I’ll pay you $15,000 even though I don’t know who you are or what you’ll do, says the seller of a $500,000 home in Anywhere, USA, to the buyer’s agent. Why are sellers paying huge commissions to unknown people?
Joe Seller meets with his agent, and they come to an agreement. Joe Seller will pay his agent a percentage of the sales price of the home for his agent to perform a multitude of tasks, many of which are out-of-pocket costs paid by Joe Seller’s agent. These tasks include staging, marketing, placing the home on the Multiple Listing Service (MLS), open houses, showings, contract drafting and negotiation, over-seeing repairs, and the list goes on. Joe Seller knows what he is getting for what he is paying his agent.
Joe Seller also agrees to pay the buyer’s agent a percentage of the sales price. Neither Joe nor his agent know who the buyer’s agent will be and what he will or will not do. The buyer’s agent may spend no money and less than an hour on the purchase yet gets a fat $15,000 check. Is that fair? Surprisingly yes.
Let’s say Joe Seller elects not to pay the buyer’s agent’s commission. Joe Seller’s agent places the home on the MLS and inputs “zero Commission to be paid” in the required section. All agents know that no commission will be paid to the agent who brings a buyer. What happens next? Out of the three scenarios, only the first is pain-free for all involved.
Scenario One: Betty Buyer’s agent tells Buyer, “I found this great home that I think you will love, but the seller is not paying a commission to buyer’s agents. Please sign this Buyer Broker Agreement that holds you, Buyer, responsible for paying me 3% of the sales price.” Buyer signs the Buyer Broker Agreement, figuring that she would otherwise be paying that amount to Joe Seller as part of an increased purchase price, so no money is lost.
Scenario Two: Betty Buyer’s agent tells buyer, “I found this great home that I think you will love, but the seller is not paying a commission to buyer’s agents. Please sign this Buyer Broker Agreement that holds you responsible for paying me 3% of the sales price.” Betty Buyer refuses to sign the Buyer Broker Agreement because all her cash is tied up in the loan down payment and move-in costs. Betty Buyer has no money left over to pay her agent. Had Joe Seller agreed to pay the buyer’s commission and raised the asking price to cover that cost, then Betty Buyer could have financed that amount in the home loan. However, Joe Seller refused to pay a buyer’s agent.
Since Betty Buyer’s agent is not getting paid, the agent bows out of the transaction. Agents do not work for free. Betty Buyer will have to work directly with Joe Seller’s agent. Buyer will be unrepresented and at a distinct disadvantage. Alternately, in states where dual representation is allowed, Buyer will be represented by the Joe Seller’s agent, who is now doing extra work. Still, Buyer will be at a disadvantage because it is likely that Seller’s agent will advocate more for Seller than Buyer. The more money Joe Seller gets for the home, the more his agent is paid.
Joe Seller’s agent loses because he is doing more work for the same money. Betty Buyer’s agent loses because she does not get a commission even though she found Buyer the house. Betty Buyer loses because she paid more than she needed to and received lower quality service.
Scenario Three: In this scenario, Betty Buyer’s agent has been all-in with Buyer for months, searching daily, sending out inquiries to her network of agents, and taking Buyer to various homes. Yet, each home Betty Buyer’s agent shows to Buyer is missing something. Finally, her agent comes across a home about to hit the market and sure to go under contract fast. This home has everything Buyer is looking for and at the right price. What does Buyer’s agent do when she sees that no commission will be paid by Seller? She knows that her client is using all her cash for the down payment and will have nothing left to pay her. Therefore, Betty Buyer’s agent skips past the home and never tells Buyer about it. If she told Buyer about it, Buyer might end up working directly with the Joe Seller’s agent. Buyer’s agent will have spent months with her client and handed the sale and her commission to someone else.
Betty Buyer is a loser here. The perfect home finally becomes available, and she never knows about it. Joe Seller is a big loser as well. Many agents who would have brought buyers to his home had he offered a commission are taking their clients somewhere else. If Joe Seller had added $15,000 in buyer’s agent commission to his sales price, he would have had more agents bringing buyers to his house and could have made more money.
The Solution is Status Quo:
Ideas for taking the onus off the seller are floating around. They include the buyer paying a flat fee, hourly fee, and commission based on the purchase price. These mirror how attorneys are paid: flat fee, hourly, and contingency. Still, these ideas do not solve the problems presented in scenarios two and three. Many buyers will not have the money to pay their agent, no matter what the payment plan is. Agents will avoid showing homes when the seller is paying no fee and or a small hourly or flat fee.
Another bad idea floating around is that once a final purchase price is negotiated and finalized by contract, an agreement is made to tack on 3% (or 2% or whatever commission is predetermined) to the sales price. This percentage comes out of the seller’s proceeds at the close of escrow and right into the buyer’s agent’s pocket. Fingers are crossed that the lender’s appraiser values the home high enough to compensate for that tacked-on cost. In reality, it is highly likely that the lender’s appraisers will determine that the fair market value of the home is X…not X plus 3%, and the loan will not be approved. When the agreed-upon purchase price is in the contract, it is likely that the lender’s appraiser will see that as the fair market value, and if the price is in line with other similar homes, the loan will be approved. If a commission is added to the purchase price post-contract, the lender will interpret it as an over-valuation of the home and deem that commission as money it will not recover if it forecloses on the home. The loan will be denied.
When sellers refuse to pay the buyer’s agent’s commissions, the gap between the haves and have-nots widens. Buyers who are unaffected by having to pay their agent a commission are those who buy homes with cash – the haves. It is the have-nots, those with limited funds, who are financing transactions. These have-nots are 80% of today’s home buyers, according to the National Association of REALTORS®. These buyers get stuck in the disadvantaged scenarios two and three.
The best way to solve the commission conundrum is to continue the current practice, a practice that has worked for decades in this and other countries. Joe Seller offers to pay both his and Betty Buyer’s agent’s commissions. To make Joe Seller feel better, he should tack on 3% to his asking price, and not tell a soul.
