate Council of Ontario, develops and administers
educational courses required for registration in ntario. In December 2002, the OREA
Board of Directors approved the creation of the OREA Real Estate College.
The College offers courses in the pre-registration segment including Real Estate as a
Professional Career, Land, Structures and Real Estate Trading, The Real Estate Transaction—
General, The Residential Real Estate Transaction (and the alternate commercial course
titled The Commercial Real Estate Transaction), the articling segment (specialized courses
within the two-year articling period), including Real Property Law, Principles of Appraisal,
Principles of Mortgage Financing, Principles of Property Management, Real Estate Investment
Analysis and The Residential or Commercial Real Estate Transaction not previously taken
during the pre-registration segment. The College also offers the Real Estate Broker Course
for the broker segment of the overall registration curriculum.
As designate for the Real Estate Council of Ontario, the College is responsible for the
development of course content and other materials to satisfy required areas of study and
other criteria as established by the Registrar, the qualifying, training and managing of
course instructors, the marketing and delivery of registration courses throughout the
province, the provision of proctored examinations and associated program administra-
tion and reporting functions.

Registration Education—Changes Effective April 1, 2016 EDUCATION UPDATE

All students enrolled in the pre-registration education program on or after April 1, 2016 are required to complete five
courses prior to registering to trade in real estate. The new education program requires both the Residential Real Estate
Transaction and the Commercial Real Estate Transaction, as well as the Real Property Law course, to be completed in addition
to the other pre-registration courses identified above. The articling segment will require one elective to be completed
within the two-year articling period. Additional information regarding education requirements is discussed in Chapter 2.

WEB LINKS
The OREA website (www.orea.com) includes detailed information about the Association, its structure,
member programs and benefits, and government relations. The website also provides important
information concerning a career in real estate and registration education.

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The Appraisal Institute of Canada


The Appraisal Institute of Canada (AIC), founded in 1938, is the national society of pro-
fessional real estate appraisers. The Institute is dedicated to serving the public interest by
advancing high standards for members of the appraisal profession through the granting
of professional designations including the CRA (Canadian Residential Appraiser), AACI
(Accredited Appraiser Canadian Institute) and P. App (Professional Appraiser).
Practising members provide reasoned valuations widely respected by courts, chartered
banks, real estate corporations, trust companies, mortgage and lending institutions, as
well as all levels of government and private individuals. Members are governed by a Code
of Ethics and Uniform Standards of Professional Appraisal Practice that establish mini-
mum standards of performance in the rendering of professional services. The Institute’s
education program is available through most of its provincial associations and chapters.
Certain universities and colleges also offer the program on a full-time basis. The national
office of the Appraisal Institute of Canada is located in Ottawa. Provincial offices are
maintained in all provinces.

WEB LINKS
Appraisal Institute of Canada Go to the Institute’s website (www.aicanada.ca) for detailed
information about the organization and a career as a property appraiser.

Real Estate Institute of Canada


In 1955, the Canadian Association of Real Estate Boards formed the Canadian Institute
of REALTORS® to carry out its aims in the field of education. A three-year university
course was prepared in co-operation with the University of Toronto. Successful students
received a designation in real estate from the Institute.
In 1971, when CREA was organized, the Canadian Institute of REALTORS® became a
division of CREA. The name was subsequently changed to the Real Estate Institute of
Canada (REIC). The primary purpose of REIC was to act as the educational arm of CREA
and to co-ordinate education courses on a national basis. In the ensuing years, REIC
became an autonomous institute to serve its mission of establishing, maintaining, promot-
ing and advancing professional standards of practice among those occupations concerned
with real estate. All REIC members must fulfill ongoing professional development
requirements.
The Institute’s mission statement summarizes its primary purpose:
The Real Estate Institute of Canada exists to advance
opportunities for persons involved in real estate.

REIC grants various professional designations of which the most relevant for real
estate practitioners is the FRI (Fellow of the Real Estate Institute). However, those actively
pursuing property management activities should investigate the CPM (Certified Property
Manager), the CLO (Certified Commercial Leasing Officer) and the ARM (Accredited
Residential Manager). The Real Estate Institute of Canada is located in Etobicoke and
has chapters across Canada.

WEB LINKS
Real Estate Institute of Canada Go to Institute’s website (www.reic.ca) for detailed information
about the organization.

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The CCIM Institute


The CCIM Institute is an affiliate of the National Association of REALTORS® in Chicago,
Illinois. The Institute provides education programs and services for professionals in com-
mercial and investment real estate, as well as allied industries. The Institute awards the
CCIM designation to individuals completing a series of graduate level courses based on
advanced concepts/techniques in commercial real estate. Four core courses provide the
fundamental skill sets required: financial, market, user decision and investment analysis
relating to commercial investment properties.
The Institutes’s vision statement is to be the leading edge professional association to
the commercial real estate industry. Two Canadian Chapters of the Institute have been
formed: the Western Canadian Chapter and the Central Canadian Chapter. Various
boards across Canada offer credit courses toward the CCIM designation. Contact the
National Commercial Council of The Canadian Real Estate Association for current
information.

WEB LINKS
The CCIM Institute Go to the Institute’s website (www.ccim.com) for detailed information
about the organization and the CCIM designation. Individuals interested in commercial activities
can obtain additional information from the National Commercial Council of The Canadian Real
Estate Association. Go to www.crea.ca and click on Commercial Council.

Society of Industrial and Office REALTORS®


The Society of Industrial and Office REALTORS® (SIOR) is a leading international
organization of commercial and industrial practitioners. The SIOR designation is awarded
by SIOR, an affiliate of the National Association of REALTORS® in the United States. The
Society is dedicated to the maintenance of high professional standards in the fields of
industrial and office real estate. The Society offers a candidate status that is designed to
provide entry-level real estate practitioners with a meaningful program to motivate and
encourage them to work toward obtaining the SIOR designation. The world headquarters
of SIOR is located in Washington, D.C. SIOR has three Canadian chapters: Eastern
Canada, Central Canada and Western Canada.

WEB LINKS
Society of Industrial and Office REALTORS® Go to the Society’s website (www.sior.com) for
detailed information about the organization.

REAL ESTATE BROKERAGE:


ROLES AND AUTHORITIES
Real estate brokerages in Ontario provide valuable marketplace services to consumers who
Brokerage seek professional assistance when buying, selling or otherwise acquiring or disposing of
A corporation, partnership or real property. The legal relationship between the brokerage and consumer (typically a
sole proprietorship that trades in buyer or seller) is a complex intertwining of common law and regulatory requirements.
real estate on behalf of others
for compensation or reward, or
expectation thereof.

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Brokerage as an Agent
A brokerage is viewed legally as an agent under common law. Common law represents
principles, customs and procedures recognized over many years by the courts. In a legal
sense, the brokerage is an agent that enters into an agency relationship with a principal Agent
(the buyer or seller). This agency relationship is legally defined as being between two One who is authorized by a
persons, one of whom [the principal] expressly or impliedly consents that the other [the principal to represent the prin-
agent] should act on his behalf, and the other of whom similarly consents so to act or so acts. cipal in business transactions
with a third party. In the real
(Ref: Bowstead on Agency, 15th ed. (1985).) The relationship is typically documented by way estate profession the agent is
of a buyer representation agreement or seller representation agreement (commonly the brokerage.
referred to as a listing agreement).
Many types of agents operate under common law principles; e.g., agents involved with
insurance, investments and entertainment. The real estate brokerage as an agent has
various duties to the principal including general, fiduciary and regulatory obligations. In
Ontario, regulatory obligations are set out under the Real Estate and Business Brokers
Act, 2002. Intricacies of agency relationships (i.e., representing others) are fully detailed
in Land, Structures and Real Estate Trading.

REPRESENTING OTHERS
The common law term agency and related words (e.g., agency relationship) do not Agency
appear in the Real Estate and Business Brokers Act, 2002 and associated Regulations. The The relationship between prin-
legislation focuses instead on representation which is generally analogous to agency in cipal and agent, wherein an
terms of duties and responsibilities. The Act also sets out various requirements about agent is employed and authorized
by the principal to represent the
representation agreements and other trading matters, including the brokerage right to principal in business transactions
delegate authority to registered brokers and salespersons. with a third party.

Brokerages, Brokers and Salespersons


REBBA 2002 sets out definitions for brokerage, broker and salesperson. The Act clearly
states that the role of a brokerage is to trade on behalf of others. Brokers and salespersons
must be employed by a brokerage.

“brokerage” means a corporation, partnership, sole proprietor, association or other


organization or entity that, on behalf of others and for compensation or reward or the
expectation of such, trades in real estate or holds himself, herself or itself out as such;

“broker” means an individual who has the prescribed qualifications to be registered


as a broker under this Act and who is employed by a brokerage to trade in real
estate; (“courtier”)

“salesperson” means an individual who has the prescribed qualifications to be registered


as a salesperson under this Act and who is employed by a brokerage to trade in real
estate;
(REBBA, Sec. 1)

Types of Brokerages
While the definition of a brokerage includes an association or other organization, current
registration procedures only permit a brokerage to trade in real estate as a corporation,
partnership or sole proprietorship.

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Corporation The real estate brokerage corporation is created by statute law and is
established through the registration of articles of incorporation.
Brokerage corporations can vary from small privately-held operations
to large offering or public companies. The corporation, unlike the
partnership and sole proprietorship, provides a distinction between
the business operation and its owner(s). As a legal entity, the corporation
is capable of merging, creating subsidiary companies and generally
operates distinct and separate from its owner(s).
Corporations are subject to various disclosure and related require-
ments when seeking registration, most notably in regard to share-
holders, officers and directors.

Partnership A partnership involves two or more individuals or entities that pool


their personal and financial resources in a joint effort. A partnership
is created by the prospective partners entering into a partnership
agreement. A change in a partnership under the Real Estate and
Business Brokers Act, 2002 is deemed to create a new partnership.
Interestingly, a surviving or remaining partner is permitted to carry
on in the partnership name if all advertising and related materials
clearly state that the surviving or remaining partner is a sole proprietor.

Sole A sole proprietorship involves a business operation owned by one


Proprietorship person who operates individually or with the assistance of employees.
The sole proprietor owns all the assets, is responsible for the debts, is
entitled to the profits and is accountable for any losses. A sole propri-
etor must operate using the name of the broker.

Brokers of Record and Managers


Broker of Record The Act requires the brokerage designate a broker of record. This individual must be a
A broker designated by a broker employed by the brokerage. This individual ensures that the brokerage complies
brokerage to ensure brokerage with REBBA 2002 and associated Regulations. Further, branch office managers may be
compliance with the Real Estate appointed and can be either a broker or a salesperson provided that they meet criteria
and Business Brokers Act, 2002
and Regulations. set out in the statute to act in a management capacity.

Employee Employees vs. Independent Contractors


A relationship in which the The Act provides that brokers and salespersons can be employed by a brokerage provided
employer directly controls and that they have met prescribed qualifications to be registered as such. For taxation pur-
supervises the work of the
employee and is responsible for poses, the relationship between the employing brokerage and brokers and/or salespersons
the employee’s actions in the can involve employee or independent contractor (IC) status.
performance of such work.
With an employee, a contract of service exists—legally referred to as a master/servant
relationship in which the master (employer) controls and supervises the work of the
Independent Contractor servant (employee). With an independent contractor , a contract for service is created.
An individual who works accord- Independent contractor agreements are generally more lengthy documents given detailed
ing to his/her own methods and contracted duties and responsibilities.
judgement. Tax-related rules An independent contractor works according to his or her own methods and judgement.
apply to independent contractors.
Brokers or salespersons seeking independent contractor status are doing so for taxation
purposes. Such an arrangement does not in any way minimize the fundamental employee/
employer relationship as established under the Real Estate and Business Brokers Act, 2002
and associated Regulations. For taxation purposes, various common law tests are applied

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A Career In Real Estate Chapter 1 25

by the Canada Revenue Agency (CRA) to determine whether an individual is an independ-


ent contractor or not. Exact rules applied can vary based on individual circumstances
and persons contemplating IC status should seek expert advice.

A Typical Real Estate Brokerage

Corporation

BROKERAGE Partnership
Sole Proprietorship*

Branch
Managed By
Broker or
Brokers
Qualified Salesperson

BROKER OF
RECORD

Salespersons
Administrative
Staff

* The Broker of Record is the Sole Proprietor


in a Sole Proprietorship.

As a general guideline, the Canada Revenue Agency will take into consideration the
entire relationship between a brokerage and a broker or salesperson in making a determina-
tion of whether that individual is an employee or an independent contractor. A broker or
salesperson is more likely to be viewed as an independent contractor if:
• The brokerage exercises only limited control over the individual’s day­to­day work
activities.
• The broker or salesperson pays for his her own tools and equipment and other costs
of doing business.
• The broker or salesperson is free to hire others to assist in day­to­day work activities.
• The broker or salesperson bears financial risk as well as having the opportunity for
profit.
• The genuine intention of both the brokerage and the broker or salesperson is that
the relationship is one of an independent contractor.

As an additional note, the Canada Revenue Agency has recently confirmed that commis-
sion sharing arrangements (i.e., the broker or salesperson paying the brokerage a percent-
age of commission for overhead) does not in itself establish an employee relationship.
Uncertainty had existed on this point, as commission sharing arrangements were thought
to adversely affect independent contractor status. Once again, the CRA takes the entire
relationship into consideration.

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Applying Common Law Principles FOCUS ON ICI STATUS

As further input, the Canada Revenue Agency has traditionally applied common law principles in determining
independent contractor versus employee status. Recent announcements by the CRA appear consistent with that
common law approach involving four components:

Ownership/Economic Reality Does the individual use his/her own tools or other materials to perform
contracted services?

Integration Does the individual operate his/her activities with relative independence
from the hiring brokerage?

Control Is the individual controlled by the brokerage?

Contract for Service Does supporting documentation exist to confirm independent contractor
status?

Tests Leading to Independent Contractor Status

Ownership/
Economic Reality Integration

Contract For Control


Service

Typical employee and independent contractor agreements are illustrated in workbook exercises. Go to
www.cra.gc.ca for additional information.

UNDERSTANDING THE
LISTING/SELLING PROCESS
Brokers and salespersons are actively involved in the listing and selling of real estate. Activities
can be broadly grouped under six components. To better appreciate the type of work
involved in residential resales, the progress of a typical residential transaction (if in fact any
transaction can be classified as typical) is detailed. In this example, the brokerage is repre-
senting the seller. Perspectives and duties vary based on the type of representation (e.g.,
whether or not the brokerage is representing the buyer or seller), the brokerage policies,
local practices and procedures, and the property type (e.g., residential or commercial).

Listing
The listing agreement is entered into between the seller and the real estate brokerage,
authorizing the brokerage to act as the seller’s agent in offering the property for sale. A
large portion of residential resale activity involves developing leads and converting them
into saleable listings to provide the brokerage with goods on the shelf. Skill is uppermost
as listings that are not at or close to market value or in which the confidence and co-
operation of the seller has not been obtained usually result in lost effort, money and image.

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The Real Estate and Business Brokers Act, 2002 and Regulations sets out various require-
ments both regarding disclosures prior to the obtaining of a listing, the contents of such
agreements and the requirement to ensure that the party(ies) signing receive a copy of the
agreement. Once a saleable listing has been obtained, the brokerage represents the seller
and in that capacity must fulfill various regulatory and common law duties (and other
standards if the brokerage is a member of organized real estate pursuant to the CREA Code
of Ethics and Standards of Business Practice). Since the broker or salesperson involved
in the listing process is authorized to act on behalf of the brokerage, all such obligations
extend to those individuals.

Prospecting
Prospecting involves the search for qualified buyers for listed property. The public prob-
ably has the impression that this means placing an ad in the paper and a sign on the
property. Although these activities are examples of prospecting, experienced salespersons
use other methods of active prospecting that may be far more effective. There is an old
saying in the real estate profession that the property will qualify the buyer. In other words,
the property in terms of type, location and price range will provide an experienced sales-
person with a profile of a typical buyer and will target marketing activities and efforts
accordingly. As every new salesperson will discover, real estate prospecting challenges the
initiative, the imagination and the dedication of anyone actively involved in the marketplace.

Qualifying and Showing


Qualifying involves determining the buyer’s needs and wants. The scope of activity involved
in the process depends on whether the brokerage is representing the buyer (i.e., working
in the best interests of that individual) or providing limited services to the buyer as a
customer (not representing that individual, but providing information in an honest manner
and also exercising care and skill). The role being performed must be fully disclosed to
ensure that the buyer fully understands what will or will not be done during the process
of qualifying and showing property, as well as subsequent negotiations. REBBA 2002 sets
out exact requirements regarding such disclosure.
The qualifying process is typically followed by selecting a limited number of properties
to be shown. One of the purposes of qualifying is to narrow the field to avoid confusion
and wasted time and effort. Following the appropriate selection, the process of showing
and providing accurate and complete information follows.

Offer Preparation
People skills are paramount as there is no point in asking for an offer unless the property
is the right one for the buyer. Experienced salespeople know the signs to look and listen
for and also recognize that timing and positive reinforcement are important. Make no
mistake, salespersons must typically ask for the offer.
The offer itself is a complex document, involving a great deal of detail with numerous
decisions to be made by the buyer. Once again, the Real Estate and Business Brokers Act,
2002 and Regulations set out requirements concerning both the offer preparation and its
presentation. In preparing an offer, the salesperson accepts a very serious responsibility to
ensure that the document contains all terms and conditions required by the buyer, and
that the elements necessary to create a binding agreement, according to the common
law of contract, are present.

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Offer Presentation
Presentation of the buyer’s offer to the seller involves an analysis of the document itself
and discussion of such matters as market conditions and circumstances that the seller
should take into consideration. The precise roles played by salespersons involved in the
presentation will depend upon whom they are representing. The seller may accept, reject,
or counter the buyer’s offer. Countering the offer means that the seller signs an offer to
sell the property to the buyer under terms differing from the buyer’s original offer to
purchase. This would then require an offer presentation to the buyer.
When faced with challenging negotiations, it is not uncommon for salespeople to
bounce back and forth between seller and buyer several times before the parties agree on
the final terms. If an offer is ultimately accepted, copies are delivered to all parties. Since
the transaction can involve one or more brokerages, copies of the accepted agreements
are also provided to the respective brokerages. The brokerage (or brokerages as the case
may be) must then prepare trade record sheets confirming sale information, outline
internal commission distribution for the sale and complete other relevant details, which
is then approved by the broker of record. Any deposit received is typically placed in the
listing brokerage’s real estate trust account.
As with other aspects of the listing and selling process, the Real Estate and Business
Brokers Act, 2002 and Regulations set out requirements concerning the offer presentation,
dealing with other registrants (i.e., other brokerages and their employed brokers and
salespersons), competing offers, agreements relating to commission, the handling of
deposits received including time limits to place them in a trust account, the completion
of supporting documents and the maintenance of business records.

Follow-Up
The brokerage and its representatives must follow through after the sale in the same
competent and conscientious manner required during the listing process and subsequent
negotiations. For example, the agreement may have one or more conditions that must
be satisfied and appropriate written notifications prepared when these conditions are
fulfilled. Also, the parties may elect to amend the agreement. Once again, the brokerages
and representatives involved must act in a diligent and timely manner to address such
changes; e.g., amendments must be signed by the parties and copies distributed. If the
conditions are not met or other circumstances occur that cause the transaction to fall
through, then mutual releases must be signed and copies distributed.

SALESPERSON REMUNERATION
Real estate sales has many benefits, not the least of which is the potential for a worthwhile
income. Most brokerages compensate brokers and salespersons by sharing amounts
Commission received. Remuneration typically involves a commission established as a percentage of the
Remuneration paid to a registrant sale price, but other options exist in the marketplace. The method of remuneration is
on the sale or lease of property. normally set out in the representation agreement (e.g., a listing agreement or buyer
It is usually expressed as a percen- representation agreement) and may be calculated as follows:
tage of the sale amount, but it
can also be an agreed amount, • A commission based on percentage of the sale price; and or
or a combination of both.
• A flat fee.

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A Career In Real Estate Chapter 1 29

REBBA 2002 provides for either arrangement or a combination of both. A retainer fee
may also be agreed upon between the brokerage and the buyer or seller that is typically,
but need not be, credited towards any remuneration received.
Rights and responsibilities concerning remuneration involving the agent (brokerage)
and principal (buyer or seller) are addressed in greater detail in subsequent courses. Topics
include the entitlement to remuneration, the terms under which remuneration is paid
and holdover periods following expiration of a representation agreement. While commis-
sion is most commonly associated with listing and selling activity, other income can be
generated from non-selling activities including property management, opinions regarding
value or buyer/seller referrals to other brokerages. Salaries or other remuneration arrange-
ments between brokerages and their employed brokers and salespersons are possible,
but rarely found today in Ontario.

The Commission Sales Model


As most Ontario brokerages compensate brokers and salespersons by sharing commis-
sions, detailed information and examples are provided about this remuneration model,
while acknowledging that many variations exist in the marketplace.

COMMISSION SHARING
The income received by a broker or salesperson involving a particular transaction is
typically subject to the number of brokerages and salespeople involved in the transaction
and the distribution methods used. In the simplest scenario, if a salesperson lists and sells
a property, the commission is paid to the brokerage who then splits the amount with that
salesperson. Commission sharing methods can vary significantly based on circumstances. Commission Sharing
Typically, commission dollars received are allocated between listing and selling portions Methods of commission distribu-
with a subsequent split between listing and selling salespersons. When two brokerages tion involving one or more
are involved, funds are distributed between listing and selling brokerages, who then subse- brokerages and/or salespersons.

quently split commission based on the portion received (either listing or selling portion)
with their respective salespersons.

COMMISSION SPLITS
Commission splits can vary significantly in the marketplace. Some offer a yearly plan with Commission Splits
increasing salesperson splits as an incentive for higher levels of production. Others provide A method of sharing commission,
a high split (e.g., 90% or higher of total commission) but require a significant salesperson most commonly in reference to
contribution toward brokerage expenses and/or a monthly desk fee paid by the salesperson. a brokerage/salesperson split,
typically as per an agreement
Still others use a commission sharing arrangement (e.g., 50/50 or 60/40) until a stipulated between the parties as employer/
number of transactions or a specific dollar volume is attained, with the balance during a employee or two independent
contracting parties.
particular year at a higher split (in favour of the salesperson). Differing remuneration
methods may apply to different brokers or salespersons within the same brokerage.
Regardless of the arrangement, brokers and salespersons are typically responsible for
most personal expenses including automobile maintenance and related costs.

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SCENARIO 1 One Brokerage Involved In A Commission


Total commission is received by the brokerage and allocated between listing and selling portions
(e.g., 50/50). The applicable portions are then split with the listing and selling salespersons
according to contractual arrangements (e.g., listing salesperson contracted for a 50/50 split;
selling salesperson for a 70/30 split).

ABC Realty Inc. 50%


$1,250
ABC Realty Inc. $2,500 To Salesperson Lee
Listing & Selling Listing Portion (Listing Salesperson)
Brokerage
$1,250
$5,000 50% Net To Brokerage
Commission Received

ABC Realty Inc. 70%


$1,750
$2,500 To Salesperson Garcia
Selling Portion (Selling Salesperson)

$750
30% Net To Brokerage
COMMISSION
ALLOCATION COMMISSION
SPLIT

SCENARIO 2 Two Brokerages Involved In A Commission


Total commission is received by the listing brokerage and distributed between the listing and
selling brokerages. (Note: The term distributed is used to differentiate from allocation within a
brokerage). The applicable portions are then split with their respective listing and selling sales-
persons according to contractual arrangements (e.g., in this instance, the listing salesperson
contracted for a 60/40 split and the selling salesperson for a 90/10 split).

ABC Realty Inc.


Listing Brokerage
$5,000 60%
$1,500
Commission Received ABC Realty Inc. To Salesperson Lee
$2,500 (Listing Salesperson)
$2,500 Listing Portion
Distributed to
Selling Brokerage $1,000
40%
Net To Brokerage

XYZ Real Estate Ltd. 90%


XYZ Real Estate Ltd. $2,250
Selling Brokerage To Salesperson Ward
$2,500
Selling Portion (Selling Salesperson)

$250
10% Net To Brokerage
COMMISSION
DISTRIBUTION COMMISSION
ALLOCATION COMMISSION
SPLIT

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A Career In Real Estate Chapter 1 31

Commission Scenarios (Six of Many)


BROKERAGE ABC Realty Inc. XYZ Real Estate Ltd.
SALESPERSON Lee Garcia Martin Ward
Listing
SCENARIO 1
Selling
Listing
SCENARIO 2
Selling
Listing
SCENARIO 3
Selling
Listing
SCENARIO 4
Selling
Listing
SCENARIO 5
Selling
Listing
SCENARIO 6
Selling

COMMISSION PLANS
Brokerages establish commission plans outlining commission splits and related policies.
These are commonly described in policy manuals and/or attached to salesperson employ-
ment contracts. A variety of commission plans are available but most are derived from
two basic formats:
• Conventional commission plans (referred to as split plans); and
• Desk fee plans (payment of a monthly fee by the salesperson normally combined with
a higher commission split than the conventional plan).

Conventional Commission is paid to the salesperson based on gross commission


Plan income received less payment to other brokerages. The brokerage is
responsible for most expenses associated with the listing and marketing
of the property. Historically, such plans offered a 50/50 or 60/40 salesperson/
brokerage split with accrued bonuses paid at the end of the year or
progressive splits based on sales volume paid during the year. Intense
market rivalry has produced many variations on this basic concept, as
salespeople seek increased split participation and more involvement in
selling expenses incurred in the sale process.
The selection of a salesperson compensation package will depend
largely on competitive forces within the market, expenses paid by the
brokerage on behalf of the salesperson and services provided by the
brokerage. In determining an appropriate plan, the brokerage must weigh
out various factors, such as average production level of salespeople, range
of estimated sales production for individual salespeople, net cash received
by the brokerage relating to this production, brokerage expenses and
distribution of cash flow throughout the year.

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32 Chapter 1 A Career In Real Estate

Desk Fee Plan This plan has gained prominence throughout Canada, as it attracts
salespeople given the potential for high commission earnings. Under
this arrangement, the salesperson pays a desk fee to the brokerage relating
to the brokerage’s fixed expenses (e.g., premises, staff, etc.) as well as all
or most expenses relating to the listing and selling process (e.g., advertising,
promotional materials, administration fees charged by the brokerage,
etc.). Desk fee plans tend to attract experienced registrants who have an
established clientele or enter the profession with well established
personal networks.
From the brokerage’s perspective, such plans limit income that might
otherwise be obtained from upward market swings and increased pro-
duction of salespeople. Proponents quickly respond that revenues can
increase with aggressive recruiting strategies, the building of larger, more
effective sales forces and efficient brokerage management.

SCENARIO 1 SCENARIO 2
ABC Realty Inc. operates a desk fee plan and both listing In a slightly different scenario with the same commission
and selling salespeople are independent contractors, and sale price assume that:
each paying $925 per month in desk fees. The total • AB Realty Inc. is the listing brokerage and Real
commission on a specific property is 5%. Based on Estate Ltd. is the selling brokerage;
a $200,000 selling price and assuming a 95/5 split • AB Realty Inc. has a 5/5 desk fee plan and
between the brokerage and each salesperson and listing Real Estate Ltd. has a conventional plan (60/40 split)
and selling portions being split equally, the following and pays most expenses of the salespeople; and
commission calculation would apply: • he commission allocation between listing and
selling brokerages is 50/50.
Listing Selling
Brokerage Name ABC ABC Listing Selling
Commission Distribution 5% (100% of 5%) Brokerage Name ABC
Gross to Brokerage 10,000 Commission Distribution 2.5% 2.5%
Salesperson Names Miller Lane (50% of 5%) (50% of 5%)

Salesperson Commission 95/5 95/5 Gross to Brokerage 5,000 5,000


Split Salesperson Names Miller Warden
Salesperson Share 4,750 4,750 Salesperson Commission 95/5 60/40
Net to Brokerage 250 250 Split
Salesperson Share 4,750 3,000
Net to Brokerage 250 2,000

NOTE The selling salesperson receives less commission


as various expenses are paid by the brokerage.
Commission distribution arrangements can vary
significantly in the marketplace.

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A Career In Real Estate Chapter 1 33

KNOWLEDGE
INTEGRATION
Notables
• Real estate plays a significant role in both • The listing selling process is best described
Ontario and Canadian economies. under six headings: listing, prospecting,
• Real estate development and construction qualifying and showing, offer preparation,
has a ripple effect that flows through the offer presentation and follow-up.
economy. • Salesperson remuneration is typically by
• A career in real estate can be rewarding, way of the commission sales model, but pay-
but personal determination and commit- ment of a flat fee is also acceptable. REBBA
ment are vital and prospective salespersons 2002 also allows remuneration that includes
should be realistic regarding career both a percentage of the selling price and a
expectations. flat fee. While salesperson income typically
arises from listing and selling activity, other
• Career path choices must be made including non-selling activities and referrals can gen-
the particular market segment in which to erate income.
focus one’s attention, the type of brokerage
to select and what benefits/services organized • Commission arrangements vary both
real estate can offer in regard to your between and within real estate brokerages.
career. • Terminologies regarding commission
• Selected professional organizations pro­ calculations are not standardized, but
viding services to registrants in Ontario generally involve a distribution of commis-
are included to provide a broader perspec- sion between listing and selling brokerages,
tive on career opportunities and services the allocation of listing and selling com-
in the marketplace. ponents within a brokerage, and the splitting
of commission between brokerage and
• Roles and responsibilities for brokerages, salesperson.
brokers and salespersons are clearly set out
in the The Real Estate and Business Brokers • Commission plans are typically structured
Act, 2002 and Associated Regulations. using a conventional plan or a desk fee plan,
but many variations exist in the marketplace.
• While a salesperson has the option of being
an employee or an independent contractor
for taxation purposes, all salespersons under
REBBA 2002 are deemed to be employees
for purposes of the Act.

Glossary
Agency Corporation Real Estate and Business
Agent Employee Brokers Act, 2002
Broker Independent Contractor Real Estate Board
Broker of Record Multiple Listing Service® REALTOR®
Brokerage (MLS®) Registrant
Canadian Real Estate Organized Real Estate Salesperson
Association (CREA) Ontario Real Estate Association Sole roprietorship
Commission artnership Three-Way Relationship
Commission Sharing rincipal
Commission Split Real Estate

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34 Chapter 1 A Career In Real Estate

Web Links
Web links are included for general interest regarding selected chapter topics, but are not
required for examination purposes.

Real Estate Boards For a detailed listing of real estate boards in Ontario, go to the
OREA website (www.orea.com), click on About and then click on
Ontario Real Estate Boards.
The Canadian Real Estate The CREA website (www.crea.ca) provides interesting background
Association information concerning organized real estate in Canada and specifics
about trademarks and certification marks. See also www.realtor.ca
for information about residential and commercial properties offered
by REALTORS® throughout Canada.
Ontario Real Estate Association/ The OREA website (www.orea.com) includes detailed information
OREA Real Estate College about the Association, its structure, member programs and benefits,
and government relations. The website also provides important
information concerning a career in real estate and registration
education.
Appraisal Institute of Canada Go to the Institute’s website (www.aicanada.ca) for detailed
information about the organization and a career as a property
appraiser.
Real Estate Institute of Canada Go to the Institute’s website (www.reic.ca) for detailed information
about the organization.
CCIM Institute Go to the Institute’s website (www.ccim.com) for detailed information
about the organization and the CCIM designation. Individuals
interested in commercial activities can obtain additional information
from the National Commercial Council of The Canadian Real Estate
Association. Go to www.crea.ca and click on Commercial Council.
Society of Industrial and Office Go to the Society’s website (www.sior.com) for detailed informa-
REALTORS® tion about the organization.
Canada Revenue Agency Go to the CRA website (www.cra.gc.ca) for additional information.

Strategic Thinking For Your Career


Questions are included to assist in developing your new career. No answers are provided.
1. What training will I require to 5. What advantages does organized real
become more tech-savvy for today’s estate offer that will assist me in
real estate marketplace? providing enhanced listing, marketing
and selling services and which real
2. What specific activities will assist in
estate board(s) are of particular
acquiring saleable listings, once I am interest to me?
registered as a real estate salesperson
with the Real Estate Council of Ontario? 6. Based on information provided to
this point in the course, my skills
3. Which market segments are appealing
appear best focused on listing and/or
and is there sufficient activity in those selling activities. What additional
segments to focus my efforts and activities should I undertake to
build a career in the local marketplace? improve those skills?
4. Which professional organizations are
7. What compensation plans and other
best suited to advance my career and benefits/features are available with
my intended market niche? brokerages that operate in my local
marketplace?

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
A Career In Real Estate Chapter 1 35

Chapter Mini-Review
Solutions are located in the Appendix.

1. One potential benefit of owning 9. A corporation is not required to dis-


property is that credit may be more close any information about its officers
readily available to that owner. and directors when registering as a
real estate brokerage.
True False
True False
2. The provincial government has put
in place certain long term plans for 10. All real estate brokerages registered with
anticipated growth in the Greater the Real Estate Council of Ontario must
Golden Horseshoe. designate a broker of record regardless
of whether the brokerage is a sole pro-
True False prietorship, partnership or corporation.
True False
3. Future tax revenues are part of the
ripple effect when a new house is
constructed. 11. All real estate brokers and salespersons
are viewed as independent contractors
True False for purposes of the Real Estate and
Business Brokers Act, 2002 and
4. Math and computer skills are much associated Regulations.
more important than people skills True False
when considering a career in real
estate sales.
12. A commission split typically refers to
True False the division of commission between
brokerages.
5. In residential sales, the time span True False
between when a property is listed,
subsequently sold and ultimately 13. The distribution of commission between
closed can be four, six or even eight brokerages can vary in the marketplace.
months depending on market condi-
tions and related considerations. True False

True False
14. Commission plans are usually set out in
brokerage policies and/or contractual
6. Standard condominiums are made arrangements with salespersons.
up of units and common elements.
True False
True False
15. In a typical desk fee arrangement, the
7. Mortgage brokerages can employ both brokerage generates its primary revenue
mortgage brokers and mortgage agents. from monthly fees paid by salespersons
to the brokerage.
True False
True False
8. The term ICI refers to investment,
condominium and industrial real estate.

True False

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
36 Chapter 1 A Career In Real Estate

Active Learning Exercises


Solutions are located in the Appendix.
The following exercises are based on Chapter 1 examples. Suggestion: Take a sheet of
paper and write down the question numbers and your responses. Don’t put answers in
the workbook. If left blank, you can retry the questions later for review purposes.
Complete the following exercises by inserting the appropriate commission dollars (“$”)
earned based on the information provided. Assume that all commission allocations
(i.e., listing and selling portions) within one brokerage are 50/50. A “ ” indicates which
brokerage and salesperson(s) participates in the exercise transaction.

Example Sale Price: $279,000 Commission Rate: 6%

Brokerage Name ABC Realty Inc. XYZ Real Estate Ltd.


Listing Brokerage
Selling Brokerage
Commission 3% 3%
Distribution (50% of total) (50% of total)
Gross to Brokerage $8,370.00 $8,370.00
Salesperson Lee Garcia Martin Ward
Listing Salesperson
Selling Salesperson
Salesperson
60/40 50/50
Commission Split
Salesperson Share $5,022.00 $4,185.00
Net to Brokerage $3,348.00 $4185.00

Exercise 1 Commission Calculations—One Brokerage


Sale Price: $329,000 Commission Rate: 6%

Brokerage Name ABC Realty Inc. XYZ Real Estate Ltd.


Listing Brokerage
Selling Brokerage
Commission 6%
Distribution (100% of total)

Gross to Brokerage $________________________

Salesperson Lee Garcia Martin Ward


Listing Salesperson
Selling Salesperson
Salesperson
60/40
Commission Split

Salesperson Share $___________

Net to Brokerage $___________

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
A Career In Real Estate Chapter 1 37

Exercise 2 Commission Calculations—One Brokerage


Sale Price: $256,000 Commission Rate: 5%

Brokerage Name ABC Realty Inc. XYZ Real Estate Ltd.


Listing Brokerage
Selling Brokerage
Commission 5%
Distribution (100% of total—50% listing vs. selling)

Gross to Brokerage $________________________

Salesperson Lee Garcia Martin Ward


Listing Salesperson
Selling Salesperson
Salesperson
60/40 65/35
Commission Split

Salesperson Share $___________ $___________

Net to Brokerage $___________ $___________

Exercise 3 Commission Calculations—Two Brokerages


Sale Price: $225,000 Commission Rate: 4.5%

Brokerage Name ABC Realty Inc. XYZ Real Estate Ltd.


Listing Brokerage
Selling Brokerage
Commission 2.25% 2.25%
Distribution (50% OF 4.5%) (50% OF 4.5%)

Gross to Brokerage $________________________ $________________________

Salesperson Lee Garcia Martin Ward


Listing Salesperson
Selling Salesperson
Salesperson
60/40 55/45
Commission Split

Salesperson Share $___________ $___________

Net to Brokerage $___________ $___________

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38 Chapter 1 A Career In Real Estate

Exercise 4 Commission Calculations—Two Brokerages


Sale Price: $301,000 Commission Rate: 5%

Brokerage Name ABC Realty Inc. XYZ Real Estate Ltd.


Listing Brokerage
Selling Brokerage
Commission 2% 3%
Distribution (40% of 5%) (60% of 5%)

Gross to Brokerage $________________________ $________________________

Salesperson Lee Garcia Martin Ward


Listing Salesperson
Selling Salesperson
Salesperson
55/45 90/10
Commission Split

Salesperson Share $___________ $___________

Net to Brokerage $___________ $___________

Exercise 5 Multiple Choice

5.1 Which of the following statements is correct?


a. Commercial real estate can be broadly defined to include industrial, com-
mercial and investment sales, as well as leasing.
b. nowledge of land values and permitted uses is rarely required when selling
land for redevelopment within urban centres.
c. Industrial real estate typically includes the listing and sale of warehousing,
but not manufacturing facilities.
d. The CCIM designation is awarded by the Society of Office and Industrial
REALTORS®.

5.2 Who is authorized to represent the seller in a typical residential real estate listing?
a. The mortgage broker.
b. The real estate sales representative.
c. The appraiser.
d. The listing brokerage.

5.3 Which of the following is NOT a correct statement?


a. A real estate salesperson acts as an authorized representative of the brokerage.
b. The Real Estate and Business Brokers Act, 2002 is an example of legislation
that imposes duties and limitations on a real estate brokerage, as well as
brokers and salespersons.
c. A listing is taken in the name of the salesperson, who then legally represents
the seller.
d. A real estate brokerage can be registered as a corporation, partnership or
sole proprietorship.

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A Career In Real Estate Chapter 1 39

5.4 Which of the following is a correct statement regarding independent contractor


status?
a. Salespersons, but not brokers, are considered to be employees of the brokerage
for purposes of the Real Estate and Business Brokers Act, 2002.
b. The Canada Revenue Agency does not provide guidelines to assist in determin-
ing employee versus independent contractor status.
c. All salespersons must be independent contractors in order to be registered
under the Real Estate and Business Brokers Act, 2002.
d. Various common law principles are used to determine whether a salesperson
is an employee or an independent contractor.

5.5 A broker of record, according to the Real Estate and Business Brokers Act, 2002:
a. Must be designated by the salespeople employed by the brokerage.
b. Is designated in the case of a corporation, but not in a partnership.
c. Can be either a salesperson or a broker at the time of designation.
d. Must be employed by a brokerage.

5.6 A site salesperson (not registered under REBBA 2002) employed by a builder is
typically involved in various promotional/marketing activities. Which is NOT
one of them?
a. Providing information about resale homes in the area.
b. Demonstrating homes through the use of diagrams and plans.
c. Viewing of models or fully completed houses.
d. Describing pre­packaged financing packages available for the new homes.

5.7 A registered salesperson specializing in new home sales will likely find more
emphasis and time spent on which of the following activities?
a. Qualifying buyers.
b. Listing property.
c. Discussing new home plans and options.
d. Both a. and c.

5.8 Which of the following is NOT a true statement?


a. The legal structure of a condominium is set out in the declaration and
description.
b. The common elements are owned by the unit owners as tenants in common.
c. The unit owners are not personally liable for the debts of the condominium
corporation.
d. A condominium is created upon the registration of the declaration and
description.

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40 Chapter 1 A Career In Real Estate

5.9 Which of the following is usually NOT a duty of a property manager?


a. Maintaining the physical integrity of the property.
b. Paying the property expenses.
c. Acting as full-time building superintendent.
d. eeping the property leased.

5.10 Which of the following is (are) correct with respect to property management?
a. Property management requires better than average people skills.
b. Personnel management is a common activity for property managers.
c. Negotiation of contracts is a common activity for property managers.
d. All of the above are true.

5.11 Professional appraisers in Canada are usually referred to as:


a. Licensed valuators.
b. Fee appraisers.
c. Municipal assessors.
d. Home Inspectors.

5.12 Organized real estate in Canada:


a. Consists of The Canadian Real Estate Association (CREA) and the Real
Estate Institute of Canada.
b. Consists solely of the Ontario Real Estate Association (OREA) and The
Canadian Real Estate Association (CREA).
c. Is structured on a three way-relationship that involves CREA, provincial
associations and boards.
d. Is controlled by the National Association of REALTORS®.

Exercise 6 Employment Agreements


Detail four significant differences between the Brokerage/Salesperson Employment
Agreement and the Independent Contractor Salesperson’s Agreement. See subsequent
pages for reprints of both agreements.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
A Career In Real Estate Chapter 1 41

Brokerage/Salesperson Employment
Agreement
Form 600
for use in the Province of Ontario

This Employment Agreement made this .............................. day of............................................................................, 20............................


BETWEEN:
BROKERAGE: ................................................................................................................................................................................................
AND:
SALESPERSON: .............................................................................................................................................................................................
For the purposes of this Agreement, Salesperson includes a Broker registered under the Real Estate and Business Brokers Act, 2002.
WHEREAS the Brokerage is registered as a Brokerage and the Salesperson is registered pursuant to the Real Estate and Business Brokers Act, 2002, (“the Act”);
AND WHEREAS the Brokerage wishes to employ the Salesperson on the terms and conditions contained in this Agreement;
NOW THEREFORE the Brokerage and the Salesperson agree to the employment of the Salesperson by the Brokerage in consideration of the following
mutual terms, conditions and covenants of this Agreement:
1. The Brokerage:
a) Shall supply the Salesperson with office and secretarial facilities in accordance with the Brokerage’s office policies and practices in that regard;
b) Shall advise, counsel, instruct, and assist the Salesperson in the performance of the Salesperson’s duties;
c) Shall loan, by way of advances on account of anticipated commissions, such periodic amounts as may be established from time to time by the Brokerage,
it being understood and agreed that such amount(s) so advanced shall constitute a debt due and owing to the Brokerage without notice or demand;
d) Hereby declares that any monies received or receivable on account of commission by the Brokerage from any trade in real estate conducted on
behalf of the Brokerage by the Salesperson, shall be held by the Brokerage in trust and the Brokerage shall disburse in a timely fashion, directly
from the Brokerage’s Commission Trust Account (subject to any direction pursuant to paragraph 3(a) hereof) to the Salesperson, commission due to
the Salesperson in connection with the trade, as determined in accordance with Schedule “A” hereto; (Brokerage to attach commission schedule.)
e) Shall receive any monies on behalf of or from the Salesperson, for real estate Board and association fees, dues or assessments or for personal tax
remittance, in trust and remit said monies on the Salesperson’s behalf in a timely fashion by issuing a trust cheque to the Board or association or
Revenue Canada for the entire amount collected on behalf of or from the Salesperson;
2. The Brokerage shall not:
a) Pledge any portion of a Commission Trust held on behalf of the Salesperson as collateral for any loan or use said amount for any other personal
or corporate reason without the express written consent of the Salesperson.
3. The Salesperson:
a) Hereby irrevocably directs the Brokerage to deduct from any commissions payable or termination pay due and owing to the Salesperson, whether
out of Commission Trust or otherwise, the amount of any indebtedness as outlined in Section 1(c) above;
b) Shall become and remain a member in good standing of the ....................................................................................................... Real Estate
Board(s)/Association(s) and pay to the Brokerage, when required, any fees, dues or assessments required from time to time by the Board(s)/Association(s);
c) Shall pay any registration or renewal fees imposed upon the Salesperson under any provincial legislation;
d) Shall maintain Errors and Omissions Insurance, Consumer Deposit Insurance and Commission Protection Insurance coverage in good standing at all times;
e) Shall supply and maintain at the Salesperson’s expense, a suitable automobile and keep it insured at such limits for public liability and property
damage as the brokerage may from time to time direct, and shall provide proof of such insurance to the brokerage;
f) Shall fully and faithfully serve the Brokerage and conduct himself/herself in accordance with the Brokerage’s office policies and practices, the
By-laws and Code of Ethics of the Real Estate and Business Brokers Act, 2002, the Code of Ethics and Standards of Business Practice of the
Canadian Real Estate Association, the by-laws, rules and regulations of the said real estate Board(s)/Association(s) and the Act.
4. The Salesperson shall not:
a) Reduce the amount of commission on any real estate representation agreement or customer service agreement if it is contrary to the Broker’s office
policies and practices, without the prior written authorization of the Brokerage. If the Salesperson breaches this provision, the amount by which any
such commission is reduced shall be deducted from the Salesperson’s share of the commission received;
b) Sign any document or make any representation that would be binding on the Brokerage and would be contrary to the Brokerage’s office policies
and practices, without the Brokerage’s prior written consent.
5. The Salesperson consents to the collection, use and disclosure of personal information of the Salesperson by the Brokerage for the purpose of a
transfer, sale, or financing by the Brokerage of the business, or compliance with the requirements of the Real Estate Council of Ontario, or such other
use of the personal information as the Brokerage deems appropriate in connection with managing or carrying on the affairs of the business.
6. This Agreement may be terminated without notice by either party subject to the provisions of the Employment Standards Act of Ontario. Upon the
termination of the Salesperson’s employment, the transfer or surrender of the Salesperson’s registration shall be immediately sent to the Registrar
appointed pursuant to the Act. The Salesperson agrees to immediately return all keys, signs, equipment and materials supplied by the Brokerage and
to surrender all listing books, certificates, or other materials in accordance with the rules and regulations of the said real estate Board(s)/Association(s).
7. The Salesperson agrees that he/she will not assign, transfer or convey, pledge or encumber this Agreement or any interests hereunder without the
prior written consent of the Brokerage.
8. This Agreement and all rules and regulations hereby incorporated by reference constitute the entire Agreement between the parties and there are no
oral or written conditions, warranties, promises or inducements except as referred to herein and in Schedule(s) ............................ attached hereto.
IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals, and in the case of a corporation, the corporate seal and the hands of
duly appointed officers in that behalf:

.................................................................................... ............................................................................... DATE ............................


(Witness) (Signature of Salesperson) (Seal)
.................................................................................... ............................................................................... DATE ............................
(Witness) (Signature of Authorized Signing Officer of Brokerage) (Seal)
.................................................................................... ...............................................................................................................................
(Name of Brokerage) (Title)

The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate
Association (CREA) and identify real estate professionals who are members of CREA. Used under license.
© 2017, Ontario Real Estate Association (“OREA”). All rights reserved. This form was developed by OREA for the use and reproduction
by its members and licensees only. Any other use or reproduction is prohibited except with prior written consent of OREA. Do not alter
when printing or reproducing the standard pre-set portion. OREA bears no liability for your use of this form. Form 600 Revised 2009 Page 1 of 1

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
42 Chapter 1 A Career In Real Estate

Independent Contractor
Salesperson’s Agreement
Form 601
for use in the Province of Ontario

INDEPENDENT CONTRACTOR AGREEMENT:

BETWEEN: ......................................................................................................................................, hereinafter referred to as (the “Brokerage”)

AND: .................................................................................................................................................., herein referred to as (the “Salesperson”)

In this Agreement, the term “Salesperson” includes a Broker registered under the Real Estate and Business Brokers Act, 2002.

WHEREAS:
A. The Brokerage is a duly registered real estate brokerage pursuant to the Real Estate and Business Brokers Act, 2002 (Ontario) (the “Act”) and the
regulations made pursuant thereto (the “Regulations”) and owns, for the purpose thereof, all facilities and equipment required to conduct a real
estate brokerage business.
B. The Salesperson is an independent contractor desiring access to such facilities and equipment for the purpose of conducting therefrom a real estate
business.

NOW THEREFORE in consideration of the mutual covenants and agreements and for other good and valuable consideration as herein provided, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE ONE – APPOINTMENT


1.1 The Brokerage hereby retains and appoints the Salesperson as an independent contractor in accordance with this Agreement and the Salesperson
hereby accepts such appointment as an independent contractor upon and subject to the terms, conditions, covenants and provisions set forth herein.
The parties acknowledge that the Salesperson is a self-employed independent contractor and is not and shall not represent himself or herself to be
a partner or employee of the Brokerage or to have any relationship to the Brokerage other than as a self-employed independent contractor.

ARTICLE TWO – FACILITIES


2.1 The Brokerage shall make available the services, facilities and equipment provided for in Schedule “A” attached to this Agreement.

ARTICLE THREE – GENERAL CONDITIONS


3.1 The Salesperson shall govern their conduct by the Act and Regulations and the constitution, by-laws, Code of Ethics and Standards of Business
Practice of the local real estate board/association of their membership (the “Board”), and all requirements of the Real Estate Council of Ontario
(“RECO”) all as may be amended from time to time.
3.2 The Salesperson shall furnish their own automobile and pay all expenses thereon and shall carry liability and property damage insurance

satisfactory to the Brokerage. A minimum of $ .................................................... is required for liability insurance.


The Salesperson shall provide proof of such insurance to the Brokerage upon request.
3.3 The Salesperson shall during the Term of this Agreement:
a) maintain in good standing all registrations required by the Act and Regulations necessary to trade in real estate;
b) be a member in good standing of RECO; and
c) be a member in good standing of the Board.
3.4 The Salesperson shall maintain errors and omissions and such other insurance as RECO may require from time to time.
3.5 The Salesperson shall obtain and maintain HST registration as required by the Excise Tax Act (Canada) as amended from time to time.
3.6 The Salesperson shall not obligate the Brokerage for goods or services.
3.7 The Salesperson shall only use such real estate forms that have been approved by the Brokerage prior to their use.
3.8 The Salesperson has read and agrees to the office policy as outlined in the Brokerage’s office policy manual and agree to conduct themselves
accordingly and in accordance with any amendments thereto communicated to the Salesperson in writing from time to time.
3.9 The Brokerage may set-off against the Salesperson’s commission or other amounts the Brokerage may owe the Salesperson or any amount due to
the Brokerage from the Salesperson including without limitation payable to the Brokerage pursuant to Article Five of this Agreement.

ARTICLE FOUR – COMMISSIONS


4.1 The full amount of all gross commissions resulting from real estate transactions procured by the Salesperson and received by the Brokerage as
required by the Act shall be credited to the Salesperson’s account and shall remain the property of the Salesperson.

4.2 All credit balances in the Salesperson’s account shall be paid by the Brokerage to the Salesperson on a ................................................ basis,
net of fees and other amounts owed to the Brokerage by the Salesperson.
4.3 The commission to be charged for any transaction shall be determined solely by the Salesperson and shall belong to the Salesperson. The parties
acknowledge that the Act requires that commission be collected only by the Brokerage.

ARTICLE FIVE – FEES, EXPENSES AND COSTS


5.1 The Salesperson agrees to pay the Brokerage the Fees set out in Plan “A” or “B”, as applicable, which form part of this Agreement.

ARTICLE SIX – REPRESENTATION AGREEMENTS AND CUSTOMER SERVICE AGREEMENTS


6.1 All representation agreements and customer service agreements are the property of the Brokerage according to the Act during the term of this
Agreement. Upon termination of this Agreement, the Brokerage agrees to terminate any representation agreements or customer service agreements
procured by the Salesperson if the seller or buyer under the agreement approves.

ARTICLE SEVEN – ADVERTISING


7.1 All advertising to be approved by the Brokerage in advance.

INITIALS OF SALESPERSON: INITIALS OF BROKER:

The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate
Association (CREA) and identify real estate professionals who are members of CREA. Used under license.
© 2017, Ontario Real Estate Association (“OREA”). All rights reserved. This form was developed by OREA for the use and reproduction
by its members and licensees only. Any other use or reproduction is prohibited except with prior written consent of OREA. Do not alter
when printing or reproducing the standard pre-set portion. OREA bears no liability for your use of this form. Form 601 Revised 2011 Page 1 of 4

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
A Career In Real Estate Chapter 1 43

ARTICLE EIGHT – TERMINATION


8.1 This Agreement may be terminated by either party at any time without cause upon 24 hours written notice that may be delivered personally
or by facsimile. Upon termination both parties agree to complete their obligations herein in order to complete an orderly conclusion of their
relationship. The Salesperson will not have any claim on real estate transactions that have not been procured from representation agreements prior
to termination, or any future commissions therefrom.
8.2 Upon termination of this Agreement, the Salesperson will return to the Brokerage all keys, listings, listing books, blueprints, signs, plans, maps,
supplies and sales literature received at any time from the Brokerage. The Salesperson agrees to pay the Brokerage for the value of such items that
were not returned upon termination of this Agreement.
8.3 If on termination the Salesperson is indebted to the Brokerage then until such debt has been paid, the amount outstanding from time to time shall

bear interest at the rate of ............................ per cent per annum calculated and payable monthly.
ARTICLE NINE – TERM
9.1 Any and all changes to this Agreement from one year to the next will be announced at a meeting of the salespeople on or about ...........................
each year. This Agreement will commence on the date hereof and run until the end of the current calendar year and subject to announced changes,
if any, and termination as provided for herein, this Agreement will automatically renew annually (the “Term”).
ARTICLE TEN – BROKERAGE’S SUPPLIES
10.1 The Salesperson shall only use supplies which conform to the Brokerage’s current specifications and standards, including signs, business cards,
stationery and other items used for communications or presentations to customers and prospective customers and all promotional and novelty items.

ARTICLE ELEVEN – LITIGATION, DISPUTE AND ARBITRATION


11.1 If any transaction in which the Salesperson is involved results in a dispute, arbitration, litigation or legal expense, the Salesperson shall co-operate
fully with the Brokerage in the resolution or prosecution of same.
11.2 The Brokerage reserves the right to determine whether or not any litigation or dispute concerning any transaction in which the Salesperson is
involved shall be prosecuted, defended or settled, or whether or not legal expense shall be incurred.
ARTICLE TWELVE – DEPOSITS
12.1 All monies, documents or property received by the Salesperson in connection with any transaction shall be delivered to the Brokerage immediately.
All cheques must be made payable to the Brokerage in accordance with the Act.
ARTICLE THIRTEEN – CORRESPONDENCE
13.1 All letters received and a copy of all letters written by the Salesperson pertaining to the business of the Brokerage shall be turned over to the
Brokerage for its records and shall be the property of the Brokerage. All letters are to be approved by the Brokerage before mailing.
ARTICLE FOURTEEN – INDEMNITY
14.1 The Salesperson hereby indemnifies the Brokerage against all liability, loss, damages, costs and expenses sustained, suffered or incurred by the
Brokerage as a result of any breach by the Salesperson of the Salesperson’s obligations under this Agreement or as a result of any claim by a third
party arising out of the Salesperson’s real estate business activities. This indemnity shall survive the termination of this Agreement.
ARTICLE FIFTEEN – USE AND DISTRIBUTION OF PERSONAL INFORMATION
15.1 The Salesperson consents to the collection, use and disclosure of personal information of the Salesperson by the Brokerage for the purpose of a
transfer, sale, or financing by the Brokerage of the business, or compliance with the requirements of the Real Estate Council of Ontario, or such
other use of the personal information as the Brokerage deems appropriate in connection with managing or carrying on the affairs of the business.
ARTICLE SIXTEEN– GENERAL AGREEMENT TERMS
16.1 Either party may waive any default of the other party under this Agreement, but, no such waiver shall affect the rights of that party in respect of any
subsequent default, whether of the same or a different nature.

16.2 This Agreement which includes Schedule(s) “A”, ................................ and Plan A or Plan B as appropriate, shall constitute the entire agreement
between the parties with respect to its subject matter and supersedes all prior agreements and understandings in any way relating to that subject
matter. This Agreement can only be changed by a writing signed by both parties. No remedy conferred on a party under this Agreement, or by
law, shall preclude the exercise by that party of any other remedy available to it in equity or in law in respect of the same default.
16.3 This Agreement is personal to the Salesperson and no right of the Salesperson under this Agreement may be assigned without the prior written
consent of the Brokerage, which consent may be arbitrarily, or unreasonably withheld. The Brokerage may, without the consent of the Salesperson,
assign any of its rights under the Agreement and, following such assignment, shall be relieved of all obligations in respect of the rights so
assigned. Subject to the foregoing, this Agreement shall enure to the benefit and be binding upon the parties and their respective heirs, executors,
administrators, successors and permitted assigns.
16.4 The use of section headings in this Agreement is for convenience of reference only and shall not affect the interpretation of this Agreement.
16.5 All notices or other communications required or permitted under this Agreement to be given by one party to the other shall be in writing and shall
be given by personal delivery (including courier), or by facsimile to the party as follows:
a) if to the Brokerage, at Attn: .................................................................................................................................................................
Fax: (......................)...........................................................
b) if to the Salesperson, at Attn: ...............................................................................................................................................................
Fax: (......................)...........................................................
Any such notice or communication shall be deemed received on the earlier of actual receipt, if delivered or on the date transmitted, if by facsimile
unless received after 5:00 p.m. on a business day (i.e. a day other than a Saturday or Sunday or statutory holiday in Ontario) in which case receipt
will be deemed to be on the next business day. Either party may change its address for service by giving notice thereof pursuant to the term of this
Section.
16.6 Each party agrees, at the request of the other party, to do, execute and give such further and other acts, documents and assurances as may be
reasonably requested in order to give full effect to this Agreement and to the transactions contemplated herein.
IN WITNESS whereof the parties have duly signed this Agreement as of the date indicated.

................................................................................ ............................................................................... DATE ...............................


(Witness) (Signature of Salesperson) (Seal)

................................................................................ .............................................................................. DATE ...............................


(Witness) (Signature of Authorized Signing Officer of Brokerage) (Seal)

The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate
Association (CREA) and identify real estate professionals who are members of CREA. Used under license.
© 2017, Ontario Real Estate Association (“OREA”). All rights reserved. This form was developed by OREA for the use and reproduction
by its members and licensees only. Any other use or reproduction is prohibited except with prior written consent of OREA. Do not alter
when printing or reproducing the standard pre-set portion. OREA bears no liability for your use of this form. Form 601 Revised 2011 Page 2 of 4

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
44 Chapter 1 A Career In Real Estate

Schedule “A”
Independent Contractor – Salesperson’s Agreement
Form 601
for use in the Province of Ontario

1. Secretarial services during normal office business hours.

2. Reception area.

3. Desk space as determined by the Brokerage.

4. Reasonable sales and administrative training, as determined by the Brokerage.

5. Use of telephone and fax facilities.

6. Standard office equipment as customarily provided in a real estate brokerage business.

7. Reasonable quantity of stationery.

8. Photocopying facility.

9. Sales Information Sheet (Trade Record) will be prepared by secretary.

10. A reasonable number of “For Sale” and “Open House” signs.

11. Multiple Listing Service processing fees and re-processing fees, where previously authorized.

12. Client and customer referral(s).

13. Listing fees, stand sign installation.

14. Courier facilities.

15. Business cards.

16. Office duty time.

17. Standard newspaper advertising program, as determined by the Brokerage. Salespersons may advertise over and above the Brokerage’s program,
at their own expense, provided they meet all governing provincial and local rules and regulations.

18. Brokerage to assist in all areas that are deemed essential to complete a real estate transaction if requested by the Salesperson.

19. All salespersons shall sign the inventory list.

20. Such other items and service as the Brokerage may in its sole discretion agree to provide to the Salesperson. The Brokerage has the right at any
time without notice to increase or decrease said service.

21. ............................................................................................................................................................................................................

................................................................................................................................................................................................................

............................................................................................................................................................................................................

............................................................................................................................................................................................................

The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate
Association (CREA) and identify real estate professionals who are members of CREA. Used under license.
© 2017, Ontario Real Estate Association (“OREA”). All rights reserved. This form was developed by OREA for the use and reproduction
by its members and licensees only. Any other use or reproduction is prohibited except with prior written consent of OREA. Do not alter
when printing or reproducing the standard pre-set portion. OREA bears no liability for your use of this form. Form 601 Revised 2011 Page 3 of 4

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
A Career In Real Estate Chapter 1 45

PLAN “A” – FEES PAYABLE TO BROKERAGE


To compensate for administrative and operating costs incurred by the Brokerage in providing the items and services in Schedule “A” the Salesperson shall
pay the Brokerage:

1A .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ........................................

1B .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ........................................

1C .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ........................................

1D .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ........................................

1E .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ .........................................

1F .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ .........................................

1G .................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ........................................

Under Plan “A” plateaus will be calculated on commissions received within the contract year. Effective, on each and every anniversary date, the plateau
level will start at the beginning and the Salesperson will be paid accordingly. Furthermore, in the event of any switch in plans at the Salesperson’s
anniversary date, they will be paid by the rules of the Plan they were on at the time the business was written.

Salesperson will be responsible to pay for:


a) Monthly and yearly dues and fees and other charges as charged by the Board, the Ontario Real Estate Association and the Canadian Real Estate
Association;
b) Registration/renewal fees, monthly and yearly fees and other fees charged to the Salesperson by RECO.

Salesperson shall pay all dues and fees and miscellaneous items outstanding at the end of each calendar year and the following year’s Board
yearly dues by cheque on or before January 1 of the following new year.

PLAN “A” AGREEMENT

I, ........................................................................................................................................................... (Salesperson) hereby agree to PLAN “A”.

....................................................................................................... .......................................................................................................
(Signature of Salesperson) (Signature of Authorized Signing Officer of Brokerage)

PLAN “B” – FEES PAYABLE TO BROKERAGE


To compensate the Brokerage for administrative and operating costs incurred by the Brokerage in providing the items and services in Schedule “A” the
Salesperson shall pay the Brokerage:

1A ..................... % of the Salesperson’s net commissions on the portion of total net annual commissions not exceeding $ ..........................................
The above compensation for the Brokerage applies to all transactions.

1B Plus ...........................................................................................................................................................................................................

Dollars ($ ............................................................. ) desk fee per month is payable on the first day of each and every month.

A .................................................... interest charge per month ( .................................................... per annum) for late payment will be charged.
The desk fee includes all the items and services as set out in Schedule “A” contained herein, except as follows:

This plan includes ................................................................. (................................................................) listing fees annually

This plan includes ................................................................. (................................................................) standard sign installations annually

Over these specific amounts, the Salesperson is responsible for, said costs and will be billed accordingly on a monthly basis. An inventory of the
Salesperson’s listings and sign installations will be taken prior to commencement of the contract period and shall be counted against his/her yearly
maximum for that contract period.

PLAN “B” AGREEMENT

I, ........................................................................................................................................................... (Salesperson) hereby agree to PLAN “B”.

........................................................................................................ .......................................................................................................
(Signature of Salesperson) (Signature of Authorized Signing Officer of Brokerage)
The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate
Association (CREA) and identify real estate professionals who are members of CREA. Used under license.
© 2017, Ontario Real Estate Association (“OREA”). All rights reserved. This form was developed by OREA for the use and reproduction
by its members and licensees only. Any other use or reproduction is prohibited except with prior written consent of OREA. Do not alter
when printing or reproducing the standard pre-set portion. OREA bears no liability for your use of this form. Form 601 Revised 2011 Page 4 of 4

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
46

CHAPTER 2

Real Estate—
A Regulated Profession
Introduction
Real Estate is a regulated profession. When preparing for a career in real estate, it’s
important to understand both the value of professional regulation and the registrant’s
obligations. The Real Estate Council of Ontario (RECO) is responsible for regulating the
activities of real estate brokerages, brokers and salespersons in Ontario. RECO administers
the Real Estate and Business Brokers Act, 2002 and associated Regulations (referred to
collectively as REBBA 2002) on behalf of the provincial government.
Individuals anticipating salesperson registration under the Act need to understand key
responsibilities associated with that regulated status. RECO ensures that these responsi-
bilities are carried out by brokerages, brokers and salespersons through various regulatory
activities, and that all registrants uphold integrity in real estate transactions and protect
the public interest.

Learning Outcomes
At the conclusion of this chapter, students will be able to:
• utline the RECO mandate, role and responsibilities, and
operating structure.
• Identify and discuss registration standards including dis­
closure, fitness for registration, education requirements,
processing the application, Registrar’s options and stat-
utory exemptions.
• utline registrant obligations when maintaining registra­
tion including the articling segment, continuing educa-
tion, changes to registration and renewals.
• Identify and discuss education standards established by
the Registrar for registration and continuing education.
• Identify and discuss insurance requirements, coverages,
claims reporting, and the new application/renewal process.
• Describe complaints and enforcement procedures
including the RCI process, possible outcomes and public
information availability.
• Discuss the role of inspections and investigations in the
regulation process.
• Detail available consumer and registrant resources with
emphasis on the RECO website and outreach programs.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
47

THE REAL ESTATE COUNCIL OF ONTARIO


The Real Estate Council of Ontario (RECO) is a self-managed, not-for-profit corporation.
RECO was established in 1997 as a delegated administrative authority under the Safety
and Consumer Statutes Administration Act, as a result of the mutual desire of the govern-
ment and the real estate industry to enhance professionalism, increase consumer protec-
tion and provide an efficient, responsive regulatory framework.
RECO administers and enforces the Real Estate and Business Brokers Act, 2002 in accord-
ance with the terms of the Administrative Agreement between the provincial government
and the Council. The provincial government continues to be responsible for the Real
Estate and Business Brokers Act, 2002 and associated regulations, as well as general over-
sight of RECO. The key goals of RECO’s inaugural board of directors were to:
• establish a code of ethics and complaints process that would apply to all real estate
registrants;
• establish a continuing education program;
• establish an insurance program; and
• achieve real estate act reform.

The code, complaints process, continuing education and insurance requirements all
came into effect after RECO was established. One of the objectives was to ensure that all
real estate registrants—not just those that are members of organized real estate—were
required to adhere to the same standards. These new programs were initially put in place
through member-approved RECO by-laws. The final goal of the inaugural Board, that
being real estate act reform, was achieved when REBBA 2002 came into effect in March
2006. The programs originally put in place through by-laws are now contained in
REBBA 2002.

Role and Responsibilities


The Council’s role and responsibilities are mandated to ensure that the regulation of trad-
ing in real estate builds and sustains public trust in the real estate marketplace, thereby
creating a solid foundation for the industry’s success. RECO is responsible for interpreting,
enforcing and suggesting modification to such regulation. RECO is also committed to
working with stakeholders to maximize the value of regulation through various activities.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
48 Chapter 2 Real Estate—A Regulated Profession

RECO performs a distinct role in the real estate marketplace focused on protecting
Registrar the public interest. The Council must be clearly distinguished from organizations such as
An individual appointed by the Ontario Real Estate Association (OREA) and real estate boards. These organizations
RECO to exercise powers and provide professional services to their respective memberships, but are not directly involved
perform duties imposed under
in the regulation of the real estate industry. Currently, OREA is also the designate
the Real Estate and Business
Brokers Act, 2002 and associated (appointed by the Registrar of the Council) for developing, delivering and administering
Regulations. registration courses on behalf of the Registrar.

Role/Responsibility: Real Estate Council of Ontario

CORE
PURPO
SE

To fost
confide er
n MISSION
uphold ce and
integrity
in real
est
transac ate
tions.
To regulate the activity
of trading in real estate
in the public interest.

RECO has an exclusive contract


with the government to Interpret, enforce
administer the Act and must and suggest
perform in a manner consistent modification to
with the government’s regulation.
expectations and the terms of
the Administrative Agreement.
RELATIONSHIP RESPONSIBILITY

PROTECTING THE PUBLIC INTEREST


RECO regulates the activities of registrants trading in real estate in the public interest. The
individual and collective interests of consumers and real estate registrants must always
be balanced in order to ensure that the broader public interest is served. Protecting the
public interest is achieved through many activities including:
• Enforcing standards required to obtain and maintain registration as a brokerage,
broker or salesperson and delivering the duties of the Registrar.
• Establishing minimum requirements for pre­registration and continuing education
courses.
• Conducting routine inspections of brokerage offices to ensure compliance with
REBBA 2002 and educating brokers on correct procedures.
• Addressing inquiries, concerns and complaints about the conduct of registrants received
from all sources and taking appropriate action to protect the public interest.
• Establishing and administering insurance requirements which includes consumer
deposit protection.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 49

• Promoting ongoing education and competent, knowledgeable and professional


service.

RECO’s role and responsibilities for the protection of public interest are best described
under the five categories as illustrated:

Protecting the Public Interest

REGISTRATION
Enforcing standards
required to obtain and
maintain registration
under REBBA 2002.

EDUCATION INSURANCE

Establishing the minimum Establishing and administering


requirements for pre-registration, insurance requirements, which
registration-related and include consumer deposit, errors
continuing education programs. and omissions, and commission
protection coverages paid for by
RECO ROLE & real estate brokers and salespersons.
RESPONSIBILITIES

COMPLAINTS AND INSPECTIONS AND


ENFORCEMENT INVESTIGATIONS
Addressing concerns and complaints Conducting routine, compliant-
about the conduct of registrants initiated and courtesy inspections,
received from all sources regarding as well as exercising investigative
the Act, Regulations and the Code powers set out in REBBA 2002, to
of Ethics, and taking appropriate ensure that RECO’s mandate to
action. Most complaints involve protect consumers is continuously
Code of Ethics violations as these upheld.
are most prevalent in day-to-day
business operations.

Operating Structure

Board of Directors

Standing Task
Committees Forces

Office of the
President/CEO

Office of the Corporate


Registrar Services

Complaints,
Information Finance and Legal
Compliance and Education Systems Accounting Services
Discipline

Inspections and Administration


Registration Communications and Human Insurance
Investigations
Resources

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
50 Chapter 2 Real Estate—A Regulated Profession

Board of Directors RECO is governed by a 12-member board of directors. Nine of the


directors are registered real estate brokers or salespersons; three from each of the three
election regions. The remaining three directors are appointed by the Ministry of Small
Business and Consumer Services on behalf of the provincial government. The board of
directors establishes committees and task forces to fulfill its mandate with input from
consumers, government and registrants.
Standing Committees and Task Forces The board of directors relies on selected stand-
ing committees (e.g., audit and by-law committees), as well as task forces that focus on
specific initiatives. The board has established task forces to address various issues that
impact Ontario consumers and/or registrants. The role of each task force is to identify,
research, consult and make recommendations regarding such matters. Members of these
task forces include consumer, industry and government representatives, and may also
include subject matter experts (e.g., regulatory law) when necessary to address specific
areas of concern.
Office of the President/CEO The President and CEO reports directly to the board of
directors and is responsible for the day-to-day management of RECO and its employees.
RECO operates on a not-for-profit basis, with any excess revenue invested in improvements
to compliance matters, public information, accessibility, education and technology.
Office of the Registrar Most matters impacting real estate registrants involve the
Registrar. The Registrar is appointed pursuant to the Real Estate and Business Brokers Act,
2002. The statutory duties and functions of the Registrar are distinct and require indepen-
dent decision-making so that the provisions of the Administrative Agreement are fully
complied with. One or more deputy registrars may be appointed to carry out specific
duties under the Registrar.
The Registrar performs various duties including granting, renewing, suspending or
revoking a registration, ordering an immediate or temporary suspension of a registration,
and requiring the cessation of false advertising. The Registrar also establishes, reviews and
approves education curriculum for registration courses, as well as ongoing continuing
education for brokers and salespersons.
Corporate Services The Real Estate Council of Ontario has various departments for
day-to-day corporate operations.

REGISTRATION STANDARDS
Applicants must meet specific requirements when seeking registration under REBBA 2002.
Completion of prescribed educational courses is only one aspect of the overall process.
Registration
The regulatory process to
become a registrant pursuant to Obtaining Registration
the Real Estate and Business
Brokers Act, 2002 and associated When seeking salesperson registration, the applicant must make application to the
Regulations. Registrar using the prescribed form. Applicants should go to www.reco.on.ca to down-
load the new/reinstatement application package.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Last Name Full First Name Middle Name Birth Date Sex
YEAR MONTH DAY M F
Residence Address - (If R.R.: Give Lot, Concession No. & Township) (Street Number & Name) Apt. or Suite Residence Telephone No.

City Province Postal Code


Real Estate—A Regulated Profession
E-mail Address Fax No.
Chapter 2 51

Address for service in Ontario (If different from Residence Address. Must be a street address) Apt. or Suite Telephone No.

Disclosure
City Province Postal Code E-mail Address Fax No.
When completing the application, applicants must honestly disclose information request-
ed and submit full particulars as needed. CertainSECTION key questions
B should be reviewed in
anticipation of Provide
completing
employmentthis form
history once2 years,
for previous the including
pre-registration education
a description of any segment
period in which isemployed.
you were not
Name and Address of Employer (If applicable) Description of Activity such
successfully completed. A portion of the registration form is illustrated highlighting as Period (previous 2 years)
type of work / position / school / travel, etc From (yr/m/d) To (yr/m/d)
information that RECO takes into consideration when determining eligibility for
registration. Applicants having unique circumstances regarding any of these matters
should contact RECO directly.
SECTION C
Please review the Completion Instructions on Page 3, before answering YES or NO to the following questions. If you answer yes to any question
and have not previously disclosed in writing, you must do so now. If you have previously disclosed this information please indicate “already on
file” beneath the corresponding question. (Refer to Completion Instructions on Page 3).
1. (a) Are you a Canadian Resident who is a Canadian Citizen?  Yes  No
(b) Are you a Canadian Resident who is a Landed Immigrant? (If yes, refer to Page 3 for Completion Instructions.)  Yes  No
2. Are you, or will you be, engaged or employed in any other business, occupation or profession? (If yes, refer to Page 3 for  Yes  No
Completion Instructions.)
3. Are you a partner, officer, director or shareholder in any other registered real estate business? (If yes, refer to Page 3 for  Yes  No
Completion Instructions.)
4. Are you now or have you been involved in personal bankruptcy and/or been an officer, director or majority  Yes  No
shareholder of a corporation which has been declared bankrupt or insolvent, or is presently a party to bankruptcy or
insolvency proceedings? (If yes, refer to Page 3 for Completion Instructions.)
5. Are there any unpaid judgments and/or unpaid debts outstanding against you? (If yes, refer to Page 3 for Completion  Yes  No
Instructions.)
6. Have you had a registration and/or licence or professional status of any kind refused, suspended, revoked, or cancelled  Yes  No
and/or have you been involved in any proceeding during which you resigned a registration or licence or professional
status of any kind, or are there any proceedings pending? (If yes, refer to Page 3 for Completion Instructions.)
7. Are there currently any charges pending, or have you been found guilty, pleaded guilty to, or been convicted of an  Yes  No
offence under any law? (If yes, refer to Page 3 for Completion Instructions.)

1b If you answered yes, you must submit a copy of 5 If you answered yes, you must submit a copy of each
your Landed Immigrant Status papers. judgment and other such documents pertaining to
outstanding debts against you (example; garnishments,
2 If you answered yes, the information required
requirements to pay, writs of execution etc.). State the
includes: amount outstanding and repayment arrangements on
1. The full name of the business, as well as the a separate sheet. You must also submit full particulars
position held and the nature or description of regarding the circumstances that lead to the matter(s)
the business, occupation or profession. on a signed and dated statement.
2. If the other employment involves activity that
6 If you answered yes, you must submit full particulars
falls under the definition of “trade” found in the
on a signed and dated statement.
Act, you must provide a copy of the complete
job description supplied by the employer. 7 All applicants must submit a current, original

3 If you answered yes, you must submit full particu-


Canadian Criminal Record Check compiled by the
Canadian Police Information Centre (CPIC) (must be
lars on a signed and dated statement.
dated within 6 months of submission of application) and
4 If you answered yes, you must submit the if the response was “Yes” they must also submit full par-
assignment, list of creditors and discharge papers. ticulars on a signed and dated statement. This does not
include municipal parking violations or minor Highway
Traffic Act offences unless your driver’s license was
suspended. This includes a charge where a conditional
discharge or an absolute discharge has been granted.

Fitness for Registration


Applicants must have certain necessary qualities for registration under the Act. Personal
circumstances can impact fitness for registration. In particular, certain fitness issues will
require appropriate disclosure by the applicant and close review by the Registrar’s office.
The following is provided for example purposes only and is not exhaustive.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
52 Chapter 2 Real Estate—A Regulated Profession

BANKRUPTCY
Bankruptcy must be disclosed on an application for either registration or renewal, whether
discharged or otherwise. If a filing of bankruptcy occurs at any time during the 2-year
Registration Cycle registration cycle, the Registrar’s office must be informed within five days. While this
The length of time from circumstance may not necessarily result in a denial of registration, applicants must provide
registration of a registrant to sufficient details with the application or to the Registrar’s office so that an informed
renewal of that registration.
Registration cycles in Ontario
decision can be made. Each application is assessed on an individual, case-by-case basis.
are two years in duration. A decision by the Registrar’s office is not possible without receiving certain documents
including a copy of the complete assignment of bankruptcy, the list of creditors and the
discharge papers, if applicable. Once all information is received, a registration officer
will contact the applicant if additional details are required.

CRIMINAL CHARGES AND CONVICTIONS


Criminal charges and convictions must be disclosed on the application regardless of
when these occurred or what dispositions took place. As with bankruptcy, while such
matters will not necessarily result in denial of registration, full details must accompany
the application so that an informed decision can be made. A registration officer will con-
tact the applicant if additional details are required. The applicant may also be requested to
attend a meeting to further discuss and obtain clarification on any concerns regarding
suitability for registration under the Act.

WORK PERMIT
An individual who is eligible to work in Canada on a work permit can apply for registration.
The Registrar will need to verify proof of his or her eligibility to work in Canada and
current status regarding residency. Documentation providing proof of the work permit from
Citizenship and Immigration Canada is required when submitting an application for review.

Education Requirements
THE SALESPERSON REGISTRATION EDUCATION PROGRAM (PRE-REGISTRATION)
Applicants must complete pre-registration courses, as prescribed by RECO, in order to
become a registered salesperson. The following education requirements apply to students
who enrolled in the pre-registration education program prior to April 1, 2016.

STEP 1

Real Estate as a
Professional Career
STEP 2

Land, Structures and


Real Estate Trading
STEP 3

The Real Estate


Transaction—
General STEP 4

The Residential Real


Estate Transaction
The remaining Course is OR
taken in the articling segment.
The Commercial Real
Estate Transaction

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 53

To be registered to trade in real estate in Ontario, individuals must complete the pre-
registration educational requirements leading to provisional salesperson status. The pre-
registration courses must be completed within 18 months of starting the first course,
Real Estate as a Professional Career.
Upon successful completion of the pre-registration segment, individuals may pursue pro-
visional salesperson status by seeking registration under REBBA 2002, with the Real Estate
Council of Ontario (RECO). An application for registration as a provisional salesperson,
signed by the employing brokerage, must be submitted to RECO within 12 months of
successfully completing The Residential Real Estate Transaction or The Commercial Real
Estate Transaction course examination. Once the application has been reviewed and
approved, the registrant would commence a two year registration cycle and at this point
they could commence trading in real estate. As there are no speciality designations in
Ontario, registrants are permitted to trade in residential and commercial real estate.
Students who exceed the 12 month deadline date of completion of The Residential
Real Estate Transaction or The Commercial Real Estate Transaction course examination are
no longer eligible to apply for registration with RECO. In order to qualify for registration
with RECO, they must repeat the pre-registration segment.
The Registrar, REBBA 2002, has the authority to establish the education requirements
for individuals seeking registration or renewal of registration as a broker or salesperson
under REBBA 2002. The Registrar has the authority to grant applicants course credits or
examination challenges for any course in the Salesperson Registration Education Program
or the Broker Registration Education Program on the basis of an education equivalency. The
purpose of the Educational Equivalency Assessment Process is to ensure that applicants
have demonstrated that they possess the required academic qualifications, experience,
and/or competencies in order to trade in real estate effectively and in the public interest,
as required under REBBA 2002.
Individuals may apply for an Educational Equivalency Assessment if they believe their
educational background and/or work experience warrants consideration. Each application
is assessed on an individual basis, and by virtue of the materials provided by the applicant.
The Registrar’s decision is final.
Types of Educational Equivalency Assessments considered by the Registrar include:
• completion of commensurate courses provided by other institutions that specifically
correlate to the Salesperson Registration Education Program or the Broker Registration
Education Program course learning outcomes;
• respective education programs leading to broker or salesperson status in jurisdictions
outside of Canada;
• sufficient relevant work experience obtained in fields relating to real estate such as
lawyers, mortgage agents/brokers, and persons having worked in the appraisal,
commercial and industrial fields;
• previous registration as a broker or salesperson in ntario.

Each Educational Equivalency Assessment application must include the following:


• A cover letter outlining your request, detailing your real estate related academic
background and/or work experience.
• A completed notarized affidavit form with notary seal.
• Relevant documentation to support your request. The Registrar’s decision will be
rendered based on the supporting documentation included in your application.
• A non­refundable administrative fee of $100 (Canadian funds). Payment may be
made payable to RECO by cheque, money order, or credit card payment.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
54 Chapter 2 Real Estate—A Regulated Profession

For further information on the types of educational equivalency assessments con-


sidered by the Registrar, and application documentation, visit the RECO website at:
www.reco.on.ca.

PRE-REGISTRATION EDUCATION PROGRAM—


ENROLMENT ON OR AFTER APRIL 1, 2016
Students who enrol in the pre-registration education program on or after April 1, 2016
will be required to complete the following five courses prior to registering to trade in
real estate:
• Real Estate as a Professional Career
• Land, Structures and Real Estate Trading
• The Real Estate Transaction—General and The Residential Real Estate Transaction
• The Commercial Real Estate Transaction
• Real Property Law

All courses must be completed within 18 months of starting the first course, Real Estate
as a Professional Career. An application for registration as a provisional salesperson under
REBBA 2002 must be submitted to the Real Estate Council of Ontario (RECO) within 12
months of successfully completing all five pre-registration course examinations.

ONTARIO LABOUR MOBILITY ACT


In January 2009, Canada’s premiers endorsed amendments to the Agreement on Internal
Trade (AIT) that commit all provinces and territories to improving labour mobility for
certified workers in professions and trades.
The Ontario Labour Mobility Act, which received Royal Assent Dec. 15, 2009, ensures
that workers certified to practise in one province or territory are entitled to be certified
in that occupation in Ontario without having to complete additional material training,
experience, examinations or assessments.
The AIT and the Ontario Labour Mobility Act allow for certain certification requirements
to continue, such as applications and application fees, evidence of good character and
criminal background checks, evidence of good standing, active practice, additional non-
material testing, experience, examinations or assessments for local jurisprudence or
local knowledge, and post-certification conditions.
A real estate broker or salesperson from another province or territory is required to
successfully complete the Interprovincial Challenge Examination, which tests for local
jurisprudence, before they are eligible to apply for registration with RECO in Ontario.
The Interprovincial Challenge Examination is administered by the Ontario Real Estate
Association (OREA) on behalf of the Registrar.
Please visit the RECO website (www.reco.on.ca) for further information on the quali-
fying criteria and application process to write the Interprovincial Challenge Exam.
Once you have reviewed the information, and if you are eligible to write the
Interprovincial Challenge Examination, please contact the Ontario Real Estate Association
to schedule a date and time to write the exam.

Processing the Application


When a salesperson’s application is received at the Real Estate Council of Ontario, RECO
staff complete a name search to determine if the application is a new registration, or a
reinstatement of a previous registration. An applicant may apply using his or her legal

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Real Estate—A Regulated Profession Chapter 2 55

name, including one or more legal given names in the correct order followed by surname.
A recognized short form of the given name can be used or a name by which the applicant
is commonly known. Once registered, only the registered name can be used unless the
Registrar approves a change.
The application is then checked for completeness, signatures and The Residential or
Commercial Real Estate Transaction transcript. Employer history is reviewed, as are all
answers to questions included in the application form. As discussed earlier, financial
position and past conduct warrant special emphasis, as these not only impact the applica-
tion for registration but also the renewal. RECO may request additional searches including,
but not limited to, a bankruptcy search and a Sheriff ’s search for writs.
Delays in processing applications are often due to applicant errors. The most common
include address information not completed correctly, employment history not fully detailed,
misreading of questions resulting in incomplete/incorrect answers and failure to make
full disclosure as required. The application must be fully completed and signed. The
prescribed application fee(s), the applicable course transcript, and a Canadian Criminal
Record Check or Police Clearance letter must accompany the application. Further, appli-
cants must ensure that any changes regarding information provided on his or her applica-
tion be provided to the Registrar’s office within five days of the change.
Once the initial review of the application is completed, the individual will receive an
invoice for the insurance premium. The insurance premium must be paid in full before the
registration will be approved and processed. Applicants cannot trade in real estate until
their wallet registration certificates are received. These are mailed directly to the brokerage.

SPECIAL NOTE: Salesperson applications submitted to RECO for registration where the applicant’s
enrolment date to the pre-registration education program is on or after April 1, 2016,
must include the applicable transcript indicating successful completion of all five of the
pre-registration course examinations.

Registrar’s Options: New Application and Renewals


Three options are open to the Registrar when reviewing new or renewal applications:
• Process the application and approve registration or continued registration.
• Process the application and approve the registration with voluntary conditions applied
to the registrant.
• Propose to refuse revoke the registration of the individual (15 days to appeal the pro­
posal to the Licence Appeal Tribunal, upon receipt of written decision).

REGISTRATION APPROVAL
The certificate of registration, once the application is approved, is sent in duplicate to
the employing brokerage. The certificate sets out the registrant’s name, salesperson status,
the employing brokerage name, registration number and expiry date. An applicant can-
not hold him or herself out to be a salesperson or trade in real estate on behalf of a real
estate brokerage until the registration certificate is received.
Salespersons are required to carry their certificates of registration and show them to any
person upon request. The duplicate is kept at the brokerage office (or branch) to which the
registration relates. The certificate must be returned immediately to RECO if the Registrar
suspends, revokes, cancels or refuses to renew the registration. The certificate must also
be returned if the registrant terminates or transfers to another brokerage. The applicable
sections of Regulation 580 05 (Code of Ethics) are reprinted on the following page.

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56 Chapter 2 Real Estate—A Regulated Profession

CERTIFICATE OF REGISTRATION: BROKER OR SALESPERSON


31. Every broker or salesperson shall carry his or her certificate of registration and, on the request
of any person, shall show it to the person. . Reg. 580 05, s. 31.

CERTIFICATE OF REGISTRATION: BROKERAGE


32. (1) A brokerage shall ensure that every certificate of registration issued to the brokerage is kept
at the office to which the certificate relates. . Reg. 580 05, s. 32 (1).
(2) A brokerage shall, on the request of any person, show to the person any certificate of
registration issued to the brokerage. . Reg. 580 05, s. 32 (2).

CERTIFICATES OF REGISTRATION FOR BROKERS AND SALESPERSONS KEPT BY


BROKERAGE
33. (1) A brokerage shall ensure that all duplicate original certificates of registration given to the
brokerage in respect of brokers and salespersons employed by the brokerage are kept in a
safe place. . Reg. 580 05, s. 33 (1).
(2) A brokerage shall, on the request of any person, show the duplicate original certificate of
registration given to the brokerage in respect of a broker or salesperson employed by the
brokerage to the person. . Reg. 580 05, s. 33 (2).

REGISTRATION REFUSAL
The Registrar may refuse to grant a registration if, in the Registrar’s opinion, the appli-
cant cannot be reasonably expected to be financially responsible in the conduct of
business, if the past conduct of the applicant affords reasonable grounds to believe that
business will not be carried on legally, honestly and with integrity, or if the applicant
makes a false statement in the application. The Registrar will notify the applicant in
writing of such refusal. If an applicant’s registration or a registrant’s renewal is refused or
revoked, the person must wait at least 12 months before re-applying and provide evidence
that material circumstances regarding the application have changed.

Statutory Exemptions to Registration


Selected exemptions to registration are set out in Section 5 of the Act. The most notable
exemptions include an auctioneer, provided that the trade is made in the course of, and as
part of, the auctioneer’s duties as an auctioneer; a full-time salaried employee of a party
to a trade if the employee is acting for or on behalf of his or her employer in respect of
land situated in Ontario (e.g., a salaried salesperson employed by a builder to sell that
builder’s homes); a solicitor of the Superior Court of Justice who is providing legal serv-
ices if the trade in real estate is itself a legal service or is incidental to and directly arising
out of the legal services; and a person who trades in real estate solely for the purpose of
arranging leases to which the Residential Tenancies Act applies.
Section 5 of the Act fully outlines exemptions to Section 4 (which addresses the pro­
hibition against trading in real estate unless registered):

5. (1) Despite section 4, registration shall not be required in respect of any trade in real estate by,
(a) an assignee, custodian, liquidator, receiver, trustee or other person acting under the
Bankruptcy and Insolvency Act (Canada), the Corporations Act, the Business Corporations
Act, the Courts of Justice Act, the Winding-up and Restructuring Act (Canada), or a
person acting under the order of any court, or an executor or trustee selling under the
terms of a will, marriage settlement or deed of trust;
(b) an auctioneer if the trade is made in the course of and as part of the auctioneer’s duties
as auctioneer;
continued...

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Real Estate—A Regulated Profession Chapter 2 57

(c) a person who is registered under the Securities Act if the trade is made in the course of
and as part of the person’s business in connection with a trade in securities;
(d) a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada),
a credit union as defined in the Credit Unions and Caisses Populaires Act, 1994 or a loan, trust
or insurance corporation trading in real estate owned or administered by the corporation;
(e) a person in respect of any mine or mining property within the meaning of the Mining
Act or in respect of the real estate included in a Crown grant or lease, a mining claim or
mineral lands under the Mining Act or any predecessor of that Act;
(f) a full-time salaried employee of a party to a trade if the employee is acting for or on
behalf of his or her employer in respect of land situate in Ontario;
(g) a solicitor of the Superior Court of Justice who is providing legal services if the trade in
real estate is itself a legal service or is incidental to and directly arising out of the legal services;
(h) a person, on the person’s own account, in respect of the person’s interest in real estate
unless,
(i) the trade results from an offer of the person to act or a request that the person act
in connection with the trade or any other trade, for or on behalf of the other party
or one of the other parties to the trade, or
(ii) the interest of the person in the real estate was acquired after the offer or request
referred to in subclause (i) whether or not the trade is the result of the offer or request;
(i) a person in respect of the provision for another, for remuneration other than by
commission, of all consultations, undertakings and services necessary to arrange for the
routing of a right of way including the acquisition of land or interests in land for the
purpose, and the person’s employees engaged in the project;
(j) a person who trades in real estate solely for the purpose of arranging leases to which the
Residential Tenancies Act, 2006 applies; or
(k) such persons or classes of persons that are prescribed as exempt from registration in
respect of any class of trades in real estate. 2002, c. 30, Sched. C, s. 5 (1).
Independent contractor not an employee
(2) An independent contractor is not an employee for the purpose of clauses (1) (f) and (i).
2002, c. 30, Sched. C, s. 5 (2).

MAINTAINING REGISTRATION
Registrants have ongoing responsibilities to comply with various requirements in order
to maintain registration under the Act. In particular, education requirements include
the completion of the articling segment, as well as ongoing continuing education courses.
Registrants must also ensure that registration and insurance renewals are in accordance
with prescribed timelines and that any material changes in information previously com-
municated to the Registrar’s office are promptly updated.

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58 Chapter 2 Real Estate—A Regulated Profession

Articling Segment—Enrolment in Pre-Registration


Education Program Prior to April 1, 2016
The articling segment, consisting of three courses, must be completed within two years
following initial registration. Registrants are required to successfully complete the follow-
ing mandatory courses:

REAL PROPERTY
LAW
The Residential Real
Estate Transaction
The remaining Course not
OR previously taken in the
pre-registration segment.
The Commercial Real
Estate Transaction

Plus one of the following electives:

ELECTIVE ELECTIVE ELECTIVE ELECTIVE

Principles of Principles of Real Estate Principles of


Appraisal Mortgage Financing Investment Analysis Property Management

Articling courses completed prior to registration do not qualify. If a registrant is unable


to complete the articling segment by the two-year renewal expiry date, his or her registra-
tion will terminate. The registrant may then file a reinstatement application (as opposed
to a renewal application) once the courses are successfully completed and applicable
transcripts are received. Registrants are not permitted to trade while unregistered and
not until such time as the reinstatement application process has been fully completed.

Articling Segment—Enrolment in Pre-Registration


Education Program on or after April 1, 2016
Students who enrol in the pre-registration education program on or after April 1, 2016
will be required to complete only one articling course within two years following initial
registration. Students may select from the following electives: Principles of Appraisal,
Principles of Mortgage Financing, Real Estate Investment Analysis and Principles of
Property Management.

Continuing Education
Continuing Education Registrants must fulfill RECO’s continuing education (CE) program requirements. These
Requirement for completion of requirements apply to all registered real estate brokers and salespersons regardless of the
mandatory and elective courses
length of time that they have been trading in real estate. The only exception involves
by registered brokers and sales-
persons, in accordance with the registrants within their first two-year registration, as they are only required to complete
RECO mandatory continuing the articling segment courses.
education policy.
Please visit the RECO website for further information on the continuing education
requirements you must complete in every two-year registration cycle after your initial
two-year registration.

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Real Estate—A Regulated Profession Chapter 2 59

Changes to Registration Information


All registrants must disclose any changes regarding the information provided to the
Registrar’s office within five days of the change. Failure to do this could result in charges
for non-disclosure being laid under the Act. Further, every brokerage must notify the
Registrar of any termination of a broker or salesperson. Required forms for such notifica-
tions to the Registrar are located on the RECO website.

Registration Renewals
Every registrant is responsible for ensuring his or her registration is renewed. As a courtesy,
RECO sends renewal reminders to registrants 60 days in advance of the expiry date of their
registration. To renew a registration, registrants must meet the education requirements
and also apply to renew their registration with RECO. If a registration renewal is delayed
in being processed, there is a provision in REBBA 2002 that, provided all requirements of
registration have been met and the renewal and fee payment are received by RECO prior
to expiry, the registration is deemed to continue should the renewal not be processed
prior to expiry.
To renew a registration, a broker, salesperson, or sole proprietor may process an online
registration renewal via RECO’s online portal, MyWeb. Upon submission of an online
renewal, a registrant’s broker of record would receive an email from RECO advising them
of the renewal application that requires their review. The broker of record would then
verify and confirm the information via MyWeb. Alternatively, an application for Renewal:
Broker/Salesperson in paper format is available via the RECO website and MyWeb, and
may be submitted to RECO via email, fax, courier, or mail. Once RECO has reviewed and
approved the renewal, online or paper, a registration certificate is mailed to the brokerage.

Insurance Renewals
Insurance coverage for brokers and salespersons is based on a 12-month policy, which is
renewed each year in mid-August. A registrant cannot trade in real estate unless he or she
is insured. Suspensions are imposed on those that do not meet the insurance requirement.
In the case of a new applicant for registration, the application will not be completed
until the insurance premium is paid.

EDUCATION STANDARDS
The Registrar establishes education requirements and associated standards for registration
courses involving salespersons (pre-registration segment), the articling requirements for
salespersons (articling segment) and educational requirements for brokers (broker
segment), as well as continuing education policies and procedures. The Registrar is also
responsible for designating one or more organizations that are authorized to provide
the required educational courses.
The goal of the registration courses is to prepare individuals for a career in real estate
as a broker or salesperson through formal education that involves a combination of self-
study and classroom education. Students are required to pass examinations at the
completion of each individual course within each of the three segments. This goal is
further defined by the following objectives:

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60 Chapter 2 Real Estate—A Regulated Profession

• To develop a sustainable course curriculum that supports RECO’s mandate to protect


the interests of consumers through the development of skilled and educated registrants.
• To deliver to students a timely opportunity to train as real estate professionals.
• To provide students with comprehensive, accurate and up­to­date education that
will allow them the ability to develop the necessary skills and knowledge to succeed
in the marketplace.

The Registrar has overall authority for educational programming. The registration
courses are developed, delivered and administered on the Registrar’s behalf by a designate,
which is currently the Ontario Real Estate Association. Reporting to the Registrar, the
designate is responsible for the development of the course curriculum and material, the
delivery of the courses and the day-to-day administration of the program.

Pre-Registration, Articling and Broker Education Segments


The Registrar establishes learning outcomes for all courses in the pre-registration,
articling and broker segments. The designate is then responsible for developing course
content and material necessary to satisfy the learning outcomes. The Registrar reviews
and approves all content prior to the courses being offered, while ensuring that the course
materials are accurate, comprehensive, relevant and up-to-date.
Courses are made available to students in a variety of delivery methods, including
classroom and distance education (correspondence and/or online). The designate is also
responsible for delivery of courses as demand warrants. Notwithstanding demand, the
designate must ensure reasonable access to courses for all potential students in Ontario.

COURSE COMPLETION
Students should be prepared to invest significant time and effort in completing courses
and preparing for examinations. Classroom/study hours are illustrated, but these do not
include additional time needed by individual students for further study and review.

ENROLMENT IN PRE-REGISTRATION EDUCATION PROGRAM PRIOR TO


APRIL 1, 2016
MINIMUM CLASSROOM/
SEGMENT COURSE
STUDY HOURS
Real Estate as a Professional Career 35

PRE-REGISTRATION Land, Structures and Real Estate Trading 60


SEGMENT The Real Estate Transaction—General 40
The Residential or Commercial Real Estate Transaction 40

Real Property Law 40


ARTICLING The Residential or Commercial Real Estate Transaction 40
SEGMENT
One Articling Elective 40

Real Estate Broker Course 60


BROKER SEGMENT
One Articling Elective 40

WEB LLINKS
Salesperson Registration Education Program Course Descriptions/Scheduling Go to the
Ontario Real Estate Association website (www.orea.com) for pre-registration, articling and broker
course information.

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Real Estate—A Regulated Profession Chapter 2 61

EXAMINATIONS
All examinations for pre-registration, articling and broker segments are three hours in
length. The examination constitutes 100% of the final mark and a final mark of 75%
(minimum) must be achieved to successfully complete a course. Students are permitted
two opportunities to successfully pass an examination. If a failing grade is obtained on
the second attempt, the course must be taken once again and successfully completed.

ENROLMENT AND PASS RATES—ENROLMENT IN PRE-REGISTRATION


PROGRAM PRIOR TO APRIL 1, 2016
Statistical data on enrolments shows a noticeable decline as students progress through
the three segments. This is due, in large part, to students deciding that real estate is not a
career that they wish to pursue. The decline can also be somewhat attributed to a student’s
failure to complete a course, as evidenced by the pass rates.

Course Enrolment: Number of Students

51,121 47,781 48,813 55,096


2012 2013 2014 2015

Pre-Registration Segment
Articling Segment
Broker Segment

Course Examinations: Average Pass Rates


89%
89%

86%

85%
75%
75%

74%

69%
67%
66%

66%

61%

2012 2013 2014 2015

Pre-Registration Segment
Articling Segment
Broker Segment

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62 Chapter 2 Real Estate—A Regulated Profession

Expanding Horizons CURIOSITY

Salesperson registrants wanting to expand their knowledge should seriously consider taking the Real Estate Broker
Course. This 60-hour program not only provides detailed information on the establishment, operation and management
of a real estate brokerage, but also offers important insights into the broker of record function, leadership skills and
business planning.

WEB LLINKS
Continuing Education Policies Go to the RECO website (www.reco.on.ca) and select the
Education menu for detailed, current continuing education information and policies.

INSURANCE REQUIREMENTS
The Real Estate and Business Brokers Act, 2002 requires that all broker and salesperson
registrants participate in RECO’s insurance program as a condition of registration. The
mandatory insurance program, introduced on September 1, 2000, was intended primarily
for consumer protection, but has evolved significantly since inception.
RECO takes an ongoing active role in the insurance program by continuously review-
ing claims data, policy wordings and program administration to ensure the program is
operating effectively in the best interests of consumers and registrants. Terms and condi-
tions, including premiums, are negotiated with insurance service providers on an annual
basis.

Coverages
CONSUMER REGISTRANT
PROTECTION PROTECTION

Consumer
Deposit Errors and Commission
Protection Omissions Protection

Protection to the consumer for Protection for registrants for Protection for registrants from
loss of deposits caused by real errors and omissions committed loss of commission caused by
estate broker fraud, misappro- in the course of their professional real estate broker fraud, mis-
priation of funds or insolvency. services. appropriation of funds or
insolvency.
Policy Limits Policy Limits
• $100,000 per claim • $1,000,000 per claim Policy Limits
• $3,000,000 per occurrence • $3,000,000 annual aggregate • $100,000 per claim

• o deductible • $2,500 deductible (would • $3,000,000 per occurrence


apply to a claim settlement— • $250 deductible per claim
the deductible would increase
by $2,500 for each additional
claim settlement made on
behalf of the same registrant
within a three­year period)

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Real Estate—A Regulated Profession Chapter 2 63

ERRORS AND OMISSION COVERAGE

Examples Of Mistakes That May Be Covered Examples of What May Not Be Covered

• Unintentionally omitting an important clause in • Fraud


an offer • Fines and penalties
• Unintentionally providing incorrect information • Appraisals (if completed for financing purposes)
on a property (e.g., property taxes)
• roperty management (if these services are
• Allegations of under­pricing or over­pricing a more than 35 percent of the gross revenue of
property the individual or brokerage)
• Unfounded accusations qualifying for a defence • ortgage brokering
• laims or circumstances not related to
professional services (as defined by the policy)
and usually covered by other policies (e.g.,
General iability)

NOTE: laims related to properties or businesses in which a registrant has a personal interest may be
covered if the necessary disclosures required under The Real Estate and Business Brokers Act, 2002, are
made to the buyer/seller (see Act, S. 32; ode S. 1 ( )).

Claims and Potential Claims


Policy coverage is on a claims made basis. In other words, the policy requires that the
claim made against the registrant be reported to the insurer during the policy period.
Registrants must also report a circumstance; i.e., a potential claim. A circumstance is best
described as an incident or situation that a registrant could reasonably foresee involving
actions which did or would result in a claim.
As an example, a buyer or seller may make allegations during sale negotiations that
ultimately result in a problem at closing. While a claim is not made coincident with the
allegation, the party (when making a subsequent complaint) would allege that the situa-
tion arose not at closing, but rather as a result of an act, error or omission at point of
negotiations.
Every registrant should make certain that the insurer is involved as soon as possible
after he or she becomes aware of a problem that is a claim or a potential claim. Reporting
a claim or a potential claim does not mean that the registrant is responsible or liable for
negligence, or that the registrant has done anything wrong. By making the report, the
registrant is complying with the reporting condition contained in the policy. This ensures
that the insurer can investigate the claim and determine the best way to proceed to protect
the registrant’s interests.
The policy provides continuing coverage for errors and omissions claims following a
registrant’s date of retirement or leaving the business for any reason except for disciplinary
action by RECO, at no additional cost to the registrant and subject to the terms and con-
ditions of the master policy.

New Application and Renewal Processes


The registration cycle is two years commencing from the date of approval of the registra-
tion application. However, the insurance term is based on a one-year cycle commencing
each September 1 until the following September 1. With new registrants, an invoice for
premium payment follows initial review of the registration application. The invoice reflects
cost of insurance from the date of the registration application review until the following
September 1. The registration application receives final approval upon receipt of payment
of the insurance fee, plus applicable taxes.

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64 Chapter 2 Real Estate—A Regulated Profession

New and reinstating registrants joining the insurance program between September 2nd
and June of the following year must pay the pro-rated insurance fee for the remainder
of the insurance term. New and reinstating registrants joining the insurance program in
July or August are required to pay the pro-rated insurance fee for the remainder of the
insurance term, plus the annual insurance fee for the following September 1 – September 1
term. Registrants can make insurance payments by VISA or MasterCard on RECO’s web-
site by accessing their MyWeb account and clicking on Pay Insurance Now.
Non-payment will result in suspension. The Registrar will initiate the suspension
process for each registrant who has failed to make the required annual insurance payment
before the due date fixed by RECO’s board of directors. This suspension for nonpayment
takes effect on the start date of the new coverage period. Suspended registrants are not
entitled to trade in real estate.
A suspended registrant must pay the outstanding annual insurance premium. Upon
that payment, registration will be revived for the unexpired balance of the registration
cycle. The registration renewal date will not change.

WEB LLINKS
RECO Insurance Program Additional details about the RECO Insurance Program, policy
coverages, exclusions, reporting procedures and forms can be obtained on the RECO website
(www.reco.on.ca) or the Alternative Risk Services Inc. website (www.reco-claims.ca) developed
on behalf of the insuring company.

COMPLAINTS AND ENFORCEMENT


While most real estate registrants conduct properly, RECO does receive complaints from
the public and other registrants about conduct. The complaint process provides an
impartial and flexible assessment of such concerns, as they relate to the Real Estate and
Business Brokers Act, 2002. Complaints must be in writing and should include the com-
plainant’s contact information, names of registrants involved, details of the complaint
and copies (not originals) of any supporting documents.
The complainant need not determine if there has been a violation, as RECO will
review the complaint and establish whether or not the Council has authority to resolve
the matter. RECO does not have the authority to mediate monetary or contractual
disputes, or to assess and/or award damages. Such disputes are civil legal matters and
should be discussed with a lawyer.
The complaints process, while handled in a timely fashion, has no set time periods.
Steps taken vary depending on the nature of the complaint and information available to
RECO. The entire process is designed to be fair to all. The Act provides that the person
against which the complaint is lodged is entitled to be notified of the complaint, to seek
legal advice and be represented (if so desired). He or she is provided written notification
of what action is being taken by the Registrar, along with an explanation or reasons for
the action.

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Real Estate—A Regulated Profession Chapter 2 65

RCI Process
The Registrar’s Complaints and Inquiries (RCI) Process provides a uniform method of Registrar’s Complaints and
Inquiries (RCI) Process
addressing complaints, while having sufficient flexibility to acknowledge unique character-
A process established under the
istics of any particular complaint. The process sets out appropriate steps to make inquiries
Real Estate and Business Brokers
and arrive at a fair course of action. When a registrant receives a request for information Act, 2002 and associated
from the Registrar, he or she must answer/respond to it. Regulations for the handling of
all complaints and concerns
involving registrants.

RCI
PROCESS

ALL COMPLAINTS & CONCERNS


Public Other Registrants Other

Reviewed By
Registrar

Assigned To Staff
For Detailed Review

Beyond SUMMARY OF REGISTRAR’S OPTIONS Warrants No


Registrar’s (see Enforcement: Possible Outcomes below for detailed discussion)
Further Action
Jurisdiction 1. Attempt to Mediate or Resolve
2. Give Written Warning/Further Action if Activity
Continues
3. Determine if Further Education Courses are Required
4. Refer to the Discipline Committee
File Closed (Code of Ethics Violations) In some cases, the allegations
5. Take Action Under REBBA 2002 (S.13 and S.14) are not supported by the
(i.e., Refuse to Renew, Suspend, etc.) evidence and information
available. In such a case, the
Registrar may determine that
no action is required or that
there is insufficient information
to take action.

Possible Outcomes
Most complaints do not involve serious misconduct and do not require severe sanctions
or formal legal proceedings. The possible outcomes presented here identify all options
available to the Registrar. Depending on specific allegations, the Registrar will determine
what option(s) is/are appropriate.

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66 Chapter 2 Real Estate—A Regulated Profession

Acknowledgement The Registrar may accept an acknowledgement and undertaking


and Undertaking by the registrant, if appropriate.

Consent to The Registrar, with the registrant’s consent, may apply voluntary
Conditions conditions to a registration. Conditions are considered on a case
by case basis and vary depending on the nature of the complaint.

Attend a Meeting The Registrar may request a meeting with the registrant to discuss
the complaint. At the meeting the registrant may receive an infor-
mal educational reminder, advice or caution.

Mediating or The Registrar may attempt to mediate or resolve the complaint.


Resolving a Complaint

Written Warning The Registrar may issue a written warning indicating that, if the
conduct that led to the complaint continues, further action may
be taken.

Educational Courses The Registrar may require a registrant to take further educational
courses.

Referral to Matters involving alleged breaches of the Code of Ethics may be


Discipline referred to a discipline committee. The chair of the discipline
Committee committee generally assigns a panel, consisting of three members of
the committee, to hold a hearing. A notice of hearing is given to the
registrant. Following the hearing, the discipline panel prepares a
final decision, including reasons. If the discipline committee makes
a determination that a registrant has failed to comply with the Code
of Ethics, it may order the registrant to take educational courses,
pay a fine of up to $50,000 and fix/impose costs. The discipline
committee is required to publish a copy of its decisions, including
reasons, on RECO’s website for a period of at least sixty months.

Immediate The Registrar has the power to order an immediate temporary sus-
Suspension pension of a registration where he or she believes it is in the public
interest. Registrants who are subject to such an order must immediately
cease all activities related to trading in real estate and return their
certificate of registration to the Office of the Registrar. A registrant
subject to such an order will also be subject to a Registrar’s proposal.

Registrar’s Proposal The Registrar may propose/recommend to revoke, suspend, refuse


to renew or apply conditions to a registration if a registrant is in
contravention of REBBA 2002 and its regulations (other than the
Code of Ethics). In this case, the Registrar issues a notice of pro-
posal, which sets out the reasons for the proposed action and
states that the registrant is entitled to appeal the proposal to the
Licence Appeal Tribunal (LAT) within 15 days after service of the
notice. If no request for an appeal is received by the LAT, the
Registrar will carry out the proposal.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 67

Director’s Action The Director, under REBBA 2002, may appoint investigators to
conduct investigations under the Act and can also freeze the trust
accounts of brokerages where he or she believes that it is advisable
for the protection of clients and customers. The Director can take
similar action against non-registrants who are believed to be
trading while unregistered.

Provincial Offences Offences relating to REBBA 2002 and its regulations (other than
Prosecution the Code of Ethics) may be processed in accordance with the
Provincial Offences Act. The Provincial Offences Act is a procedural
law for administering and prosecuting provincial offences, including
violations of REBBA 2002. The Provincial Offences Act sets out
procedures for legal prosecution in the Ontario Court of Justice
system including serving an offence notice to an accused person,
conducting trials, sentencing and appeals. Individuals convicted
of offences are subject to fines of up to $50,000 and or prison
terms of up to two years. Corporations are subject to fines of up
to $250,000. Courts may also order convicted persons to pay
compensation and make restitution.

Public Information
Under the Act, the Registrar is required to make certain information available to the public.
RECO provides a registrant search feature on its website. Information available includes
the registration status, the current expiry date of registration, whether or not the indivi-
dual has complied with insurance requirements, and enforcement or disciplinary activi-
ties related to the brokerage, broker or salesperson. The enforcement or disciplinary
activities disclosed include:
• Registrar’s proposals to refuse, apply conditions to, suspend or revoke a registration;
• charges and convictions; and
• discipline and appeals panel decisions.

In addition, the Registrar may choose to make certain information available through
public mediums such as media advisories, alerts or statements, in instances where pro-
viding such information could assist in protecting consumers. This information can be
in regard to registrants, former registrants, officers and directors of brokerages, or any
person who is trading in real estate. For details on the types of information made avail-
able to the public, refer to ntario Regulation 567 05, Sec. 11.
Additional information is available on the RECO website. Go to Complaints &
Enforcement.

BROKERAGE INSPECTIONS
AND INVESTIGATIONS
The primary role of the inspection process is to administer the regulatory requirements
set out in the Real Estate and Business Brokers Act, 2002, which in turn increases the level
of protection that RECO is able to provide to consumers and registrants. This risk-based
program focuses efforts on significant problem areas that can jeopardize consumer pro-

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
68 Chapter 2 Real Estate—A Regulated Profession

tection and/or represent deviations from acceptable, regulatory-related business practices.


The Council’s inspection program also enables one-on-one contact between RECO
inspectors and brokers of record, as well as providing opportunities to educate brokers
of record about maintaining current and appropriate records.

Types of Inspections
The Council has the authority to inspect a registrant’s business premises during reason-
able hours. Inspectors have access to all documents, records, money and other valuables
relevant to the inspection. No person may obstruct an inspector in carrying out his/her
duties.
Inspectors typically focus on real estate records such as trade contracts and related
documentation, trust accounts and proper accounting procedures. Handling of trust
funds is particularly important to ensure that consumer funds are promptly deposited,
correctly handled and fully accounted for while in the brokerage’s possession.

ROUTINE INSPECTIONS
Routine inspections are conducted to ensure compliance with the Act. Typically, inspectors
randomly select brokerages for inspections. The brokerage is contacted by telephone
and a date is mutually agreed upon which is usually at least one week away. In some
instances, an inspection without notice may be conducted when circumstances warrant
this action. During the inspection, an individual trained to provide accurate information
can field registrant questions. RECO also routinely conducts inspections on brokerages
that are winding down their operations.

COMPLAINT-INITIATED INSPECTIONS
Sec. 20 of the Real Estate and Business Brokers Act, 2002 authorizes the Registrar, or any
person designated by him/her, to conduct an inspection to ensure compliance with the
Act and regulations, deal with a complaint or ensure that a registrant remains entitled to
registration. The Registrar may also investigate complaints against registrants and those
persons who are trading in real estate without benefit of registration under the Act.

COURTESY INSPECTIONS
Inspectors will conduct courtesy inspections by request. For example, the broker of record
may be concerned that internal operations are not fully aligned with regulatory require-
ments or may require assistance in implementing new procedures. Courtesy inspections
can be very effective for both the broker of record and management staff to correct
problems and improve reporting systems within the brokerage.

RECONCILIATION INSPECTIONS
In addition to on-site inspections, randomly selected brokerages are asked to submit trust
account reconciliations for a given period so that the Office of the Registrar may review
the reconciliations, ensuring compliance with the Real Estate and Business Brokers Act,
2002 and its Regulations. Along with the trust account reconciliation, brokerages must
include a copy of the bank/financial institution statement for the real estate trust account,
a list of the pending trades that make up the trust liability of the brokerage and a letter
indicating that the broker of record has reviewed the submission and can attest to its
authenticity. A sample letter of reply is included with the reconciliation request.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 69

Number of Inspections: 2007–2013

1,200

1,000

800

600

400

200

0
2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

Investigations
The Real Estate Council of Ontario conducts various investigative procedures that may
result in court action for statutory violations. Investigations can involve search warrants,
seizures, freeze orders and applications to Court. Investigators can access premises,
require persons to produce documents and then remove those documents for copying.
In these instances, RECO may pursue the violation through legal processes as set out in
the Provincial Offences Act. Matters concerning court proceedings, sentencing and appeals
go beyond the scope of this text.

Number of Investigations: 2007–2013

160

120

80

40

0
2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
70 Chapter 2 Real Estate—A Regulated Profession

RESOURCES FOR
CONSUMERS AND REGISTRANTS
RECO provides timely and relevant information to consumers and registrants through
its website, newsletters and other publications. New resources are continuously being
introduced. Recent efforts have expanded online resources for registrants and consumer-
focused information when working with registered brokers and salespersons, including
topics such as representation agreements, negotiations and key market trends/issues.

RECO Website
Registrants, as well as consumers, can access important resources through the RECO web-
site (www.reco.on.ca). Current news and information is continuously updated with topics
of interest to registrants. Other primary resources are grouped under information categories.
Where applicable, helpful frequently asked questions and procedural guidelines are included.
On the consumer side of the website, information is provided on the following topics:
• About outlines RECO’s purpose, mission and values, REBBA 2002 and related
legislation.
• Home Buyers and Sellers offers helpful tips for consumers on topics involving the
listing and selling of real estate.
• Complaints & Enforcement explains how complaints against registrants are handled
and enforcement options available to RECO, including disciplinary action and
criminal charges as well as discipline decisions.
• Resources provides access to the Act, the regulations and RECO’s corporate by-laws.
• Contact provides primary contact information, as well as direct enquiry instructions
for registration, education, complaints, inspections and investigations, communications
and insurance as well as the ability to contact the Registrar with any questions or
concerns.
• Real Estate Professional Search permits consumers to find a registrant and/or confirm
the registration status of an individual or brokerage.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 71

MYWEB
MyWeb is an extranet service for real estate registrants, which allows them to access their
personal registration information, change their address, confirm whether applications
have been received, make online insurance credit card payments, access insurance certi-
ficates and receipts, and complete online registration renewals. Signing up for MyWeb
also ensures that registrants will receive important news and updates by e-mail.

The MyWeb extranet service has proven very effective and RECO continues to expand
online services to registrants:
• nline voting procedures are in place for election of RECO directors (nine out of the
12 directors).
• Expanded e­mail services include election results, news releases, key legislative changes
and important announcements.
• The bi­annual satisfaction survey is conducted online making it accessible to all
registrants who chose to participate. This survey assists RECO in identifying areas
for improvements and implementing changes in the interest of quality services and
information to registrants. The online version also facilitates enhanced reporting, as
years registered, registration category and other information can be captured for
statistical analysis while maintaining the anonymity of survey respondents.
• Insurance payments can be made and confirmed online.

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72 Chapter 2 Real Estate—A Regulated Profession

MyWeb provides a wealth of information for registrants to assist them in their day-to-
day practice, such as:
• Examples of advertising guidelines.
• Latest industry news.
• Education requirements including mandatory continuing education.
• RECO publications.
• Discipline and appeals hearings and decisions.
• Registration information of employees for brokers of record.
• RECO inspection information.

This information can be accessed on the RECO website by logging onto MyWeb.
Additionally, registrants may receive important reminders and updates from RECO, such
as their registration and insurance renewal due dates.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 73

Outreach
RECO is continuously increasing public awareness of its role and responsibilities, and
responds to inquiries from consumers, media, regulatory organizations, financial institu-
tions and law enforcement agencies. Attendance at real estate functions and consumer-
focused events is also a key component of this outreach. In a typical year, RECO represent-
atives attend more than 40 real estate board association trade shows events.
RECO also participates in regulatory-related activities involving the Canadian Real
Estate Regulators Group (CRG), which consists of senior staff representatives from the
real estate regulatory bodies in many Canadian jurisdictions. The CRG is a valuable
vehicle for the exchange of information between jurisdictions, regulatory harmonization
and co-operation on common issues. RECO representatives also attend conferences and
meetings conducted by the Association of Real Estate License Law Officials (ARELLO).
This international organization facilitates the exchange of information and co-operation
among regulators and policy makers in the area of real property.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
74 Chapter 2 Real Estate—A Regulated Profession

KNOWLEDGE
INTEGRATION
Notables
• The Real Estate Council of ntario is a self­ • Continuing education requirements apply
managed, not-for-profit organization to all registered brokers and salespersons.
responsible for administering and enforcing • REBBA 2002 requires that all broker and
the Real Estate and Business Brokers Act, 2002. salesperson registrants participate in RECO’s
• RECO performs a distinct role focused on insurance program as a condition of
protecting the public interest. registration.
• Applicants must meet specific requirements • Registration is based on a two­year cycle
when seeking registration under REBBA commencing from the date of approval of
2002. the registration application. The insurance
• Personal circumstances can impact fitness term is based on a one-year cycle commenc-
for registration and certain fitness issues ing each September 1st.
require appropriate disclosure by the • The complaints process provides an impartial
applicant. and flexible method to address complaints
• Applicants cannot trade in real estate about conduct from both the public and
until their wallet registration certificates other registrants.
are received. These are mailed directly to • The Council undertakes routine, complaint­
the brokerage. initiated and courtesy inspections.
• Registrants must comply with various • RECO conducts various investigative
requirements to maintain registration procedures that may result in court action
under the Act. for statutory violations.
• Registrants must disclose any changes regard­ • RECO provides timely, relevant information
ing information provided to the Registrar’s to consumers and registrants through its
office within five days of such changes. website, newsletters and other publications.
• The Registrar has overall authority for
education programming.

Glossary
Administrative Authority Real Estate Council of Ontario (RECO)
Code of Ethics Registrar
Continuing Education (CE) Registrar’s Complaints and Inquiries (RCI)
Discipline Committee Process
Inspection Registration
Investigation Registration Cycle

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 75

Web Links
Web links are included for general interest regarding selected chapter topics, but are not
required for examination purposes.

Salesperson Registration Go to the Ontario Real Estate Association website (www.orea.com) for
Education Program pre-registration, articling and broker course information.
Course Descriptions/
Scheduling
Continuing Education Go to the RECO website (www.reco.on.ca) and select the Education menu for
Policies detailed, current information and policies concerning continuing education.
RECO Insurance Program Additional details about the RECO Insurance Program, policy coverages,
exclusions, reporting procedures and forms can be obtained on the RECO
website (www.reco.on.ca) or the Alternative Risk Services Inc. website
(www.reco-claims.ca) developed on behalf of the insuring company.

Strategic Thinking For Your Career


Questions are included to assist in developing your new career. No answers are provided.
1. Personal circumstances can impact 3. What guidance can my intended
fitness for registration. Do I have any employing brokerage provide to ensure
circumstances that might impact my that I fully comply with regulatory
ability to be registered under REBBA requirements discussed in this chapter?
2002?
2. Have I fully reviewed all resources on
the RECO website to better understand
the Council’s role and responsibilities,
as well as my obligations?

Chapter Mini-Review
Solutions are located in the Appendix.

1. The RECO board of directors is 3. The Registrar has the authority to


directly responsible for the day-to-day grant applicants course credits or
management of the Council and its examination challenges on the basis
employees. of education equivalency.

True False True False

2. Bankruptcy details must be disclosed 4. No person can trade in real estate in


by an applicant seeking registration Ontario unless registered under the
or a registrant seeking renewal of Real Estate and Business Brokers Act,
registration. 2002.

True False True False

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
76 Chapter 2 Real Estate—A Regulated Profession

Chapter Mini-Review (continued)


5. Applicants must complete continuing 11. Insurance policy coverage is on a claims
education requirements prior to made basis, which requires that any
applying for salesperson registration. claim made against the registrant be
reported to the insurer during the
True False policy period.

6. Every broker and salesperson registrant True False


must fulfil the mandatory continuing
education requirements in each registra- 12. The RCI process is primarily designed
tion cycle following the first registration to handle complaints and concerns
renewal. regarding registrant conduct from the
public and from other registrants.
True False
True False
7. When a broker or salesperson registrant
changes his/her address, proper writ- 13. Under REBBA 2002, the Registrar is
ten notice must be made to RECO required to make certain information
within five days of the event. about registrants available to the public
including registration status and
True False current expiry date of registration.

8. A salesperson is not required to carry True False


his or her certificate of registration,
but must have it available at his or her 14. RECO inspectors have the right to
employing brokerage to show it to access all documents, records, money
any person upon request. and other valuables in a real estate
brokerage registered under the Real
True False Estate and Business Brokers Act, 2002.

9. All examinations for pre-registration, True False


articling and broker segments are three
hours in length and a final mark of
60% (minimum) must be achieved to
successfully complete each course.

True False

10. The three coverages under the RECO


insurance program are errors and
omissions, commission protection
and general liability.

True False

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 77

Active Learning Exercises


Solutions are located in the Appendix.

Exercise 1 Registration and Beyond


1.1 Which of the following is a true statement regarding registration as a real estate
salesperson in Ontario?
a. A salesperson registrant must renew his or her registration each year.
b. A salesperson must pay a two year premium for the RECO insurance program
on every registration renewal date.
c. A person registered under the Securities Act is exempt under the Real Estate
and Business Brokers Act, 2002 when that person is involved in any sale of
real estate.
d. An applicant must successfully complete the prescribed pre-registration
education and pass the applicable examinations within 18 months of
starting the first course Real Estate as a Professional Career.

1.2 Within the RECO operating structure, the board of directors relies on which of
the following to identify, research, consult and make recommendations on issues
impacting consumers and/or registrants?
a. Registrar
b. Task Force
c. President/CEO
d. Corporate Services

1.3 Which of the following is NOT an exemption under the Real Estate and Business
Brokers Act, 2002?
a. A receiver, trustee or custodian acting under selected Acts in respect of any
trades in real estate.
b. A person practicing as a solicitor who is providing legal services if the trade
itself is a legal service or is incidental to and directly arising out of a legal service.
c. A person who is employed as a salesperson for a builder, is paid a commission
for each sale made on behalf of that builder and is only selling homes offered
in the marketplace by that builder.
d. A person, on his/her own account, in respect of owned real estate (subject
to certain qualifiers).

1.4 Which of the following is NOT normally required when becoming registered as
a real estate salesperson?
a. Have a good past record of financial responsibility and conduct.
b. Include the applicable transcript with the application.
c. Fully disclose any criminal charges and convictions.
d. Provide proof that the RECO insurance has been paid in full at time of
application.

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78 Chapter 2 Real Estate—A Regulated Profession

1.5 In the two-year articling segment following initial registration, which of the
following courses is NOT considered an articling elective?
a. Real Estate Investment Analysis
b. Principles of Mortgage Financing
c. Principles of Appraisal
d. Real Property Law

1.6 With regard to the RECO insurance program:


a. Registrants may select one of three coverages offered under the program.
b. Registrants may collect commission when not insured, provided a Declaration
of Non-Insurability is provided to the consumer.
c. Reporting a claim or potential claim does not mean that the registrant is
responsible or liable for negligence.
d. Registrants are not required to pay insurance premiums after the first two-
year registration cycle.

1.7 The RCI process:


a. Requires that all written complaints and concerns be referred to the disci-
pline committee.
b. Begins with all written complaints and concerns being reviewed by the Office
of the Registrar.
c. Would never involve prosecution under the Provincial Offences Act.
d. Does not provide for mediation.

1.8 Routine inspections:


a. Are always conducted without advance notice.
b. Are typically set up by randomly selecting brokerages for inspection.
c. Are conducted pursuant to requirements outlined in the Provincial Offences
Act.
d. Do not focus on brokerage real estate records, but rather involve an informal
discussion between the inspector and the broker of record.

1.9 The Registrar has various options under the Registrar’s Complaints and Inquiries
(RCI) Process. Which is NOT one of them? This question requires that the incorrect
option be identified.
a. Impose a fine not to exceed $25,000.
b. Require the registrant to take further education courses.
c. Attempt to mediate or otherwise resolve the matter.
d. Refer to the discipline committee.

SECTION I I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N
Real Estate—A Regulated Profession Chapter 2 79

Exercise 2 Regulatory Requirements/Compliance (Matching)


Match the words in the left column with the appropriate descriptions in the right
column (not all descriptions are used).

___ Registration Requirement a. Notify Registrar within five days of


the event.
___ CPIC
b. Lack of financial responsibility.
___ Address Change
c. Legal processes relating to an
___ Search Warrant and Freeze Order investigation.
___ Grounds for Refusal of Applicant
d. Pay RECO insurance when new
application review is complete.
___ Exemption

___ Mandatory Continuing Education e. A buyer or a seller who is not a client.

___ Discipline Hearing Panel f. A professional or ethical obligation


expected of RECO registrants
according to the Code of Ethics.

g. A bank or authorized foreign bank.

h. Criminal record check.

i. An agent authorized to trade in real


estate.

j. May assess fine, plus costs.

k. Completed in every two year cycle.

I N T R O D U C T I O N T O T H E R E A L E S TAT E P R O F E S S I O N SECTION I
SECTION II
REAL ESTATE
AND SOCIETY
Section II contains two chapters, the first of which focuses on real estate within
the broader perspective of society including fundamentals of supply/demand
economics. The second concentrates on Ontario’s economic, demographic and
geographic profiles, the real estate marketplace and real estate values.
The first chapter begins with key provincial and national indicators, along
with unique qualities associated with real estate markets and the functioning of
these markets within the broader economy.
The discussion then narrows to specifics
about the real estate marketplace and
indicators commonly used by brokerages to
track trends.
The second chapter addresses key Ontario
economic and demographic trends with
particular emphasis on how the real estate
market functions, key trends for the future
and the impact of those trends on real estate
in the future. The chapter also addresses
other important profile information about
the province including its geographic make-
up, Ontario’s cities and regions and key facts
about the Ontario economy. Lastly, the chapter
highlights how various factors impact value,
discusses key value concepts and analyzes
widely accepted value principles that interact
in the marketplace.
82

CHAPTER 3

Economics and the


Real Estate Market
Introduction
Societies need economic systems in order to meet the needs of their members. Such
systems function to address these needs by establishing what must be produced and
distributed to whom, when and in what manner. Price is focal to any economic system,
as it establishes value. Consumer choice largely determines prices and associated value
within our largely market-driven Canadian economy. Of course, markets are not totally
free flowing given government involvement and monitoring. Real estate is but one of many
sectors within Canada’s economic system and any analysis of its role and importance
begins with understanding economics.
A solid grasp of economics and its impact on real estate is fundamental to value,
negotiations and the listing/selling process. Chapter 3 begins with economic principles
and then expands into how the real estate market operates. Key indicators are identified
and discussed given their importance as a backdrop to real estate trends. Little wonder
that real estate chat is typically crammed with mortgage
rates, market statistics, buyer and seller markets, list to
sale ratios, vacancy rates, construction costs and number
of days on the market.
Fortunately, information abounds. Economics and real
estate are routinely splashed across daily newspapers inclu-
ding new construction levels, resale activity, new projects
and rising prices. Overall economic trends are also readily
available. The Bank of Canada, for example, actively informs
Canadians through monetary policy reports and updates, as
well as eight fixed announcement dates regarding interest
rates and economic conditions. These rates directly impact
mortgage rates and consequently real estate market activity.
Statistics Canada publishes a free daily subscription on key
indicators (since 1932) which provides analysis ranging
from employment rates to apartment building construction.
Economic trends are within easy grasp of every Canadian.
Provincial ministries including the Ministry of Finance,
the Ministry of Economic Development and Trade and the
Ministry of Municipal Affairs and Housing also provide
extensive information about the Ontario marketplace,
including the real estate sector.

SECTION II R E A L E S TAT E A N D S O C I E T Y
83

Learning Outcomes
At the conclusion of this chapter, students will be able to:
• utline basic economic principles and indicators underlying the Canadian and
Ontario economies.
• Describe the ntario marketplace in terms of supply demand (including the actions
of government in relation to the natural forces of supply and demand), market
equilibrium, market bubbles/corrections and business cycles.
• Analyze the ntario real estate market in terms of unique characteristics that differ­
entiate this market from others including factors such as the lack of a standard
product, the local nature of the market and its fixed location.
• Analyze selected features that typically influence the ntario real estate market
including demographic, employment, interest rate and building activity changes.
• Discuss seller, buyer and balanced markets along with the impact of market cycles
and real estate market corrections.
• Explain how brokerages typically track both residential and commercial markets and
identify key trends through the use of selected market indicators including mean
(average) and median prices.

R E A L E S TAT E A N D S O C I E T Y SECTION II
84 Chapter 3 Economics and the Real Estate Market

ECONOMICS: AN OVERVIEW
Economics Economics is broadly defined as the study of how individuals and society allocate scarce
The study of how society chooses resources in satisfying their wants and needs, including the production, distribution and
resources, which have alternative consumption of goods and services to meet the needs of various economic units (e.g.,
uses, in order to produce various individuals, families, corporations and governments).
commodities over time and dis-
tribute them for consumption
now and in the future among
various people and groups in
Basic Elements and Markets
society. People utilize resources, capital, technology and expertise to create goods and services. The
creation, distribution and ultimate consumption of such goods and services is largely
dictated by the forces of supply and demand. Further, the amount of production and its
ultimate use by consumers, determines the standard of living enjoyed within a particular
society.
Embodied within the national and provincial economies are thousands of individual
markets, in which buyers and sellers meet to bargain and exchange desired commodities
and services. An important market within the broader economy picture is the real estate
market. Economics seeks to apply certain theoretical principles and axioms to explain the
shifts, trends and fluctuations within these interwoven forces.

FACTORS OF PRODUCTION
All economies require four basic elements in order to produce goods and services:
• Land;
• Labour;
• Capital; and
• Entrepreneurial skills.

Collectively, these are referred to as the


factors of production. The overall
effectiveness of the economy is dictated
by its basic philosophic orientation.
A capitalistic economy operates on
individual decisions in an open
marketplace. Command systems,
usual to socialist countries, are
based on government bureaucratic
decisions in both the selection of
priorities, and the means of
distribution of goods and services to
the society. The interplay of con-
sumers and businesses in the produc-
tion and consumption of products and
services is best illustrated by a cycle with
government playing an integral, central
role in the process.

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Economics and the Real Estate Market Chapter 3 85

ECONOMIC PRINCIPLES
AND PRIMARY INDICATORS
Canada’s economy, best described as mixed economy, entails the interplay of economic
units and government in the direction of economic activity and production of goods and Mixed Economy
services. This situation frequently pits opposing forces on the same economic battlefield, An economy consisting of both
resulting in a complicated structure full of intermingling philosophies, factions and private economic units (e.g.,
individual, families and
activities, fluctuating in perpetual push/pull motions. corporations), as well as
The entire process underlying the Canadian mixed economy can be depicted as a government participation in the
cyclical mechanism commencing with consumers (such as individuals, families, house- direction of economic activity
and production of goods/
holds and companies), leading to the factors of production in the resource market, the services.
creation of goods and services by businesses utilizing entrepreneurial skills and finally
returning full circle to the consumer. The government, situated at the hub, affects the
flow variously as a user, regulator and producer of many goods and services.
Money is exchanged in countless transactions each and every day throughout the
country, in accordance with the economic current, and moves from consumer demand
through the factors of production and, lastly, to the final purchase of goods and services.
The payment of money circulates in a counter-clockwise direction to the flow on the
chart. Because most transactions involve the payment of money in return for goods and
services, the Canadian economy is considered to be a price system as opposed to a barter/
exchange system.
Today’s economist faces the complicated, if not impossible, task of weighing the relative
impact of subtle natural market forces against a myriad of vested interests intruding on
the perfect equilibrium envisaged in supply/demand economics. As a result, specialists
have increasingly relied on business statistics to provide insight and illuminate important
trends within our complex economy. A broker or salesperson, although not requiring
extensive knowledge of such information, should be aware of key indicators having a
direct bearing on real estate, as well as many other interlocking markets in the overall
economy.
Inevitably, practically all indicators utilized by economists relate directly back to factors
in the cyclical flow of the economy. These are:
• Resource Markets (land, labour, capital, entrepreneurial skills);
• Businesses (supply); and
• Consumers (demand).

Unfortunately, statistical information often mirrors the disturbing complexities found


in the marketplace. However, certain key indicators are highlighted that demonstrate a
high degree of reliability in predicting economic swings including real estate market
activity.

Resource Markets
LABOUR
Labour possesses an understandable priority with most economists. The national employ-
ment rate is the most widely publicized, but other, more finely tuned indices measure
such things as job creation and job vacancy statistics. This information, broken down by
regions throughout the country, is very meaningful when analyzing local markets.

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Labour indicators not only measure the strength of the economy, but also the efficiency
with which manpower is being utilized in addressing consumer demand. Statistics
Statistics Canada Canada provides extensive research and statistical data on total employment, employment
A federal agency with the man- rates and detailed labour force statistics.
date to collect, compile, analyze,
abstract and publish statistical
information about Canada; e.g., CAPITAL
the census. Statistics Canada Statistics Canada publishes worthwhile information not only on existing capital invest-
provides key real estate indica-
tors for both residential and ment from private and public sectors but also on anticipated allocations of capital dollars
commercial marketplace activity. by large and small companies. The availability of capital and attractiveness of interest
rates charged are directly tied to economic expansion.

Businesses
NATIONAL PRODUCTION
The supply of services and goods in the marketplace is a critical measure of the economic
output. Economists have focused on two major indices:
Gross National The most widely known indicator is the Gross National Product (GNP).
Product (GNP) This indicator measures total production in the economy, and conse-
quently is considered statistically representative of overall prosperity
within the country. The GNP measures production by Canadian resi-
dents, corporations and individuals, both within and beyond Canada.

Gross Domestic This indicator gauges production located solely within the country,
Product (GDP) and is a complementary indicator for the GNP.

MANUFACTURING ACTIVITY
Statistics Canada also produces information concerning manufacturer’s new orders, ship-
ments and inventories. This information is necessary when assessing overall demand
through the depletion and replenishment of goods.

UTILIZATION RATES
Although no key indicator exists assessing the effective use of production facilities within
the country, economists do rely upon various topical reports from Statistics Canada.
These attempt to illustrate whether the economy is operating at its full potential, utilizing
the available production factors.

Consumers
RETAIL SALES—SELECTED RETAILERS
Statistics Canada tracks information concerning retail sales volume. These statistics are
normally viewed as a lead indicator foreshadowing overall trends in the economy. Swings
in retail sales will usually be reflected in the GNP.

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CONSUMER CONFIDENCE AND SPENDING


The Conference Board of Canada produces a quarterly report on consumer attitudes
that has proven to be a fairly reliable indicator of future economic trends. If attitudes
are positive and consumers are aggressive in the marketplace, increased expenditures on
goods and services will normally result.

CONSUMER DISPOSABLE INCOME/DEBT


The ability of consumers to expend dollars in the marketplace relates to both the amount
of disposable income (used for acquisition of goods and services) and overall household
debt load (ability to pay for acquisitions). A rise in disposable income, coupled with high
consumer expectations and lowering debt loads, normally result in economic growth.

THE CONSUMER PRICE INDEX (CPI)


The CPI is a combined measure of both the forces of supply and demand in the marketplace.
The CPI, often incorrectly labeled as the cost of living index, measures the price of goods
and services relating to 600 items which are commonly purchased by an average family
living in a metropolitan area. This index is generally regarded as a valid measure of
purchasing power. The CPI contains a price index for new houses (labour and material
prices only; land value is not included) as well as a rental index. The Consumer Price
Index and related sub-indices are valuable indicators as they: Consumer Price Index
• uantify family expenditures; An indicator of consumer price
fluctuations, most commonly
• Provide input on price trends; and associated with comparisons of
• Reflect current inflationary trends. purchasing power and inflationary
pressures. The overall CPI tracks
600 items, but sub-indexes are
The CPI is normally published by Statistics Canada in the third week of the following also tracked for specific groupings;
month. Consumer price indexes are provided for Canada, the ten provinces, the territories e.g., shelter.
and 16 major centres across Canada.

Consumer Price Index CPI FOCUS

Consumer Price Index (CPI) 2002–2012 (Based on 2002 = 100)


130
Consumer Price Index

120

110

100

90
Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12

This popular indicator of inflationary pressure (loss of buying power) is closely watched. The CPI, as a cost of living
measure, tracks 600 goods and services purchased by the average family; e.g., a family spending $100 for a basket of
goods in 2002 would require $122.81 for that same purchase in 2012.

Source Statistics Canada and the Bank of Canada. The Bank of Canada provides an easy-to-use CPI calculator;
go to www.bankofcanada.ca/en/rates/inflation_calc.html.

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STATISTICAL ANALYSIS
Brokers and salespersons require an awareness of statistical techniques used in economic
analysis. Unfortunately, data can be manipulated to accentuate certain facts or provide
credence to a specific point of view. Conversely, certain worthwhile measures genuinely
assist the reader in analyzing data and identifying trends.

Indexes
Economists frequently use EXAMPLE Anycity Housing Index
indexes to show the change of a BASE YEAR: 1990
particular indicator over time.
YEAR HOUSE PRICES % CHANGE
A base year is selected, and all
subsequent years are compared 1990 $100,000 0%
as a percentage of the base. A 1995 $115,000 15%
hypothetical housing index for 2000 $130,000 30%
Anycity is illustrated.
2005 $145,000 45%

2010 $195,000 95%


Seasonally Adjusted
This example is called a simple index, however, not
Occasionally economists want to every index is derived in this basic manner. Complicated
take the peaks and valleys out mathematical calculations utilizing weighted means,
of data (i.e., seasonal variations standard deviations and moving averages may be required.
in production or employment
due to time of year). By
averaging seasonal fluctuations,
it is possible to reveal underlying trends. Seasonally adjusted figures are normally used
when comparing data within one year. Unadjusted figures are more commonplace in
year-to-year analysis.

Three Month Moving Average


In order to minimize monthly fluctuations some statistical reports provide a three month
moving average, which is normally calculated as follows:

EXAMPLE Three Month Moving Average


REPORTING MONTHS INVOLVED AND 3 MONTH MOVING
MONTH HOUSING UNITS SOLD AVERAGE
March Jan. 200; Feb. 300; Mar. 400 300

April Feb. 300; Mar. 400; Apr. 500 400

May Mar. 400; Apr. 500: May 600 500

A moving average should not be confused with a quarter to quarter change (one three-
month period compared to another).

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Weighted Average
Occasionally economists will work with weighted, as opposed to simple, averages.

EXAMPLE Weighted Average


Two-storey homes command $180,000, split levels $150,000 and bungalows $120,000.
Therefore, the simple average of house sale prices is $150,000. However, further investigation
reveals that these figures were derived from 100 sales (40 bungalows, 40 split levels and 20
two-storeys). The true average price should reflect the higher activity in the lower price ranges.
Therefore, the weighted factors are:

Bungalows .40 (40 out of 100) x $120,000 = $48,000

Split Levels .40 (40 out of 100) x $150,000 = $60,000

Two-Storeys .20 (20 out of 100) x $180,000 = $36,000

Combined Weighted Average $144,000

Graphs/Charts
Lastly, caution is advised when reading business statistics and studying graphs and
charts—appearances can be deceiving. Two charts portraying the same information can
appear dramatically different if the incremental values on the vertical axis are altered as
illustrated for a fictitious Ontario city.

Anycity Graph Comparison


Average Sale Prices—Anycity
2008–2014

Graph #1 Graph #2
200,000 175,000

190,000 172,500
Average Price ($)

Average Price ($)

180,000 170,000

170,000 167,500

160,000 165,000

150,000 162,500

140,000 160,000
2008 2010 2012 2014 2008 2010 2012 2014
Year Year

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UNDERSTANDING THE MARKETPLACE


Supply/Demand Forces
The dynamics of the Ontario, as well as Canadian, marketplaces determine price through
the interaction of supply and demand. In a perfect world, the forces of supply and demand
dictate the most favourable price, as buyers and sellers negotiate freely in the marketplace.
Markets in this perfect world would be completely unrestricted and would allow exchanges
based solely on universal supply/demand principles. Both the Canadian and Ontario
economies are far removed from such an unencumbered structure.
Real estate is but one of numerous interconnected markets comprising the overall
Ontario economy, others include the stock market, the commodities market, the capital
market and the labour market. Demand is demonstrated in these markets by the quantity
of goods or services that buyers are capable of acquiring at various prices. Supply, repre-
senting the opposing force, embodies the quantity of goods or services that sellers are
capable and willing to produce at various prices.
Under perfect market conditions,
when the price of a product falls, the Demand Supply

Price
demand for that item will increase
and, conversely, as the price rises, the
demand is progressively weakened.
This interplay of price and quantity
Equilibrium Market
sold is diagrammatically represented Price Equilibrium
by supply and demand curves as
illustrated. The optimum point at
which supply and demand curves Equilibrium Quantity
intersect is said to be market Quantity

Market Equilibrium equilibrium. A shift in either supply Supply As price increases, the quantity increases.
The point where quantity
or demand will alter the equilibrium
Demand As quantity increases, the price decreases.
supplied equals quantity and, therefore, affect what is referred
demanded. to as the balanced price. Market The point where quantity supplied equals
Equilibrium quantity demanded. The equilibrium point
shows the equilibrium price, and the
equilibrium quantity.
Market Equilibrium
Economists have traditionally explained the economy in terms of market supply/demand
curves and creation of a perfect equilibrium, where prices paid and value received reflect
a true exchange. An underlying assumption exists that market forces constantly seek
absolute parity between production (supply) and utilization of services and goods
(demand). Traditional economic theory held that a natural tendency existed for market
mechanisms to operate efficiently, thereby ensuring optimum balance and producing
the fairest market prices. Consequently, the system would function to the best advantage
of society as a whole. This philosophic perspective has changed substantially during the
twentieth century.
The modern economy is a more complex picture of competing forces, which defy
simple interpretation through equilibrium doctrine. In fact, contemporary industrial
economies wrestle with instabilities as opposed to balance in the marketplace. This is
due, in no small part, to the intrusion of competing factions nurturing predetermined
concepts of what constitutes a just economic system. Most notably, disputes arise over
the allocation of rewards to meet certain political, social or economic aspirations. As a
consequence, simple concepts of supply, demand and equilibrium become entwined

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with the potential for almost unlimited obstructions to the free flow and pricing of
goods and services.

Market Bubbles/Corrections
Economists are increasingly focused on instabilities, rather than equilibrium, in better
understanding market dynamics. For example, real estate markets have demonstrated a
tendency to overheating, giving rise to significant price swings and the Ontario market-
place is no exception. These market bubbles, typically driven by speculative zeal, take on Market Bubble
a life force of their own, as consumers rush in to acquire real estate while prices rise. The The over expansion of a market
buying frenzy creates further inflationary pressure and the bubble progressively grows due primarily to excessive buyer
larger. confidence resulting in inflated
values. Real estate bubbles, when
Real estate bubbles are particularly problematic. Consumer zeal fuels feverish con- a burst occurs, can have signifi-
struction, aggressive lending practices and the misdirection of vital economic resources. cant negative impact on the
overall economy.
The fallout from the inevitable correction can have disastrous results involving high
unemployment, substantial economic upheaval and significant losses in value. Fortunately,
governments have taken steps to carefully track such matters and investors, as well as
others involved in real estate, carefully watch for danger signs.

Business Cycles
A business cycle refers to a series of events within the business environment that take Business Cycle
place in roughly the same order and at the same approximate intervals. A business cycle A series of economic events; i.e.,
is concluded when this series of periodically recurring events brings circumstances back prosperity, recession and recovery,
more or less to overall conditions that existed when the cycle began. that takes place in the same
approximate order and time
The concept of cyclical trends in business has remained a popular theoretical basis interval.
for analyzing, explaining and forecasting long term economic trends in Ontario as well
as the overall Canadian economy. Cycles are particularly evident in real estate and are a
consequence of supply and demand factors combined with a host of intrusive elements
from both private and public sectors. No two cycles display the same time interval or
intensity. The business cycle is typically associated with three phases as illustrated:
• Prosperity (high employment, consumer
Prosperity Prosperity
confidence and intense market activity);
Peak Peak
• Recession (rising unemployment, waning
y
ver

consumer confidence and no real


very
co

growth); and
Re

Reco

• Recovery (economic corrections and Recession


improvement in key growth indicators). Trough

Economic recovery leads to prosperity


Length of Business Cycle
and the cycle begins once more.

Prolonged Recession can develop into full scale


Depression which may dramatically extend the length
of a business cycle before any recovery is realized.

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Government Intervention
Government intervention represents a primary interruption to the natural forces of supply
and demand. Interference from all three levels of government (federal, provincial and
municipal) is evident from several perspectives.

SPENDING POLICIES
Governments can directly impact the market through its acquisition of goods and services,
thus directly affecting the natural forces of demand as follows:
• By the issuance of government contracts to purchase supplies;
• By intrusion in the capital markets to support federal or provincial expansion
programs; and
• By the establishment of lending policies and related monetary policies.

Similarly, in the case of supply, marketing boards may withhold products to artificially
peg the balanced equilibrium and dictate market prices. Further, government departments
may control the use of specific raw resources or limit exploration for these substances.

CROWN CORPORATIONS
The mere existence of government owned companies influences the natural supply and
demand equation in the economy. Government economic objectives and social policies
are often inextricably tied to decision-making processes. For example, the decision for a
crown-owned airline to service certain remote areas may be based on political/social
objectives, as opposed to economic reality. Therefore, the allocation of resources is direct-
ed in a manner which would not have otherwise occurred under the auspices of pure
economic principles. Similarly, in real estate, the government may decide to subsidize
housing or acquire large blocks of housing units to meet certain social objectives. The
normal allocation of resources is disrupted given the pursuit of these goals.

TAXATION
The government allocates economic benefit through its taxation policies. Certain groups
within society will pay proportionately more taxes to support social policies, which they
may neither want nor expect to utilize. Conversely, the government may introduce
incentives to promote the production or acquisition of goods and services, to the detri-
ment of other social goals.

STATUTES/REGULATIONS
Governmental policies affect practically every aspect of life in both Ontario and Canada
as a whole. Regulations and statutory laws monitor, direct and control countless trans-
actions on a daily basis through such things as production specifications, environmental
requirements, duty and export directives, and price controls.

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ANALYZING THE REAL ESTATE MARKET


Real estate markets, once largely overlooked, from both provincial and national economic
perspectives, are now carefully scrutinized by economists. Current research confirms
that the real estate market is more focal to economics than originally thought. Millions of
dollars routinely flow through the buying, selling and development processes particularly
in and around major urban centres. Real estate has always intrigued researchers due, in no
small way, to its unique qualities that make analysis and predictions somewhat complex.

Characteristics
The real estate market is somewhat unique, as it lacks various characteristics of the typical
sales market. For example, no physical marketplace exists where sellers display goods and
buyers come to shop. Other distinctive qualities are grouped under six main headings.

No Standard Uniqueness of residential and commercial properties.


Product

Local Real Estate Immobile, impacted by local market forces and situations.
Market

Fixed Location Largely fixed in nature; cannot be taken to the market.

Market Not Centralized control has proven difficult; MLS provides some
Standardized form of order to trading activities.

Slow Supply/ Supply demand forces impacted by unique market variables; i.e.,
Demand time to introduce product and to deplete available inventory.
Adjustment

Private Buyer/seller transactions are generally private matters and lack


Transactions the immediacy, open bidding and widespread distribution of sale
information, such as is found in the stock market.

NO STANDARD PRODUCT
No two houses are ever exactly the same. Even in new subdivisions where builders erect
numerous houses with virtually the same plan, each property is ultimately adapted to
the needs of the owner.
Although a number of homes may be physically different, they may be exchangeable in
a monetary sense due to their utility. For example, six homes, all different in appearance,
shape and geographical site, may fall into the same price range because all are six-room
bungalows in the same general area with roughly the same square footage, having three
bedrooms and built to the same set of building regulations. The usefulness of all six homes
would be approximately the same, but subtle price variations arise due to age, upkeep,
special features and amenities, and geographic location.

LOCAL REAL ESTATE MARKET


Interprovincial and international real estate transactions do occur, but the vast majority
of Ontario real estate activity is concentrated within the province and its many sub-
markets, which remain largely local in character because the commodity cannot be moved.
Ownership may change hands outside the community, but it is generally what happens

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within the community that determines supply and demand and thus price or value.
Consequently, real estate salespeople in one Ontario city are primarily concerned with,
and must have knowledge of, market conditions in that community, as opposed to other
locations across the province or the country.
This is not to ignore broader economic issues that affect markets in the province or
across the country. For example, a significant change in federal government policies con-
cerning interest rates will directly impact the real estate market throughout the country.
Similarly, provincial legislation directed at planning provisions and new construction
requirements will impact developments in many parts of Ontario. However, despite
these overriding influences, real estate retains its local character; e.g., the announcement
of a new major employer in St. Thomas would have little, if any, impact on Huntsville.
Similarly, a significant increase in Toronto commuters acquiring property in Kitchener-
Waterloo would be a localized event having no direct impact on real estate in Kingston.

FIXED LOCATION
Real estate is one commodity that cannot be taken to the consumer. The consumer must
come to the property. The marketplace is the property site and negotiations may take place
in an office, but the real sale is made at the location. To quote an often heard statement:
it’s all about location, location, location.
Residential and commercial buyers routinely differentiate seemingly identical proper-
ties by focusing on fixed location factors; e.g., access to transportation, proximity to
services, surrounding properties, travel distance, distance to market, property taxation
and compatible land uses within the area. Two similar structures in different locations
can involve significantly different prices. The same is not true for other products/services.
For example, the car dealer’s location within a city does not normally dictate automobile
price, nor does the cost of groceries align with the grocery store’s view.
To compound matters, slow adjustment and local market considerations affect price.
One location may offer similar features, but supply is limited. Immediate demand drives
up prices of existing inventory, particularly given time delays to bring new construction to
market. ther local circumstances may compound the dynamics; e.g., a freeze on building
permits due to lack of municipal services.

MARKET NOT STANDARDIZED


Although the Multiple Listing Service , offered by ntario real estate boards, provides a
degree of orderly process in marketing properties, any attempt at large-scale organization
or a central control system for the real estate market beyond the local level faces signifi-
cant challenges given the fixed location and lack of a standard commodity. Even though
MLS listings may be viewed on the Internet, marketing still remains local in nature.

SLOW SUPPLY/DEMAND ADJUSTMENT


With an oversupply of most consumer goods, production can usually be slowed or halted
quickly. Existing supply is typically used up and the market seeks balance between supply
and demand. This is seldom true of real estate. When demand is high, numerous building
projects are often commenced. If the market changes and demand drops, the projects
are completed anyway, adding to the oversupply. Because of the durability of real estate,
the supply remains. On the other hand, when a sudden surge in demand occurs, no
quick solution is available given the time required to plan, finance, develop and build.

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PRIVATE TRANSACTIONS
Generally, the purchase of real estate is a private transaction between buyer and seller, the
results of which are not published for the public at large. Information regarding ownership
is, however, available through documents registered at provincial land registry offices.

Influencing Factors
A market of any kind usually functions to facilitate the exchange of goods and services.
Under normal circumstances, a market is a centre of distribution, a pricing system and a
control centre of operations; e.g., locally, regionally, provincially and nationally.
In a money economy, goods are exchanged for money and money for goods. The result
of these exchanges is a redistribution of goods and money. In the real estate market, the
process of exchange results in the production and allocation of properties according to
the preferences of users in the marketplace and their financial capabilities. Thus, the real
estate market functions to redistribute existing properties, cause an increase in the supply
of new properties, determine the use of such properties and establish the value of those
properties.
The real estate market is sensitive to changes in the balance of economic, political and
social forces within our society, which in turn influences the supply and demand for real
estate. The following are among the more important influences:

DEMOGRAPHIC CHANGES
Demographics (the study of population trends) is discussed in more detail later. However,
as an example, family composition is a significant factor impacting the real estate market.
The family is the primary housing consumer unit. For example, when a couple marries,
their marriage sets up a third family. Normally the new couple establish an independent
household and thereby absorb a unit of housing. This is known as the family formation
rate. An increase in family formations normally creates a similar increase in demand for
housing.

EMPLOYMENT CONDITIONS AND WAGE LEVELS


A strong demand for housing typically is associated with periods of prosperity and increas-
ed employment. Given strong employment opportunities and rising wages, more new
homeowners from the labour force are able to enter the market by buying their first home.
In turn, existing homeowners now have the ability to move up by acquiring larger homes.
However, the converse is also true. High unemployment over a period of time will
adversely affect the real estate market, although employment insurance programs have
cushioned, to some degree, the shock of layoffs. Also, pensions and other social security
programs, coupled with an increase in life expectancy, have enabled seniors to continue
as homeowners after retirement, although perhaps they may buy a smaller home or
condominium. Regardless, economic downturns have typically foreshadowed a weakening
of real estate markets.

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An illustration is included showing labour force statistics for the Province of Ontario
over the past 37 years. The real estate market has undergone two significant market cycles
which involved real estate market downturns (one in the early 1980’s and another begin-
ning in 1989). While it is impossible to determine the exact relationship as many factors
are at play, an undeniable link exists.

Labour Force Statistics as an Influencing Factor LABOUR FORCE FOCUS

An undeniable link exists between unemployment rates and housing activity. Fewer dollars generated through jobs
impact large ticket purchases including housing.

Unemployment Rates—Ontario 1976–2013


12.3% Dec 1982
12
Unemployment Rate (%, Seasonally Adjusted)

11.6% Sep 1992

10

7.5%
Aug 2013
6

4.9% Oct 1989


4
1976 1980 1985 1990 1995 2000 2005 2010

View unemployment rates with caution. The real rate might be significantly higher due to various factors including
unreported unemployment (those discouraged in the job search) and/or those not registered with established agencies.

Source Statistics Canada. CANSIM Table 282–0087

MORTGAGE VOLUME AND INTEREST RATES


Loans are based on the lender’s confidence in the borrower and the security that the
borrower offers. Loans made on the security of real estate are no exception. Loans are only
made when lenders feel that real estate is a sound investment, that properties acquired
will retain their value and that the borrowers will earn sufficient sums to provide for
repayment of the loans. Of course, mortgage volumes can’t be looked at in isolation as
interest rates being charged is also a key factor.
If interest rates are high, the real estate market is usually adversely affected as people
tend to stay put in their existing housing accommodations. As debt is frequently a major
component in a house purchase, any significant interest increase directly impacts the
market. If interest rates are low, then mortgages become more affordable and consumers
react accordingly.
As an illustration, the Ontario marketplace has been particularly strong during the
past several years. The long-term trend of both one year and five year mortgage rates is
undoubtedly a contributing factor. The rates illustrated are a sampling of fixed rates pro-
vided by lending institutions and compiled by the Bank of Canada.

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Comparison—Bank of Canada Bank Rate &


Chartered Bank Administered One-Year and Five-Year Conventional Mortgage Rates

10%

8%

6%
5-Year Mortgage Rate

4%
1-Year Mortgage Rate

2%
Bank Rate

0%
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul

2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Bank of Canada

WEB LINKS
For more information concerning interest rate policies and related matters, go to
www.bankofcanada.ca. Mortgage financing and interest rate issues/policies are analyzed in
greater depth in Land, Structures and Real Estate Trading.

Interest Rates and the Bank of Canada CURIOSITY

The central bank of Canada is owned by the federal government and is responsible for the overall administration of the
country's financial system including monetary policy, bank note issuance, central banking services and administration
of public debt. The specific role of the Bank of Canada is set out in the Bank of Canada Act.
Brokers and salespersons are most directly impacted by Bank of Canada policies through mortgage and other
interest rates charged to residential and commercial borrowers. Two primary goals of the bank are low/stable inflation
and financial stability. Interest rates play an important part in that process. Borrowing costs are directly tied to economic
trends, product/service costs and business activity, of which directly or indirectly affect real estate activity.
The Bank of Canada, as an independent monetary institution (all shares are held by the Ministry of Finance), can
impact interest rates through policy decisions. The Bank does not set rates, but rather influences rates by establishing
an overnight rate and an associated operating band. The overnight rate impacts short-term lending by establishing
an interest range for overnight trading activities involving major institutional lenders. The overnight rate is applied to
funds that lenders require to balance their accounts at end-of-day. An electronic large value transfer system is used to
dispense funds as needed. The overnight rate provides a clear signal to lenders of the central bank's position on
interest rates.
For example, the overnight rate might be set at 4.25%. The associated operating band would be 4.00% to 4.50%.
A maximum band spread is 0.5% between interest paid for money held (the lower limit) and interest charged for
borrowed funds (the upper limit). The mid-point in the band is known as the target rate which is the official Bank of
Canada rate. Overnight business is transacted between lenders and the Bank of Canada based on the operating band.
The operating band and overnight target rate directly influence how prime rates are established by lenders for short-
term loans, including mortgages. Longer term mortgages are more directly impacted by bond yields in the marketplace;
e.g., the five-year yield on government bonds.

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98 Chapter 3 Economics and the Real Estate Market

BUILDING ACTIVITY
Substantial building activity normally indicates a strong real estate market. However, over-
building may depress real estate values by introducing new supply in excess of demand.
Unless the increase in supply is coupled with a corresponding increase in consumer demand,
real estate prices can experience a downward trend. Conversely, sudden increasing demand
can place upward pressure given the time frame to build additional inventory. Additional
details are provided later in this chapter when discussing real estate market cycles.

Types of Markets
Real estate markets are typically discussed in terms of three categories reflecting increasing
demand, increasing supply or balanced supply/demand characteristics.

SELLER’S MARKET
In a seller’s market, the number of buyers wanting properties exceeds the supply. This type
of market is characterized by properties that sell quickly, rising prices, many buyers looking
and a minimal inventory available for sale. These characteristics have implications for the
buyer, who has to make decisions quickly, must pay more and frequently has conditional
offers rejected as the seller can demand a firm sale for his or her property. Often, sellers
have the luxury of considering several offers and counter-offering for higher prices.

BUYER’S MARKET
In a buyer’s market, the supply of properties on the market exceeds the demand.
Characteristics of this market include longer selling periods for properties on the market,
fewer buyers compared to properties available, higher inventory and stabilized or declin-
ing prices. The implications for the buyers in this type of market are more favourable
negotiating leverage, more choice and the luxury of additional time in searching for just
the right property.

BALANCED MARKET
In a balanced market, the number of properties on the market equals the demand. The
characteristics of this market include properties selling within a reasonable period of
time, demand equalling supply, sellers accepting reasonable offers and prices generally
stabilized. The atmosphere is usually more relaxed.

Real Estate Market Cycles


The real estate market generally moves through phases similar to general business cycles.
Real Estate Cycle However, the real estate cycle may demonstrate more pronounced peaks and valleys.
A cycle which may differ from Prosperity can occasionally linger in the marketplace, buoyed by fervently optimistic con-
other business cycles due to sumers and speculators. Conversely, recessions deepen unnecessarily as developers flood
unique attributes and circum- an overheated market with new structures, only to see consumer demand evaporate before
stances associated with real
estate. their completion. On a more optimistic note, real estate markets have traditionally tended
to be on the leading edge of the recovery cycles as improved economic conditions emerge.

LONG VS. SHORT CYCLES


Economists have long debated the existence of both long-term and short-term cycles
operating in the real estate market. However, to date, both defy the regularity and consis-

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Economics and the Real Estate Market Chapter 3 99

tency necessary to permit accurate predictions. Many believe that the long cycle is driven
by demographics (e.g., age composition, marriage patterns, population changes and
migration), transportation patterns, macro economic growth cycles and long-term govern-
ment policies. The shorter cycle appears affected predominately by interest rates, consumer
confidence and general economic conditions, particularly within the local area or region.
Some argue that the current, long-term cycle originated in the mid-forties with the
appearance of baby boomers, post Second World War consumer confidence, substantial
immigration to Canada, favourable government regulations and an expanding easy money
policy in both public and private lending institutions. The 1945–2000 period appears as
an extended recovery/prosperity curve in a long-term cycle, following the disastrous
impact of the depression years. Others dispute the long cycle theory but acknowledge
the sustained attractiveness of real estate holdings. Despite various fluctuations, the size
and strength of real estate markets have moved in progressively upward trends.
Other industry observers contend that the real estate market has demonstrated consis-
tent short cycles. The duration seems to be approximately every six to ten years. However,
it is important to emphasize that the length and intensity of the prosperity, recession and
recovery stages may vary considerably by geographic locale. As with extended cycles,
conflicting opinions must be noted.
Some assert that the existence of short cycles is largely illusory and too simplistic to
address economic complexities in the real world. These individuals insist that unique
events in the marketplace (e.g., credit restrictions, short-term housing scarcity, govern-
ment policies and employment trends), randomly impact the market, thereby creating
unusual, often erratic activity that defies accurate cyclical prediction. Such movements
may not be recession/recovery cycles but merely statistical evidence of the constant
imbalance of supply and demand. Based on this explanation, economists may be force-
fitting market blips into neatly packaged cycles where none really exist. Obviously, the
entire topic is one of ongoing investigation.

Prosperity Prosperity
REAL ESTATE CYCLE VS. B B
BUSINESS CYCLE Peak Peak
ry
ry

ve
ve

If some form of real estate A


co
co

A
Re
Re

cycle does exist, research sug- D


gests that certain variances are Recession
present to differentiate it from
the traditional business cycle. C
Undoubtedly, such variations Trough
occur in part given unique
Length of Business Cycle
factors associated with real
estate that are not found in Business Cycle
other market sectors; e.g., fixed Real Estate Cycle
location and slow supply/
demand adjustment. A Lag in bringing units on market may delay overall
recovery.
B High consumer confidence coupled with delay in
completing houses may perpetuate prosperity for a
longer period.
C Market adjustment more pronounced due to B with
a deeper recessionary trend as a consequence.
D Sales activity resumes providing a leading indicator
of overall economic recovery.

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100 Chapter 3 Economics and the Real Estate Market

Real Estate Market Corrections


Buyers should ultimately balance sellers in a perfect marketplace, but countless intervening
factors make real estate cycles at best difficult to predict, at worst destructive. The
amplitude of a cycle can have far reaching effects. Simply put: How high is up and how low
is down.
Economists are keenly interested in real estate ups and downs given that real estate has
displayed disturbing boom/bust cycles. The imperfect allocation of resources can have
disastrous economic impact:
• Increasing consumer confidence, a seller’s market and lack of supply can give way to
frenzied buying and market bubbles.
• The bubble of buyer excitement grows from its own momentum, with little or no
economic justification.
Market Correction • Frenzied activity in the bubble typically leads to a severe market correction.
A market readjustment, usually • Ultimately, such a market correction inflicts significant economic damage; e.g.,
occurring following a period of unemployment, large equity (value) losses, oversupply of products and services and
recession or prosperity, but typical-
ly associated with a downturn in
financial hardship including foreclosures and powers of sale.
demand and increasing supply.

EXAMPLE A Casualty of Imperfect Markets


How imperfect is the market? The consequences can be devastating, if not properly
understood and contemplated.

Activity
Market Status Forces and Factors
(Developer A)
Contemplates Landlord Market/ • o construction.
Building High Renter Demand • Adverse rental legislation being reviewed.
Arranges Interim Landlord Market/ • acancy rate lowers to less than 1%.
Financing Overheated • Government offers financial incentives.
• enders actively pursue developers.
Starts Landlord Market/Bubble • Favourable financing many starts.
Construction Grows • umerous developers enter construction
phase.
• Rents continue rising given critical shortage.
• igh migration levels fuel the shortage.
• ntry of new units slowed by red tape.
• egative publicity about the shortage
increases.
Delays in Minor Market • Government responds with rent controls.
Completion orrection/ xcess • Financing moves to other opportunities.
Construction Begins
• conomic downturn and rising interest
rates.
• ew units start appearing on the market.
Completes Severe Market • Bulk of new construction now on market.
Building Correction • acancy rate soars to double­digit.
• Financing dries up.
Declares Recession • evelopers exit given adverse legislation
Bankruptcy and economic realities.

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Economics and the Real Estate Market Chapter 3 101

Interest Rates and Market Corrections CURIOSITY

Interest rates may have greater impact on market bubbles than originally contemplated. Financial experts are concerned
about zealous equity borrowing by property owners. A buoyant market produces increased property values. With mortgage
rates hovering at their lowest in decades, owners are creatively addressing other financial burdens by borrowing against
increased equity.
Mortgage funds are then used to maintain lifestyle, acquire goods and pay off high interest credit card debt. To outward
appearances, the economy is expanding. Behind the scenes, rising real estate equity is driving the momentum, with the
debt boom close behind. No real accumulation of wealth is occurring, only manipulation of mortgaged equity. A correction
could prove onerous if real estate values decline in an over-leveraged marketplace.

TRACKING THE
ONTARIO RESIDENTIAL MARKET
Most active residential real estate professionals rely upon three primary sources of
market information:
Brokerage Files Specialized data collected relating to specific market areas or niches;
e.g., residential, condominium and rural/recreational.
MLS® Statistics Real estate boards offer detailed MLS statistics to assist in estab­
lishing market trends, preparing competitive market analyses for sellers and offering
guidance to buyers in the negotiating process. MLS data is typically separated into
active and historical (sold and/or expired) categories. Statistical information is also
available to assist members with marketplace trends and specialized local data for
pre-determined geographic districts.
Other Sources arious organizations provide tailor­made data to target audiences;
e.g., residential or commercial specialists, builders, developers and financial institutions. Canada Mortgage and
Housing Corporation
For example, Canada Mortgage and Housing Corporation (CMHC) offers excellent
A federal agency mandated to
resources relating to housing and construction trends. The Land Registry Office is carry out various housing-related
also an important source for detailed property records and related information. activities, including participation
in the residential mortgage
Market indicators vary, but most provide sale prices, average (mean) prices, median market.

prices, average sale to listing ratios and number of days on the market.
Market Indicators
Statistical tracking systems usually
EXAMPLE Market Indicators—Typical Monthly Sale/List Report involving resource, business and
(Results for this 5-month period have been rounded to the nearest dollar and percentage.) consumer markets. In real estate,
specific indicators will vary for
AVERAGE LIST AVERAGE SALE TO LIST DAYS ON residential and commercial
MONTH markets.
PRICE SALE PRICE PRICE MARKET

JUL–2012 174,900 170,000 97% 65

JUN–2012 203,273 199,080 98% 49

MAY–2012 216,204 201,646 93% 51

APR–2012 207,991 201,018 97% 73

MAR–2012 212,156 204,747 96% 66

AVERAGES 202,905 195,298 96% 61

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102 Chapter 3 Economics and the Real Estate Market

WEB LINKS
Canada Mortgage and Housing Corporation Go to www.cmhc-schl.gc.ca for specifics of
programs and services offered by the Canada Mortgage and Housing Corporation.

Market Trends
Statistics are often focused on measures of central tendency, most notably the mean
(average) and median. The mode, which is the third measure of central tendency, is used
for real estate appraisal statistics. Further, means and medians are spotlighted in press
reports and various media publications. While valuable, neither in isolation warrant such
status. Today’s professional registrant understands that accurate market depictions come
not from one or two measures, but rather from many distinct, but complementary, indicators.
Making snap decisions using measures of central tendency can be problematic. A
decline or increase is often taken as an indication of falling or rising prices, but appearances
can be deceiving:
• Mean and median may move due to increased sales activity in upper or lower price
ranges. The shifting distribution gives an impression of rising or falling prices.
• Mean and median may move abruptly in a particular month given lower total sales,
particularly if several very high or very low sales are included.
• Mean and median may be rising, but this may be due to selected market niches and not
representative of for all property types or areas included within the statistical report.

EXAMPLE Measures of Central Tendency


Mean (Average): Mode:
Total of figures divided by number of figures. Most frequently appearing number in an array of figures.

Five selling prices of homes are: $232,000


245,000
$245,000
245,000 $245,000 Mode
260,000
245,000
240,000
253,500
237,000
272,000
262,000
1,244,000 ÷ 5 = $248,800
Mean (Average) Price

Median: Frequency of sale prices is more typically illustrated by


Middle figure in an array of figures ordered from smallest to largest. groupings:

$237,000 $0–100,000
240,000
245,000 Median Price 100,001–200,000

260,000 200,001–300,000
262,000
300,001–400,000
Note: If no exact mid-point, average of the two sale prices
400,001–500,000
occupying the mid-point position is used:
$232,000 500,001+

237,000 0 10 20 30 40 50 60 70 80

240,000
245,000
260,000
262,000

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Economics and the Real Estate Market Chapter 3 103

The Newspaper Article PERSPECTIVE

Broker of record Williams was asked by the local newspaper to comment on market conditions in Anytown, Ontario.
Williams is well known for keeping his finger on the real estate pulse:

NEWSPAPER NEWSPAPER
Comment on recent market activity and what it What are the hot housing styles these days?
means for your community.
WILLIAMS Our research department tracks all new
WILLIAMS The market is strong in Anytown. We track residential sales in Anytown. Over the past
various key indicators. With sales of existing two years, two-storey houses account for
homes up 5.2% year-on-year and average nearly 70% of all new sales, with bungalows
prices hovering 11.2% higher than last year, coming in a distant second at 13%. Our
things look positive. Right now, we’re at 52 buyers tend to be young with small families.
days on average to sell a home, as opposed to The two-storey provides larger floor area for
67 days one year ago. In my opinion, activity available lots which range from 35–45 foot
will remain strong with sales high, listings frontages. It’s a matter of getting the best
at a premium, and mortgage rates stable or bang for your buck.
rising slightly. A seller’s market will remain
with buyers deciding to make the move
before prices and mortgage costs go up.

NEWSPAPER
NEWSPAPER What about residential construction? Can consumers tap into your expertise?

WILLIAMS Building starts in Anytown are up by 19% WILLIAMS Absolutely, our brokerage publishes an
from last year with building permit activity indepth market review every four months
anticipated to remain strong for the foresee- with key trends, statistics and articles of
able future. In particular, single detached interest for both buyers and sellers. Just call
starts are up 12% over last year. More impor- our office to receive a paper copy or subscribe
tantly, the absorption rate for this new to the e-bulletin.
inventory appears well balanced with starts.
Interest rates may be a factor in the next few
months, as we await any change in the over-
night rate by the Bank of Canada. Construction
of single-family homes continues to drive
the market. We have seen significant activity
in all areas with the exception of the inner
core market which focuses primarily on
new townhouses and condominiums.

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104 Chapter 3 Economics and the Real Estate Market

TRACKING THE
ONTARIO COMMERCIAL MARKET
Commercial markets demand intense research activity. Larger brokerages typically employ
staff to track leasing and sale data concerning office, retail, industrial and other markets.
Primary sources include:
MLS® Statistics Separate commercial MLS databases are offered by larger boards.
Brokerage Files Many brokerages rely heavily on internal databases reporting on
local market conditions, trends and forecasts.
Statistics Canada Manufacturing, production, inventory, cost and building activity
indexes, along with census data and demographic analysis. For example, the illustra-
tion details one of many reports issued by Statistics Canada.
Economic Development Offices Economic, local/regional development trends and
market statistics. For Ontario community statistics and commercial searches. A
centralized information site for key Ontario economic indicators and information
of interest to commercial registrants is maintained by the Ministry of Economic
Development and Trade at www.investinontario.com.

Building Construction Price Index ONTARIO COMMERCIAL FOCUS

Commercial research often goes well beyond local Ontario markets to national/international trends.

Non-Residential Building Construction Price Index (2002=100)

2011 4th Quarter 2010 to 4th 3rd to 4th Quarter 2011


4th Quarter Quarter 2011 (% Change) (% Change)
Composite 148.3 +4.1% +0.6%
Halifax 141.7 +2.8 +0.4
Montréal 141.6 +3.0 +0.2
Ottawa 154.1 +5.4 +0.5
Toronto 150.0 +4.8 +0.7
Calgary 166.7 +3.9 +0.9
dmonton 163.5 +4.1 +0.8
Vancouver 139.5 +4.0 +0.7
Source Statistics Canada. CANSIM Table 327–0043.

WEB LINKS
Statistics Canada Go to the Statistics anada website (www.statcan.gc.ca) for detailed
information regarding key economic, demographic and related indicators along with specifics
relating to both residential and commercial construction activity.

Ontario Economic Conditions Go to www.investinontario.com for information regarding


current Ontario economic conditions and market trends impacting the commercial market.

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Economics and the Real Estate Market Chapter 3 105

The Practical Applications PERSPECTIVE

A recent conversation with Salesperson Lane can help put economics into perspective from a real estate point of view.

INTERVIEWER INTERVIEWER
You completed the pre-registration courses last OK, but what about market indicators, real estate
year. Did you find practical use for economic topics cycles and all that. Does it ever come into the
covered? discussion?

LANE Well, at the time, I wasn’t certain how I could LANE Absolutely. I haven’t met anyone that doesn’t
use some of the information, but reality hit know about real estate cycles. Today’s investors
actually within weeks of obtaining my registration. are savvy to market jargon. My listing presentation
package has several charts about cycles and
trends; e.g., the most active periods of the year
INTERVIEWER What do you mean? for commercial sales, how leasing markets are
performing and how mortgage rates have
LANE Let me start with trends and statistics, then work trended over the past few months. Don’t get
backwards to economic principles and forces. My me wrong. I only discuss one or two key trends.
broker of record is a stats believer. She insists I leave the balance for their review or they can
that every listing presentation include market check out detailed research provided on the
data. Given her background in commercial sales, brokerage’s website. Remember, professional
nothing is done without facts and figures. Today’s image is vital. Don’t inundate people with stats,
sellers don’t appreciate marketing fluff, they just make it available to them. It’s really competi-
want to know what’s happening. I give them the tive out there and a professional listing package
facts. My professional listing package includes makes a big difference.
comparable properties, recent trends, average
number of days to sell and so forth. Commercial
sellers know that I’m serious and have done my INTERVIEWER
homework. I want their business. After all, if Alright, I’m convinced about real estate market
you don’t list, you don’t last. indicators, but what about the discussion of the
economics and the real estate market. Does that
help with your day-to-day activities?

LANE I’ll admit that’s the toughest to apply, but per-


haps a quick story will help. Last week, I went to
see a small local developer who is mostly involved
with build-to-suit projects. He’s not a big player,
just three or four smaller buildings a year. But he’s
got the same concerns as the large developers.
Should he build on speculation and try to estimate
what commercial buyers will want? What’s going
to happen with interest rates and is the market
overheated? Now, I haven’t done any business
yet, but we had a great conversation for more
than an hour. He felt comfortable with me. After
all, we talk the same language. You know…
lease rates, building permits, key indicators,
market bubbles, business cycles and all that.

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106 Chapter 3 Economics and the Real Estate Market

KNOWLEDGE
INTEGRATION
Notables
• Economics can be broadly defined as the • The instabilities of the economy are com­
study of how individuals and society monly seen in terms of overheated markets,
allocate scarce resources in satisfying their bubbles and market corrections which
wants and needs. can significantly impact the economy as
• The Canadian economy, best described as well as labour markets, investors, home
a mixed economy, involves a cyclical owners and other stakeholders.
mechanism. • Real estate has distinctive elements com­
• Economic indicators can be broadly pared with other markets; e.g., fixed loca­
grouped under resource, business and tion and slow supply/demand adjustment.
consumer categories. • Many factors influence the real estate
• The dynamics of the ntario marketplace market including demographic trends,
(as with other provinces and the national employment conditions and interest rate
economy) determine price through the changes.
interaction of supply and demand forces. • Residential and commercial registrants
• Business cycles and real estate cycles, while typically use somewhat different resources
generally similar, often differ in length and to obtain real estate and related data, and
amplitude. to better understand market trends.
• Traditionally, economists explained the • Residential brokerages are typically more
economy in terms of market equilibrium; focused on MLS data, with commercial
however, the reality is that the modern registrants relying more heavily on exten-
economy wrestles with instabilities not sive brokerage research, government
equilibrium. resources and private consulting/reporting
mechanisms.

Glossary
Business Cycle Mean
Canada Mortgage and Housing Corporation Measures of Central Tendency
Consumer Price Index Median
conomics ixed conomy
Market Bubble Mode
Market Correction Overnight Rate
arket quilibrium Real state ycle
Market Indicators Statistics Canada

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Economics and the Real Estate Market Chapter 3 107

Web Links
Web links are included for general interest regarding selected chapter topics, but are not
required for examination purposes.

Interest Rates For more information concerning interest rate policies and related matters,
go to www.bankofcanada.ca. Mortgage financing and interest rate issues/
policies are analyzed in greater depth in Land, Structures and Real Estate
Trading.
Canada Mortgage and Go to www.cmhc-schl.gc.ca for specifics of programs and services offered by
Housing Corporation the Canada Mortgage and Housing Corporation.
Statistics Canada Go to the Statistics anada website (www.statcan.gc.ca) for detailed informa-
tion regarding key economic, demographic and related indicators along with
specifics relating to both residential and commercial construction activity.
Ontario Economic Go to www.investinontario.com for information regarding current Ontario
Indicators and economic conditions and market trends impacting the commercial market.
Commercial Real
Estate Information

Strategic Thinking For Your Career


Questions are included to assist in developing your new career. No answers are provided.
1. What specific local trends should I 3. At what stage in the real estate cycle
analyze and who provides the most are we now? What indicators confirm
relevant information? that fact? What impact does this
have on my new career?
2. What current supply/demand forces
are affecting the local marketplace? 4. What market statistics does my employ-
Do they favour the buyer, the seller ing brokerage (either selected or
or both? contemplated) provide that will
assist with my career?

Chapter Mini-Review
Solutions are located in the Appendix.

1. Economic indicators can be roughly 4. Real estate markets are typically subject
grouped into three categories: resource to slow supply/demand adjustments.
markets, businesses and consumers.
True False
True False
5. A seller’s market usually arises when
2. Consumer confidence has proven to buyers wanting homes exceed avail-
be a poor indicator of future economic able supply of homes.
trends.
True False
True False
6. The amplitude of a real estate cycle is
3. The Consumer Price Index (CPI) the distance between the high and low
measures the price of 600 goods and points in that cycle.
services.
True False
True False

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108 Chapter 3 Economics and the Real Estate Market

Chapter Mini-Review (continued)

7. Research appears to indicate that a 10. Demographic changes can impact the
typical business cycle contains various long term demand for houses.
components: prosperity, market
bubble, recession and recovery. True False

True False 11. The sale to list price ratio measures


the spread between listing and selling
8. A real estate cycle may have certain prices.
variances when compared to a busi-
ness cycle due in part to unique factors True False
associated with real estate such as slow
supply/demand adjustment and fixed 12. Commercial and residential brokerages
location. rely on the same indices to analyze
local market conditions and trends.
True False
True False
9. An increase in the average number of
days to sell property often indicates a 13. The mode is the middle figure in an
seller’s market. array of figures ordered from smallest
to largest.
True False
True False

Active Learning Exercises


Solutions are located in the Appendix.
Exercise 1 The Real Estate Market (Matching)
Match the phrase/word in the left column with the appropriate description in the right
column (not all descriptions will be used).

___ Consumer Price Index a. Crown Corporation

___ Bubble b. Measure of Central Tendency

___ Base Year c. Purchasing Power

___ Recovery d. Supply Equals Demand

___ Average Price e. Fixed Location

___ Market Equilibrium f. Benchmark Used for Comparative


Purposes
___ Government Intervention
g. Overheated Market
___ Real Estate Characteristic
h. Real Estate Cycle
___ Business Cycle
i. Overnight Rate

j. Recession

k. Buyer’s Market

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Economics and the Real Estate Market Chapter 3 109

Exercise 2 Multiple Choice


2.1 The Gross National Product (GNP) measures:
a. Manufacturer’s new orders.
b. Production of products and services solely within Canada.
c. Total production of the Canadian economy.
d. The total investment capital in Canada from both private and public sources.

2.2 The use of a three-month moving average when providing statistical information:
a. Is designed primarily to remove seasonal variations within data.
b. Minimizes monthly fluctuations.
c. Is most commonly associated with statistics relating to the residential real
estate market.
d. Relies on a weighting system in order to produce the moving average.

2.3 Which of the following market indicators provides the best indicator of what
buyers are willing to pay for available listed properties in the residential real estate
marketplace?
a. Sale to list ratio.
b. Consumer Price Index.
c. Average price.
d. Weighted average.

2.4 Which of the following is NOT a true statement?


a. Dynamics of the real estate market can be impacted by slow demand/supply
adjustments.
b. Demographic changes can affect real estate demand.
c. The overall (all items) Consumer Price Index involves 300 items.
d. The national employment rate is a business indicator within the national
economy.

2.5 Real estate brokerages often rely on various primary sources of local market
information. Which of the following is one of those sources?
a. Land registry offices.
b. Brokerage files.
c. Multiple Listing Service .
d. All of the above.

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110 Chapter 3 Economics and the Real Estate Market

2.6 The real estate market is somewhat unique. Which of the following market
characteristics best describes the statement: No two houses are exactly the same?
a. No standard product.
b. Local real estate market.
c. Fixed location.
d. Slow supply/demand adjustments.

2.7 The Bank of Canada:


a. Sets interest rates for the Canadian mortgage marketplace.
b. Is responsible for the overall administration of Canada’s financial system.
c. Sets an overnight rate which can vary 0.5% from the previous day’s rate.
d. Is owned jointly by the federal and provincial governments.

Exercise 3 Measures of Central Tendency


3.1 Based on the following array of figures, select the appropriate answers concerning
the average, median and mode.
310,000 315,600 319,200 310,000 323,500 312,000

311,900 310,000 313,900 312,900 318,700

i. The mathematical average of the above figures is:


a. 312,900
b. 313,927
c. 348,777
d. 314,336

ii. The median is:


a. 313,900
b. 312,900
c. 315,600
d. 310,000

iii. The mode is:


a. 312,000
b. 310,000
c. 313,900
d. 300,000

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Economics and the Real Estate Market Chapter 3 111

3.2 Based on the following array of figures, select the appropriate answers
concerning the average, median and mode.
219,000 238,900 218,000 229,000 219,000

227,400 247,500 221,300 219,000 219,000

245,200 231,100 227,400 216,000 241,800

i. The mode is:


a. 215,000
b. 245,500
c. 227,400
d. 219,000

ii. The median is:


a. 247,500
b. 227,400
c. 219,000
d. 216,000

iii. The average is:


a. 227,973
b. 341,962
c. 216,000
d. 247,500

Exercise 4 Market Dynamics


Five graphs/charts are illustrated (on the following pages) for the fictitious Westville
market illustrating selective data over various periods. Assume that Ms. Jones is contem-
plating selling her residential bungalow (at the end of Year 4) currently valued in the
$200,000 range. Decide whether this is an opportune time for marketing the property
by identifying and briefly explaining four key trends that could impact the seller.

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112 Chapter 3 Economics and the Real Estate Market

Unemployment Rates Interest Rates


January, Year 1 – December, Year 4 January, Year 1 – December, Year 4
13.0% 12%
Mortgage—5 Yr.
Ontario Westville
Mortgage—1 Yr.
12.0% 10%
Bank of Canada

11.0% 8%

10.0% 6%

9.0% 4%

2%
8.0%

7.0% 0%
Year 1 Year 2 Year 3 Year 4 Year 1 Year 2 Year 3 Year 4

Consumer Price Index—Canada Housing Starts Year 1 – Year 4


137 Including Shelter Component, 2002 = 100 Westville

136 1000

Shelter CPI
135
800

134
600

133

400
132

200
131

130 0
Year 3 Year 4 Year 1 Year 2 Year 3 Year 4

MLS® SALES: Westville Area—Major Submarkets

SALES AVERAGE PRICE

Year 2 Year 3 Year 4 Year 2 Year 3 Year 4

Riverdale 1,953 2,775 2,500 $172,640 $171,500 $172,500

Northville 3,314 4,450 4,050 $169,921 $168,000 $169,000

Westville 5,548 7,800 7,200 $180,292 $179,500 $181,000

Bonville 2,273 2,675 2,500 $223,204 $224,500 $225,000

Central 6,052 7,750 7,300 $293,545 $276,500 $278,000

astville 6,421 8,500 7,800 $168,508 $168,500 $170,000

Glenville 4,764 6,125 5,600 $178,521 $182,000 $183,000

Sunrise Acres 6,250 8,350 7,800 $243,786 $240,000 $240,000

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114

CHAPTER 4

Ontario Profiles, Trends


and Real Estate Values
Introduction
The Ontario marketplace is best viewed in terms of economic and demographic forces.
These forces explain not only how today’s market operates, but also provide background
as to what trends can be expected in the future. Real estate, as one sector in the overall
provincial economy, has demonstrated significant sales volume increases and notable
price increases driven by supply/demand forces.
Real estate is a valuable commodity actively traded to meet the needs of an expanding
population. Value is central to real estate negotiations. Every day, thousands of Ontario
professionals work with property value—each with his or her own unique perspective.
Insurance brokers concentrate on replacement cost to provide adequate house/contents
coverage, tax assessors routinely establish assessed value leading to tax notices, stock
brokers analyze corporate assets including real estate values, loan officers scrutinize real
property security for a mortgage and appraisers painstakingly prepare narrative appraisals
for the courtroom. Meanwhile, brokers and salespersons
routinely address value in listing and selling property.
The focal role of value in the real estate market warrants
detailed attention. This chapter addresses key value concepts
and value principles that must be understood by anyone
assisting buyers and sellers and negotiating transactions
in the real estate marketplace.

SECTION II R E A L E S TAT E A N D S O C I E T Y
115

Learning Outcomes
At the conclusion of this chapter, students will be able to:
• Discuss the impact of economic and demographic factors on the development of
Ontario’s growing and dynamic marketplace.
• utline selected geographic factors about ntario and the current status of cities,
towns and regions within the province, including an outline of recent developments
regarding municipal boundaries.
• Identify and discuss three major demographic trends including population size growth,
population distribution and population composition along with their forecasted
impact on the growing Ontario real estate market.
• Describe basic real estate dynamics including an overview of price and volume stat­
istics in the residential marketplace and anticipated trends for the future.
• Describe and differentiate between various value concepts including value in exchange
and value in use, subjective and objective value, and market price and market value.
• utline four assumptions underlying market value.
• Explain how various principles of value interact in the marketplace and provide an
example of each principle as it relates to real estate values.

ONTARIO PROFILES
Economic
SECTOR OVERVIEWS
Ontario has a diversified economic base with particular areas of strength centering on
manufacturing and business/financial services. The auto industry is of particular note
given its strong presence in the province, which includes feeder industries that provide
assembly components. Industry leaders including Ford, DaimlerChrysler, General Motors,
Toyota and Honda have selected Ontario as the site for manufacturer activities. However,
declining market share for the big three (Ford, DaimlerChrysler and General Motors)
will pose challenges in the future.
While internationally acknowledged for its manufacturing and business resources/
skills, many do not realize that Ontario also has the largest agriculture component of any
Canadian province with sales exceeding $8 billion (2005). In addition, forest products and
mining remain vital sectors of the provincial economy. Mining in Ontario represented a

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116 Chapter 4 Ontario Profiles, Trends and Real Estate Values

$7 billion dollar economic activity in 2005. Tourism is also an important element of


Ontario’s economy. The tourism industry reported that this sector employed more than
250,000 jobs representing approximately four percent of the total provincial employment.
Interestingly, the information and communication technology components of the
Ontario economy are playing an increasingly important role, as the province gradually
moves away from goods manufacturing to services. This growing field is placing Ontario
on the leading edge of activities such as software development and wireless innovations
that complement business and financial services. Another interesting growth area involves
the entertainment and creative sectors (e.g., broadcasting and publishing).
The housing market has demonstrated continued strength through the past decade, in
fact, broad­based growth has occurred in both residential and commercial segments. ey
indicators such as high consumer confidence, job growth and low mortgage rates that
favourably impact real estate markets have not been dampened by the challenges of
increasing energy prices and a rising Canadian dollar, both of which typically negatively
impact key manufacturing sections and indirectly affect the housing market. Southern
Ontario residential markets in particular have been very strong mirroring a generally
resilient provincial economy.

GROWTH/PROSPERITY
Recent history presents a strong economic picture with the province’s real gross
Gross Domestic Product (GDP) domestic product (GDP) staying in the 2–4% range during the past twenty years. While
Gross domestic product is a these figures are somewhat less than GDP statistics from previous decades, the economy is
measure of the size of an econ- doing well with unemployment rates hovering around the 6% range, down from historical
omy representing the market levels in the 7 to 8% range.
value of all goods and services
produced within a given time ntarians have enjoyed added prosperity due to various factors including higher
period. productivity and increased returns on investment as seen through the steady rise in the
Toronto Stock Exchange 300 Composite Index over the past four years. Productivity
levels have also increased steadily during the last 15 years. The province’s residents have
experienced growth in personal income levels particularly during the last decade accom­
panied by modest gains in real savings.

WORKFORCE/EMPLOYMENT
The province’s labour force, making up 4 out of every ten persons in the total Canadian
workforce, is highly skilled with over 60 percent having completed post­secondary educa­
tion (age group: 25 to 64). ntario has a well­balanced economy, which makes up 40%
of all economic activity within Canada. Employment growth has been in the 2 to 2.5%
range for most of the past twenty years. Labour market statistics have generally reflected
the buoyant economy in terms of labour income and average weekly earnings.

OTHER FACTORS/CONSIDERATIONS
The ntario economic scene has benefited from lower long­term interest rates, particu­
larly in the period following 2000. The inflation rate, once demonstrating erratic swings
in the 1980’s and early 1990’s (ranging from 12% to 0%) has stabilized in the 1.5 to 2.5
range over the past decade. However, certain factors beyond provincial control can directly
impact the long term economic outlook, including the value of the Canadian dollar (a
rising value can impact exports), interest rates (an increase typically negatively affects
GDP) and the general economic climate in the United States (nearly 90% of all exports
from Ontario are destined for US markets with the European Union as a distant second).

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On an international scale, oil price fluctuations are also a key factor. An increase in
oil prices is a negative factor for Ontario given that this province must import oil and
natural gas. However, in terms of overall impact, this situation is offset by Ontario’s strong
export business with provinces that are energy exporters; i.e., Alberta.

Demographic Immigration
Immigration refers to population
POPULATION/IMMIGRATION movements from one nation to
another nation of which the
Ontario has a population of approximately 13 million people, represents the country’s individuals are not citizens, but
most populated province and boasts a cosmopolitan flair given that approximately three are seeking long-term residency.
The term migration, in a demo-
out of every ten Ontarians is foreign born. In fact, ten percent of the entire population
graphic sense, generally refers to
arrived in this province within the past fifteen years. This high level of immigration has any movement of human
been the major factor in population growth and has resulted in con siderable diversity. population.
For example, 1 in 4 ntario residents speaks another language over and above English
or French.
Foreign-Born Population (as a percentage of total population), Census 2001 Data

Fort Albany
Waskaganish

Moosonee
Chibougamau

Matagami

Armstrong
Hearst
Geraldton Kapuskasing Amos

Manitouwadge Rouyn-Noranda Val-d’Or


Timmins
Nipigon
Marathon Kirkland Lake

okan
Thunder Bay Chapleau Mont-Laurier
Wawa
Maniwaki

Greater Sudbury North Bay


Pembroke
OTTAWA
Sault Ste. Marie Espanola

Parry Sound Brockville


Bracebridge
Kingston
Orillia Belleville
Owen Sound

Oshawa
TORONTO

Hamilton
Brantford

London
Sarnia

Chatham
Windsor

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118 Chapter 4 Ontario Profiles, Trends and Real Estate Values

Interprovincial migration (movement from Ontario to other provinces and vice


versa) does not significantly impact the overall picture, as net gains or losses are small
(immigration less emigration) in relation to total population. Historically, ntario has
enjoyed strong population growth over the years. During the past 20 years, the ntario
population has grown at approximately 1.5% per year.

GROWTH PATTERNS
Population growth is not evenly distributed throughout the province. The Greater
Toronto Area (GTA) has proven to be the most popular destination for new immigrants.
In fact, about 60% of all provincial growth took place within the GTA during the past 20
years. Further, two key trends over that same period bear special mention. First, most
growth has occurred in urban areas and second that growth (beyond the GTA) has favoured
Central ntario, Eastern ntario and Southwestern ntario. orthern ntario com­
munities have grown more slowly than their southern counterparts.

AGE DISTRIBUTION/DEPENDENCY
Census In terms of age distribution, the 2001 Census reported that 54.7% of ntario residents
A census, for purposes of this were in the 25 to 64 age group with 12.5% age 65 and older. A gradual aging of the
course, is a periodic count of population has been evident over the past twenty years, but will undoubtedly accelerate as
population conducted by the the baby boomers face retirement over the next two decades. Dependency rates are the
Government of Canada. A full
census is conducted every ten best measure of this trend. In other words, demographers track the percentage of persons
years, the last being 2001. A age 65 and those 14 years and younger as compared to the core working­age group of
partial census is conducted at
15 to 64. Given the rising dependency rate, interesting challenges face us in the future.
the five-year interval; e.g., 2006.

WEB LINKS
Ontario Profiles Economic and demographic profiles are summary in nature. Students seeking
detailed information should access the following websites: Ministry of Economic Development,
Trade and Employment (www.ontario.ca/ministry-economic-development-trade-employment),
the Ministry of Finance (www.fin.gov.on.ca) and Statistics Canada (www.statcan.gc.ca).

Geographic
SIZE/BOUNDARIES
ntario is Canada’s second largest province ( uebec is the largest) and covers more than
one million square kilometers (approximately 415,000 square miles) bounded on the east
by uebec, on the west by Manitoba, on the north by James Bay and Hudson Bay with
the balance (most of Southern ntario) forming a peninsula bounded by the Great Lakes
and the United States. ntario borders three US states, namely ew ork, Michigan and
Minnesota. The southernmost point in ntario is Middle Island (near Point Pelee) which is
roughly parallel to Rome Italy. The northernmost areas are roughly parallel to Scandinavia.

CLIMATE
Southwestern and southern Ontario have moderate climates with slightly more severe
climates in Eastern ntario; i.e., shorter cooler summers and longer colder winters. Colder
temperatures with progressively shorter summer seasons occur when moving in a north­

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ward direction from Toronto to orthern ntario communities; e.g., orth Bay, Sudbury,
Sault Ste. Marie and Thunder Bay. Areas in the extreme northern part of ntario are
best described as sub­arctic with very cold winters.
The Great Lakes provide a moderating influence to adjacent areas, most noticeably to
Southwestern ntario and the Greater Toronto Area including the Golden Horseshoe
(an area along Lake ntario stretching from Port Hope Cobourg on the east to iagara­
on­the­Lake on the southwest).
NOTE: The Ontario Government now officially refers to an Extended Golden Horseshoe which includes areas
to the north and west of Lake Ontario including Barrie and Kitchener-Waterloo.

Proximity to the lakes can also produce heavy snowfalls (referred to as lake effect snow),
particularly to areas in a generally easterly or southerly direction from the lakes. Lake
effect snow squalls occur when dry cold air (typically from the prevailing westerly winds)
passes over warm lake air. Toronto, being located on the north side of Lake Ontario,
usually avoids heavy snowfalls except when the prevailing winds arrive from the east or
southeast when disturbances move up through the eastern United States.

CITIES/TOWNS
More than 88% of all ntarians reside within major metropolitan centres. While the
Greater Toronto Area is by far the largest, other cities provide diversified business oppor­
tunities and a high standard of living. As of the 2011 Census, the ten largest Census
Metropolitan Areas were:

Toronto (including Mississauga and Brampton) 5,583,064

Ottawa-Gatineau (including Clarence-Rockland 921,823


and Russell)

Hamilton (including Burlington and Grimsby) 721,053

Kitchener (including Waterloo and Cambridge) 477,160

London (including St. Thomas and Strathroy- 474,786


Caradoc)

St. Catharines (including Niagara Falls and 392,184


Welland)

Oshawa (including Whitby and Clarington) 356,177

Windsor (including Lakeshore and LaSalle) 319,246

Barrie (including Innisfil and Coldwater) 187,013

Greater Sudbury (including Whitefish Lake and 160,770


Wahnapitei Reserves)

A census metropolitan area, for purposes of this discussion, consists of one or more
adjacent municipalities situated around a major urban core.
Source Statistics Canada, 2011 Census, adapted from Population and Dwelling Counts, for Canada, Provinces
and Territories, Census Metropolitan Areas and Census Agglomerations, 2011.

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WEB LINKS
Ontario Road and Satellite Maps Go to maps.google.ca for detailed Ontario road maps as
well as provincial satellite images. This user-friendly zoom mapping system allows for detailed
viewing of road systems and provides satellite photos when using the hybrid mapping option.
Note: The extent of close-up zoom imagery varies across the province based on satellite image
availability.

Province of Ontario
Hudson Bay
Fort Baie d’Hudson
Severn 

Peawanuck

A

B
er
O
IT Riv

R
N
A
M

rn James Bay CANADA


ve
Se
 Big Trout Baie James
Lake Attawapiskat 
Sandy k
is

Lake Win

Lansdowne Moosonee
 House 
er

R
ny v

e
Ri
MANITOBA

 Pikangikum N

os
ba

QUE
Al

Mo
ONTARIO

BEC
Red Lake

/ QU
Sioux Armstrong
 Kapuskasing
Lookout L  Cochrane

ÉBE
 Nipigon  
Kenora
  Dryden Geraldton Iroquois Falls 

C
Timmins 
Marathon 
 Kirkland Lake
Fort Thunder
Frances Bay New 
LS

Ot
  Wawa Chapleau Liskeard
u per 

ta
ior a

w
LS Greater/
USA / É-U d’A North R / Hawkesbury
up Grand R des O u t
éri Sault Sudbury Bay a o u a is 
eur Elliot 
Ste 
MarieLake Pembroke Cornwall
Ottawa 
 Espanola

t
 

n
ure
int e R
Little  Huntsville Brockville

-La
Sa nc
 Bancroft 

Fl awre
Current Parry 
Sound Kingston

L
LEGEND / LÉGENDE 

St
L Owen Orillia
National capital / Sound    Belleville
Capitale nationale Michigan Port   Peterborough
Elgin Barrie
L Oshawa
tario
Provincial capital /  
Huron L On
 Toronto 
Capitale provinciale
Other populated places / Goderich Kitchener
   St Catharines
Autres lieux habités  
Hamilton Welland
Trans-Canada Highway / London USA / É-U d’A
Sarnia  St Thomas
La Transcanadienne UNITED STATES  
Major road / OF AMERICA Chatham-
Route principale  Kent rié
International boundary /
ÉTATS-UNIS  Windsor LÉ
D’AMÉRIQUE ie
Frontière internationale Er
L Scale / Échelle
Provincial boundary /
Limite provinciale 100 0 100 200 300
km km
© 2002. Her Majesty the Queen in Right of Canada, Natural Resources Canada.
Sa Majesté la Reine du chef du Canada, Ressources naturelles Canada.

GEOGRAPHIC REGIONS VS. MUNICIPAL BOUNDARIES


Ontario can be roughly divided into six geographic regions, although exact geographic
boundaries are subject to interpretation and can vary based on the ministry, agency or
other organization publishing regional information. As a general guideline, Southern
ntario is made up of four regions: Southwestern ntario, Central ntario, the Toronto
area (viewed as a distinct entity) and Eastern ntario. orthern ntario is divided into
orthwestern and ortheastern ntario. These regions are not to be confused with the
municipal structure which consists of regions (regional governments), counties and
municipalities.

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While most Ontarians think in terms of six geographic regions, municipal boundary
arrangements used for political and administrative purposes are more complex. Ontario
was originally divided into counties not only for administrative purposes, but also for
land registration. The counties were surveyed and then divided into townships in order
to accurately describe land for registration purposes. While the system generally proved
effective, inevitably population growth resulted in much larger urban centres that spilled
over traditional county boundaries. In general, the system introduced in the late 1700’s
lacked the dynamics needed for a growing and increasingly complex provincial economy
and demographic structure.
In the early 1950’s, the government embarked on replacing heavily populated counties
with regional municipalities. These regional municipalities generally had more authority
than counties concerning land use planning and municipal infrastructure decisions; e.g.,
roads and services/facilities. Over the next forty years, various regions were formed, in
heavily populated areas such as ttawa, Durham orthumberland, Peel, iagara and
Waterloo.
However, the transition was not easy and tracking various changes is a complex matter.
Counties were merged, split or in some instances renamed in order to accommodate the
regional concept. To compound matters, townships were sometimes transferred from
their original county into an adjacent regional government. For example, when the
Regional Municipality of Durham orthumberland was created, the Township of South
Monaghan was transferred to Peterborough County.
In the past decade, municipal structuring is now moving away from regional govern­
ments as cities take on new prominence in the planning and administrative process. For
example, the Regional Municipality of Hamilton­Wentworth is now the City of Hamilton,
the Regional Municipality of ttawa­Carleton is now the City of ttawa and ictoria
County (Lindsay and surrounding areas) is now the City of awartha Lakes. Changes
such as these in which regional governments were merged with their local municipalities
has effectively reduced the total number of municipalities in ntario by approximately 40%.

WEB LINKS
Municipal Boundaries Students should generally understand basic municipal boundary
structure, but not changes occurring that affect regional municipalities, counties and municipalities
over the past several decades. Those seeking detailed municipal profiles and information concerning
ongoing changes can access applicable websites; e.g., the Association of Municipalities of Ontario
(www.amo.on.ca) and the Ministry of Municipal Affairs and Housing (www.mah.gov.on.ca). Land
registration and related topics are discussed in more detail in Land, Structures and Real Estate
Trading.

The Bigger Picture: Urban Economics PERSPECTIVE

Urban economics exists at the crossroads of economics and geography. Economics concentrates on how individuals and
society allocate scarce resources in satisfying their needs and wants, while geography is the study of the earth, its spacial
features and the impact of these on human activity. Urban economics goes beyond questions of supply/demand and
the interplay of human activity on a geographic dimension to the broader issues of how cities are formed, what impact
various forces have on land use within regions and cities, how such factors affect locational decision-making and the
impact of such decisions on urban planning now and in the future.
continued...

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The Bigger Picture: Urban Economics PERSPECTIVE

CONCENTRIC CIRCLE THEORY


Urban economists have generally concentrated on what makes cities grow, what shape that growth takes and the
consequent complex interactions that give rise to land use patterns, densities, location of residential versus commercial
developments and transportation systems. Urban economics, as we know it today, began with theorists postulating on
patterns of urban growth. The most notable, based on the 1920’s work of Ernest Burgess, a respected urban sociologist
from the University of Chicago
(born in Tilbury, Ontario), described
urban growth in terms of concentric
circles emanating from a central
business core. Burgess conceived
1 Central Business District
of a model that contained five
2 Transition/Light Industrial
zones: the central business
district (CBD), transition zone, 1 2 3 4 5 3 Working Class Homes
working class homes, middle 4 Middle and Higher Income Homes
and higher income residential, 5 Suburban
and suburban.

AXIAL THEORY
Later theorists would build on this foundation to arrive at models
such as the axial theory, which essentially consisted of Burgess’
concentric plan with allowance for transportation systems. ARTERIAL ROAD
The more efficient the transportation system or systems, the
more growth that would occur along that route or routes.
The axial theory was the first to seriously consider commuting
time as a factor in how cities grew.
5
4
3
1 Central Business District 2
1
2 Transition/Light Industrial
3 Working Class Homes
4 Middle and Higher Income Homes
5 Suburban/Commuter

COMMUTER RAIL LINE

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The Bigger Picture: Urban Economics PERSPECTIVE

SECTOR THEORY
Homer Hoyt (a real estate broker from Chicago) provided further 2
enhancement introducing the sector theory. Hoyt noted that develop- 3
ments flowed outwards in sectors from the central business district due
to transportation and other factors. He based his work on Chicago
where high income residential areas paralleled Lake Michigan,
commercial districts were located near busy roads, middle income 3
4
residential neighbourhoods gravitated to preferred but not the best
locations and poorer areas occupied less desirable areas adjacent to
railroads. In other words, each sector grew outwards not as a 1
homogenous group envisaged by Burgess, but rather divided
3
by such factors as income and social class. 5
1 Central Business District
2 Transition/Light Industrial 4 2
3 Working Class Homes 3
4 Middle and Higher Income Homes
5 Highest Income—Residential ARTERIAL ROAD

MULTIPLE NUCLEII THEORY


Subsequent urban economists would further refine these models by moving away from the one CBD (the monocentric
city) to address the growth of suburban core commercial areas and resulting realignment of traffic patterns, densities and
land usage to accommodate these relatively independent suburban subpoints of economic activity. Each successive
model seemed to be a refinement based on the era in which it was developed. Certainly, Burgess’ concept worked for
city growth in the early 1900’s but later models provided successively better ‘fits’ as cities became more complex and
urban economists sought further theoretical refinements. Interestingly, most modern cities typically display components
of all four models with multiple nuclei having the best fit for large centres; i.e., the Greater Toronto Area. Numerous
models have been developed based on these four primary theories but such discussion goes beyond the scope of this text.

5
ARTERIAL 5 EXPRESSWAY
ROAD 4
2 3 1
4 3 4
SUBW
AY 2
2
5 3 3
3 1
4
1
1 Central Business District
5 2 2 Transition/Light Industrial
3 Working Class Homes
4 Middle and Higher Income Homes
5 Suburban/Commuter

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The Bigger Picture: Urban Economics PERSPECTIVE

Urban economists now concentrate on complex city and regional growth dynamics including the clustering of economic
activities (e.g., auto sales parks consisting of various dealers), big-box developments, regional concentrations (e.g., the
Kitchener, Waterloo, Cambridge and Guelph areas), commuting patterns extending outwards forty and fifty miles from
the city core and the decentralization of manufacturing including the rise of one-story suburban manufacturing facilities
due to improved trucking systems, better highways and the automobile. Such events in turn result in population disper-
sion (urban sprawl) beyond traditional city boundaries and the consequent increased commuter time, traffic congestion
and associated problems.
The urban planner of today is wrestling with the impact of high-occupancy vehicle lanes, exclusive busways, light
rail and other forms of mass transit, housing to address sprawl, city core intensification, balanced regional development
and a host of legislative changes to bring these to reality. Meanwhile, the urban economist is analyzing the efficiencies
and effectiveness of such decisions, identifying inefficiencies and examining alternative public policies.

DEMOGRAPHICS AND
THE REAL ESTATE MARKET
Demography Demography is the study of population with particular emphasis on changes to that
The study of population changes population in terms of its size, distribution and composition. Population trends are key
over time with particular emphasis to understanding how society and the real estate market change over time. Demographics
on the growth/size, distribution provides valuable insight far beyond its basic role of analyzing populations; e.g., variances
and composition of the
population. in birth rates, death rates, migration and aging. Demographics is invaluable when
looking into the future, as the population make­up over time is pivotal to economic and
social life within Ontario.
As an example, continued high levels of immigration involving young people foretell
of greater demands on housing as family units are formed, the type of housing that best
suits that growing segment of the population, what essential services and facilities must be
made available, what schools must be built, what pre­school day care facilities are needed,
what job opportunities must exist the list goes on and on. An aging population impacts
everything from public transit and health care to retail products that will be in demand
and those that won’t. Conversely, real estate planners, developers and builders also face
older Ontarians seeking amenities such as golf courses not hockey rinks, tennis courts
not downhill skiing and aerobics not weight lifting.
Three key demographic factors are discussed that will profoundly impact the Ontario
real estate market and possibly your future career.

Population Size/Growth
Ontario is currently experiencing relatively low birth rates, which began falling during
the 1970’s. atural increase (births less deaths) only accounts for 30% of growth. The
balance is attributable to immigration from other countries. This immigration trend brings
diversity and is a significant factor that impacts social and economic dimensions, societal
infrastructure, the ongoing utilization of land and the shape and size of Ontario cities.
Assuming current patterns continue, net migration will be the most significant ongoing
factor in Ontario’s population growth. For demographic purposes, net migration is the
difference between the number of people entering versus the number of people exiting
from the Province of ntario within a specified period of time. ntario has experienced

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consistent population growth due to net migration and this trend is expected to continue.
Two graphs are included reflecting total immigration numbers over 25 years and projected
population growth to 2036.

Total Immigrants—Ontario (1986–2011)


200,000
# of Immigrants

150,000

100,000

50,000

0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Year

Source: Statistics Canada, CANSIM Table #051-0004

Projected Ontario Population (2010–2036)


20,000
Projected Ontario Population

15,000
(thousands)

Projected Ontario Population in 2036: 17,445,300


10,000

5,000

0
2010 2015 2020 2025 2030 2035

Year

Source: Statistics Canada, CANSIM Table # 052-0004.


Population estimate used for this projection is July 1, 2009.
Projections are based on a medium growth/medium migration trend scenario.

Recent projections by the Ministry of Finance for the period up to 2025 point to a
slowing of net migration, while still remaining the key factor in population growth.

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Components of Population Growth

250,000 Historical Projected

200,000

150,000

100,000 Net Migration

50,000
Natural Increase
0
1985 1995 2005 2015 2025

Source: Graphic adaptations based on the original charts in Toward 2025:


Assessing Ontario’s Long Term Outlook, Ministry of Finance, 2005

REAL ESTATE MARKET IMPLICATIONS


ntario has enjoyed a strong real estate market due to many economic and demographic
factors, none the least of which is a continuing flow of new residents into the province.
ew house construction is a major source of employment and is key in addressing pent
up demand. Fortunately home ownership is a high priority for most Canadians with two
out of three households owning their own home.
Home Ownership (percentage of population), Census 2001 Data
Fort Albany
Waskaganish

Moosonee
Chibougamau

Matagami

Armstrong
Hearst
okout
Geraldton Kapuskasing Amos

Manitouwadge Rouyn-Noranda Val-d’Or


Timmins
Nipigon
Marathon Kirkland Lake

okan
Atilokan
Thunder Bay Chapleau Mont-Laurier
Wawa
Maniwaki

Greater Sudbury North Bay


Pembroke
OTTAWA
Sault Ste. Marie Espanola

Parry Sound Brockville


Bracebridge
Kingston
Orillia Belleville
Owen Sound

Oshawa
TORONTO

Hamilton
Brantford

London
Sarnia

Chatham
Windsor

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Government long range planning must be in place to ensure that adequate serviced
land is available for development. In larger urban areas, land intensification is foremost
to permit increased densities and avoid problems associated with suburban sprawl that
has occurred during the past three decades.
During the period 2001 through 2005, housing starts increased given growing demand,
but Ontario’s proportionate contribution to total housing stock (compared with other
parts of the country) had decreased over this period. A housing start refers to a dwelling
unit where full footings are in place. With multiple unit structures, the definition of a
start applies to the entire structure. Clearly, ntario faces a housing challenge if net
migration continues at current levels.

Housing Starts, Canada and Ontario (2001–2011)

250,000

200,000
Number of Housing Starts

150,000

100,000
41% 39% 37%
35% 36%
45% 32%
30% 35%
32%
50,000 34%

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Canada Ontario
Percentages shown indicate Ontario housing starts
as a percentage of total Canadian housing starts.

Source: Statistics Canada, CANSIM Table # 027-0008.


Data provided by Canada Mortgage and Housing Corporation.

Population Distribution
Population growth within the province favours urban areas and more particularly large
cities in Southern ntario. The Greater Toronto Area is forecasted to remain as the prime
destination for immigrants followed closely by the Central Region (encompassing areas
immediately surrounding the GTA). As in the past, orthern ntario will receive the
least number of immigrants.

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Population of Ontario Regions


Millions
Population Shares (%)
8 2005 2015 2025
GTA 45.9 47.8 49.0
2005 2015 2025
Central 21.9 21.8 21.8
6
East 13.2 12.9 12.7
Southwest 12.6 12.1 11.7

4 Northeast 4.5 3.8 3.4


Northwest 1.9 1.7 1.5

0
GTA Central East Southwest Northeast Northwest

Source: Graphic adaptations based on the original charts in Toward 2025:


Assessing Ontario’s Long Term Outlook, Ministry of Finance, 2005

REAL ESTATE MARKET IMPLICATIONS


Population growth is now focused primarily in Southern ntario and more specifically
Central ntario, Southwestern ntario and the GTA. While many benefits accrue to
these areas, offsetting negatives include traffic congestion, deteriorating water and air
quality, and loss of natural resources. Continued growth, particularly within the GTA
and surrounding areas, necessitates broader planning initiatives to address increased
population. These plans must focus on environmentally­conscious land development,
prudent land use, energy­efficient housing structures, higher densities and urban infill,
and forward­thinking infrastructure design all of which impact how real estate will be
marketed in the future.
Initial legislative steps are already underway. Greenbelt legislation now permanently
protects certain areas of the province and various restrictions are in place to contain urban
sprawl in the Greater Golden Horseshoe, but much more is needed. Conversely, more
sparsely settled northern areas require government ministries and agencies to recognize
the need to build stronger northern communities by fostering job creation and opening
new entrepreneurial opportunities to hopefully better balance growth within the province.

Population Composition
The second key demographic factor impacting ntario, as with most western industrial­
ized countries and regions, is the gradual aging of the population as more and more
baby boomers enter the 65 age group. The shift to an older population brings with it
new demands for those involved in real estate.
An illustration is provided highlighting the changing age distribution of the Ontario
population. According to Ministry of Finance estimates, those in the age group 65 will
account for almost one in five residents of the province with the median age for Ontario’s
population to rise from the current 38 years to 42.1 years by 2025. At the same time, the
working force will gradually diminish proportionately as will younger age groups; i.e.,
ages 0–14 and 15–24.

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Age Distribution of the Population

Percent 9.3 10.9 12.6 14.2 15.7 Population


100 (in millions)
10.5 12.1 12.9 15.3 19.4 Age 65+
80 19.9 21.0 Age 45-64
25.3
27.9 Age 25-44
26.5
60 Age 15-24
31.5 Age 0-14
33.2
30.2
40 28.0 27.3
17.5 13.4 13.5 12.8
20 10.9
20.5 20.4 18.1 16.0 15.8
0%
0
1985 1995 2005 2015 2025

* Numbers may not add due to rounding.

Source: Graphic adaptations based on the original charts in Toward 2025:


Assessing Ontario’s Long Term Outlook, Ministry of Finance, 2005

REAL ESTATE MARKET IMPLICATIONS


The aging population is already impacting the ntario real estate market. ew retire­
ment communities are appearing in many Ontario cities and towns, as developers seek
the right mix of housing styles and amenities. Recent urban intensification projects in
ntario communities emphasize condominium bungalow developments, land­lease
arrangements, retirement villages and extended care facilities offering independent living,
assisted living and nursing services. This demographic change affects commercial real
estate development that must address altered needs involving health care, clinics, thera­
peutic and other support services, as well as retail operations catering more and more to
an older population.
Housing developments now and in the future must look at innovative structures such
as stairless entryways and homes, structural provisions for elevators, flexible configurations
(to accommodate multi­generation families and in­law suites), wider hallways, walk­in
bath enclosures, tracking for lift mechanisms, etc. Residential developments must seriously
consider security, facilities for clubs, fitness centres and social events, and various sports
activities including golf courses.
Interestingly, the aging population is not focused entirely on traditional retirement
living configurations. The baby boomers are much more cosmopolitan in their outlook
than previous generations. Downtown condominium markets have proven attractive, as
empty nesters and retirees seek the convenience of urban centres. Retirement for many
is much more than scaling down house size. It is a lifestyle choice to buy into new­style
destination communities that are self­contained complexes complete with recreational
and social amenities, as well as support services.

Demographics and Value


Supply and demand forces may drive the real estate market, but population dynamics
are a key underlying factor. While demographics can’t be readily isolated from economic
and social factors, population change is a significant contributor to increased prices. For
example, high net migration into the GTA has been a major factor in driving up average
prices, compared with other urban areas in the province (see subsequent discussion
titled Market Profile: Residential Prices and Volumes).

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Interestingly, demographics can also impact sub­markets within the province. For
example, demographics as well as economic factors were in play when cottage prices rose
significantly over the past decade, as GTA families sought out limited shoreline availability
particularly to the north and east of Toronto. Demographics was also behind forward­
thinking investors building retirement facilities knowing that an expanding client base
was quietly building as baby boomers aged. Retirement communities with bungalow­
style housing have flourished in many areas of the province, as growing numbers of
retirees leave expansive two­story suburban homes in the search for stairless, smaller
accommodation in outlying cities and towns. Where demand grows, so also does value.
In fact, demographics is at play everywhere whether it’s the strong downtown condo­
minium market attracting young professionals or young families seeking affordable
housing within 40–50 miles of the GTA. Population growth, its distribution and composi­
tion remains a key factor in establishing value.

MARKET PROFILE: RESIDENTIAL PRICES AND VOLUMES


The ntario marketplace, while enduring cyclical trends, has demonstrated long­term
strength for well over four decades. The resiliency of the real estate market is evidenced
in average price increases and overall volume figures. Price mechanisms continuously
operate to establish values as supply/demand forces play out in the real estate market. As
clearly evidenced in the graphics presented, countless exchanges of real property and
gradually rising prices have ultimately led to increased value for those owning real estate.
Real estate is viewed for value purposes as a good long­term investment, particularly
as a hedge against inflation. Real estate values are widely discussed and analyzed. Value
is typically the main topic of discussion when listing and marketing residential or com­
mercial real estate. Anyone contemplating a career in real estate requires a solid grounding
in value concepts and principles, and how these operate in the real estate market.

ONTARIO

250,000 $500,000
Unit Sales Average Price

200,000 $400,000
Number of Unit Sales

Average Price
150,000 $300,000

100,000 $200,000

50,000 $100,000

0 0
88 90 92 94 96 98 00 02 04 06 08 10 12

Year

Source: CREAStats, The Canadian Real Estate Association

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AVERAGE PRICE & UNIT SALES BY REGION

TORONTO HAMILTON-BURLINGTON
100,000 Unit Sales Average Price $500,000 100,000 $500,000
Unit Sales Average Price
80,000 $400,000 80,000 $400,000
Number of Unit Sales

Number of Unit Sales


Average Price

Average Price
60,000 $300,000 60,000 $300,000

40,000 $200,000 40,000 $200,000

20,000 $100,000 20,000 $100,000

0 0 0 0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
Year Year

OTTAWA DURHAM REGION


100,000 $500,000 100,000 $500,000
Unit Sales Average Price Unit Sales Average Price
80,000 $400,000 80,000 $400,000
Number of Unit Sales

Number of Unit Sales


Average Price

Average Price
60,000 $300,000 60,000 $300,000

40,000 $200,000 40,000 $200,000

20,000 $100,000 20,000 $100,000

0 0 0 0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
Year Year

LONDON & ST. THOMAS KITCHENER-WATERLOO


100,000 $500,000 100,000 $500,000
Unit Sales Average Price Unit Sales Average Price
80,000 $400,000 80,000 $400,000
Number of Unit Sales

Number of Unit Sales


Average Price

60,000 $300,000 60,000 $300,000 Average Price

40,000 $200,000 40,000 $200,000

20,000 $100,000 20,000 $100,000

0 0 0 0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
Year Year

Source: CREAStats, The Canadian Real Estate Association

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AVERAGE PRICE & UNIT SALES BY REGION (continued)

WINDSOR-ESSEX BARRIE & DISTRICT


100,000 $500,000 100,000 $500,000
Unit Sales Average Price Unit Sales Average Price
80,000 $400,000 80,000 $400,000
Number of Unit Sales

Number of Unit Sales


Average Price

Average Price
60,000 $300,000 60,000 $300,000

40,000 $200,000 40,000 $200,000

20,000 $100,000 20,000 $100,000

0 0 0 0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
Year Year

ST. CATHARINES SUDBURY


100,000 $500,000 100,000 $500,000
Unit Sales Average Price Unit Sales Average Price
80,000 $400,000 80,000 $400,000
Number of Unit Sales

Number of Unit Sales


Average Price

Average Price
60,000 $300,000 60,000 $300,000

40,000 $200,000 40,000 $200,000

20,000 $100,000 20,000 $100,000

0 0 0 0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
Year Year

Source: CREAStats, The Canadian Real Estate Association

UNDERSTANDING VALUE
Value is defined as the quantity of one thing that can be obtained in exchange for another.
Money is the common denominator by which real property value is usually measured.
The utility of a commodity, such as property, is expressed in the amount of money that
would be paid for its acquisition. Value is the present worth of future benefits arising
out of ownership and depends on the need for, and availability of, that commodity; i.e.,
supply and demand forces in the marketplace.

Differing Perspectives
Value is the key word used in practically every segment of the real estate business. Its
significance and importance would imply a precisely and clearly understood meaning.
Unfortunately, this is not the case. alue is a word for which there are as many definitions
as there are types of value in everyday life. For example, the tax assessor usually thinks

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of value in terms of assessed value, the insurance broker in terms of insurable value, the
accountant in terms of book value, the mortgage broker in terms of lending value, the
appraiser and the registrant in terms of market value. Further, a natural tendency exists
to attach to the word value a variety of descriptive adjectives suggesting a specific kind
of value; e.g., intrinsic value, sentimental value, salvage value, liquidation value and Objective Value
appraised value. The direct cost of creating, as
A precise meaning has been a life­long study of many economic theorists. Most debates distinct from the perceived value
centre on objective versus subjective value. Objective value maintains that value is tied in the mind of the buyer or seller.

to the cost of reproduction. Subjective value states that value exists only in the minds of
buyers and sellers. Further, one of the most important distinctions for real estate purposes
is that value may have one value in exchange and quite a different value in use. Another Subjective Value
important distinction arises from activities of commercial registrants between market Value that exists in the mind of the
value (value based on the actions of typical buyers and sellers), and investment value buyer or seller, as distinct from
objective value based on cost.
(value of the subject property based on individual investor needs, goals and objectives).

Value in Exchange vs. Value in Use


Value in exchange is best described as the probable price at which a commodity trades in
a free, competitive and open market and is synonymous with market value (see subsequent
discussion). In other words, value in exchange looks to the widest possible marketplace
and the alternative uses for a particular property. Value in use, however, involves the
economic good to its owner/user, which is based on the productivity of the economic
good to that specific individual. This usually consists of market value plus an increment
that represents some extra value to the owner/user.
For real estate purposes, value in use is the value attributed to a property by the owner
who is using that property. The property would probably have been designed or used to
suit the particular needs and enjoyment of the owner and takes on a special significance
that translates into an additional monetary value in the owner’s opinion or in the opinion
of a potential buyer. This type of value is difficult to measure and is normally different
in every case. It may often be higher than market value, since it is looked at from the
owner’s viewpoint only (see also investment value discussed later in this chapter). While
value of use is most applicable to commercial, income­producing properties, the funda­
mentals can also apply to residential property.

Value in Use—A Matter of Perspective HOUSING FOCUS

Value in Use—The Residential Seller


Seller Smith, at retirement age, installed an oversized lap pool in the rear yard of his new two-bedroom, 940 square
foot bungalow. As a former athlete, Smith prides himself in his physical prowess, uses the pool every day and conducts
a rigorous exercise program. He took great pains to replicate a lap pool that he once used as a young man in training
for provincial competitions.
For Smith, the value in use exceeds the $38,000 cost in terms of direct benefits in personal fitness and satisfaction.
However, from the average buyer’s standpoint, the unusual shape and size of the pool may in fact add no particular
value or, if it did, a considerably smaller amount than Smith’s perspective. If Smith elected to sell his home, undoubtedly
he would think in terms of value in use as he attaches a high value to the pool. The buyer would negotiate in terms of
value in exchange (market value) that would typically be a lower amount.
continued...

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Value in Use—A Matter of Perspective HOUSING FOCUS

Value in Use—A Unique Manufacturing Operation


The value of a small plant in Barrie is worth $750,000 based on current use to the owner and the unique layout that
accommodates a specific manufacturing process. However, to a developer, this aging building and site has a market
value of $650,000 (less building demolition costs), when contemplating a new condominium project. On the one
hand, the owner is looking at the property from his unique perspective. However, the developer is concentrating on
other uses for the property given that the owner’s special value would no longer apply.

Subjective vs. Objective Value


alue has both subjective value and objective value dimensions: objective relating to the
direct cost of creating (e.g., acquiring a lot and building a home), and subjective involving
Valuation the perception of value in the minds of the buyer and seller. In subjective valuation, cost
Estimated worth or price. The
is not the primary consideration, but rather the present worth of future benefits that
act of estimating the worth of accrue from ownership. For example, a home and lot may objectively cost $225,000 to
real property. build, but the $195,000 price that the buyer is willing to offer is subjective.
Most estimates of market value rely on subjective perceptions of value. However,
appraisers who want to ensure that both dimen sions are analyzed when appraising resi­
dential property apply the direct comparison (subjective) and cost (objective) approaches.
The cost approach involves analysis of actual cost, while income and direct comparison
approaches emphasize subjective values (based on sales of comparable properties in the
marketplace). ote: The income approach is the third method used with revenue­
generating properties; e.g., multi­unit residential and commercial operations. All three
approaches are fully detailed in Land, Structures and Real Estate Trading.

Market Price vs. Market Value


Market Price
Market price is the price paid for a specific property, while market value is an estimate
Price paid for an individual
of value arising from many sales (market prices). Consumers are often misled by market
property, as distinct from market price. For example, a sale may occur for $295,000 and neighbours assume that comparable
value which is estimated from homes will command at least that value. However, special circumstances may have been
the market prices of many sales.
present; e.g., the seller was under financial duress and sold below true market value.
Conversely, the property may have had certain distinctive features that commanded a
higher price than could be expected from other generally comparable homes in the area.
To further distinguish the terms, think of market price in terms of an accomplished
or past single event—one sale in the marketplace. Market value, on the other hand, is
estimated based on a number of past market prices. In reality, market price and market
value can be closely aligned assuming that an active, efficient marketplace is operating
which involves a reasonable number of sellers wishing to sell and a reasonable number
of buyers ready, willing and able to buy.

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MARKET VALUE DEFINED


Market value (also referred to as value in exchange) is based on judgement arising Reasonable
from various sales in the marketplace. The definition, frequently found in appraisal Time
reports, is:
No Undue
The most probable price, as of a specified date, in cash, or in Pressure
terms equivalent to cash, or in other precisely revealed terms,
MARKET
for which the specified property rights should sell after reason- VALUE
able exposure in a competitive market under all conditions Prudent
requisite to a fair sale, with the buyer and seller each acting Behaviour
prudently, knowledgeably and for self-interest, and assuming
that neither is under undue duress.
Informed
Source: The Appraisal of Real Estate, 11th Edition, Appraisal Institute
Buyer & Seller

Investment Value—Commercial Properties


Investment value is defined as the value of an investment property from the perspective Investment Value

of a specific investor. Investment value must be clearly differentiated from market value. Value, closely associated with
market value, but also impacted
Market value focuses on the most probable price that a property will sell for based on a by cash flows, investment
typical buyer and seller. Many appraisers reference market value as value in the marketplace. objectives and investor-specific
Both market value and investment value flow from the present value of future anticipated criteria.

benefits. However, differing assumptions and conditions can alter the perception of such
benefits. Investment value is slanted to the individual’s objectives and unique investor
circumstances that can affect yield and the valuation estimate; for example, marginal tax
rate or distinct operating methods that may affect income and or expense projections,
which in turn impacts the income flows and the valuation process using the income
approach. In a sense, investment value closely approximates value in use discussed earlier.
Interestingly, commercial registrants work in two worlds: market value estimates and
investment value estimates. On the one hand, a salesperson may be required to estimate
market value assuming no specific buyer when working with a seller client. Conversely,
he/she may analyze prospective properties based on the needs and dictates of a specific
buyer client and arrive at a unique investment value. The difference between these values
is dependent on assumptions made. Market value and investment value can be the same
theoretically, but rarely are in practice. Salespersons may prepare both market and invest­
ment value estimates, or even a range of values for each based on selected assumptions.
The client is then furnished with parameters in which to select an initial bid position, as
well as an overall negotiating range.

EXAMPLE Investment Value—The Skilled Buyer


Investor Reed is seriously considering a multi-residential property located in Anycity, Ontario. The market value of the
property has been established based on income using data from typical buildings of the similar age, construction and
general location. The market value is estimated at $875,000. Reed, however, has exceptional managerial abilities and
expertise in developing additional income sources from such properties, and can introduce specific cost saving measures
through technology that would not be available to smaller investors.
As a consequence, Reed’s buyer representative prepares a detailed forecast of cash flows based on those unique
skills to arrive at a value specific to the client. Using the income approach to value, the buyer representative estimates
the real value to the buyer (value in use) in the $975,000 to $1,050,000 range given the potential for higher return.

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VALUE PRINCIPLES
Certain underlying forces are at work, despite the outward appearance that the real estate
market is randomly driven by numerous individual transactions and market prices are set
by countless negotiations. Fortunately, appraisal research has contributed significantly
by explaining and codifying certain dominant principles to explain how value is created.
Principles of Value Fifteen generally­accepted principles of value are detailed that, in concert, provide insight
Various premises used as
to anyone delving into market value and the subtleties of real estate negotiations.
guidance in the determination
of value.
Consistent External
Anticipation Balance Change Competition Conformity Contribution
Use Factors

Increasing/
Highest and Supply and Surplus
Decreasing Progression Regression Substitution
Best Use Demand Productivity
Returns

These principles are either fundamental to understanding value or explain how various
real estate components contribute to value. They are isolated for discussion purposes but,
in fact, are typically interwoven in the marketplace.

Anticipation
A principle affirming that value is created by the anticipation of benefits, that is, money
or amenities to be derived in the future. Value may be defined as the present worth of all
future benefits. When buying a home, buyers anticipate that certain benefits will accrue in
future years, and the purchase price is based on the present worth of those anticipated
benefits.

EXAMPLE Value Principle—Anticipation


Buyer Jones is attempting to decide whether he will purchase Smith’s home for approximately $380,000 or
another property listed at $349,900. Jones evaluates the listing information for both properties. While they
are identical in many ways, the Smith property contains a family room fireplace and patio doors leading to an
oversized deck. The competing property, while containing a cozy family room, lacks the sunlight that flows
through the sliding doors. Jones can already visualize his family sitting by a blazing fire on the cold winter
nights ahead. Jones, unwittingly, is applying the principle of anticipation. He is mentally debating whether
the future benefits of Smith’s property justify the additional asking price. In other words, he is attempting to
establish value by anticipation.

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Balance
A principle holding that value is created and maintained in proportion to the equilibrium
attained in the amount and location of essential uses of real estate. More simply put, the
value of a property is governed by the balance found within a particular marketplace. Loss
in value will result if there are less services or amenities than needed or more services or
amenities than can be supported. For example, where there are too many drugstores in a
community, either some will be successful at the expense of the others or none will yield
an adequate return on the investment they represent.
With an individual property, the agents or factors in production (labour, coordination,
capital and land) must be in proper balance in order to maintain maximum value. Too
much or too little of any one of the factors, in proportion to the services rendered by the
others, tends to reduce value. For example, having two building custodians where only
one is needed will result in less net income, which in turn translates into less value when
income is capitalized in the appraisal process.

EXAMPLE Value Principle—Balance


A commercial building derives its value from various contributing factors such as parking facilities provided to
tenants and guests. Inadequate parking (an imbalance in apportionment) could negatively impact the value
of the property, as essential uses and appeal of the real estate to commercial tenants are affected owing to
this deficiency. A similar situation might arise in a downtown residential condominium project. Given limited
space, too few parking spaces might be available to unit owners, along with little or no guest parking facilities.
This could negatively impact the value of the property as consumer appeal is adversely affected by this
deficiency. However, this type of situation is not a simple cause/effect relationship. Other factors would come
into play, such as adjacent parking lots, convenience/availability of public transit services, owner demographics
and size of units.

Change
A principle stating that economic and social forces are constantly at work and that changes
caused by these forces affect real property. Accordingly, the appraiser views real property
and its environment as being in transition, observing evidence of trends that may affect
the property in the future. The principle of change is fundamentally the law of cause and
effect. The principle of change illustrates the fact that a value estimate provided by an
appraiser is only valid as of a specific time. This principle is a constant consideration
when estimating value. The effective date of an appraisal is always clearly stated in the
report.

EXAMPLE Value Principle—Change


Anne Appraiser is hired to estimate the value of a property at 123 Main Street. This two-storey residence
occupied by the Smith family is zoned single-family residential. Mr. Smith requires the appraisal as he is
refinancing and placing a new first mortgage on the property. Anne completes the lender’s standard form
report and states in writing that the property is worth $380,000, as of November 30th, 20xx. One week
following the appraisal and before the bank issued a commitment letter on the mortgage, the major employer
in the community, in a totally unexpected move, files for bankruptcy leaving more than two thousand
workers (one-fifth of the total work force in the town) unemployed. Real estate inventory swells immediately
with supply far outpacing demand. Within sixty days, a noticeable downturn in prices occurs. The lender,
now more cautious, calls for a second opinion from another appraiser. The second appraisal, impacted by
change involving economic factors not present earlier, estimates the value at $345,000.

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Competition
A principle, in terms of appraisal theory, stating that excessive profits will tend to create
competition that, in turn, has a negative impact on profits; or as often heard and simply
put: excess profit breeds ruinous competition.

EXAMPLE Value Principle—Competition


Smith anticipates and initially receives high returns from a You Store It (Anycity) Inc. facility. His forecasted
demand proves correct and, although lacking any market data to suggest a larger facility, he confidently starts
a second phase, effectively doubling the number of storage units. Unknown to him, various large tracts of
land are zoned for similar facilities. Within a few months three competing firms have increased the supply of
units by 500%. Smith, as well as the competitors, are subsequently drawn into a price war to capture the more
or less level demand for this type of service. The value of the real estate is negatively affected, as Smith’s
income level declines and this decline is reflected in the value estimate.

Conformity
An appraisal principle stating that land must be utilized to reasonably conform with the
existing standards of the area in order to maintain maximum value. The word reasonable
denotes the degree of conformity. Too much conformity results in monotony that could
be as detrimental to value, as not having conformity at all. In residential areas, variety in
building styles of the same quality presents a more pleasing appearance than rows of
identical houses. Zoning regulations protect a neighbourhood from conversion to or
intrusion of inharmonious uses and generally support the principle of conformity.

Consistent Use
A principle stating that when improved land is in transition to another highest and best
use, it cannot be appraised with one use allocated to the land and another to the building
or other improvements. If an appraiser is estimating the market value of a parcel of land
improved with an old house, and estimates that the highest and best use is for an office
building development, then the appraisal should not accord any value to the house over
that of the land. Adding value for the old house would be inconsistent, as its worth in
the market is overshadowed by the commercial value of the land and cannot be additive
to it. In dealing with compensation for expropriated property, this theory is referred to
as double recovery.

EXAMPLE Value Principle—Consistent Use


Smith is considering buying an older residential home that is currently zoned for commercial use. An appraiser
estimates the land to be worth $535,000 (which includes the cost of demolishing the existing structure). The
seller argues that the property is worth the land at $535,000 plus the value of the house. The appraiser is apply-
ing the principle of consistent use, as the property’s highest and best use is commercial which necessitates
removal of the structure.

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Contribution
A valuation principle stating that the value of any component of a property is measured
by how much it adds to the net income (or market value if the subject property is non­
income producing; e.g., a residential house), by reason of its presence, or detracts from
the net income (or market value) by reason of its absence. Therefore, the value of any
factor in production depends upon its contribution to net income or value and not upon
its cost. The principle of contribution is sometimes known as the principle of marginal
productivity.

EXAMPLE Value Principle—Contribution


Buyer Jones is attempting to justify the cost of new bathroom installation amounting to $21,000 in a town-
house valued at $269,000. While the true cost is $21,000, the market value may only be increased by $10,500.
Based on the principal of contribution, the new bathroom is said to have a contributory value of $10,500.
The addition of this bathroom would constitute an over improvement and would not normally be economically
justified.

External Factors
A principle (sometimes referred to as externalities by appraisers) involving a broad array
of situations that can impact the value of property. External factors can include circum­
stances or situations near the property or more distant influences that nevertheless impact
value. In the case of adjacent factors, value may be enhanced by the existence and prox­
imity of services provided to the property. On a more general perspective, overall economic
conditions within the immediate area, the region as a whole, or for that matter, the
country can impact the value of real estate. As earlier discussed, real estate is vulnerable to
economic prosperity, as well as economic slowdowns, and can also be impacted by govern­
ment regulations and requirements that affect its marketability.

EXAMPLE Value Principle—External Factors


Buyer Smith acquired a residential bungalow in East Ridge, a suburb of Anycity, approximately two years ago.
At the time of acquisition, the property was valued at $359,000. Since that time, Anycity has lost three major
employers resulting in double-digit unemployment figures. To compound matters, significant improvements
to various municipal services have resulted in a dramatic increase in property taxes. These two external factors
have affected property values. Local real estate brokerages report that residential properties are being sold for
approximately 10–15% less than two years ago. Smith has had his property appraised and the market value
is currently estimated at $329,000.

Highest and Best Use


That use which, at the time of the appraisal, is most likely to produce the greatest net
return in money or amenities to the land over a given period. et return may be monetary
as with an income­producing property or may, in the case of a single­family dwelling,
take the form of amenities such as pride of ownership, comfort and convenience. In cases
where a site has existing improvements, the present use may fail to meet the criteria of
this definition. The highest and best use may very well be determined to be different from
the existing use. The present use will typically continue, however, unless and until land
value in its highest and best use meets or exceeds the total value of the property in its
existing use.

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The appraiser, in estimating market value, must consider not only the current use, but
also the likely uses to which it is adapted and for which it is capable of being used in the
reasonably foreseeable future. Purely speculative future uses may not be considered. Since
owners have a natural tendency to utilize their property as advantageously as possible,
and since economic pressures usually dictate the optimum or most profitable use, the
highest and best use of a property will most often be its present use.
However, this is not always the case. Instances exist where an owner, for various reasons,
does not use his or her property at its highest and best use, at least as the term is used in
the appraisal sense. This is especially true along major new highways and rapidly expanding
areas where relatively sudden changes in demand occur and appropriate uses are neces­
sitated. Also, the passage of time typically causes radical changes in optimum land usage.

EXAMPLE 1 Value Principle—Highest and Best Use


Seller Smith owns a detached, but rundown, bungalow in a rapidly expanding commercial area of Anycity.
The property was appraised two years ago at a value of $260,000 for the 40 year-old house and 90’ x 100’
lot fronting on Main St., based on residential single-family occupancy. However, just two years later, developers
are now prepared to pay approximately $4,500 per front foot for land in the area. The city has assured poten-
tial buyers that any property fronting on Main Street within the general vicinity of Smith’s property can be
rezoned to C4 (commercial retail shopping). Based on this information, Smith’s lot alone appears to be worth
$405,000 (90 x $4,500). The highest and best use has shifted from single family to retail commercial, given
rapidly changing optimum use patterns.

EXAMPLE 2 Value Principle—Highest and Best Use


Seller Jones owns a farm that now falls within the expanded municipal boundaries of Anycity. As the city
expands, the farm acreage will undoubtedly become more valuable as a residential subdivision site than as a
farm. Anne Appraiser has been retained to appraise the property and concludes that the highest and best use
of the farm property would be a site for a subdivision. Accordingly, she prepares the appraisal for purposes of
a potential subdivision site rather than as a farm. However, before basing a value estimate on a use other than
its existing farm use, she must be convinced of three things:

• he property is physically adaptable to the other use.


• Actual demand exists for the other use sufficient to enhance market value.
• he property is available for such other use and would not violate existing oning by­laws or
private deed restrictions.

The third point should be emphasized. Anne Appraiser may consider a use that is presently prohibited by
the zoning by-laws if good reason and evidence exists to believe that a change to permit this particular use is
probable and not simply possible, and that the change is imminent.

Increasing and Decreasing Returns


A valuation principle stating that when successive increments of one or more factors of
production are added to fixed amounts of the other factors, an initial enhancement of
income in dollars, benefits or amenities occurs, to a point of maximum return (the point
of diminishing returns), followed by a relative decrease in incremental value in relation
to the value of the added factor(s). This principle is also referred to as the principle of
diminishing returns or the principle of variable proportions.

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EXAMPLE 1 Value Principle—Increasing and Decreasing Returns


Builder Anderson discovers an interesting fact about house construction in Anycity. While a 1,200 square foot
bungalow with a single garage commands $325,000, the same bungalow with a double garage (costing
$20,000 more) adds $35,000, bringing the value to $360,000. Several sales at this level confirm his theory.
Anderson then concludes that the addition of a third garage (at a cost of $20,000) will produce a similar
increase raising the market value to $395,000. However, after constructing a bungalow with the triple car
garage, the property remained unsold for six months and ultimately sold for $372,500. Anderson has experienced
the law of increasing and decreasing returns. While the two-car garage added value beyond its cost, the
successive addition of more garages does not incrementally increase total market value.

EXAMPLE 2 Value Principle—Increasing and Decreasing Returns


Smith operates a manufacturing plant that produces electrical appliances. Owing to an increased administrative
workload, he is unable to effectively manage the 20 employees on a daily basis. Consequently, worker efficiency
and production quality have suffered. Smith, based on the advice of a consultant, hires a full-time manager
to oversee the day-to-day operation. As a result, overall efficiency leaps 15 percent with customer returns of
defective equipment dropping by 50 percent over three months. Corporate profits rise by 10% after paying
the manager’s salary.
Seeing the impressive results, Smith reasons that two managers could achieve even better results and
hires a second person. In the next three months, no appreciable difference is evident and, in fact, profits
dipped slightly. Smith experiences the principle of increasing and decreasing returns. The addition of manage-
ment expertise is only effective to a point after which the incremental value of that additional factor of
production (in this case, labour) becomes proportionately less and less effective.

Progression
A principle, as an extension of the principle of conformity, stating that in the case of
properties that are dissimilar, the value of the poorer property will be affected positively
by the presence of the property of higher value. The principle of conformity outlines
that to maintain maximum value, land must be utilized to reasonably conform with the
existing standards of the area.

EXAMPLE Value Principle—Progression


Buyer Jones has often heard the old adage about buying the worst house on the street. However, he is now
experiencing the reality of the statement. Jones is looking for a three-bedroom home with a single-car garage
while hoping to maximize his advantage in terms of the principle of progression. He has located three properties
through a real estate brokerage that are roughly comparable in terms of size, condition and overall appearance:

ADDRESS LISTED PRICE

Property 1 42 Main Street $368,500

Property 2 233 West Street $372,000

Property 3 136 The Ridge $415,000

Properties 1 and 2 are located in single-family residential areas where the majority of homes are priced
between $355,000 and $375,000. Property 3, however, is the smallest home on The Ridge. Homes adjacent
to the property and in the immediate area sell between $410,000 and $450,000. Jones is particularly attracted
to Property 3, but doesn’t want to pay the higher price. The salesperson, while sympathizing with his client’s
position, knows that the principle of progress has relevance given the property’s proximity to higher priced homes.

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Regression
An extension of the principle of conformity which states that to maintain maximum
value, land must be utilized to reasonably conform with the existing standards of the area.
The principle of regression extends that concept by stating that between dissimilar
properties, the value of the better property will be affected adversely by the presence of
the property of lesser value.

EXAMPLE Value Principle—Regression


Buyer Jones understands the advantages of acquiring the worst home on the street and benefiting from the
principle of progression; i.e., the value of the lower priced property will be positively impacted by the presence
of properties of greater value. However, he is about to experience the opposite effect, known as the principle
of regression.
Several years ago, Jones acquired an attractive bungalow without regard to adjacent older properties. The
home was obviously the best property in that particular neighbourhood. When Jones listed the property, many
buyers were impressed, but no offer was forthcoming. The listing salesperson provided three comparable sales
that were almost identical to Jones’ property in terms of size, condition and overall appearance, but located
in better neighbourhoods:

ADDRESS LISTED PRICE

Property 1 402 Main Street $314,500

Property 2 321 West Street $305,000

Property 3 136 The Ridge $315,000

Despite the listing salesperson’s recommendation to market the property at $295,900, Jones could see no
appreciable differences (except for the neighbourhood) and listed at $319,900. After two months with no offers,
he reduced the price to $299,900 and the property sold for $289,500. As the listing salesperson explained,
the value of Jones’ property was directly impacted by lower-priced properties in the immediate area.

Substitution
A principle stating that a prudent buyer will pay no more for real property than the cost
of acquiring an equally desirable substitute in the marketplace. This principle presumes
that buyers will consider the alternatives available to them, that they will act rationally
and prudently on the basis of information about those alternatives, and that time is not
a significant factor; i.e., a substitute property can be acquired without unreasonable delay.

EXAMPLE Value Principle—Substitution


Buyer Jones is seriously considering two properties: a one-year-old, resale townhome offered at $296,900 and
a new unoccupied townhome built by the same builder on an adjacent street priced at $289,500 (including
HST). After inspecting both properties, Jones discovered the following differences. The resale property, while
showing minor wear and tear, was fully decorated. In addition, all landscaping was completed and the drive-
way was paved.
Jones, in making his ultimate decision, is unwittingly using the principle of substitution. He is carefully weigh-
ing out alternatives in terms of desirability and cost. His ultimate conclusion will be rationally based on differ-
ences noted between the two properties assuming that both can be acquired for approximately the same price.

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Supply and Demand


A primary valuation principle stating that market value is determined by the interaction
of supply and demand forces as of the date of the appraisal. According to this principle,
if the supply increases but the demand remains constant, prices will decrease. If the
demand increases but the supply remains constant, prices will increase. If both supply and
demand increase or decrease proportionately, prices will remain relatively stable.

EXAMPLE Value Principle—Supply and Demand


The importance of this principle is obvious. Consider the effect on house prices if a large corporation moves
its head office and employees from City A to City B. In City A, prices will fall because of oversupply, while in
City B prices will rise due to increased demand (assuming that all other factors remain the same, and supply/
demand forces were previously equal in both cities). As another example, if construction of new homes
exceeds demand, the resulting excess supply will ultimately impact prices.

Surplus Productivity
A principle relating to the net income remaining after all expenses necessary to the opera­
tion have been paid and the capital invested in improvements has been satisfied. This
remaining net income is imputable to the land and tends to fix the value of the property.
As a result, the land is valuable according to the surplus productivity imputed to it.
In the operation of an income­producing property, three levels of return are necessary,
while the fourth (the land) can command only the residual income with no fixed or neces­
sary rate of return. As previously discussed under general economic theory, the four
levels are factors in production and must be satisfied in order of labour, coordination,
capital and land. Surplus attributable to land largely determines its value. This income
approach used by appraisers is based on this principle.

EXAMPLE Value Principle—Surplus Productivity


Salesperson Jamieson is applying the principle of surplus productivity to arrive at the land value. The improve-
ments on the subject property have an estimated value of $150,000 and a forecasted net operating income
of $27,000. Market research indicates that a discount (return) rate of 10% applies and that the remaining
economic life of the building is 40 years. The income is capitalized based on the return rate (10%) plus the
recapture rate of 2.5% (100 ÷ 40 or 2.5% per year).

Net Operating Income $27,000


Income Earned by the Building (150,000 x (.10 + .025) 18,750
Residual (Surplus) Income Attributable to the Land 8,250
Value of the Land ($8,250 ÷ .10) 82,500

NOTE: Capitalization is studied in more detail in Chapter 9: Capitalization, Taxation and Closing Adjustments.

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Cost vs. Payback MARKET MEMO

Heated debates between dollars spent and value received reach every corner of the marketplace. The sellers adamantly
want $200,000 for their property, because that’s what they’ve got in it. Buyers will pay only $175,000 because that’s what
it is worth. Cost vs. value goes to the heart of negotiations. New hardwood floors may cost $14,000, but their value
may only be $10,000 in the eyes of the buyer. Essentially, buyers and sellers are arguing over subjective versus objective
value. Knowing the difference and listing property based on value not cost is vital to any sales career.
The Appraisal Institute of Canada conducted a member survey about payback on renovations. In other words, the
Institute researched what payback (increase in value) would occur for every dollar spent.

Top Ten Projects With Average Potential Payback

PROJECT POTENTIAL PAYBACK


(%)

Painting and decor, interior 73

Kitchen renovation 72

Bathroom renovation 68

Painting, exterior 65

Flooring upgrades 62

Window/door replacement 57

Main Floor Family Room Addition 51

Fireplace Addition 50

Basement Renovation 49

Furnace/Heating System Replacement 48

The reader is reminded that this information is derived from a survey of Institute members and does not constitute a
formal research project.

Source: Appraisal Institute of Canada, 1999

How “Beyond The Lot Line” Factors Can Affect Value PERSPECTIVE

Value involves a complex interplay of what exists on the property, as well as what is present nearby. The principle of
external factors best highlights the challenge for anyone estimating value. Clearly anything beyond the control of the
property owner can impact value, whether it be the type of property next door, the number of competitors in a
commercial complex, or the services available within a specific neighbourhood. Recently, the environment has taken
centre stage as one more external force to be reckoned with. Both positive and negative possibilities are highlighted.

continued...

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How “Beyond The Lot Line” Factors Can Affect Value PERSPECTIVE

Contamination: The Property Next Door

M any factors can affect value. Increasingly, contamination has become a hot topic in real estate marketing.
For example, in Brantford, a large underground chemical contamination from a former refrigerator­
making plant was discovered. Trichloroethylene, known as TCE, is a toxic chemical used as a degreaser in
manufacturing. Initial estimates suggest that a 12­block residential area in the city’s east side may be affected.
In Port Colborne, high levels of lead were discovered in the soil. Elevated levels have been linked to various
medical problems. ear Waterloo, residents voiced objection to mega­farms and the potential impact of
offensive odours and possible water contamination involving farms that can house more than 2,500 pigs with
storage for 15.5 million litres or more of liquid manure.
ntario is not alone. Perhaps, the most­publicized contamination story lies in the o Co ( orth of Coke
vens in Sydney, .S.) where a neighbourhood is caught in the aftermath of more than a century of steelmaking,
ironically the result of the government­operated plant and coke ovens that became a provincial crown corpora­
tion in the late sixties.
This story is far from over, even with millions now spent on research and clean­up, and more funds allocated.
For years, coke oven emissions floated over adjacent residential areas and leaked into Sydney harbour. Concerns
centre on high levels of polycyclic aromatic hydrocarbons, but testing has also revealed concentrations of other
elements, such as arsenic, lead, manganese, copper and cadmium.
The difficulty from a real estate perspective involves the stigma attached to the o Co area. According to
some registrants, the demand for homes dwindled, as buyers avoided affected neighbourhoods. Others have
minimized the health risk and point to huge funds now invested in remediation (clean­up involving soil
removal). However, despite such efforts, the issue still casts a shadow on the marketplace.
While sincere efforts to clean­up the area are positive, perceptions and the linger ing memory of problems
are more difficult to erase. Time may be the only solution.

Green Value: Teeing Off

E ven those who don’t play the game are attracted to golf course communities. This niche in the residential
market provides open space, a different lifestyle, and often an opportunity to reclaim land once relegated to
dump sites, quarries and brownfields (contaminated sites). Premium prices are now associated with lots
backing onto courses. Open spaces, green vistas and rear yards that don’t butt up to neighbouring houses are in
demand.
Clearly, real estate values follow these sought after locations, as choice lots are few and supply demand forces
dominate. Presently, golf course communities are springing up in urban as well as rural settings. From a
planning perspective, such communities can pose certain challenges (e.g., water resources to keep greens and
fairways in excellent shape), but the trend is clearly growing.

Noise Pollution: Taking Off

T he sound of aircraft may cause some to daydream about travel, but not those near an airport runway. The
creation of new runways or extensions to existing ones typically evoke debates and extensive community
consultations.
Courts have awarded settlements to disgruntled neigh bours, recognizing that property values are affected.
But noise problems are becoming much more pervasive than taxiways and jet engines. Canadians are living in
closer proximity to one another. What soundproofing should be installed in condominiums, what windows
will block street level noise and what to do about noisy neighbours? uiet and privacy are increasingly in
demand…and demand usually translates into value.

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KNOWLEDGE
INTEGRATION
Notables
• The ntario marketplace has demonstrated • Market price is the price for an individual
a strong economic picture over the past property, market value is an estimate of
few years particularly in manufacturing, value arising from many sales.
business/financial services and information/ • Most definitions of market value include
technology sectors. four dimensions: informed buyer and
• Population growth has been driven pri­ seller, prudent behaviour, no undue pres­
marily by immigration with approximately sure and reasonable time.
one out of three Ontario residents being • Both market value and investment value
foreign born. flow from the present worth of future ben­
• Population growth is concentrated in efits, however investment value is particu­
urban areas with the largest growth in the larly sensitive to individual investor perspec­
Greater Toronto Area. tives; e.g., objectives and yield requirements.
• ntario’s population has been gradually • Fifteen widely­accepted principles impact
aging with the 65 age group growing value. Be prepared to discuss each principle
more quickly than other age groups. and support the explanation given using
• Historical trends involving total residential an example.
sales volume and average price support • Typically, the great debate in many consumer
the fact that ntario has enjoyed a strong minds has to do with the cost of some­
real estate market over the past few years. thing, as opposed to its value in the
• alue can have different meanings depend­ marketplace.
ing on the person’s perspective. • alue is affected not only by what is located
• alue has both objective and subjective on the property, but what is adjacent to it.
perspectives. Most estimates of value rely
on subjective values (e.g., direct compari­
son approach).

Glossary
Census Market Value
Demography Objective Value
Gross Domestic Product Principles of Value
Immigration Subjective Value
Investment Value Valuation
Market Price Value in Use

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Web Links
Web links are included for general interest regarding selected chapter topics, but are not
required for examination purposes.

Ontario Profiles Economic and demographic profiles are summary in nature.


Students seeking detailed information should access the following websites:
Ministry of Economic Development, Trade and Employment
(www.ontario.ca/ministry-economic-development-trade-employment),
the Ministry of Finance (www.fin.gov.on.ca) and Statistics Canada
(www.statcan.gc.ca).
Municipal Boundaries Students should generally understand basic municipal boundary structure,
but not changes occurring that affect regional municipalities, counties and
municipalities over the past several decades. Those seeking detailed municipal
profiles and information concerning ongoing changes can access applicable
websites; e.g., the Association of Municipalities of Ontario (www.amo.on.ca)
and the Ministry of Municipal Affairs and Housing (www.mah.gov.on.ca).
Land registration and related topics are discussed in more detail in Land,
Structures and Real Estate Trading.
Ontario Road and Go to maps.google.ca for detailed Ontario road maps as well as provincial
Satellite Maps satellite images. This user-friendly zoom mapping system allows for detailed
viewing of road systems and provides satellite photos when using the hybrid
mapping option. Note: The extent of close-up zoom imagery varies across
the province based on satellite image availability.

Strategic Thinking For Your Career


Questions are included to assist in developing your new career. No answers are provided.
1. What additional information can I 4. The text includes selected examples
obtain from my local municipality to regarding value in use. What other
better understand economic, demo­ circumstances might I encounter that
graphic and geographic perspectives would indicate value in use rather
for my community? than market value?
2. Can I explain significant trends that 5. The principles of progression and
may impact growth in the local real regression often apply in urban
estate marketplace? environments. Do they also apply in
rural or cottage areas, particularly when
3. Am I able to confidently discuss value adjacent properties are at a distance?
concepts and discuss these with buyers
and sellers in relation to their needs
and wants?

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Chapter Mini-Review
Solutions are located in the Appendix.

1. Interprovincial migration does not 8. A fireplace costing $15,000, but having


contribute significantly to Ontario’s a market value of $24,000 is an example
population growth when compared of the principle of contribution.
with immigration from other countries.
True False
True False
9. In the past decade, municipal structur­
2. Demographic analysis using dependency ing in Ontario has increasingly moved
measures is a valid method to assess toward more regional governments.
the gradual aging of a population.
True False
True False
10. Provincial net migration can be
3. A seller, who has unwittingly under­ generally described as the difference
sold due to a lack of market knowledge, between the number of people enter­
is nevertheless deemed to have ing and exiting the province within a
obtained market value, as the buyer specified period of time.
acted prudently and in good faith.
True False
True False
11. The difference between market value
4. Value in use arises only in commercial and actual cost can be negligible in a
transactions where a building is built reasonably efficient marketplace with
specifically to meet the needs of the no unusual intervening factors
owner. impacting values.
True False True False

5. The principle of anticipation essentially 12. Value in exchange and value in use
says that a value today is only valid are synonymous when discussing real
for today. estate values.
True False True False

6. The statement ‘the smallest home on the 13. Subjective value can be generally
street may be the best buy’ generally described as the perception of value
describes the principle of progression. in the mind of a seller or buyer.
True False True False

7. According to the principle of surplus 14. If a property is overpriced, more


productivity, net income flows to the motivated buyers will consider the
building and other improvements on property than if it was properly
the land. priced for the marketplace.
True False True False

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Active Learning Exercises


Solutions are located in the Appendix.

Exercise 1 Real Estate Values (Matching)


Match the phrase/word in the left column with the appropriate description in the right
column (not all descriptions are used).

___ Demography a. Market Value

___ Market Price b. Nearby Items Affecting Value

___ External Factors c. Study of Population

___ Principle of Progression d. Price Paid in a Particular Transaction

___ Objective Value e. Southwestern Ontario

___ Value In Exchange f. Actual Cost

___ Value In Use g. Distinctive Feature Valued by Owner


___ Geographic Region h. Poorer Property Affected Positively

i. Salvage Value

j. Comparative Market Analysis

Exercise 2 Multiple Choice


2.1 Assume that the Ontario government recently announced a new regional office
for orth Bay that will involve the hiring or transferring of 500 employees to
that community. As a consequence, housing will be in short supply for the fore­
seeable future. Which principle of value best describes this situation?
a. Principle of Progression
b. Principle of Surplus Productivity
c. Principle of Supply and Demand
d. Principle of Increasing Decreasing Returns

2.2 It shouldn’t make any difference that all the other homes on this street are a lot
less expensive than mine. I say value is value; they don’t affect my property’s
value. Which principle of value might be used to dispute this statement?
a. Principle of Anticipation
b. Principle of Regression
c. Principle of Progression
d. Principle of Supply and Demand
e. Principle of Surplus Productivity

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2.3 Buyer Williams bought the James residence for $359,500. The property was
originally listed at $379,900 and was subsequently reduced to $365,000, before a
successful sale was concluded. The selling price of $359,500 is best described as
the:
a. Market Value
b. bjective alue
c. alue in Use
d. Market Price

2.4 Builder Adams is determined to put a triple­car garage on the next new home
that he builds. Here’s his reasoning. The first home had a single­car garage which
brought $15,000 more in selling price; and the second home had a double­car
garage which increased the selling price by another $15,000. Therefore, it only
makes sense that a triple­car garage will add a further $15,000. Which principle
might be used to dispute this argument?
a. Principle of Increasing Decreasing Returns
b. Principle of Consistent Use
c. Principle of External Factors
d. Principle of Regression

2.5 Salesperson Lane prepared a CMA three months ago for Seller Jones at $489,900,
but Jones elected not to sell. Three months later, a second CMA was prepared. To
the seller’s dismay, the recommended listing price was lower due to economic
conditions in the area. What principle best explains this situation?
a. Principle of Contribution
b. Principle of Change
c. Principle of Consistent Use
d. Principle of Highest and Best Use

2.6 Which of the following is T a theory applied by urban economists to the


development of cities?
a. Concentric Circle Theory
b. Market Cycle Theory
c. Axial Theory
d. Multiple uclei Theory

2.7 Demography is the study of:


a. Municipal boundaries.
b. Physical and spatial features.
c. Market activity.
d. Population changes over time.

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Exercise 3 The Neighbourhood


Broker Rashad placed a value on the Wong’s property approximately two years ago. At
that time, based on comparables available, the market value was $295,000. However,
during the two years, the general neighbourhood has suffered from noticeable decline.
While most residential areas in the west­end have been stable, this particular locale has
deteriorated due to poor maintenance of properties and a number of vacant buildings.
Rashad now feels that the home, according to recent sales, will bring approximately
$265,000. Identify the main principles of value that apply along with reasons.

Exercise 4 Is Bigger Better?


Mr. and Mrs. Singh are seriously contemplating purchasing the Westheiser property.
The property has a large fieldstone fireplace dividing the kitchen and living room areas.
riginally built in 1988 for $15,500, the current cost for this fireplace would be approx­
imately $40,000. Several comparable properties inspected by the Singhs are in the
$430,000–440,000 range (each containing smaller, exterior wall fireplaces). The Westheiser
property at $499,900 is remarkably similar to the others except for this unique feature.
Interestingly, the home has been on the market for over six months with no takers,
despite fairly brisk sales activity in that price range, particularly homes with fireplaces.
The Singhs are seriously debating how much to offer. What principles of value are at
work? Refer to specific principles, along with explanations for your selection(s).

R E A L E S TAT E A N D S O C I E T Y SECTION II
SECTION III
THE CONSUMER AND
MARKETING FUNDAMENTALS
Section III highlights real estate from the consumer’s perspective including his
or her needs and wants in acquiring and disposing of property. The discussion
centres primarily on the residential market with special emphasis on consumer
decision making, vulnerabilities and recent buying trends. The balance of the
chapter is directed to consumer legislation, the role of ethics, privacy requirements
and assistance provided to consumers by other professionals in order for them
to make informed decisions.
The second chapter in this section shifts
the discussion to marketing fundamentals
including market research, planning and
developing effective real estate marketing
strategies. Marketing and consumer behavior
are inextricably tied. The success of marketing
and advertising is often measured by the
actions taken by buyers and sellers in the
marketplace. The chapter highlights typical
marketing methods used by registrants, the
importance of customer service and key
marketing strategies used in today’s real
estate marketplace.
154

CHAPTER 5

Consumer Behaviour and


Consumer Protection
Introduction
Consumer behavior can be broadly defined as the study of individuals, groups and organ-
izations regarding how they select, obtain, use and dispose of products, services, experiences
or ideas in order to satisfy their needs. The study of consumer behavior is complex with
many factors impacting the decision-making process. More simply put, consumer behaviour
is the analysis of how individuals buy, what they buy, when and why.
Chapter 5 analyzes consumer behaviour relating to the buying and selling of the tang-
ible product (i.e., real estate) with consumer services (listing a seller’s property or assisting
a buyer in locating suitable property) found in Chapter 6: Marketing Methods and
Customer Service. Needs and wants are analyzed using a well-known theory advanced by
Maslow and advocated by many marketers, followed by a discussion of consumer vulner-
abilities particularly concerning such matters as who represents whom in a real estate
transaction, the need for prudence when inspecting properties and signing agreements,
and the general lack of cooling off periods.
The chapter then addresses ethical issues and profes-
sionalism when dealing with consumers followed by con-
sumer protection legislation including the Consumer
Protection Act, the Competition Act and the Ontario Human
Rights Code. Privacy legislation is also discussed from both
brokerage and salesperson perspectives. REBBA 2002 is not
included in this chapter, as the Code of Ethics (including
all trading and related requirements) are detailed in subse-
quent courses. The final topic highlights the importance of
seeking professional advice and the type of guidance that
consumers can expect from lawyers, appraisers, surveyors,
lenders, mortgage brokers, insurance agents and brokers,
and home inspectors in the buying and selling process. The
discussion includes services provided by these professionals,
as well as ethical responsibilities and consumer complaint
procedures.

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Learning Outcomes
At the conclusion of this chapter, students will be able to:
• Describe the basics of consumer behavior including such influencing factors as
personal traits, external influences, brand loyalty and the actual products.
• utline and explain consumer needs and wants in relation to the real estate
marketplace.
• Detail consumer vulnerabilities and how registrants can assist consumers in avoid­
ing pitfalls when buying or selling real estate.
• utline ethical fundamentals that registrants must practice to advance consumer
protection.
• Discuss consumer protection legislation with emphasis on the Consumer Protection
Act, the Competition Act and the Ontario Human Rights Code.
• Describe privacy legislation with regard to protecting personal information, obtain­
ing consumer consent and safeguarding information.
• utline the role of various professionals who provide advice and guidance to con­
sumers when buying and selling real estate.

CONSUMER BEHAVIOUR BASICS


Consumer behavior is affected by both internal and external forces. To the casual observer,
consumer decisions can seemingly defy logic. Even trained marketing professionals, who
devote all their energies to understanding consumer behavior, can be baffled by unexpected
twists and turns. Why does one product sell well while another languishes on the shelf?
What drives real estate buyers to buy in one location, completely ignoring another of
seeming equal utility? Why do certain sellers receive multiple offers in a bidding war and
others are overlooked?
The challenge lies in dissecting the consumer mindset and analyzing basic underlying
motivations—the world of needs and wants. The fact is that consumers do not make
split second decisions. The process involves many factors that take place before the sale,
at the point of sale and after the sale. Consumer behaviour is best viewed as a continuum
that involves the cycling of all three, as buyers and sellers gain new experiences, gather
new input and, of course, gain additional knowledge through ongoing purchases.

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To compound matters, many internal factors come into play to form the individual
mindset. Personality traits are formed over the years, as well as certain lifestyle patterns
that dictate if and when something will be purchased. Personal perceptions are also built
on many external influences, be it what others think, what specific age or ethnic group
to which the consumer belongs and, of course, what overall cultural influences are in
play. Lastly, our commitment to certain brands and our knowledge of products are also
significant determinants.

Personal Traits and Psychographics


Decisions are influenced by internal personality traits and demographic factors. The
young professional will approach a real estate purchase from a far different perspective
than a mid-thirties couple with young children. Their needs are different and purchasing
decisions are based in part on those needs. Not only do the mindsets vary, but also personal
backgrounds. The aging boomer bases house buying decisions on very different premises
than the single mother. Ironically, their decision process may ultimately point them to
the same neighbourhood and house.
However, a person’s demographic makeup and personal traits do not provide a complete
Psychographic picture. Marketing companies typically rely on psychographic studies as well to delve
Research concerning the study deeper in consumers’ lifestyles, opinions and interests. Consumers make decisions not
of consumer lifestyles based on simply based on who they are, but also what lifestyle they seek. For example, in recent
interests, opinions, actions and years, real estate developers and builders are addressing the growing non-traditional
activities.
market segments that include single women, unmarried couples with no children, baby
boomers and young professionals. Housing diversity is everywhere from high-ceiling lofts
overlooking trendy downtown Toronto to gated senior communities with walkways,
marshes and bird watching.
But psychographics goes much further. We live in a world of social activism. Many
individuals, based on personal beliefs, will gravitate to companies that address signifi-
Green Building cant lifestyle issues. Green building is an excellent example in which house building techni-
Energy efficient construction ques promote energy efficiencies, prudent use of resources and sound environmental
methods used in residential and planning. Consumers may be willing to pay more for energy-efficient home features such
commercial structures. as solar assisted or geothermal heating/cooling systems and new window technologies.
Commercial buyers may seek out reflective glass, increased thermal resistant materials,
energy efficient lighting systems and smart technologies to demonstrate sound environ-
mental values, while also acquiring a more efficient structure. Green building is a win-
win situation. It not only addresses social issues, but also makes sound economic sense
assuming a reasonable payback period for the added costs.

What Others Think


Marketers also understand that no one exists in isolation. ur opinions are formed by
what others say and do. They need not be friends or relatives. Ironically, the most trusted
advice may come from someone who is not even liked, but their opinions are respected.
Like it or not, we often make decisions based on what other people will think of our
purchases. The impressive facade of a two-story house with pillared entrance makes a
statement. Little wonder the backsplit quickly came and went in a world of consumers
seeking not just size (the backsplit offers lots of space), but street appeal.
In sociological terms, the ‘others’ are typically referred to as reference groups, which
can be either formal (a structured group such as a religious organization or a social club)
or informal (a group of neighbours or friends who meet informally). Regardless, the

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group exercises some degree of power over its members. Many types of power can be
exerted from a respect for those in authority within a reference group: Three people in
our brokerage have bought that car and they all highly recommend it. f course, in real
estate sales, who hasn’t heard: Yes, we like the house, but my father has to see it and make
certain it’s OK.
Many people follow others for conformity, whether out of fear of being different, a
desire to belong, or both. The office worker may carefully select a certain neighbourhood
so as to not be viewed as different. Even independent thinkers can compromise their
individuality in some ways. For example, the rising entrepreneur as a renegade in business
may buy a traditional home in the right neighbourhood to confirm his social standing.

Market Niches
Birds of a feather do stick together. Consumers are social and the urge to flock with others
of similar psychographic, ethnic, age and other attributes is strong. This group dynamic
gives rise to expanding market niches. For example, the desire to group is particularly
evident in adult lifestyle developments now springing up in this province and across
Canada. The natural tendency is for aging boomers to seek out others going through the
same lifestyle passage and developers are reaping the benefits of this social reality. Humans
seemingly want to gather with those who think or act the same way as they do.
Marketing companies discovered this fact years ago in market segmentation and target Market Segmentation
market strategies. The consumer marketplace is made up of many sub-markets that can The division of a market into
be based on such factors as ethnicity, income level, lifestyle, family structure and age. f submarkets in which consumer
course, target markets can be either geographic (e.g., a specific neighbourhood or condo- needs are generally similar.

minium building) or non-geographic (e.g., individuals dispersed across the province, but
all members of the same sub-market). Marketing companies then target these specific
consumer audiences with products that align with or complement the underlying
commonality.

The Growing Second Property Market MARKET MEMO

A new market niche is opening. Buyers of second properties, such as vacation and investment properties, are taking on a focal
role in the resale market. Demographic changes (i.e., the aging population), low mortgage rates and sustained economic prosperity
over the past decade have played a significant role. No one knows how big this market is in Canada. Interestingly, in the United
States, surveys indicate that second property activity represents approximately 40% of the resale market.
Initial indications suggest that baby boomers are driving this market and plan to use this second property as a primary residence
in the future (e.g., a winterized cottage in the Kawarthas) or to build capital to offset high anticipated costs for care in older age.
US statistics suggest that most acquisitions are single-family detached homes within a one hour’s drive from the primary residence.
Further research is required to assess the extent of the second property market in Canada, but clearly opportunities exist to service
consumers not only from a real estate brokerage perspective, but also from other professional perspectives including financial,
taxation and property management dimensions.

Culture Culture
Culture and cultural values also have a strong bearing on how consumers make decisions The shared values of a society in
which socially acquired behavior
in the marketplace. ntario, as well as much of Canada, has experienced significant patterns are communicated
immigration and associated cultural diversity. Marketing experts know that products are symbolically, usually through
selected based on their alignment with cultural values, ethics, rituals and traditions. An language.

individual’s culture is much like a filter allowing through only those products and services
that align with internalized priorities and real estate is no exception.

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Feng Shui is a good example. This ancient Chinese belief system centres on space
arrangement and placements in relation to philosophical, geographical and aesthetic
principles. The location of stairways, straight lines and sharp corners in sitting areas and
geographic location of houses can have a positive or negative effects in terms of feng shui.
ne home, viewed positively under western cultural standards, may be immediately
dismissed by another based on feng shui principles.
Cultural differences can also account for buyers seeking certain house plans and room
configurations given particular rituals and customs. For example, certain ethnic groups
will seek out homes with large kitchen/dining room areas for family events. Where one
buyer may dismiss a second kitchen as a needless waste of space, another might view it
as a necessity.
But culture goes well beyond traditional ethnic divisions. Canadians are avidly embrac-
ing the new electronic culture and this love affair goes well beyond cell phones and wire-
less hotspots in coffee shops. Home builders have had to address growing demands of
consumers hooked on high-speed access, modular wiring, video Internet links and wire-
less communication. Many new homes also boast the latest in computer-assisted energy-
efficient heating/cooling, zoned controls and security/surveillance systems (complete
with remote access when away from home).

Brand Loyalty
Consumer behavior is often determined not by what an individual does or what groups
to which he or she belongs, but rather by confidence personally attributed to a specific
Brand Loyalty product through brand loyalty. While such confidence can arise from personal experience
A consumer’s commitment to a or valued opinions of others, the branding process is internalized. ften, consumers
specific product or service. unconsciously dismiss countless valid alternatives, only to pick up that favourite label.
Brand names are everywhere in the marketplace from clothing to automobiles and
appliances, and real estate is no exception.
A buyer may specifically seek out a trusted builder when acquiring a new home and
sacrifice other factors (e.g., a location close to work) in order to have the builder’s name-
plate affixed in the entrance way. In fact, in some communities, it’s fashionable to mention
who built your home as well as where it’s located: Oh yes, we bought a [name of builder]
home. His workmanship is simply the best! A buyer may also insist that a newly constructed
home have specific brand products (e.g., plumbing fixtures, lighting and insulation).
Brand loyalty goes well beyond such utilitarian motivations as functionality, design
and reliability. ften, it is simply chic to have a certain brand name in the hopes that all the
marketing glitz of high fashion and image will rub off on the hopeful consumer. Perhaps,
the consumer thinks that he or she will be a better driver just by getting behind the
steering wheel of a new car, become a romantic by just sipping a certain wine, achieve
that elusive hole in one with just the right set of golf clubs or lose those excess pounds
by putting on a certain pair of running shoes.
Branding now goes well beyond products and has entered the service field. Real estate
brokerages have long identified with branding, particularly through franchise affiliations.
Brokers and salespersons are the latest converts, as they pursue personal branding in
hopes of implanting a lasting image in the buyers’ and sellers’ minds. If the range of
personal photos on bus stops, benches and billboards are any indication, the concept is
working well.

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Product Appeal
Some products just make good sense to the consumer because they’re appealing. That
appeal can arise from utilitarian needs and/or attractiveness (e.g., visual appearance).
There’s an old saying in real estate that warrants emphasis: People don’t buy houses, they
buy homes. The design, layout, amenities, colours and the ambience all play out in the
decision-making process. Consumers see themselves in the home enjoying its features
and benefits. Many buyers evaluate homes not so much from a sticks and bricks perspec-
tive, but rather on a personal impression of what they want in that home.
This is not to say that structural, mechanical, electrical and insulation systems are not
very important. It’s just that buyers don’t typically rush down to the basement to inspect
the furnace. They’re too busy standing by the stone fireplace mentally placing their furni-
ture in the room. Marketers long ago realized that it’s not the steak, it’s the sizzle and
they are continuously searching for the latest features that will satisfy the ever unfolding
needs of changing consumer behaviour.
These days, the new house market is focused on energy efficiency and the needs of a
technology conscious consumer seeking a new home laden with electronic features from
automatic sensing systems to full digital access in every room. Product appeal is also alive
and well in resales. Home staging has taken centre stage as prudent sellers seek to display Home Staging
their homes to gain a marketing advantage. Homeowners have come to realize that staged Improving the appearance of a
homes can sell faster and possibly for more money. It’s a matter of playing up the strengths home to increase its attractiveness
and powering up the visual presentation. Staging has now gained such prominence that to potential buyers.

sellers of vacant property may decide to rent furniture and accessories in hopes of
transforming an empty house into a warm, inviting home.

The Electronic World Beyond


The world is just too small these days. Consumer behaviour is driven by forces well beyond
local perspectives. Consumers, including real estate buyers and sellers, are influenced by
products, happenings and opinions far and wide. The Internet is quickly obliterating
time and space limitations when it comes to product information, what to buy and how
other consumers feel about specific products. Consumers need only type in a product
name and a host of specifications, pricing and product reviews fill the web browser page.
Buyers now routinely access real estate databases to compare resale properties, prices
and amenities. But the electronic power for consumers goes well beyond basic shopping.
A residential condominium builder in ttawa may advertise the latest kitchen design inno­
vations and appliances, while the seemingly innocent buyer is already aware that the condo
units are equipped with last year’s products. The commercial buyer may critically inspect
a new retail building equipped with energy-saving devices, knowing that these systems
have had problems and that improved products are readily available. All this and more
is readily available to even the casual computer user on the internet.

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Understanding Today’s Real Estate Consumer PERSPECTIVE

What do the typical buyers do these days? The National Association of REALTORS® (USA) conducts periodic buyer/
seller surveys relating to the residential marketplace. Here’s a few facts to consider from their 2012 survey:
• hirty­nine percent of homebuyers purchased their first home.
• ighty­nine percent of home buyers purchased a home through a salesperson.
• inety percent of homebuyers used the Internet to search for a home.
• ighty­eight percent of sellers were assisted by a salesperson when selling their home.
• he most important reason for buying, among repeat residential buyers, was to find a larger home.
• eighbourhood quality was the most important factor when deciding on location.

Of particular note is the widespread use of the Internet to search for homes. Consumers are becoming much more
savvy and are in step with the electronic real estate marketplace.

Source The National Association of REALTORS® Profile of Home Buyers and Sellers, 2012.

CONSUMER NEEDS AND WANTS


A consumer need is an underlying biological or psychological desire to attain something
for a particular purpose. This need typically results in specific behavior to achieve the
desired goal. A want, on the other hand, is what we think we require in order to meet
the need. ur wants are usually determined based by all the internal and external forces
that underlie consumer behavior. To put it bluntly, humans live in the world of needs;
advertisers and marketing companies live in the world of wants. While needs may be
similar, how individuals attempt to satisfy these needs is a more complex matter.

The Battle of Needs and Wants CURIOSITY

Consumers commonly wrestle with needs and wants when making purchases in the marketplace. Here’s a few examples:

Two individuals need automobiles to get to work. The first person wants a high priced foreign
sports car while the second wants a sport utility vehicle. The need is the same, but the wants are
very different.
A young couple need basic shelter, but they want a new, upscale suburban home.
The young businessperson needs an office, but he or she wants an executive suite in a central
business district.

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Hierarchy of Needs
Many theorists have attempted to explain needs in terms of models and classification
systems, most involving an analysis of underlying motivation. A well-known approach Motivation
involves Maslow’s hierarchy of needs. Maslow, a noted expert of human motivation, The desire to accomplish
developed this theory in the early 1940’s which culminated something, which may involve
in his book titled Motivation and Personality (1954). This either a short or long term goal.

hierarchy offers a relatively straightforward method of


understanding
standing progressive levels of need as individuals
fulfil basic physiological requirements and progress
to higher levels. This hierarchy can explain in part
SELF-
what motivates consumers in the marketplace ACTUALIZATION
when making various buying decisions. Self-Fulfillment and
Maslow is only one of many such theorists, Creativity

but his theory is well accepted and under-


EGO
stood in most marketing circles and, for
Status and Personal
purposes of this course, will provide Accomplishments
adequate background information on
consumer needs. Maslow provides five SOCIAL
levels of need. Individuals move up Companionship, Family and
Social Interaction
and down this hierarchy based on
personal circumstances.
SECURITY
Shelter and Safety

PHYSIOLOGICAL NEEDS
This level of need involves the PHYSIOLOGICAL
basic human drive for self- Basic Life Essentials
preservation including the
search for food and water. In
other words, if these needs are
not fulfilled, they take on immediate priority with the individual. In our society, basic
psychological needs are normally satisfied. These needs are not solely geared to survival,
but do include those judged as primary needs for existence. Consumers satisfying only
physiological needs give little regard beyond that. In consumer terms, the issue is not
which grocery store is suitable, but rather where can I find food. The closest real estate
analogy involves a person who has no shelter. The priority is to simply get a roof over
his or her head.

SECURITY NEEDS
Security needs can range from either physical or financial security. The average person
does not want to be concerned about the source of the next dollar, whether or not his/her
job will be there next week or if the valued home will be immediately foreclosed. In today’s
society, economic security appears to be as important as personal, physical security.
Physical security broadly refers to the safety of loved ones, security of a home and the
general well-being of the individual. Money is an issue at this level of need, along with
stability of job and income. Examples, for real estate purposes, could involve a young
couple seeking a better neighbourhood for their children or a fixed income pensioner
wanting an apartment in a safe neighbourhood.

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SOCIAL NEEDS
Security needs give way to higher levels of expectation. This level in the overall hierarchy
involves love, family relationships, companionship, social ties and the person’s desire to
belong. Consumers seeking social needs want to be involved with other individuals on a
meaningful basis and be actively participating in the mainstream of community life.
Maslow emphasized that we as individuals seek out acceptance with the group. If basic
physiological and safety needs are satisfied, presumably social needs become a major
driving or motivating force within our lives. A real estate buyer acquiring a large suburban
home, complete with a large yard and inground pool, would probably involve social needs.

EGO NEEDS
The attainment of security and social acceptance leads to loftier pursuits, as individuals
Status Symbols seek out a general feeling of self satisfaction. Status symbols are ardently sought and
A tangible sign of an individual's retained. The large corporate office, the seating arrangements at the board room table, the
economic or social status. status at the golf club and the size of the suburban home are all part of the ego symbols
used to display oneself to the world.
Behind these trappings of success is a foundation of financial security and social
acceptance. The expensive car, the extended vacation and the private school for children
are signs that the consumer has arrived in terms of material success and associated recog-
nition by comrades and associates. A real estate example might involve an individual
building a custom home in the country that includes various amenities such as a triple
car garage, large entertainment/home movie room and a wine cellar.

SELF ACTUALIZATION
The final stage in Maslow’s theory involves the concept of personal fulfilment and the
ability to develop one’s potential in terms of creativity and outward expression. This lofty
need is rarely attained, but is the ultimate in personal success. Individuals attempt to reach
their fullest potential through solving problems of others, addressing grander issues facing
humanity (including philanthropy) and cultivating peak human experiences (e.g., circum-
venting the world with a hot air balloon or climbing Mount Everest).
In real estate terms, this individual may reside in a penthouse condominium with both
panoramic and waterfront views, have a winter vacation home nestled in a gated Southern
Florida community and enjoy a sprawling recreational residence on a northern lake for
those hot summer weekends, readily accessible by private float plane. At the same time, his
or her humanitarian efforts could include many hours of concerted effort in developing
subsidized housing for the less fortunate and providing funding for low income senior
housing.

Real Estate and Maslow’s Hierarchy


As with any theoretical model, practical realities don’t always align well with precisely
defined stages. Maslow has been criticized as too simplistic given the narrow theoretical
view of human needs. Further, it is almost impossible to fit individuals neatly into one
particular stage or another. Indeed, consumers may display characteristics and pursue
goals on various levels throughout their lifetimes or, in fact, within a very short period
of time. For example, a person may be expressing himself or herself by playing a musical
instrument (self actualization), but having to stop due to thirst (physiological). In fairness,
Maslow contemplated such dynamic swings, acknowledging that individual circumstances

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can change, thereby affecting the need level at a particular point in time. Some people
have noted that his hierarchy also closely parallels the human life cycle from birth through
adolescence to maturity.
However, the theory provides a workable framework to better understand real estate
consumers if viewed as a continuum ranging from basic needs to lofty ideals of self
fulfilment. In fact, most consumers are seen as moving between stages. First time buyers
concentrate on the necessities of life by first acquiring real estate as basic shelter and then
moving to financial security.
Financial security is hopefully achieved which, in turn, leads to personal flexibility and
the opportunity for more functional homes. With such change come more social connec-
tions and acceptance by others at a different level. Consumers on the social level tend to
acquire properties that make a social statement well beyond basic shelter needs. Those
elevated to the ego stage delve into second homes, country estates and prime waterfront
condominiums and so forth.
With each stage comes greater real estate expectations. f course, the importance of
money tends to decrease as consumers move through higher stages. In the physiological
and security levels, money dominates while, in higher stages, money decisions are but a
single component within a much larger frame of reference.

Application and Limitations


The hierarchy of needs helps explain consumer buying behavior. Individuals on a physio-
logical level place emphasis on pricing. At this level, basic needs can only be satisfied.
While wants may exist, they are well beyond available financial resources. Conversely,
those on security and social levels have achieved a level of personal success and are willing
to pay a premium for products and services that align with achievement.
Those seeking higher levels of security are quite prepared to pay additional money for
safe neighbourhoods, security guards and monitoring systems. Further, real estate is view-
ed as an investment, much like mutual funds, that serve to protect financial security.
Buyers at the social level seek more exclusive neighbourhoods. In fact, the rapid growth of
gated communities (particularly in the United States) is testament to this drive for geo-
graphically isolated, security-oriented residential accommodation.
Maslow’s needs theory has been widely accepted despite certain limitations. For example,
cultural differences can conflict with his linear progression upwards to higher degrees of
personal satisfaction. In some societies, the pursuit of individualism (as set out in ego
and self actualization levels) may not be uppermost, while social needs and acceptance
would be more valued and pursued.

CONSUMER VULNERABILITIES
Consumers are vulnerable given the complexities and significant financial commitment
that accompanies most real estate negotiations and ensuing transactions. Brokerages
and their representatives must ensure that professional services are always provided and Vulnerable
that consumers are treated with honesty and due care, either when representing them as The potential of being open to
clients or providing services to them as customers. Seven common consumer vulner- attack or damage and being
taken advantage of in a particu-
abilities are highlighted. lar situation.

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Confusion Regarding Who Represents Who


Consumers often do not understand agency law nor appreciate the subtleties involved in
representation, the duties to be performed, whose interests are being protected and why.
REBBA 2002 sets out detailed disclosure requirements, which require that buyers and
sellers are fully aware of service alternatives available through the brokerage, what obliga-
tions are owed and how to handle circumstances in which the brokerage represents both
parties in a transaction.
If forthright and complete disclosure is not provided as soon as is practically possible,
consumers may inadvertently make statements or offer confidential information that they
would not otherwise disclose. The onus rests with brokers and salespersons to ensure
that such does not occur.

SCENARIO The Open House


In a typical open house situation, the salesperson in attendance is employed by the listing brokerage and
represents the seller’s interests. This fact should be disclosed as soon as is practicably possible to any poten-
tial buyer attending the open house to avoid any confusion. Further, the buyer customer, if unaware of this
situation, might divulge confidential information to his or her detriment, as the salesperson is obligated to
convey such information to the seller as a client.

Caution When Inspecting Properties


Brokers and salespersons should ensure that buyer clients understand the importance of
carefully inspecting properties, and seeking out appropriate professional advice concerning
any property being seriously considered for purchase. Fortunately, many professionals are
available to conduct inspections and provide reports on matters such as electrical systems,
structural components, environmental concerns, municipal compliance, surveys, home
inspections and title matters. Selected professionals are profiled later in this chapter (see
subsequent topic titled Professionals and the Consumer).

SCENARIO The Home Inspection


The buyer client is contemplating making an offer on a rural property. The salesperson representing the
buyer informs his client that he should carefully inspect the property and also seriously consider obtaining
a home inspection. The client includes an appropriate condition in the offer and a subsequent inspection
reveals structural deficiencies that must be remedied.

Due Care When Signing Documents


Agreements involving real estate transactions can be complex. Consumers must always
have a clear understanding of printed clauses. Take reasonable care in explaining matters
to buyers and sellers. If doubt exists, discuss the matter further with and seek added
confirmation from the individual; e.g., ask the consumer to reiterate what main points
have been discussed. When the consumer’s understanding remains in doubt, recommend
that he or she obtain independent legal advice. The bottom line is that consumers must
read documents carefully before signing. Placing a signature on a real estate agreement
without understanding it is simply foolhardy.

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SCENARIO The Dotted Line


The buyer client asks that the salesperson prepare an offer on 1328 Main Street. Once completed, the buyer
immediately takes the agreement and asks for a pen to sign. The salesperson has specific legal obligations to
the client to ensure that his best interests are protected. Accordingly, he carefully reviews all the terms and
conditions to ensure that the client fully understands what is being signed.

Lack of a Cooling Off Period


Cooling off periods do not typically apply when entering into a real estate transaction (with Cooling Off Periods
the exception of timeshare agreements under provincial consumer protection legislation). A time period, typically esta-
Consumers must fully understand what they are signing and the consequences of entering blished by legislation, that
into an agreement of purchase and sale. While certain remedies may be available (such as provides the consumer with an
opportunity to cancel whatever
rescinding the contract if an innocent party is drawn into an agreement through misrepre- action has been taken (e.g.,
sentation), signing an agreement of purchase and sale creates a firm and binding contract buying a specific product).
(subject, of course, to any conditions that may be included in that agreement).

SCENARIO The Hot Market


The buyer is anxious to acquire a newly listed commercial property. Fearing that she may lose the property
to a competing buyer, the buyer wants to immediately sign an offer with no conditions. The salesperson
is prepared to follow those instructions, but cautions her client that once the offer is accepted, there is no
backing out of the deal.

Failure to Include Conditions


Most conditions drafted for residential agreements require that some event must occur,
the occurrence of which makes the agreement legally binding. Wording variations do
exist in the marketplace and are more fully addressed in The Real Estate Transaction—
General. Conditions can be customized to address specific circumstances. Most common
conditions address such matters as mortgage financing, property inspections, the sale of
an existing home, and water well or sewage systems, but a host of other possibilities
exist.
Consumers must be particularly cautious in strong seller’s markets that can often involve
multiple offers and hectic negotiations. In some instances, buyers may not include condi-
tions that they would otherwise prudently insert knowing that the seller will probably
reject condition-laden offers out of hand in favour of all cash offers (i.e., no financing or
other conditions). While such action is legally possible, consumers must clearly understand
that their accepted no condition offers become firm and binding agreements without the
ability to cancel the deal if financing was in fact needed and could not be obtained.

SCENARIO The Well and Septic System


The salesperson is showing her buyer client an attractive recreational property that is ideal for the buyer’s
purposes. The client is generally unaware of issues concerning wells and septic tanks, and is quite prepared to
overlook such matters. However, the salesperson explains various problems that could arise and the necessity
of including an appropriate condition. Based on this advice, the buyer reconsiders and includes a properly
worded condition, as such problems after closing could represent a considerable cost to remedy.

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Not Respecting Deadlines


Real estate agreements are a matter of contract law. Parties are expected to prudently
observe dates concerning removal of conditions, take any actions as agreed, forward
funds when stipulated and generally give and receive notices and do such other things as
set out in the agreement. Registrants can assist consumers by clearly explaining that
‘time is of the essence’. In other words, timing is key and the parties are expected to act
diligently in that regard. A failure to meet obligations as set out in the agreement may
result in termination of the contract and the possibility of litigation including damages.

SCENARIO Sale of Home


The buyer included a 60-day condition in an agreement regarding the successful sale of his existing property.
During the specified period, the buyer did not attempt to sell his house, ignored the time limit and didn’t
communicate further with the seller. The seller took legal action for damages against the buyer, as his property
had been effectively removed from the marketplace and would have probably sold to someone else.

Not Getting Finances in Order


Real estate transactions can involve significant cash outlays. Many consumers concen-
trate on downpayments, but don’t look at the bigger picture. Lenders are cautious and
want to see stability. Remember, they will take a close look at your credit history, seek
confirmation of employment and financial resources, want written confirmation of
available funds for the downpayment and generally scrutinize your financial stability
and capabilities.
If personal funds are limited, resist the urge to move banks, apply for new credit cards,
take on additional financial responsibility or acquire ‘big ticket’ items. Make certain that
all bills are paid promptly. Don’t start a new job near the time that you are contemplating
buying real estate unless it’s clearly a positive career move. Resist the urge to venture into
a new business, unless you have abundant reserves.
Consumers also tend to be vulnerable at closing by underestimating total costs. Have
additional cash on hand to address adjustments, legal fees, moving costs, additional things
that will be needed in the new residence and a host of incidental fees that are unique to
each transaction.

SCENARIO The Credit Report


The salesperson showed the buyer more than fifteen properties before the ideal home appeared. The buyer
immediately submitted an offer conditional on arranging a new first mortgage. The lender completed a
credit report as part of the mortgage underwriting process only to discover that the buyer only marginally
met basic criteria and could not provide written confirmation that he had the necessary downpayment.
Failure to recognize and deal with these issues proved frustrating for the buyer, the seller and the salesperson.

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A Matter of Professionalism PERSPECTIVE

Registrants help people make important decisions about the largest asset they will ever own. When buying or selling
real estate, consumers are trading much of the financial worth that they have accumulated over many years. Often, an
emotional investment exists in addition to the large financial one. Most sellers are owner/occupants and have lived in, and
often improved, the property that is being sold and naturally develop a strong emotional attachment to the property.
Buyer clients also have pressures and emotional issues, as they often rely on the salesperson to seek out the best
property to meet their needs with only limited available time. Often, decisions must be made quickly by buyers having
little detailed knowledge of their new community or neighbourhood. With such large amounts of money and emotion
involved, the stakes are high. Any misconduct or unethical behaviour can be damaging to the seller, the buyer, the
public, the real estate brokerage and salesperson, and the real estate profession as a whole.
When completing a transaction, various parties to the transaction put the real estate salesperson in a position of
trust. As a client, the consumer relies on his/her professional expertise, skills, knowledge, competence and integrity.
Thousands of registrants base their business on such trust and their reputation for honesty and reliability. When a
registrant acts unethically, public confidence is eroded not just in the person involved, but in the industry as a whole.

ETHICS AND THE CONSUMER


Ethical conduct is an integral part of sound business practices. Ethics makes good sense
from both consumer and brokerage perspectives. Consumers expect to be treated with
honesty, respect, integrity and professionalism. In return, consumers give their loyalty, as
they realize that their interests will be best protected by dealing with an ethical brokerage
operation. Also, as a further benefit to brokerages, salespeople seeking employment tend
to gravitate to those brokerages that openly demonstrate a commitment to high ethical
ideals, moral standards and professional conduct.
What do terms such as morals, ethics and professional conduct really mean? Distinctions
are often blurred with philosophic battles raging over precise meanings. Some view them
as interchangeable, but subtle differences do exist. Think in terms of a continuum from
general (e.g., morals and ethics) to more precise concepts involving standards and specific
conduct.

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Morals vs. Ethics


Morals are best thought of as fundamental principles of right and wrong. Typically, morals
arise from cultural and/or religious traditions and are of a personal nature. Morals provide
the mental backdrop for decisions as to what conduct is appropriate and what direction
to take when faced with various situations in society. Ethics is more specific in nature,
referring to standards adopted within a society (or other group or association) that are
deemed to be culture-specific.
Given that cultural differences exist, so too can areas of conflict between different groups in
society, particularly when dealing with personal conduct. For example, societies routinely
wrestle with moral (and ethical) issues involving abortion, drugs and assisted suicide.

Business Ethics and Professional Standards


Business ethics typically complements broader standards within society as a whole.
Interestingly, societies can differ significantly in their approach to certain business issues
based on underlying ethical perceptions. Bribery is a good example. In some societies the
practice is commonplace (even if not fully condoned) in order to get things accomplished.
In others, the practice is not only unethical, but may be subject to prosecution.
Business ethics, in turn, flows to professional standards. ver the years, professional
organizations have advanced sound ethical practices for specific business sectors, and
real estate is no exception. Codes of conduct (often referred to as professional standards)
have been developed to address specific disclosure and conduct requirements that are
enforced by consumer complaint mechanisms, disciplinary proceedings, inspections
and investigations. Selected professionals and their applicable organizations who assist
consumers are highlighted later (see Professionals and the Consumer).
Consumers are protected when working with real estate brokerages, brokers and sales-
persons. Real estate registrants in ntario must at all times abide by the REC Code of
Ethics. This Code has the force of statutory law, as it is contained within a Regulation
under the Real Estate and Business Brokers Act, 2002. Registrants may also be members
of other professional organizations and must also adhere to those applicable standards.

Ethics and the Law


Ethics must be expressed as a set of principles or values to be useful and effective. The
individual is then able to guide his/her own conduct and judge that of others by means
of a standard of conduct. Too frequently, ethics is confused with law. They are related
and some overlap exists (as in the case of the REC Code of Ethics), but they are not
identical. While the system of laws under which we live provides a substantial basis for
ethical conduct, ethics is much more comprehensive than laws or regulations. Law deals
with people as they are, setting a minimum standard of conduct. Ethics seeks to lead
people to what they ought to be and do and, consequently, establishes a higher standard.
In other words, it is possible to be legally correct, but not ethically acceptable.
Law is designed to keep us from doing wrong while ethics encourages us to do that
which is right and good. Law is thus negative while ethics is positive. The law is not con-
cerned with a person’s motives or reasons for obeying its demands and avoiding wrongful
acts, but is satisfied by compliance and obedience, whatever the reason. Not so with ethics.
The reason or motive for one’s actions as they affect others becomes important. Ethics is
an attempt to change, to improve and to elevate people’s motives, as well as actions.

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The means of enforcement is also different. Law is enforced through the police and
courts (or administrative tribunals). Ethics is generally enforced by the governing bodies
of a profession. Law and ethics do overlap, but ethics is more extensive, continuing on
where the law leaves off. Thus, while all that is ethical is also lawful, the reverse is not
always true.

The Evolution of Business Ethics MARKET MEMO

Until relatively recent times, many people in business took such a limited view of ethics that they used bare legality
as the sole standard for their conduct in business affairs. The 19th century business person took the attitude that the
public be damned and the public did not seem to care. If it did, the public lacked the means to protect or correct the
situation, for at that time it was generally felt that government should not control or regulate business conduct.
Around the turn of the 20th century, the business community concluded that there was a right and wrong way of
doing things, not only in private life but also in dealings with customers, employees and competitors. For example,
many real estate boards across Canada were established during the early decades of the twentieth century and
required members to be bound by a code of professional conduct.
Over the years, business has attempted to improve both image and motives. This transition has occurred in part
because of government intervention. The development of laws and regulations have been in response to the public
demand to be protected from the uncontrolled use of economic power along with the disregard of public interest.
This change has also come about because of a change in attitude within the business community itself. Business
leaders, for the most part, now recognize that:

• he purpose and function of any business is to serve the public, not just to satisfy the personal
ambitions of those who own or run the business;
• thical conduct and financial success do go hand­in­hand;
• Business has a responsibility to the community which supports it; and
• A failure to recogni e and exercise such responsibility could lead to greater governmental intervention
and control.

Ethical Dilemmas
Ethical dilemmas typically occur when one’s moral values are in conflict with standards
adopted in a particular society. For example, an individual may express a moral position
on abortion based on cultural and/or religious standards that conflict with ethical stan-
dards and accepted practices within society. Interestingly, this dilemma can also extend
to a conflict with the law. n a business level, the conflict typically arises between personal
values/needs and business ethics (including professional standards established by a par-
ticular organization to which an individual is a member). However, once again, the
conflict may extend to legal considerations.
ften, the conflict involves a pragmatic circumstance and the individual takes some
action based on personal beliefs knowing that such is in conflict with established standards.
Typically, most people caught in such circumstances seek ways to resolve the conflict by
rationalizing their position, in some way arguing that the end justifies the means, or
convincing themselves and others that the decision was an exception to normal ethical
behaviour, as it involved unique circumstances warranting immediate action.

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SCENARIO Money Pressures


A salesperson might be under personal financial pressure and anxious to receive a commission. The buyer
client, when asking about the condition of the well and septic, receives a misleading response from the
salesperson which suggests that everything is okay when such is not the case. The buyer, relying on this
misrepresentation, proceeds to acquire the property. The salesperson has placed his or her own interests and
anticipated personal gain above that of the consumer. While moral and ethical principles demanded honesty,
the conflicting pragmatic financial needs triumphed.

SCENARIO The Gift


A salesperson is given a $500 gift certificate by the buyer customer for a job well done in acquiring the
property listed by that salesperson. The salesperson accepts the gift without telling anyone which, to outward
appearance, has no immediate ethical consequences and is simply a pragmatic decision. However, the
salesperson is a RECO registrant and must fully disclose this monetary gift to his client (the seller of the
property). His obligation to disclose is also a matter of agency law. As an added consideration, a salesperson
is not authorized under REBBA 2002 to receive remuneration from anyone other than his or her employing
brokerage.

More Than Your Good Name Is At Stake CAUTION

Ethics is focal to every registrant. REBBA 2002 contains numerous provisions addressing required ethical procedures
and practices as set out in Regulation 580/05. Failure to comply can lead to disciplinary action and revocation of
registration. Registrants may also face litigation should buyers and sellers be adversely affected by your conduct.

Everyday Ethical Choices MARKET MEMO

Lights…Action
Ad calls are lighting up the switchboard, and you are helping out since no other salespeople are present. Two
callers asking for other salespeople are momentarily distracted by your friendly conversation. A few well-placed
words and they could be your clients. Would anyone be the wiser?

The Rest of the Story


The seller tells the buyer in your presence that all drafty main floor windows have been replaced. Do you say
nothing or ask the obvious? What about the rest of the windows? How far should you pursue the topic? Does
the type of relationship that you have with the buyer and/or the seller dictate how you will act?

How Far Away?


A little positive spin on a negative feature…that's all. The house is three blocks from the public school (but,
the school bus route actually takes 30 minutes). If the ad states: “School Just Three Blocks Away”…is it really
distorting the truth or just favouring the positive?

The Accomplice
Another salesperson does something unethical, what's your obligation? If nothing is said, are you an accessory
to the fact? Ethical choices are everywhere.

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CONSUMER PROTECTION LEGISLATION


Today’s consumer can rely on a host of legislative requirements that regulate businesses
and individuals offering services and products to the buying and selling public. Three
are highlighted here with many others addressed under applicable topics in this and
subsequent courses. f course, the primary legislation involving real estate trading is the
Real Estate and Business Brokers Act, 2002 and associated Regulations. Legislative require-
ments for registration were detailed in an earlier chapter. Detailed trading regulations
are included in Land, Structures and Real Estate Trading.

Consumer Protection Act


The Consumer Protection Act (CPA) is the focal provincial legislation concerning consumer
protection in ntario. This Act came into force on July 30, 2005 with expanded rights
and remedies for consumers and businesses. The Act consolidated six existing consumer
protection laws and broadened consumer rights, disclosure requirements by suppliers
and remedies for unfair business practices including dishonest activities. At the same
time, the legislation set out stiffer penalties including a maximum sentence of two years
less a day with individual fines up to $50,000 and $250,000 for corporations.

THE CPA AND REAL ESTATE TRANSACTIONS


This legislation typically applies if at least one party to a consumer transaction is located
in ntario. A consumer transaction involves any act or instance of conducting business or
other dealings with a consumer, including a consumer agreement. A consumer agreement
is an agreement between a supplier and a consumer in which the supplier agrees to supply
goods or services for payment. However, Sec. 2(2) of the Act sets out important exceptions
relating to real estate transactions:

Exceptions (Relevant Exceptions Bolded for Emphasis)

(2) This Act does not apply in respect of,


(a) consumer transactions regulated under the Securities Act;
(b) financial services related to investment products or income securities;
(c) financial products or services regulated under the Insurance Act, the Credit
Unions and Caisses Populaires Act, 1994, the Mortgage Brokers Act or the
Loan and Trust Corporations Act;
(d) consumer transactions regulated under the Commodity Futures Act;
(e) prescribed professional services that are regulated under a statute of
Ontario;
(f) consumer transactions for the purchase, sale or lease of real property,
except transactions with respect to time share agreements as defined in
section 20; and
(g) consumer transactions regulated under the Residential Tenancies Act, 2006.

Further, other general provisions are also limited in their relevance to real estate,
most notably those concerning future performance contracts (Sec. 22, 23 and 26), as
well as Internet, direct and remote agreements:

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Agreements Subject to Other Acts (Relevant Exemption Bolded for Emphasis)

9.(1) The supply of goods or services pursuant to an agreement that is subject to


any of the following Acts is exempt from the application of sections 22, 23,
26 and 37 to 47 of the Act:
1. The Motor Vehicle Dealers Act or the Motor Vehicle Dealers Act, 2002.
2. The Real Estate and Business Brokers Act or the Real Estate and
Business Brokers Act, 2002.
3. The Travel Industry Act or the Travel Industry Act, 2002.
4. The Cemeteries Act (Revised), the Funeral Directors and Establishments
Act or the Funeral, Burial and Cremation Services Act, 2002. O. Reg.
17/05, s. 9 (1).
(2) The exemption from the application of sections 22, 23 and 26 of the Act is
effective even if section 21 of the Act states that sections 22 to 26 of the Act
do apply in the circumstances. O. Reg. 17/05, s. 9 (2).

However, these exemptions do not address agreements in which services are offered to
consumers, as differentiated from agreements for the transaction of real estate. Certain
registrant activities involving service agreements (e.g., seller and buyer representation
agreements) can fall under the Consumer Protection Act, but such analysis goes well beyond
the scope of this course. As a general guideline, however, the Ministry responsible for the
Act would typically refer such matters to REC , as it has direct oversight of registrants.
Interestingly, the Council’s investigative staff are authorized to lay charges under the CPA.

The Competition Act


The Competition Act (formerly the Combines Investigation Act) is a federal statute
addressing many forms of competition in the interest of promoting a fair and efficient
Canadian marketplace. This legislation seeks to protect consumers by regulating selected
business conduct throughout Canada. The Competition Act applies, with few exceptions,
to all business enterprises including real estate brokerages.
As background, the Act covers criminal as well as civil law matters. Criminal offences
relate to price-fixing, bid-rigging and misleading advertising. Civil law issues include
mergers, abuse of dominant position (activities to substantially lessen competition in
the marketplace), exclusive dealing (hindering or preventing consumers from dealing
with other suppliers) and refusal to deal (obstructing adequate supply of products to
persons carrying on businesses). The Director of Investigation and Research (head of
the Competition Bureau) is responsible for administration and enforcement of the Act.
The Bureau falls under the responsibility of Industry Canada.

MISLEADING ADVERTISING
The Competition Act prohibits misleading advertising and deceptive business practices
in the promotion of a service or the supply/use of a product. Section 52 of the Act is of
direct relevance to registrants.

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False and Misleading Advertising—Competition Act


The Competition Act, although dictating procedures on a number of trading activities, is
particularly broad in its approach to false or deceptive advertising practices. In particular,
Section 52 of the Competition Act should be noted:
52 (1) “No person shall, for the purpose of promoting, directly or indirectly, the
supply or use of a product or for the purpose of promoting, directly or
indirectly, any business interest, by any means whatever, knowingly or
recklessly make a representation to the public that is false or misleading
in a material respect.”

The following are three important factors involving offences under this statute.
• he term material refers to any information which could affect a purchasing
decision. In other words, any representation that might influence a consumer
in the marketplace can fall under the Act. Consequently, the Competition Act
touches upon practically every activity involving the day-to-day trading of real
estate and related purchasing decisions.
• roof of intention to deceive is not necessarily a prerequisite for charges under
this statute. In fact, it is not a proper defence to argue that the misrepresentation
was never intended. However, Subsection 60 (2) does state that a proper defence
can be due diligence to correct the error.
• he definition of misleading is deliberately expanded to include non­literal
impressions given by the advertisements. This is commonly referred to as the
general impression test.

52 (4) “In any prosecution for a contravention of this section, the general
impression conveyed by the representation as well as the literal meaning
thereof shall be taken into account in determining whether or not the
representation is false or misleading in a material respect.”

The actual wording of an advertisement may be technically correct, but the general
impression can still be false.

Ontario Human Rights Code


This provincial statute outlines the rights and opportunities without discrimination that Discrimination
exist for all persons in ntario. The Ontario Human Rights Code is essentially an anti- The unfair treatment of an
discrimination law, but applies to various matters impacting consumers including real individual or group due to
estate accommodation . This legislation provides a remedy by placing the complainant prejudice.

in a position that he/she would have had if the discrimination had not occurred.
The focus of this Code is on preventive or corrective measures and any person can file
a complaint if that individual believes that his her rights have been violated. The ntario
Human Rights Commission, as an independent body representing the public interest,
advocates for human rights and educates the public on human rights issues. The role of
the Commission is to research, analyze and promote human rights issues. A Human
Rights Legal Support Centre has also been established to assist complainants. The Code
complements provisions set out in the Canadian Human Rights Act and the Canadian
Charter of Rights and Freedoms.

ACCOMMODATION PROVISIONS
Registrants require a general awareness of the Code, particularly in regard to accommoda-
tion and providing services. As background, the ntario Human Rights Code involves
four basic areas of personal rights: general rights for all persons, rights of persons less

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than 18 years of age, rights regarding employment and harassment because of gender.
Every person has a right to:
• Equal treatment with respect to services, goods and facilities without discrimination.
• Equal treatment with respect to the occupancy of accommodation without
discrimination.
• A right to freedom from harassment by the landlord or agent of the landlord or by
an occupant of the same building.
• A right for persons with legal capacity to contract on equal terms, without discrimi­
nation because of race, ancestry, place of origin, colour, ethnic origin, citizenship,
creed, sex, sexual orientation, age, marital status, family status or disability.

In terms of accommodation, the Code also states that persons aged 16 and 17, when
not under parental control, shall have the right to equal treatment with respect to occu-
pancy and contracting for accommodation. At the same time, these individuals can be
held accountable for contracts made relating to such occupancy.
While the Code protects rights, it also prohibits specific forms of discrimination on
the following grounds: race, ancestry, colour, citizenship, place of origin, disability, sex,
ethnic origin, creed, age (subject to certain qualifiers), marital status (includes cohabita-
tion, widowhood and separation), family status (parent-child relationship), the receipt
of public assistance (accommodation only) and record of offences (provincial offences
and pardoned offences—in employment only).

EMPLOYMENT PROVISIONS
The Code requires that every person has a right to equal treatment with respect to employ-
ment without discrimination, that employees have a right to freedom from harassment in
the workplace and that every person has a right to equal treatment with respect to member-
ship in any trade union, trade, occupational association or self-governing profession.

Fraud WEB LINKS


Ontario Human Rights Commission For detailed information concerning current activities, go to
An intentional deception with
the Commission’s website at www.ohrc.on.ca.
the intent of gaining advantage
to another's detriment.

Real Estate Fraud MARKET MEMO

Consumer protection legislation is currently focused on the growing problem of real estate fraud, involving either
mortgage or title fraud. Mortgage fraud typically involves a fraudster acquiring a property, inflating its value and then
securing financing based on the inflated value. While such fraud most commonly affects mortgage lenders, innocent
owners have been caught up in the deception to their detriment.
Title fraud often involves a fraudster using a stolen identity and forged documents to transfer title and sell the
property without the property owner’s knowledge (or arrange financing and then disappear with the advanced funds).
With the recent passage of the Consumer Protection and Services Modernization Act, the ownership of a property cannot
be lost due to the registration of a falsified mortgage, fraudulent sale or a counterfeit power of attorney.

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PRIVACY LEGISLATION
Privacy has several dimensions including the right to make decisions about one’s own
body, the ability to determine what personal behaviour and preferences are appropriate Privacy

for oneself, the ability to freely communicate with others without intrusion, and the right The legal right to be left alone
and free of interference from
to ensure that personal data and information is respected and properly safeguarded. The others.
latter is most relevant for purposes of this course.
Privacy involving the collection, use and disclosure of personal information is a
federal priority. Recent initiatives protecting the dissemination of personal information
is due in no small part to the flourishing electronic marketplace unfolding in Canada.
Presently, most provincial governments have statutory requirements relating to govern-
ment use of personal information, but such procedures have not traditionally extended
to the private sector until recently.

Personal Information Protection and Electronic


Documents Act (PIPEDA)
This federal statute is focused on privacy matters involving business activities. The Act
provides that personal information cannot be collected, used or disclosed in Canadian
commercial activities without the informed consent of individuals providing such
information. The Privacy Commissioner of Canada was established under PIPEDA as
the ombudsman for complaints. The Commissioner is also responsible for similar duties
under the Privacy Act, which covers the federal public sector. The Commissioner not only
investigates complaints, but also conducts audits, undertakes research and generally
promotes privacy awareness.
Individuals also have the right to access and, if necessary, to challenge personal informa-
tion stored by an organization. Further, information can only be used specifically for the
intended purpose for which it was collected. Lastly, the legislation puts in place various
safeguarding procedures to ensure that such information is protected. PIPEDA was intro­
duced in three sequential stages beginning on January 1, 2001. The legislation applied to
the real estate profession in ntario effective January 1, 2004.

PERSONAL INFORMATION
Personal information, as defined by the Privacy Commission, includes any factual or
subjective information, recorded or not, about an identifiable individual. This includes
information in any form, such as:
• age, name, ID numbers, income, ethnic origin or blood type;
• opinions, evaluations, comments, social status or disciplinary actions; and
• employee files, credit records, loan records, medical records, existence of a dispute
between a consumer and a merchant and intentions (for example, to acquire goods
or services, or change jobs).

Personal information does not include the name, title or business address or telephone
number of an employee of an organization.

CONSUMER CONSENT
This Act has far reaching impact as registrants are frequent users of personal information
during the listing and selling process (e.g., mailing lists, information concerning buyers

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and sellers and dissemination of listing information). Brokerages are expected to develop
privacy policies concerning the collection, use and disclosure of personal information.
Such policies should be readily available for distribution to consumers and others.
Essentially, the legislation requires that registrants must identify to the consumer the
intended uses for personal information being collected about that consumer, collect only
the information that was requested, disclose such information only in relation to the uses
as identified and obtain the consumer’s consent for the collection and usage. Informed
consent must once again be obtained from the consumer if the personal information
obtained is used for a purpose other than identified.
While various methods of consent are possible, the best strategy involves a specific
permission such as inserting an appropriate clause in representation agreements with
clients, service agreements with customers and agreements of purchase and sale.

SAFEGUARDING INFORMATION
Registrants must also take adequate measures to safeguard information. Sensitive personal
information should be properly secured either by way of locked cabinets for print materials
or password-protected electronic files. The accuracy and integrity of information is also
key. Brokerages should have a designated person who is responsible for privacy issues to
ensure compliance with federal requirements.

NOTE: Privacy legislation impacts many activities undertaken by salespeople when working with buyers and
sellers. Key provisions and examples are highlighted in subsequent courses, most notably in The Real
Estate Transaction—General, when discussing seller and buyer representation, service agreements
with customers and agreements of purchase and sale.

The Salesperson’s Records PRIVACY FOCUS

Privacy legislation impacts everyone. Salespersons, as well as brokerages, must fully comply with PIPEDA regarding
personal information being collected from buyers and sellers. Make certain that:
• ersonal information stored on computers and/or filed in home offices is properly secured.
• Fully review privacy policies of your intended employing brokerage.
• ake certain buyers and sellers clearly understand what you intend to do with their personal information.
• btain only the requested personal information and use it only for the purposes as disclosed.
• ever assume that buyers and sellers understand privacy matters. ake the time to fully explain your
obligations. Have a brochure outlining your privacy policy.
• ever share personal information with anyone without the express consent of the applicable buyers and
sellers; e.g., sharing a mailing list.

WEB LINKS
Privacy Legislation The Privacy Commission of Canada provides excellent resource materials
that assist in establishing proper procedures when collecting and using personal information. Go
to www.privcom.gc.ca to access two publications of particular interest: Privacy Questionnaire: Is
Your Business Ready? and Your Privacy Responsibilities: A Guide for Businesses and Organizations.
Members of organized real estate also have access to the Privacy Code of The Canadian Real Estate
Association along with related guidelines to assist in establishing privacy policies.

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PROFESSIONALS AND THE CONSUMER


Many professionals provide expert advice and guidance to buyers and sellers. A select
number are highlighted by describing general roles performed in regard to real estate
transactions and consumer protection measures that exist through applicable professional
organizations to advance competence and integrity.

Lawyers
Lawyers provide legal advice and assistance to consumers in legal matters, including the
buying and selling of real estate. While most legal involvement is focused on the closing
process, legal opinion and guidance can be vital in matters relating to the listing process,
the drafting of agreements and real estate negotiations, particularly those involving
complex residential and commercial properties.
Consumers should be aware that lawyers in ntario are governed by the Law Society of
Upper Canada (LSUC). The Law Society is also authorized, pursuant to the Law Society
Act, to license ntario lawyers and regulate their activities. Ethical obligations are set out
in the Society’s by-laws and in the Rules of Professional Conduct.
In terms of consumer protection, the Law Society will assist regarding complaints
involving services provided by a lawyer, investigate those complaints and take appropriate
disciplinary action if professional misconduct has occurred. Issues addressed by the Society
include such matters as misleading information, improper communication, failure to cor-
rectly handle funds and not reporting fully regarding such funds. The Law Society provides
guidance on completing complaint forms. A Lawyer’s Fund for Client Compensation is
also available to consumers who have lost money due to a lawyer’s dishonesty.

WEB LINKS
Law Society of Upper Canada (LSUC) The Law Society of Upper Canada, founded in 1797,
has continuously pursued its mandate of overseeing and regulating lawyers in the province for
over 200 years. For more information, go to www.lsuc.on.ca.

Appraisers
APPRAISERS
An appraiser is a professional who estimates value and
possesses the necessary qualifications, ability and experience
to execute or direct the appraisal of real property. An
appraisal is the act or process of estimating value and
providing an opinion concerning that value. The opinion
can be verbal or written. Written reports can range from
a lengthy document (a narrative report) or a summary Real Estate
report (commonly called a form report). Consumers Brokers, Real Estate
Consumers Loans Officers, Appraisers
should be aware that appraisal is not just relegated to Tax Assessors,
professionals, thousands of buyers and sellers perform etc.

the function everyday. What differentiates those indivi-


duals and professional appraisers is knowledge and
Determine value Routinely Typically receive
sophistication in performing valuations. and act on that establish value of extensive training,
are designated
Appraisals are important from a consumer perspective opinion of value,
e.g., buying a
properties during
day-to-day through institutes,
to establish value, most commonly when arranging home or car, activities and (i.e., The Appraisal
bargaining at a develop special Institute of Canada)
financing at point of purchase. To ensure a consistent flea market and expertise through and/or meet certifi-
acquiring a piece experience and cation or licensing
approach to valuation, the appraisal process has been of art. training. requirements.

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formalized over the years through the use of sequential steps leading to an opinion of
value. In a detailed narrative report, eight steps are fully detailed to enable the reader to
follow the logical analysis leading to an estimate of value:

STEP 1 Define the Problem

STEP 2 Preliminary Inspection and Planning the Work

STEP 3 Data Collection and Analysis

STEP 4 Apply the Cost Approach

STEP 5 Apply the Direct Comparison Approach

STEP 6 Apply the Income Approach

STEP 7 Reconciliation and Final Estimate

STEP 8 Write the Appraisal Report

In a form report, the same eight steps are taken, however the written document
summarizes details in a systematic and precise fashion. Form reports are most commonly
associated with appraisals relating to mortgage financing etc., in which individuals receiving
the report have experience and training in the field.
During recent years, automated valuation systems have been introduced into the
appraisal process in which computer databases estimate value, using subject property
attributes in relation to recent comparable sales and various trends compiled for the
applicable area. A more detailed discussion of appraisals is found in Land, Structures
and Real Estate Trading.
The Appraisal Institute of Canada is viewed as the prominent national professional
association for appraisers, although other organizations exist in the marketplace. The
Institute, as a self-regulated designating body, requires its members to adhere to exacting
appraisal standards. Professional liability insurance is mandatory for ntario members.
Consumers seeking the services of an appraiser should carefully review credentials and
professional affiliations.

WEB LINKS
Appraisal Institute of Canada (AIC) The Institute was profiled in Chapter 1: A Career in Real
Estate. Go to www.aicanada.ca.

Surveyors
Land surveyors in ntario are licensed by the Association of ntario Land Surveyors
(A LS) in accordance with the Surveyors Act. The Surveys Act sets out requirements for
the establishment and/or reestablishment of survey components including lines, boundaries
and corners. Surveys are important from a consumer perspective, as they serve to legally
define what is being purchased or, in the case of a seller, verify the size and extent of current
land ownership. Surveys may also be required when building an addition to a house or
making some other improvement that could potentially encroach on another’s property.

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Surveyors prepare a Surveyor’s Real Property Report that sets out all visible improve-
ments in relation to the property’s boundaries. The report is accompanied by a written
document setting out any issues arising from the survey and the surveyor’s opinions on
such matters. A more detailed discussion of surveys is provided when discussing land
ownership in Land, Structures and Real Estate Trading. Surveyors must adhere to a Code
of Ethics and Standards of Practice established by Regulation under the Surveyors Act.
Surveyors are also required to carry professional liability insurance and are subject to
periodic audits by the A LS in regard to work performed.
Consumers having complaints regarding the services of a surveyor should contact the
Association. Procedures are in place for lodging and handling complaints.

WEB LINKS
The Association of Ontario Land Surveyors (AOLS) Go to www.aols.org for full discussion of
the Association’s activities along with the basics of survey techniques.

Lenders
A lender can include chartered banks, trust companies, credit unions, pension funds, life
insurance companies, loan companies, mortgage investment companies, government
agencies and individuals. Consumers should carefully review individual lender policies
when seeking real estate financing. Currently, lenders under selected federal legislation
are required to provide cost of borrowing disclosures to consumers.
Disclosure requirements set out in federal legislation involve credit agreements (e.g.,
mortgages, lines of credit and credit cards) in which the consumer must be provided
written disclosure as set out in applicable Regulations. Federal Acts containing cost of
borrowing Regulations include the Bank Act, the Insurance Companies Act, and the Trust
and Loan Companies Act.
Consumers should be aware that cost of borrowing disclosures apply to arranging a
new mortgage, switching a mortgage (transfer of outstanding mortgage balance to a new
lender) or an equity takeout/refinancing (borrowing against existing equity). Regulations
under the above-cited Acts set out both the timing and content of such disclosures. As
an example, Cost of Borrowing (Banks