Dirty Little Secret

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Real estate commissions seem to be our Dirty Little Secret. Much like my children don’t want me at their high school football game lest it provide their friends with actual, hard evidence that they indeed have parents, real estate agents don’t like to talk about commissions with buyers. “Commission” has almost become a bad word in our industry, as it suggests that we do what we do to make a living, and that this is less than honorable. 

So, I’ll say it. I do what I do to make money. But who pays me? I honestly don’t know why I am having such a tough time getting my arms around this one. Maybe I need some deprogramming, or just maybe I’m right, but I continue to think that sellers in a transaction pay the real estate fees. By that I mean, they pay the compensation to both the seller’s and buyer’s agent. It may not always be so, but at least for now, that is the way it is. Greg at the Bloodhound Blog continues this debate in a recent post, insisting that it is in fact the buyers who pay their agent. Ardell at RCG agrees, although they each put a slightly different spin on the argument. At the risk of appearing a small thinker, let me just state the facts.

In the listing contract, the seller agrees to pay a fee to their agent. Their agent, in turn, agrees to offer some portion of that total fee as compensation to the agent who brings a buyer. The argument that it is in fact the buyer’s money, any or all of the commissions paid, is based on the assumption that if the seller weren’t coughing up this amount, the price of the home would be adjusted downward accordingly. Afterall, the seller is only interested in the bottom line, correct?

Well, in a perfectly logical world, that argument holds water. The seller agrees to a commission amount, which includes the commissions to both agents. The seller has a sense of the home’s market value, does the math, and arrives at an expectation of proceeds. But in doing so, does the seller think for a minute that the buyer is paying the real estate fee? Not a chance. Now, from the buyer’s perspective, they are going to pay their perceived market value for their home of choice and not a penny more. What you have to ask yourself is, if the buyer keeps all or part of his agent’s fee, would he be willing to pay more? In most cases, I sincerely doubt it. Conversely, if the agents are not getting paid, would the seller take less? Maybe, but not likely. The seller wants what his home is worth and not a penny less. The costs of sale are a reflection of a choice the seller has made to pay for representation. It really goes back to the For Sale By Owner argument: Who really benefits from the absence of commissions? Both parties expect to; it is human nature.

Now, I will confess that the real estate fee comes into play. If you’re an agent, admit it. There are many times that you are shelling out, at contract or at inspection negotiations, even during the final walk-through, to ensure that the transaction is a success. In many cases, there are so many hands in my pocket, I don’t have room for my car keys. Agents have been known to credit money to principals to “make the deal happen”, buy appliances, pay for cleaning, home warranties, and a myriad of other items important to the parties in the transaction.  All of this is ultimately done to protect the seller’s (and the buyer’s) “bottom line”.  And, admittedly, the fees paid to the agents may factor into the price ultimately accepted by the seller. That is why some contracts have a variable commission which says that if there is no other agent, the total real estate fee is less. (This, of course, puts us into dual agency territory, the wisdom of which is a topic for another time).

So for the time being, my bottom line is that the fees are not the buyer’s money, but in fact the seller’s. If a buyer chooses to be represented, their agent will get paid, as they should. As a buyer’s (or seller’s) agent, if you opt to give some or all of your commission to your client, that is your choice. I had one transaction, as a listing agent, where I thought the whole issue was handled beautifully and respectfully by the buyer. He was a licensed agent but not practicing, and wanting to purchase one of my listings, delivered this message: “This is the amount I am willing to pay for the home based on the value I perceive. I am not represented by another agent. Do whatever you have to do to make it happen. If you can’t, I understand”. At the risk of the wrath of many, many bloggers who feel passionately that this is not so, the real estate fee is the seller’s money and the agents’ paychecks.

(Edited to add Happy Birthday to Me!)

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