3 Steps to Understanding Real Estate Commissions March 18, 2008
The number one thing that everyone can do to clear up the misunderstandings about “The Real Estate Commission” is to
1) STOP looking at the number as ONE commission. This is true for everyone, including agents and brokers.
To do this everyone needs to understand that agents represent people, they do not SELL anything. There is one fee for the person who represents the seller and there is another fee for the person who represents the buyer. STOP adding those together as if they are both all about the seller. They are NOT all about the seller. The seller includes BOTH in the asking price so that both can be financed inside the transaction by the lender. But they are still two separate fees, one for the person who represents the seller and one for the person who represents the buyer. They may or may not be equal amounts.
When a seller puts their home on the market for sale they decide whether or not to hire someone to represent THEM in the sale of their home. They negotiate that commission, usually somewhere between 0 and 3%, with THEIR agent, The Listing Agent aka The Agent for the Seller.
When a seller puts their home on the market they ALSO “set aside” a commission that will be paid to the agent who represents the buyer. Usually 0 to 3% and not necessarily the same fee as the one they are agreeing to pay to their agent, the Listing Agent. Why do sellers set aside an amount to be paid to someone else’s agent who doesn’t represent the seller at all? So that they can be in the MLS “pool” of homes for sale and so that ALL commissions to be paid at the end are INCLUDED in the asking price for financing purposes.
2) Price of home and commission issues DO have a direct relationship.
Pretend you are selling your home right now, whether or not you own a home. Let’s say the homes in your neighborhood generally sell for $500,000 and there are 25 homes just like yours on the market. You might say, I would price my home at $470,000 to beat everyone on price, if I didn’t have to pay any commissions. You might say, I would price my home at $480,000 if I could cut the commission from $30,000 to $10,000. So price of home and commissions to be paid DO have a direct relationship to one another.
The seller may want to save his 0 to 3% by not listing with an agent. The buyer may also want to save their 0 to 3% by not having an agent. By treating the commission as two separate fees from the time the asking price is set, everyone is free to either have representation or not and save accordingly.
The seller should NOT benefit if the buyer chooses to not be represented IF the seller intended to pay a buyer agent at the time the home was priced. If the seller “set aside” 0 to 3% within the original asking price for the buyer to use to pay for their representation, then the seller should not simply keep it if the buyer is not represented, nor should the listing agent just keep it “because they can”.
The only reason the seller agrees to pay the listing brokerage BOTH fees, is because the buyer and the buyer agent are unknown entities at the time the home is priced. Consequently the seller is agreeing to pay the buyer agent fee through the listing agent’s company and the listing company should not simply keep it, but legally the way the contract is currently worded, they can. Someone should change that.
3) The commission as stated at the beginning is not always the commission paid at the end.
Often the buyer and seller are just a bit apart a few times in the transaction.
Sometimes it is at time of offer. Let’s say the Asking Price is $519,000 and the buyer offers $490,000 and the Seller won’t go lower than $510,000 and the buyer won’t go higher than $500,000. They can both be unsuccessful and walk away or the agents, if their commissions were set high enough at the beginning, may share the difference equally creating a positive outcome for both the buyer and the seller.
Sometimes it is at the time of the home inspection. The buyer and seller negotiated OK at the outset, but now there are $7,000 of repairs and the Seller will only give $3,000 toward them and the buyer wants them all done. Again, if the commissions were set high enough at the beginning and the agents did not have to contribute anything or too much at the original price negotiation, the agents may split the difference and the transaction will proceed to close.
Sometimes the costs go sideways at the end. Let’s say the seller agreed to pay $5,000 of the buyer’s closing costs, but the costs are $6,500. The seller won’t pay any more than the $5,000 agreed and the buyer just doesn’t have it. Again, the agents can step in to cause the transaction to close by splitting the amount, or one or the other can pay the whole thing.
This is one of the reasons that people say commissions are 6% but NAR says in final calculations they come out to 5.1% on average. Without any budge room, often the transaction fails as agents who gave at the beginning, will not give again at the normal timeframes in the transaction where budge room is needed. Perhaps this “budge room” should be a set aside that goes back to the seller or the buyer in the event that money is not needed. That may create a better scenario than simply cutting things to the bone up front and leaving everyone without a satisfactory recourse as issues arise while the property is in escrow. Just a thought.
Postscript: In comment #44 of Gordon’s Post, Q-Diddy asked, “Tim & Ardell-Since I’m obviously in the wrong, If I’m the Seller what are the “traditional” percentages?”
Q-Diddy, hopefully the above sheds some light on the right and wrong of “traditional” percentages. It is true that 6%, that being 3% to the agent who represents the seller and 3% to the agent that represents the buyer, are general start points or guidelines. Then based on price of home, how much the buyer or seller are willing to do on their own, how many print ads and out of pocket costs they expect, how much time it takes for them to find a buyer or a property, and many other factors are considered to determine a final commission.
Will it be more than 3% for the buyer agent offered by the seller? Will the buyer then keep some of that and negotiate a lower amount with their agent? Will it be less than 3% for the seller’s agent because they don’t expect print ads or do their own open houses? It is correct that there is a point from which discussions start. But it is not true that companies that advertise a commission less than that start point are the only ones not charging that price.
It is a rare transaction when the buyer and seller do not disagree on something involving money during the transaction. Smart agents pony up and others dig their heels in and say “don’t look at me”. I think a good answer might be for all agents to negotiate a “set aside” amount within their commission to be used at time of negotiation or time of inspection or the day of closing, and for that money to be returned to their respective clients in the event it is not needed. Problem is, if you tell people they “may” get it back…they will want it back, and then the set aside will become worthless to resolve issues during the transaction.
One could probably write a book on real estate commissions with thousands of anecdotal examples of what worked out well and what didn’t. Personally I find a round number flat fee works best as it is not price driven. But I have to admit then when I cut it to the bone from the get go, I still have to make concessions in order for most transactions to close, as Tim points out and sees at the escrow phase. I don’t think anyone has all the answers yet, but I do know that there is no such thing as 6%…or at least there shouldn’t be. No one should be paying that to one agent, just because they are the only agent in the room.
How much an agent will charge, often depends on how much they have to pay to their broker. So before negotiating a commission with an agent, ask that question. How much do you pay your broker from what I pay to you? Often you can negotiate a better price from an agent who pays the least amount to their broker. Yet almost no one asks that question.
Check out these related posts:
Article Tags>> real-estate-commissions
- Posted in : General Real Estate
- Author : ARDELL
Comments»
So where do you fit “double ending”?
Maybe I’m just old-school (though not that old in the business at a mere 5 years) but it seems to me that I get contracted for X% to sell a home. Now odds and experience have shown that I’m not likely to do it on my own and would love to just get the home sold so I’l offer some of my commission to the fellow agent who brings me an acceptable deal. It is my choosing how to encourage this co-operation or not encourage it at all. Minimum I can do to get on MLS is $1. That won’t do much for encouraging my fellows but it is my decision and gets better marketing than an exclusive (or pocket) listing. Still, I’d rather get the home sold and keep my inventory flowing so I offer more. Usually more than my colleagues because I won’t it sold ASAP. Still, my choice.
To me there is no such thing as double ending. I get paid to sell the home to my client’s satisfaction, whether I brought the buyer or not. There are not two commissions. There is only one. And what I do with it is up to me (with full disclosure, of course).
I think part of the RE agent problem is that commissions are rolled into the prices. Like my suggestion in the other thread for hourly practice like an attorney, if you could not finance the 6% in the loan and instead had to pay out of pocket I think a lot more innovation in the agent space would happen.
This is only on part 1 above. There is not a commission for the person representing the buyer and the person representing the seller. There’s a listing office commission and a selling office commission. The listing office always represents the seller, the selling office sometimes represents the seller, but more typically represents the buyer.
It’s done this way for a reason–it sells property. And it sells property for a reason–some agents represent buyers. And some agents that represent buyers are less likely to show properties to buyers where the listing agent has an advantage showing properties by undercutting their client’s offers. It’s a hard concept to get your head around, but it’s all about attracting buyers. But since sellers control the game, and sellers want to sell, that’s the way it’s done.
Also, I really have to disagree with the claim that the seller sets aside certain percentages at the beginning. I know our practice is to separately discuss the LOC and SOC, but I can’t tell you how many times I’ve heard someone tell us how much an agent said they would charge, but the prospective seller can’t tell us how much LOC and SOC the agent was proposing. Was that 5.5% a 3/2.5 or a 2.5/3?Thus, it’s not so much that I’m disagreeing with what should happen as with what does happen. If an agent isn’t upfront with it at the beginning, I doubt they’re upfront with it later.
This is as to the first part only.
There isn’t a separate commission for the seller and buyer. There’s a separate commission for the listing office and the selling office. Often they both are the same, and both represent the seller.
Also, I find a lot of agents apparently don’t discuss LOC and SOC with prospective clients. They only give the total. So is that 5.5% offer a 2.5/3 or a 3/2.5? If the prospective clients don’t know up front, I’d question whether they know later on.
b,
I agree as to your conclusion. If lenders took a step back and decided they would only finance the house, and the house alone. No costs ever. That would be quite interesting.
Will,
I’ve been in the real estate business in a lot of places, but Canada isn’t one of them. I have no idea how it works in Canada.
Ardell-
What are some of the general out of pocket costs, print adds that agents have to pony up? What is the average cost for these things? A range would suffice.
If you place an ad it costs more than if you sign a long term contract to guarantee an ad continuously.
A simple classified for an Open House Ad, 5 lines or so, is about $125 Harmon Homes is about $600 for a page if you sign a long term contract. The fancier the magazine the more costly the advertising. The higher the price on the house the more people want expensive advertising. It would probably make more sense if the owner paid for the print ads. Maybe they would price differently if they had to pay for the ads over a long period of time.
I’ve been pricing commissions without print ads for the most part and recommending they upgrade the commission substantially and use someone else if they want to go that route. I don’t find them to be effective and stopped doing things that waste other people’s money just to appease people. If I think something will be effective, I have no problem working that into the marketing strategy. But generally I feel that a buyer uses the internet, and so am more likely to shell out money for staging materials or a photographer that will help beef up the internet exposure.
Maybe it’s just my clients, but most will send me a link to a property they found online minutes after it entered the mls. I haven’t had someone bring me a print ad and say “I want to see this house” in many years.
The bigger and pricier publications often have a two week lag time and a two week or one month shelf life. So during the hot market they were a total waste. Most good properties that were priced properly sold before the magazine hit the shelf.
That could change though as properties stay on market longer and print ads could come back into fashion…I guess.
I do wish there was a good online source for announcing Open Houses. There’s a place to enter Sunday Open Houses in the mls, but I don’t think that info gets published out to the General Public. If someone has seen that somewhere, I’d like to know where it appears.
Ardell -
I am actually kind of surprised that the banking industry ever rolled them into the loan, as it seems that it would be in their interest not to. Has it always been done that way as far as you know?
This is a great post. We bought our last home without a “buyer’s agent”, since we did not need one, and the house was very expensive ($2M in 2004). To be clear, we did not need help in finding the house (was near our former home, in the same school district), figuring out a price (although I am sorry to say many of my fellow Americans cannot identify the Pacific Ocean on a map), or financing, etc. I am pretty hands on regarding inspections and that sort of thing, so while it would have been nice to have someone helping, it would not have been $60K nice.
Instead, we offered to NOT bring in another mouth to feed on the condition that the listing agent agree to not lay claim to what would have been the buyer’s commission (double ending, or whatever you call it - sounds like a porno movie), and required in our offer (which I wrote up) that it go into the seller’s pocket. This made our lowball offer worth $60K more to the seller, and his realtor(R) still got his own 3%.
While I would have liked to have been able to hire an agent for a reasonable price (But, $60K is not reasonable), the few agents I asked gave me the “don’t worry about it, seller pays” BS, and explained how they were “full service”, etc.
We listed the one we sold ($1.5M) with a one percent guy (who was not worth one percent of the one percent), but this was at a time when homes pretty much sold themselves, and offered the buyer’s agent 2.5%. The buyers found the place on their own, but unfortunately dragged along some agent that glued himself to them at an open house to suck up the free commission (after all, we were paying). Don’t know if they were clued in and required a rebate from him, but it was most memorable when their agent made snide remarks about how we were lucky to get a buyer even though we were only offering 2.5% (of $1.5M! mind you). I can only hope that guy works at Starbucks these days.
Anyway, Ardell, I have been a lurking reader of your blog posts for some time now, which I greatly appreciate. I don’t mind paying for service where I get value for the service equal to what I am paying. But, paying a comission just because it is “traditional” is total BS.
I am always surprised how many home buyers don’t understand that they can have an agent soley represent them and that “typically” the seller pays the commission.
b,
My parents bought their first property 50 years ago for $7,000. I don’t remember my Mom talking about anything to do with real estate agents. I don’t remember any real estate agents in our neighborhood at all growing up. No real estate signs either. I think everyone had to go to The Godfather when they wanted to buy or sell a house in the neighborhood
I remember when my Dad died my Mom called a bunch of real estate offices and left messages saying, “I want to buy a house for $8,500, if you have one call me.” Someone did and I got her a $5,000 loan where I worked. It was a consumer loan and not a mortgage, because I worked in that department at the Bank. She paid the difference in cash. That was 34 years ago.
The first time I remember using real estate agents and mortgages was just before double digit inflation and every time since.
The churning of loans and commissions got to be bigger business when people stopped living in their houses for a long time.
I just asked Kim about his first house that he bought in Finn Hill for $33,000 in 1973. All he remembers is “sign here, sign here, sign here”
He said he must have had an agent because he would never have found the house without one. He had never been to Finn Hill before that time. It wasn’t even called Finn Hill then, it was called El Dorado. It has never been sold since. His daughter owns it and lives in it to this day.
My friend Margy remembers real estate before the mls. She said sellers would just go outside and stick signs on their lawns and agents would each individually contract with the seller if they brought a buyer. Funny how to this day sellers think we “bring them a buyer”.
Rhonda,
Most buyers understand that they pay their agent as part of the purchase price. It is “old fashioned” thinking to view it any other way.
It is just not “fair trade” worthy to tell sellers that there is a certain amount buyer agents “expect” to see when deciding whether or not to show their home, and then tell the buyer they have no say in how much the fee to their agent is and it’s none of their business because it is paid by the seller.
Though I do think that financing should only cover the amount of the commissions actually paid to the broker. Other amounts should not be financed and then paid as cash to the buyer. I wish more people were careful about either getting lender approval by showing it on the HUD 1, or taking it off the purchase price. Handing cash after closing without the lenders knowledge is not good.
How much money may have changed hands that way on properties that are now short sales is just scary.
Patent Guy,
LOL “(double ending, or whatever you call it - sounds like a porno movie)”
I hate to admit it, but I was thinking the same thing when I read that.
I was often confused about what percentage of commision should we give to real estate agents… By Giving such a useful information you have solved all of my problems…….. Thanks a lot
Ardell’s piece mentioned: “The only reason the seller agrees to pay the listing brokerage BOTH fees, is because the buyer and the buyer agent are unknown entities at the time the home is priced. Consequently the seller is agreeing to pay the buyer agent fee through the listing agent’s company and the listing company should not simply keep it, but legally the way the contract is currently worded, they can. Someone should change that.”
That can be changed by the agent, but per the ethical rules you have to disclose that you’ve done so in the agent only remarks. There’s a reason it is what it is.
Ardell — Will’s initial comment seems accurate to me as to how the system works right here in the USA. As you correctly note, the listing — oops! — selling agent can legally keep the entire commission if the buyer is not represented by an agent. The truth of the matter is that there is ONE commission that must be paid by the seller. This commission is stated in the listing agreement. Per MLS rules and sound business practices, this commission is then split (not necessarily equally) with a buyer’s agent.
Your post is really more of “where we should go” rather than a description of how the system works today. I agree that a world where there were two clearly distinct commissions would foster greater choice among buyers and sellers — i.e. it would be easier for one or both to not be represented by an agent. Sadly, that is not the system as it exists today.
Hi Ardell, good points. You forgot to mention relocation company referral fees. I just closed a transaction where the seller paid a 6% commission, with 3% to to the listing company and 3% to the buyers agent.
Both the seller and the buyer were relocation company referrals, so the listing company paid 40% of their 3% to one relocation company for the seller, and the buyers agent’s company paid 35% of their 3% to a completely different relocation company. That’s expensive!
Some of the relocation company fees are excessively high in my opinion, both 40% and 35% are too much. My client was a friend, and past client of 3 other transactions, so it really felt like a rip-off to have to pay that 35%. However, I LOVE this client, and would gladly do it again to help them. Usually, I turn down relocation business due to the costs, and extra time involved (yes, relocation buyers and relocation sellers mean more work).
So, I guess my point is that there can’t really be a “set-aside” for potential negotiations, every situation is vastly different and has to be negotiated on it’s own merits.
I think we earn every penny of our commissions, and I think that the public doesn’t realize that their agent doesn’t keep every penny.
We’ve all had those times where you finally close a transaction for a client, get paid, and realize you made about $1 an hour! The ‘easy’ ones definitely help smooth out the expensive or ‘difficult’ ones :-).
Leanne
Commissions are always negotiable, except once a seller lists and chooses what he’s going to pay.
Buyers can always pay their own agent to represent them, and can negotiate whatever they and their agent will agree too. The buyer in that case can certainly ask the seller to reduce the purchase price by the amount of the posted buyers agency commission.
Historically, commissions were paid by sellers because buyers didn’t have representation. Today, buyers have representation, and can choose to pay their agent themselves, or via the established method that most of the world real estate agents use. Yes, internationally, most agents get paid from seller proceeds.
Thanks for the info everyone, especially Ardell. I now understand the whole process a lot better and will look to leverage on this info the next time I’m selling.
Good stuff!
Craig,
Yesterday while I was writing this post I received a call from an agent from another Company. They said a buyer contacted them about his listing saying they have no agent and were asking about the 3% commission. He said: “I told them to make an offer and find out? Right?”
I said WRONG! and proceeded to explain that he didn’t answer their question as the 3% should be resolved prior to offer so that it is addressed based on the final negotiated price and not the asking price. I know for a fact that this same agent split a buyer agent fee with his client 50/50 just a few weeks ago, but didn’t know how to address it as the listing agent.
No Craig, I am not the only agent that thinks this way. Hopefully agents reading this post who have been on the fence or confused by questions from buyers will start to see things differently.
Clearly it is my hope that all agents treat buyers and their side of the equation properly. It is not my hope that I will be the only one to see it this way and this is just a commercial, as you suggest. Everytime a few agents change the way they think about these things, it’s a step forward. Writing posts such as this one which was prompted by two questions posed to me yesterday, are of value to our industry and the public at large.
I agree as to “the USA” and most of “the USA” is not thinking the same way that people here in Seattle do.
I had a seller call me some time ago who asked “why is my agent keeping the whole commission when they told me when I listed the property that the 3% was for the buyer’s agent? There is no buyer’s agent and my agent is keeping it?”
These questions arise all of the time, not just from buyers, but from sellers as well.
Q-Diddy,
Well since I wrote it for you…that’s really all that matters
amarjit,
As a seller, you still should address the issue of the buyer’s representation being included in your sale price. You clearly can choose to have no representation, but it may not be your prerogative to dictate to the buyer that they not have representation either. So it would be in your best interest to acknowledge that the buyer may have an agent.
Most agents would operate on the same basis as Zip, so you can expand your options to just about anyone without limiting yourself as to choices. Every seller wants as many buyers as possible, so weigh your options carefully and know the consequences of your decisions.
A lot depends on your home, it’s location and how easy it is to sell.
Ardell-
I love your personal historic timeline. I can only go back as far as the clunky books with black and white photos. They came out every month (week?). You could only get a book for 2 MLS areas at that time I believe. If you wanted to browse another section of town you had to horse trade books. The biggest, biggest, service an agent provided a buyer then (I was too young for any seller to trust me) was to turn over every possible rock, every possible purchase option. Buyers has no clue what was out there or how it compared to another property across town for 110K.
Good agents make a lot more money now it’s true. It’s changed from a housewife, except when the kids are at school, business (no offense moms) to a consulation/sales job. Agents love the independance and the earning potential. As real estate got more expensive the stakes have went up. Nobody can pay off a property in 5 or 10 years as was done in the 60’s and 70’s. And people want more information, all they can get. Consumer decisions about where to live, what to buy, how to use space, have become way more calculated. No more, hey this will work type decisions.
So higher purchase prices and the critical decision making by buyers are the two big reasons why I think agents (consultants) have entered the picture in such a big way.
I must admit I get annoyed when Joe consumer feels the endless information now at their fingertips (at no cost) is a birth right. Many seem to think all of this happens by magic. The major brokerage houses have spent millions crafting their user friendly websites. Of course for their own benefit, but to the benefit of the consumer too. The same goes for the NWMLS which made everything possible. Can you imagine if hunting for a home to buy was like hunting for a home to rent? Just as you said in your post, a separate arrangement struck with each seller for each shopper! Yowsa. Joe reasonable consumer just wants to pay a fair price for the service they get. That’s fair of course. Part of the price they pay floats the entire system. I can’t imagine not having it.
P.S. Craig,
If every SELLER who reads this starts to ask their agent at time of listing: “and what happens to the buyer agent fee if there is NO buyer agent?”…the world will be a better place
Rachael,
Still I would test an agent’s ability to give good advices regarding valuations etc. Not a good move to negotiate $20,000 off of a home that is $100,000 overpriced. That would be true of all agents and not simply the type that you mentioned. Good agents will tell you what’s wrong with the house, not what’s right with the house, and that is worth something most times, especially in a market like we are in now.
Ardell, Amarjit is Realty 500 :-).
Ardell — I agree, raising this issue and having this conversation is good for the industry (not to mention my business ;)). My point was simply that the current system as it exists is accurately described by Will’s comment. Your post, on the other hand, points the direction in which we (professionals, market participants, legistlature, etc.) should push the system so as to provide buyers and sellers with greater flexibility and more options.
As for my “suggestion” that your post was a “commercial” — I’m not sure what you mean.
Doug,
There are a few things I miss about the mls books.
In one area I worked, the books were broken down into school districts. It was easier for people to see that a house was just outside a preferred district and that is was priced 30% more than every house IN the district and pricing off the other district.
When someone was looking in the book they could see there were 20 pages of properties within the area priced higher. When they wanted to see the last home on the last page of that area, they knew they were looking at a house that might be priced too high for it’s area. No one wanted to buy that last home on that last page.
Sure, we can still point that out to buyers, but the visual of being the highest priced home was more apparent in the book style.
Craig,
It really doesn’t take anything more than posts like this to change the system. A simple addendum to every listing contract would correct any and all current weaknesses in the forms as they exist today.
Ardell, you said ” Funny how to this day sellers think we “bring them a buyer”.
If we are the listing agents, it’s our job to market the property to buyers and to agents. That’s what brings the seller a buyer, so you’re right on the money when you say sellers think we bring them a buyer.
Leanne,
There was a comment here earlier that was Ray Pepper in disguise and I deleted it.
Oh jeez…you are right. A.S. DOES work there! I was wondering why he did not include MLS4Owners. LOL! We’ll let him get away with one.’
Thanks for the heads up!
How could Pepper be in disguise? The minute he speaks, his words would give him away :-)! Of course, unless maybe he wasn’t offering to give away those tee shirts …
Leanne,
That was the problem with EBA companies and ESA companies. When buyer agency first came out we immediately assumed we would have to create a different business model.
Each traditional brokerage would have to decide if they would have companies that only represented sellers and a separate division in a different building that only represented buyers.
ESA - Exclusive Seller’s Agents and EBA - Exclusive Buyer Agents
But sellers really don’t want an agent who never works with buyers,so the system failed before it got off the ground.
Today it seems many people don’t care much about “representation” so you would need a third company for “none of the above” LOL
Still I think that many don’t appreciate what representation is because many agents don’t provide it and still SELL for a living. As I say, if an agent is not telling you what NOT to buy, then you might as well represent yourself.
The industry should eventually shake out much like the preparation of tax returns business. Many will do it themselves and some will want help.
Leanne,
Fake name…same IP address. But now I’ve given him the means to disguise himself even further by posting from a different place.
I have to again give Ardell and others here more props.
You guys talk about agent stuff and break it down item by item. You have in depth knowledge about the subject because you actually practice it.
If I can only say the same for the folks that read/google stuff on the Fed.
Rachael B turned out to be Ray Pepper too! Well that move got the other guy popped out with her as well as my mention of the Company.
C’mon guys. Stop being sleaze bags.
Leanne,
Regarding relocation referral fees, the buyer and or seller who pays them (though I’m sure you feel like you pay them
do get the benefit of those dollars. They are used to defray the cost the company expends for movers, short term housing accomodations, etc…
On a vey high priced home, the employee can likely waive the relocation benefits and take the 35% for themselves, if the math works out better that way for them. Most companies would not object to that as the 35% referral is only applied when relocation benefits are involved.
I do think companies should disclose the referral fee issues to their employees, so they can make that informed choice.
Interesting read from ARDELL(ofcourse I always love her honesty). Have to mention my experience about 6 years ago.
We were first time buyers and I had spent a good 1 year trying to look at houses and prices so I knew prices well and also that was the time when zillow and redfin were not around. King county had a good information but difficult to get to, but you could if you knew how to get there.
We found a house in lakemont(my wife was not sold on the house, but it was listed for a good price and a good community, and the reason was the couple was going thru a divorce).It was listed by a very big name agent(your see her smiling face and listing all over the place).
I did not have an agent, used my attorney to write up the offer and before faxing the offer i called the selling agent and told her that I am faxing in the offer and I am reducing the price I am offering by 3% since I dont have an agent. It was listed for 510K and I offered 500K minus 3% , so $485K.
She said ok, and then she called me and asked me to offer at 495K(less than my offer rate), and that one of her subagents would represent me(so she would get the buyer fees too), else she WONT present the offer to her client. I said No and stood firm, and she said she would get back to me and never did for almost 1 week. So i managed to find out the owner name and figured out the person works at Microsoft, and I too worked there, so sent him an email. He responded back that he never saw the offer and he would be open to something like that.
I guess he called her and asked her about this offer, and she calls me back and YELL’s at me saying that i am not supposed to contact the seller directly and it is total violation of privacy laws and I was doing illegal stuff and if I dont back off she will sue me and some nonsense like that. I moved on and nevere pursued the house.
Then I met the guy again after 8 months in a meeting at Microsoft and I asked him what happened to his house, and he said he sold it for $475(two weeks after my offer) and he paid 6% in commision, so he netted about 445K. He asked me why I never pursued the deal, and it seems the agent told him that I did not have a preapproval letter and that she did a credit history on me and that I was not a viable buyer.(I still wonder how she did a credit score on me with my SSN)
Finally i did buy a house without a buyer agent and saved myself $13K .
Srini — too bad that was six years ago. I would love to pursue a claim against that agent. I think the agent’s conduct violated her duty to her client and discouraged competition in the marketplace. Plus, her client suffered in that he ended up making a lot less money on the house.
Srini!!!
Thank you for that story!
1) All written offers must be presented to the seller by law. But given how much your wife loves your current home, I think maybe everything worked out for the best in the long run, since she wasn’t crazy about that house.
2) It is NOT illegal for buyers to contact sellers or vice versa (to the best of my knowledge unless the seller gets a restraining order). The rules the agent referred to are set by the mls and only applicable to its members, and I’m 99.9% sure you weren’t a member of the mls or subject to its rules. The only “law” that could have been involved would have been licensing law, and you didn’t have a license.
Still an agent can’t tell a buyer or seller to contact one another because they as agents can’t. (Actually an agent can go around another agent under certain conditions.)
I would love for you to privately email the name of that agent. I’ve already put a face on it, so you wold be doing the agent I THINK it is a favor if you would. Actually I have 3 in mind
Craig,
While you are here, can you comment on monies going to the buyer after closing from an agent? Seems to me the “agent credit” needs to show on the sheet, and if a check is drawn to the buyer because the credit exceeds the buyer’s closing costs, that needs to be done by escrow and on the sheet. Otherwise the monies must come off the price so that the lender is not funding the “cash back” without the lender’s knowledge and approval.
How do companies get away with cutting checks and handing them to buyers after closing? Isn’t that Lender Fraud unless it was a cash transaction?
I didn’t deny that I work for XRealty, but the fact remains the same, why would you pay $48,000 (on a $800,000) in commissions to a high school real estate graduate than your own personal doctor.
The housing prices have gone up years after years but the commission structure never changed. Now people have more choices in the industry.
Ardell, you raise a great point. To be honest, I don’t have an answer, but I certainly share your concerns. I agree, it does appear that this runs afoul of laws/rules regarding full disclosure to the lender.
Amarjit,
Does your company hand the buyer a big check after that commission was financed by the lender thinking it was a commission?
Don’t mention the company! LOL! and don’t post an advertisement!
You should fill in the url section when you comment and that will automatically advertise your company. You and or Ray should give me a call so that you can speak freely here without being edited or deleted. I honestly think you just need a few pointers about blogs and how they function. Call me at 206-910-1000 and I’ll be gad to walk you through it.
It really is pretty simple. Just stay on topic and hyperlink your site “behind” your name. This post is NOT about amount of commission for example
It’s about how any consumer can have choices, and not be limited to only those who toot that horn, like yours.
Clearly having your price on the sign on someone’s lawn might do more harm than good, don’t you think? Do you disclose that to your seller “clients”? Clearly agents will not want to show the property if you advertise your buyer cash back program at that seller’s house. Are you representing the seller when you list a house, or using his home as a place to advertise yourself to acquire buyer clients, where more of your profit lies?
Many questions. I’d love to have the discussion. So give me a call and I’ll help you with some basic blog etiquette stuff so hyou can “talk” more freely about the topics of the various posts.
Regarding Srini’s story, it would make sense that the seller should advertise that all offers should be cc’d to them. Otherwise, they’d be at the mercy of the selling agent’s sense of fairplay in getting access to all offers. It seems that the best interests of the seller are in making sure that they get to see ALL offers.
Ardell,
Most buyers are asked to complete a Fannie Mae Form 1003 Uniform Loan Application when applying for a loan and very frequently they are asked to sign another one at closing. By signing this document the buyer warrants and represents that the information disclosed thereon is true and accurate. The buyer also agrees and acknowledges that failure to provide accurate information may result in a civil damages claim brought against him or her and/or criminal prosecution under 18 U.S.C. Sec. 1001, et seq. Furthermore, the Form 1003 application requires the buyer to disclose the source of his/her down payment, the amount of seller paid costs, and the source and amount of other “credits.” Ergo, an agreement for the buyer to receive cash back from the seller after closing must be disclosed on the 1003 and failure to disclose would most surely be a material breach of the disclosure covenant.
Most likely there are other bases for liability for failure to disclose cash back, thus, I advise all of our clients to make sure the lender knows everything that is going on in the transaction. That way, if the lender approves (or at least acquiesces) to “creative” contract terms, my client can accurately deny that they failed to disclose.
Craig?
When two parties are represented by attorneys, do all communications get cc’d to the parties directly? Would cc’ing the other lawyer’s client be out of line?
Anamik,
Clearly that shouldn’t be necessary and wouldn’t have prevented the agent from lying to their client about Srini’s qualifications. That’s the scary part. A bad agent is just a bad agent, and they can make up stories that cause their client to think an offer is not good or even that a house is not good. The seller DID know about the offer, and still chose to believe the agent’s lies. So cc’ing the offer to the seller would not likely have helped unless the buyer and seller spoke during that time.
And then there’s the case where the agent is correct in disuading a seller because the buyer qualification are NOT good. In that case the seller would not likely want direct communication with a buyer. Many hire an agent so they don’t have to deal with these types of pressures from unqualified buyers. Srini wasn’t one, but there are many who would love to go around the seller’s agent and pretend they are better qualified than they actually are.
No easy answers when people want to behave badly.
This is not tax or legal advice. You are advised to seek appropriate counsel.
Is the SOC the buyer’s money? It depends. Craig has pointed out on several occasions that the buyer has no legal right or ability to challenge the 6% commission in WA State. On many occasions people will argue the point that the SOC is the buyer’s money.
In accounting and finance school students learn the accounting concept of substance over form. The contract legal language may differ from the economic or accounting reality of the transaction. The accounting rules (and possibly the Internal Revenue Code) for the transaction may substantially differ from the legal contract to prevent misrepresentation of the economic and financial reporting. The SOC has no tax treatment for the buyer. The SOC is part of the cost of the sale to the seller.
The economic reality is it depends. The SOC is not always the buyer’s money in substance or form of the transaction. In residential real estate, I think it is economic and accounting/finance reality on very few occasions.
The buyer and seller may negotiate a price less the listing price if one party does not use a real estate agent. The negotiated price does not necessarily equal the assets FMV. In fact, the seller may have given the buyer additional equity equal to the amount of the discount for not using an agent.
Appraisal value equal to Purchase Price
The SOC is not the buyer’s money. The appraiser calculated the value of the asset. The appraiser was not engaged to appraise the value of the buyer’s agent’s services. The asset value does not include transfer costs (i.e. buyer’s agent fees). The buyer’s cost basis for the asset is equal to the purchase price plus any transfer costs (i.e. real property costs incurred at closing). If the SOC is the buyer’s money, then the appraiser is putting a value on the cost of services provided by the buyer’s agent. If the SOC is the buyer’s money, then the appraised value of the asset should result in an amount equal to the purchase price less the buyer’s transfer costs.
Appraisal value less than Purchase Price
The SOC might be the buyer’s money. The appraiser calculated the value of the asset. The value does not include transfer costs (i.e. buyer’s agent fees). The buyer’s costs basis for the asset is equal to the purchase price plus any transfer costs. The buyer must bring additional funds to closing to make up the difference between the purchase price and the appraised value of the asset. The difference between the appraised value of the asset and the purchase price of the asset could be argued to be all or a portion of the transfer costs or buyer’s agent fees. What percentage of residential transactions results in an appraised value less than the purchase price?
Appraisal value greater than Purchase Price
The SOC might be the buyer’s money. The appraiser calculated the value of the asset. The value does not include transfer costs (i.e. buyer’s agent fees). The buyer’s costs basis for the asset is equal to the purchase price plus any transfer costs. The difference between buyer’s down payment plus loan principal less the purchase price of the asset could be argued to be all or a portion of the transfer costs or buyer’s agent fees if paid to the buyer’s agent. What percentage of residential transactions results in an appraised value more than the purchase price and any cash above the purchase price went to the buyer’s agent?
Hypothesizing that the SOC is always buyer’s money questions the validity of the appraisal process and brings up questions of appraisal fraud.
In reviewing Ardell’s question I realize she’s asking about cash to the buyer from the buyer’s agent, not from the seller. I believe my analysis above is still applicable. As long as the lender knows about it and goes along, I suspect the buyer is probably fine. A problem arises if it is concealed from the lender. A related issue is the tax consequences to the buyer of receiving this cash back. Is it taxable income? I vaguely recall reading something on Redfin a long time ago about them obtaining an IRS determination that the cash back was ok but I don’t recall what tax treatment it was to receive.
Thanks Marc,
But I think the danger in not showing it on the sheet or taking it off the price is that the buyer discloses to the Loan Broker who does not disclose it to the underlying lender. Much like when the Loan Broker says “don’t give me the repairs addendum”.
To a buyer and often to an agent, telling the Loan Rep IS telling “the lender” in their minds, but we both know that is not the case. Better to show everything on the sheet and never lie about repairs, or omit repair addendums, to shield that info from the underlying lenders view.
“Creative” Loan Reps are often part of the fraudulent activity that affects the lender who is funding the loan and that is part of why the lending industry is in such a mess right now.
Plus all of those forms just get so pushed around that I doubt a buyer notices the subtle reference to disclosing the cash back. There should be a clear statement noting if the buyer is getting any monies AFTER closing that are not on the HUD 1.
Thanks for the comment Michael. I haven’t read it yet but had to delete your sig lines. I’ve asked you before not to do that, and it is not fair to others who we are hounding about advertising in their comments instead of with just the hyperlink of the name, for me to let you post a comment with your advertisement in it.
Hope you understand. If not, give me a call and I will explain.
Marc,
I doubt it would be taxable to the buyer because it is either
1) a credit toward closing costs and buyers can deduct the ones that are appropriate tax deductions regardless of who pays them.
2) a reduction of sale price
It would seem to me that the cash back would be seen as either 1 or 2 from a tax perspective even if it was as “adjusted purchase price” or if the buyer paid their own closing costs and then had them refunded via an agent credit.
I doubt the issue is specifically addressed in the tax code, so common sense logic may be the only way to look at it. If you follow the money all the way back, it would come from the seller to the agent to the buyer. And seller credits are not taxable as far as I know.
Everyone reading this should know that when a loan officer says “don’t send me the repairs addendum” that is absolute bologna and a massive red flag (especially in today’s mortgage market). Doing so puts their client at risk of the non-disclosure I discussed above. The buyer should send it to the lender. Send It, Send It, Send It. If loan officer then decides not to forward it to the underwriter there may not be a whole lot the buyer can do about that. Either way, the buyer should definitely retain evidence that the addendum was sent as a way of evidencing that he/she fully disclosed all material terms of the transaction. Plausible deniability! If doing so means the financing falls through, then so be it. If the buyer chooses to not disclose and later goes on to be foreclosed on, they shouldn’t be surprised if they get sued by their lender for bank fraud. Or if a summons and complaint from a bankruptcy court shows up in because the lender or some other entity in the CDO financing chain went belly up.
Clearly if all agent credits show on the final closing statements, or taken off the price, the issue would be resolved. There is no reason to finance the commission and then treat it differently than commission after the fact.
I think it can be used to pay repairs as well. If the repair is happening after closing, it’s easy enough to earmark the money to pay the bill after closing.
There are always variances in appraisals. Like washer, dryer and refrigerator included or not included. Often they are included by contract and not shown as included in the mls, so appraisals are not absolute valuations. In new construction for example, some people have some heavy ugrades, sometimes adding greatly to the price, while others do not. Those upgrades are not normally readily available to appraisers, except on the subject property, but not as to comps.
Most appraisers will call and ask about concessions and details if they feel the need to be most accurate.
Marc,
Amen to that. More repairs would be done prior to closing if people all took that standpoint.
Ardell,
I don’t do tax law so I don’t know what treatment buyer’s-agent-cash-back gets. I can argue it both ways (taxable or not taxable) and the IRS tends to fall on the “taxable” side more often than not so buyer’s should ask about this aspect so they know going one way or the other. However, even if it’s taxable, getting some cash back from your agent is always better than your agent getting the whole 3% and you getting nothing but a roof, four walls, and a mortgage payment.
Marc,
A HUGE eye opener for me personally was watching how agents do things when they are buying and selling homes for themselves. Most do not want to pay their Broker, and most don’t
I read RCG infrequently and post comments infrequently. to the best of my knowledge nobody has directly chastised me about a signature line. I spot checked a few comments from the past and I didn’t find any mention to me about a signature line. I have never recieved an email or a phone call. If anyone previously chastised me in a comment posted here, then I am not aware of it because I didn’t read it. I am not aware that others are hounding over advertising because I read RCG infrequently. I will refrain from posting a signature line in future posts.
Is there a published FAQs or rules on the RCG website to outline Dos and Don’ts, so I don’t run afoul of the RCG laws?
Can’t says I blam’em!
That said, if they list their house on the MLS through their brokerage then they’re treading on their broker’s turf and are obligated like anybody else.
He who pays the piper calls the tune!
Marc,
Most agents have a one free a year deal.
Michael,
Thanks for agreeing to not post the sig lines in the future. I mentioned it on March 7, but no need to go back there.
The rules is “no blatant advertising on RCG” and there are some gray lines, but generally you can tell by the lack of signature lines on anyone else’s post or comment.
This is pretty much true of all blogs, BTW, whether that be authors or those commenting. The hyperlink to your name is “subtle” advertising and deemed sufficient. People will click on your name as a result of your comments, as I did and others will, so the sig lines are redundant and considered blatant.
We try to always say what we have to say on the blog and not in private emails so that others can learn what is and isn’t appropriate, not to single you out in public, but so that all can learn.
I did once call Leanne Finley to tell her she wasnt advertising enough
by not hyperlinking her name to a blog or website or webpage or at least her Company’s site.
Again, appreciate your comments as well as your agreement not to post signature lines on your comments in the future.
Wow - still the lead post, and comments going strong. Everyone has an opinion about RE agent commissions
Regarding my above comment no. 10, getting cash back in our situation would have been silly, since we would have simply reduced the loan amount. Much better to reduce the price (and proptery tax based on price), without some craziness of being taxed on a “refund” of our own money.
This is what I don’t get about the Redfin model (if I am allowed to comment on it on your blog). It seems to me the whole premise they are selling is “you don’t need to pay that much, but you are forced to, so we’ll give you a rebate”. If what they say is true, then sooner or later people will learn to skip the middle man, and no more Redfin. At least, not based on a “rebate” business plan.
PatentGuy,
Back to your comment #10, would you have been OK with paying 1/3 of the commission without “your agent” seeing the house at all before the offer was written? Without giving advices regarding the home and its pricing? Just curious.
Ardell,
yes, you did tell me to knock it off. I went back read the post. I apoligize. I write comments in email which includes an auto signature then copy paste everything into blog comments. I’ll refrain the future.
I would suggest contacting offenders directly for future infractions in addition to the public hand slap.
Cheers,
Michael
Senior Mailroom Sorter
Any Corporation, Inc.
PatentGuy,
I agree that reducing the sales price is a great way to do it. It reduces the excise tax the seller has to pay. In your deal that was 1.78% on the $60k buyer’s agent’s portion of the commission, i.e. $1,068. Plus, it should also lower the commission paid to the seller’s agent ($2mil x .97% = $1.94 mil x 3% =$58,200 - $60,000 = $1,800). Add that $1,800 to the $1,068 and you’ve got a good time waiting to happen. The seller wins, buyer gets a price he likes so he wins, and the agent still gets $58,200 which isn’t too shabby.
This is all interesting stuff. I have a hypothetical for you, Ardell.
What if, oddly, you were a seller, and you knew your house was worth $500k. Assume you were well educated on the market and you felt great about getting that price. And an agent comes with a cash offer, unsolicited, from his buyer for $550,000, asking for a 10% commission. Do you sign it, netting out around the full value you think the house is worth? Or do you counter at $535,000 with the logic that you only want to pay a “traditional” 3% fee, and not give the broker this $55,000 windfall?
Hi Ardell,
I would not have minded paying a reasonable “consulting fee”, if there was information or insight that a Realtor(R) may have that I did not (which will usually be the case if the Realtor(R) is any good), but a percentage of the sales price bears no relation to the actual amount of time spent, especially in that situation. Every story is fact specific. In this case, we knew of the house and its prior sales history, the neighboorhood, etc., and this was house number 5 for us over the course of 20 years of marriage, including a complete tear down remodel (never again).
I had bought and sold in the past, both with and without an agent, and my experience was not appreciably better or worse either way. I had been tracking the sales comps for the area for a few years. I knew which houses had sold, and for how much, and had been inside each one (I have some “open house stories” for another post, another time) so I could judge price differences on quality as well as location. We had lived in the very same area (Saratoga Calif) for the previous 10 years. I was very comfortable with my price, which was a low ball by slightly more than 10% off the listing price, but the saved $60K made it less of a low ball (only 7%), plus we could close without financing contingencies.
I spent a fair amount of time doing inspections, including an afternoon with a geologist, and another with a plumber, but I would have done that anyway, with or without an agent. So, would I have paid someone $20K to look at the house before I made an offer? An honest answer is “no way”.
IF I was moving to a new area (e.g., out of state), then I would have no problem paying for a good agent, but “how much” would depend on the home price. If it was for $500K or less, I would not bat an eye with the 3% rule. For over $1M, 3% is too much. For in between …, well, …. good question. It would depend.
I realize that you can only glean so much from house hunting on a computer, but you can take road trips to the new location, drive around, talk to people, attend open houses, etc., without wasting a Realtor’s(R’s) time. Why would you move anywhere sight unseen?
I would definitately hire an agent under those circumstances, and I would probably interview agents based on their blog. If it was Seattle, I would interview Ardel. Now that she knows what I am like, she may turn me down.
Gordon - If it were up to me, I would pay a listing agent 0$ for the first 90% of the value, since they do nothing for this part (maybe $5K for paperwork, insurance), but I would pay 1/3 of the next 10%, and 1/2 of anything over 100%, because at that point, they are earning their keep.
As always Ardell, very good post, and very informative. It reminded me of a recent conversation with a real estate agent friend who works in another state.
We were talking about alternate commission structures, etc., when I made a comment about agents being paid by the hour by their clients. She said to me, “if I were paid by the hour, I’d be rich enough to retire.”
I’ve never had any qualms about paying commission as a seller; maybe we’re just difficult customers, but I’ve always felt the agents on both sides of the transactions earned it. On the other hand, when you are in a high value market like Seattle, the net dollars are much higher than in a lower value market. And I’m not sure that it is entirely fair.
There has to be a better way to compensate agents, but I sure can’t think of one.
LOL,
That would generally be against many blog polices as well
Gordon,
As long as the commission was fully disclosed to the buyer I would have no problem with that. If I were being asked to hide the commission issue from the buyer, I would have a problem with that.
Holly,
There needs to be a cap. Most agents have a cap on how much they pay their broker in a year’s time, so most agents are very familiar that there is such a thing as too much
Patent Guy,
I like your formula, or at least the concept — make the agent vested in those last, hard-to-get incremental price gains. I think that’s one alternative to the current system.
As for me, I’d sign the hypothetical deal as presented. It’s a little grating to see any agent get that kind of a pay day for such little time invested. But I’m netting out well more than I would selling it conventionally and paying some commission to other agents at my $500k value. Better than even selling it FSBO, as this agent will do all the work getting the buyer closed without my babysitting him and I still net my number.
I’ve always found negotiating with the other principal, rather than his agent, nets a more productive result. If the talks stall, and the agent chooses to kick in to preserve the deal and what’s left of his fee, so be it; but he’s usually a lot happier if it’s his idea.
Ardell,
I agree with the disclosure of the fee to the buyer. I would want to see it in the contract that the buyer signs.
PatentGuy,
I hear a lot of amounts that are “no way”. I’d like to hear an amount that is “yes way” LOL
Ardell, what can I say. You asked, I answered. (And I gave you some “yes way” in there!).
Seriously, I think agents should get paid as much as they can get away with, so long as they are open and up front about it with the people that are paying them. I think the analogy regarding tax preparers is an apt one. I do my own taxes (big surprise), even though it is not worth my time. Just how I am.
Patent Guy,
I was hoping for a “yes way” round number. $10,000? $15,000? I think we already got a no on $20,000. I would never work on an hourly basis and have been doing flat fees by and large. I was just testing your “cap level”.
OK. Let’s say I wanted to consult with an realtor(R) for an hour about a specific property, sight unseen, and the realtor(R) needed half a day to prepare. I would pay $500 for such consulting.
There’s your number.
$10,000 or $15,000??? You guys smoke some great sh&t up there.
Thanks PG! That was fun! It was even lower than I expected.
Hi Ardell. It’s been awhile…
On topic, the only real remedy to commissions for some of these people seems to be to charge an hourly fee (like attorneys) to them as the seller and/or buyer. Real estate is the only business where someone is expected to work for a promise - a promise that the buyer and seller will re-negotiate if they want to. And a promise that only gets filled if the property sells - otherwise it is work for nothing.
Patent guy appears to be an unusually informed and meticulous buyer/seller. Some people like to be that informed. Others have agents do that work for them - for a fee. Since it isn’t worth it to him, he doesn’t pay it. He could write his own will, too. And manage his own 401K, and … Some people have less time and less talent to multi-task. (mho)
Patent Guy, working as a consultant for a finite period of time (an afternoon, a day, whatever is agreed upon) to convey information is much different than representing you as a buyer. An hourly or set fee is exactly the way to negotiate that time. I see no issue at all with your scenario.
Ardell. Are ya happy?
Heath,
I think just getting someone to double check what you do is worth something, as Patent Guy suggests. Like doing your own tax return and asking the accountant to look it over for obvious boo boos without the accountant signing off as “the preparer” and the benefits that come with that. Makes sense for some.
It’s like when you are at a party and someone tells you what a great deal they got when they bought their home. You might know it wasn’t such a great deal, but why hurt their feelings at that point? You just say “I’m very happy for you”…until they want you to sell it.
YES!!!!!!!!! LEANNE!
I’m very happy. Leanne works for Windermere and she is BLUE!
You guys have this nailed. I am honored to be your prop for the tail end of this thread. I will try to comment more often.
Ardell, (1) I gave up on my tax gal when I had to double check and find her errors. (2) Never, ever brag about “a deal you got”. Nobody wants to hear it, even if it’s true (and it’s probably not). (3) Is Windermere a microbrewery?
PG,
We were celebrating Leanne learning how to link her name to her site.
I’m pretty much a do everything myself kind of person too PG. When I hire someone I tell them “I’m a smart cookie, so just have my back and don’t let me be my own worst enemy.”
p.s., Heath - I did, in fact, write our wills. It’s not that hard. (Good call, man!)
In reference to the tax consequences of rebates, the IRS did indeed issue a ruling for Redfin determining that it is not taxable income. See: http://blog.redfin.com/blog/2007/03/the_taxman_does_not_cometh.html
I believe the IRS has made similar rulings going back to the 1980’s so I don’t understand why the issue keeps cropping up in Real Estate circles.
Nice addition by Michael (@49) on the economics of all this. You can’t underestimate the psychology though either. I bet if you did an experiment asking sellers whether they’d rather sell their house for $605k, with a full 6% commission or $588k with no buyer’s agent commission, the majority would go for the former.
laxtosnoco,
If the market shifted so that there were no commissions inside the transaction and prices stayed the same, do you think people would view that as a 6% rise in prices?
PG, you’ve never heard of Windermere Beer????
laxtosnoco,
Way to go finding that post. However, as I vaguely recalled, the question is not quite definitively answered. If you read Glenn’s posting carefully you’ll note the determination apparently concerned whether Redfin had to declare the full 3% commission as income or could they avoid declaring (as income) the 2/3 rebated to their customer. Glenn is careful to point out that the IRS was not advising Redfin’s customers. Glenn also appears to quote from the ruling that
“A payment or credit at closing from [Redfin] represents an adjustment to the purchase price of the home,” the IRS ruled, “and generally is not includible in a purchaser’s gross income.”
Several of the posters asked some very good questions. One in particular made an excellent point about tax basis should the buyer sell the home within two years of purchase, i.e., before they’re eligible to fully exempt their appreciation from capital gains and income tax. Is their tax basis the “full” purchase price or the amount after the price is “adjusted” by the rebate amount? What if the home was not bought as a primary or secondary residence, thus, is not eligible for the full exemption to begin with or if they sold within the first year and can’t qualify for the long term capital gains rate?
Note that no one from Redfin responded to these questions. Probably because to do so would constitute legal/tax advice which could lead to liability if the advice was wrong.
I have not read the IRS ruling and don’t plan to at this time and I’m certainly not offering tax advice. Anyone concerned about this issue should contact their tax adviser.
“If the market shifted so that there were no commissions inside the transaction and prices stayed the same, do you think people would view that as a 6% rise in prices?”
If you magically eliminated commissions, I suspect the effect would actually be for nominal prices to fall. Since the cost of buying and selling real estate would go down 6%, buyers and sellers would probably split the savings between them.
It’s kind of analogous to the old travel agent model. With agents out of the picture, the cost of travel (theoretically) drops, with airlines/hotels and travelers splitting up the savings.
Ardell,
Let me see if I understand you correctly.
The seller pays for their own representation and the buyer pays for their own representation. The transaction has no cooperative commission paid from the seller’s proceeds. The buyer and seller agree to price of $350,k. they buyer pays 3% out of his/her own pocket to their buyer’s agent.
The buyer’s cost basis would be $360,500 = $350,k + 3%. The economic price increase to the buyer is only 3%.
The seller’s proceeds would be $339,500 = $350,k - 3%.
Your question fuels my argument that buyer’s agent’s commission is not the buyer’s money in most cases. If the SOC is removed from the equation and the house price remains unchanged then appraisal accurately reflects the value of the asset and not the asset and the buyer’s agent’s service. This would also discount applying the tax capitalization hypothesis to the SOC which should show an economic decrease in the asset price agreed to between sellers and buyers. I doubt it would happen. We would have to admit the appraisal process is fraudulent.
Michael, it wasn’t very hard to find the IRS ruling using Google. My first keyword search got it: ‘redfin commission rebate IRS.’ I understand why Redfin would be cautious about making broad sweeping tax statements because of liability worries. I understand the IRS has released pre-Redfin ruling letters on rebates, but finding those would involve combing the labyrinth that is the IRS website.
Still, the response I frequently see from traditional agents is: “I’d be careful about a rebate, that might be taxable income, and you need to see a CPA about that,” which is a completely disingenuous response. The IRS isn’t trying to trick taxpayers about what might result in taxable income, and the letter is about as definitive as any statement from the IRS gets.
Cost basis is a totally different animal. Anyone who is selling and will have a taxable event needs to seek advice from a CPA; there are all kinds of adjustments to cost basis (settlement fees/improvements/etc.) to consider. But in no way should that scare someone away from negotiating a commission rebate at the time of purchase.
Michael,
Do you really think that if a buyer or a seller had to pay for agent services, and they had to write a check to the agent (or better yet, hand them a stack of $20 bills) outside of escrow, that the commission paid would be 3% of the purchase price?
I sincerely doubt that.
As to the appraisal process being faulty, it always has a 5% variance at least either way. I don’t think it needs to be declared as faulty as long as everyone understands it is not an exacting method without the answer being a range vs. an actual number.
“But in no way should that scare someone away from negotiating a commission rebate at the time of purchase.”
Sounds like a post: Top Ten Things Agents Want You To Be Afraid Of”
Ardell,
That probably won’t happen in the current market system. I doubt many buyers would have the capital to do that. Banks need to allow the cost of representation to the buyer and paid by the buyer to be funded with the buyer’s mortgage. Until then, it is cost prohibitive. In a side note, it is becoming more common in the commercial real estate space for each party to pay for their own representation.
I wasn’t questioning the statistical accuracy of the appraisal. The comments are related to what the appraisal is attempting to value. If we make the argument that the SOC is the buyers money in our current cooperative commission market system, then we have to accept the appraisal is fraudulent because the appraiser is putting a value on the asset and on the service of buyer representation. Currently, the appraisal is a value of the asset, so the SOC is the seller’s money.
Michael,
I really don’t see the value of dragging in appraiser’s to prove that “the SOC is the seller’s money”. If there is no loan, there is no appraisal. When there is an appraisal, it is to protect the lender’s interest. When lender’s are confident that the market is on an upswing, appraisals often become almost meaningless as most anything will appraise at sale price.
On the other hand, I see MUCH value in determining that the SOC is the Buyer’s Money. In my experience, agents who think the seller is paying them treat buyers much differently than those who view the SOC as the Buyer’s Money.
For that reason I always influence agents to think that the seller is paying them ONLY when they represent the seller, and the buyer is paying them when they represent the buyer.
It may be a “chicken or the egg” argument if all we care about is arguing for argument’s sake. But from an agent training and industry mindset standpoint, no agent should represent a buyer who thinks that the seller is the one paying them to do that.
I’m coming to this rather late, but: I think it’s different here in California. In an exclusive right to sell listing agreement, which is used 99.9999% of the time, the seller agrees to pay the listing brokerage/agent a set commission. In the same agreement, the listing agent states what percentage of the commission they will pay to the selling brokerage/agent. And there is elective language to state that if the selling agent isn’t a member of the mls, then they will not be entitled to a commission.
Then, the listing agent, under the rules of the local mls, must state in the mls the commission percentage being offered to the selling agent in the mls listing.
And once there is a deal, the selling agent ratifies that in another form called the Cooperating Broker compensation form.
So, if there is no buyer’s agent, the seller doesn’t necessarily save half the commission (although it’s good practice for the listing brokerage to cut it).
sfrealestate,
In CA, everyone who works for the listing brokerage works for the seller, last I checked. I’m 99% sure that is still the case.
In WA, ONLY the listing agent works for the seller and everyone else at the listing brokerage as well as every other agent, represents the buyer(s) under our Agency Laws.
WA is the only State I know about that has buyer representation at first contact and as the default position.
Unfortunately however, the contracts are pretty much the same here as yours, though I am trying my damndest to convince everyone otherwise
At least to THINK differently and act differently by acknowledging who their principal is…and is not.
Most agents go to a listing appointment telling the seller that 1/2 of the fee is for the buyer’s agent, and they do not explain that they are going to keep that money if there is no buyer’s agent. That is a leftover from when all agent’s represented sellers. The contracts were never changed to accommodate the fact that the buyer is separately represented, even in our State where buyers are almost always represented in a Single Agent vs. Dual Agent capacity.
So this is my version of “fighting city hall”
It’s easier to simply think differently and take the part of the fee that is for seller representation, and only that part, when representing the seller. Also to perceive to good purpose that the buyer is paying you when he pays for the house, if you represent the buyer.
Good things come from recognizing who you work for and who you do not, and to accept that the person you work for is the one who is paying you.
P.S. When buyer agency started we had a form that “rejected the SOC” which was replaced by a Buyer Agent Fee. Everything else remained the same, and the Buyer Agent Fee agreement said “to be paid by the seller as a convenience to the transaction”. The SOC or Cooperative Fee was “rejected” as an offer from the seller to “procure” a buyer for him, and replaced with the buyer representation fee.
That lasted about a week, and then we went back to same old; same old thinking and forms.
An all call cash transaction may include an appraisal. Appraisers value assets. Appraisers don’t value services. If you hypothesize that the SOC is the buyer’s money when paid by the seller, then appraisal consists of a value placed on the asset and the service. That isn’t the case.
A belief that the SOC is the buyer’s money might be a mission statement, mantra, or business practice to create a mindset to better serve a buyer. And, it may very well work in practice. Great.
It is just a belief. It isn’t an economic reality. The belief that 2 + 3 = 6 doesn’t make the result 6. The economic reality is the SOC is not the buyer’s money except under a couple conditions. I provided the economic conditions under which those few scenarios may exist in an earlier comment. The SOC won’t be accounted for as the buyer’s money outside of those conditions unless the accounting rules change. The accounting rules won’t change because they wouldn’t reflect the substance of the transaction.
Michael,
When an appraiser calls me to get the particulars on a sale, he wants to know anything that was different that would affect the value as a comp for another sale. No commissions is a particular. While the appraiser may not state that specifically as a plus or minus, he will go to his limits in other categories to compensate for that factor.
That is why they say appraising is an art and not a science. It may look like a science because it is on a form, but good appraisers go to great pains to effect the appropriate result by bending and stretching into it as needed.
Say there was no 3% buyer agent fee and the price was reduced accordingly. If there is no place to show that on the form , they may bump something else 3% or three things by 1% to accommodate the situation.
Michael,
Think of it this way. House costs $500,000. Buyer walks in the door with a check for $485,000 and a separate check for $15,000 and says here’s your $500,000 Mr. Seller. $485,000 is for your house and your agent. This separate $15,000 is for the payment of my agent.
It’s as simple as that and economically viable.
Ardell,
I admire you for stating the obvious. Most Realtors(R) could not bring themselves to say it, but they know it (at least the ones smart enough to, so maybe %50 of ‘em). If banks had not been underwriting real estate agent commissions all this time, things would be a whole lot different out there.
More than 100 comments. What is the record around here?
PG,
We have a couple of posts that still get comments over a year later like mine on Popcorn Ceiling Removal writtin in October of 2006 at152 comments and comments as recent as a couple of days ago. Dustin’s is the big winer written in March of 2006 with 514 comments and the most recent also a couple of days ago.
Some people read blogs from the most recent post, others find them by Googling a topic. Posts that Google well can get comments for years. Luckily the post writer gets an email when someone comments which gives us a heads up that someone is talking to us.
I read as many comments as I could. Here’ my .02:
If I took a listing and one of MY buyers bought MY listing I would be due two commissions, no?
Here’s my thinking: I have two clients a seller client and a buyer client, why would I/should I take two possible commissions and reduce them to one? I can see if someone came in from sign ads or the internet from an ad on that specific property, but not if the buyer came from one active buyer-clients.
Don’t misunderstand, I’m not a pig. I always throw money into the pot. I actually like to do it right away because it takes the “pressure” off of me as we all have our ways of doing things.
What most people forget about real estate agents is that this is a risk-reward occupation. We could make A lot of money or NO money. It all averages out and most consumers haven’t been told THAT story. If they heard that one (risk-reward) maybe they would see us in a different light.
Kevin,
I agree on your first point. You shouldn’t be penalized if your buyer client buys your seller client’s home for sure! Your seller client would not be happier if that buyer bought someone else’s house, or in your case likely condo. I think any reasonable person would agree. For agents that carry a lot of listings in a smaller defined area, like you do, that is more common than for most agents.
As to your last paragraph, how about a restaurant that is on the honor system and doesn’t make people pay. But then when someone does go to pay, they charge them for all the meals of the people who did eat and didn’t pay? You OK with that? I think not. It doesn’t work that way. Don’t laugh. We have a coffee shop here with no charges. You pay what you want and if you want. It’s an honor system coffee shop…what can I say, it’s Seattle. Were trying to change the world out here
Maybe we have to work with 40 people to have 30 sales. If someone’s working with 60 people and having 3 sales, that clearly is not the person’s fault who does buy a house now is it?
Same old I ain’t paying for a steak dinner when I’m getting a cup of coffee just because the restaurant needs to make more money.
Seriously, read this back to yourself. “Mr. PatentGuy, you have to pay me three times what my service was worth to you, because two other people worked my butt off and never bought or sold anything with me.” It only makes sense in a room full of agents. Otherwise it sounds like a bad joke.
Kevin -
You can/should collect whatever you are contractually entitled to from the seller, subject to using your best business judgment. In our purchase described in comment 10, we made my offer contingent on the seller’s agent’s commission not to exceed 3% total, which was up to the agent to agree to. He got at least as much as he would have had I dragged in another agent to feed at the trough. If you had been the seller’s agent under such circumstances, you may have viewed me as your “buyer client”, but trust me , I did view that guy as “my agent”, and I had little or no contact with him after the contract was signed. I did all the inspections, and negotiations over “this and that” directly with the seller, and worked directly with the title/escrow company on the “who pays what”, and regarding our loan details.
Ardell, once again, you are right on (the NAR folks must not like you very much). The “I do work for other people that I don’t get paid for, so you should pay me a premium” line gets nowhere with me. Quit doing work for free, or quit complaining about it. (repeat, as necessary).
please insert “pay” before “me a premium” in the prior post. My bad. I should use the preview feature….
PG,
You said to Kevin: “You can/should collect whatever you are contractually entitled to from the seller…” That’s contradictory I think, as your contract interfered with the contract between the agent and seller and changed the contract between the agent and the seller.
I don’t think you can say that he should collect whatever you are contractually entitled to from the seller and then submit a contract that prevents that from happening. What if the agent’s contract with the seller was 3.5% or 4%? You limited it to no more than 3% in your offer without knowing what the previous contract said.
I’m not saying you shouldn’t have done what you did, but you can’t then say “go get what the seller agreed to pay you before I happened along”.
What if the seller hired an agent so the agent could protect him from you, as most do. Many seller’s would give in and give up more if they are confronted by the buyer directly, that’s often why they hire an agent, because they are too nice. What would you have done if the seller said, please talk to my agent? By dealing with the seller directly, you kind of stripped him of his representation…no?
Ardell,
RE paragraphs 1 and 2 of your last comment, that’s where the “business judgment” part comes into play. Kevin could stand firm and say: “no way, PG, I get it all! Double end me, or get lost.” (OK, he would probably would phrase it differently). Or he and the seller could voluntarily agree to modify their existing contract in order that he still get a full 3% if I buy the house without bringing in another agent/broker, etc. It’s his and his client’s call to make, just as it is mine to propose.
And, sorry, but if I want to approach a seller directly, that’s my business, not his agent’s. “Stripping him of his representation” is a bit melodramatic, but is meaningless to me. Only in NAR fantasyland, do realtors(R) have magic powers to “own” their clients. By the way, if buyers can save $$$K by going direct to the seller, because sellers are “too nice”, you should always advise buyers to do exactly that, or you are not acting in their best interest.
Anyway, you will be pleased to know that in this case we contacted the agent first, visited the home several times (and at different times of the day); and then made our offer. It was after the offer was accepted that their agent disappeared. Maybe to the BMW dealership? - I don’t know. If he had been contracted to “protect” the seller from buyers without agents (I’m not sure why a seller would want that, but you say “most do”), then he would have told me to go find an agent at an open house, or working at a Starbucks, or wherever (they are plentiful in California), and not to come back without one (or maybe two, just to be safe). That would have been totally within the seller’s right to ask for.
I understand the math, the economics, and the finance. I crunch numbers for a living. I will admit that our current system is flawed and it needs to change. The SOC isn’t the buyer’s money except in a small number of transactions until the system changes.
From Ardell
“Think of it this way. House costs $500,000. Buyer walks in the door with a check for $485,000 and a separate check for $15,000 and says here is your $500,000 Mr. Seller. $485,000 is for your house and your agent. This separate $15,000 is for the payment of my agent.”
What you advocate is the SOC is the buyer’s money when it is paid from by the seller and that argument does not correlate to your example.
In your example, the seller effectively received $485,k from the buyer for the house. The seller’s selling costs are $15,k. The buyer paid $15,k for his agent from his/her own funds. The buyer’s cost basis is $500,k. The source of the funds is clear. In this case the SOC is the buyer’s money because the source of the funds is the buyer. Again, your example does not describe what you advocate.
Here is what you advocate. The buyer pays $500,k for the house. The seller effectively received $500,k. The seller pays $30,k in selling costs to the listing agent. The listing agent shares $15,k with the buyer’s agent. The source of funds to the buyer’s agent is not the buyer. Again, the economic reality is it is not the buyer’s money. The math doesn’t support it. The accounting doesn’t support.
Appraisers value assets If the FMV of the asset compared to similar homes is $500,k then the appraised value or FMV is $500,k. If the seller paid commissions of 6%, then the FMV is still $500,k. If the sale was a private party all cash sale between a buyer and seller and two attorneys, the FMV is still $500,k. If the buyer effectively paid 103% or $515,k, so the mortgage costs are wrapped into the mortgage, then the FMV is still $500,k At this point, if a buyer’s agent is involved, then you could argue the SOC is buyer’s money. The source of the funds is the buyer. The economic reality is the buyer paid for it.
To say banks underwrite the commission is not necessarily the case. To argue that point we have to apply the tax capitalization hypothesis and it may not be appropriate because a private party sale, an all cash sale, a sale with agents, and a sale without agents may all result in the same contracted price. That price may be the assets FMV.
You haven’t provided an example or the logic to show the form of the transaction that you advocate is the same as the substance of the economic reality. I’ll say this again, the system is flawed. The math, economics, the accounting don’t support your belief.
PG,
But the buyer is also his client in Kevin’s question. Not someone who called him about the condo he ended up buying. Say in August of 2007 someone hired Kevin as their Buyer’s agent agreeing to x commission. They were looking for a condo for a year with Kevin and Kevin kept saying wait for a good one. Now Kevin is hired by a seller client and markets the condo for three months and Kevin’s buyer client decides he likes Kevin’s seller clients property.
The issue is that if Kevin’s buyer client chose a property other than his listing he would get paid a listing fee from his seller client when the condo sold and he would also get a buyer agent fee for his buyer client. So why should he be penalized just because one of his buyer clients liked one of his listings?
PG, I ask you to answer this from the standpoint that agents are not only people who represent sellers. Clearly there are many people, though not you personally, who need the services of a buyer’s agent. Kevin had two clients who each agreed to pay him. Why should he forfeit one of the commissions simply because they end up at the same property?
“By the way, if buyers can save $$$K by going direct to the seller, because sellers are “too nice”, you should always advise buyers to do exactly that, or you are not acting in their best interest.”
Seriously PG, you’re going a bit overboard there. That’s like a lawyer telling a husband to go around the wife’s lawyer and intimidate her to buckle under in a divorce situation. When someone chooses to be represented they shouldn’t have to duck and hide from the other party, and people should for the most part honor the seller’s choice to be represented.
“…then he would have told me to go find an agent at an open house, or working at a Starbucks, or wherever (they are plentiful in California), and not to come back without one (or maybe two, just to be safe). That would have been totally within the seller’s right to ask for.”
Agreed. It is the seller’s right to insist that the buyer have separate representation so that the seller retains his single agency status.
One of the biggest problems that I see is what I call “undisclosed dual agency”. The buyer agrees to represent themself and keep the commission. But then if things go sideways and they want the Earnest Money back with no legal out, they don’t want to hear that the agent is only working for the seller. Most times people who want to represent themselves really only want to keep the commission. When they need representation, they look to anyone in the room and get angry when they are told, sorry I don’t represent you.
Michael,
You seem to think if the buyer walked in with two checks, one for $485,000 and a separate check for $15,000, then I am correct. But if he walks in with one check for $500,000 then I am not.
To me that is jus