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
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