Profile picture for Honestly Realty

Who Really Pays the Realtor Commission?

NAR's Standard of Practice Article 12 specifically states that Realtors may advertise their services as "free".  Is this honest and truthful?
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June 24 2010 - Fairfax
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Profile picture for sunnyview
Oh lordy. Brace yourself Honestly. This issue has been hotly debated in the past.
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June 24 2010
It depends on your perspective. I have always felt uncomfortable using the term, because really, it isn't free. Someone is paying for it, and that likely impacts the selling price of the home.
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June 24 2010
Profile picture for Honestly Realty
If it is such a sensitive subject why does Article 12 specifically allow it?
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June 24 2010
Because ethics do not equal laws or NAR policies. There are many hotly debated topics in both.
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June 24 2010
The seller pays the commission, it costs buyer 0 dollars. Should I put my flame suit on for the RE Trolls that lurk here?
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June 24 2010

Well, I would say in many of my recent transactions the bank pays the commission.

I know this, because when we got short sale approval, the bank reduced the commissions...how can they reduce what they don't pay?

Seller signs contract. so you can argue seller pays, buyer pays nothing.
Buyer brings all the money, so you can argue buyer pays, sller pays nothing since it is the buyer's money.

You are NOT supposed to advertise your services for free, unless you also state that you will be paid by the sellers cobroke... unless you really work for free I guess.

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June 24 2010
The commission is paid from the sellers proceeds at the table; however the buyer brings the money to the table.  Unless the buyers agent has a contract to be paid by the buyer, selling agent has the only contract for commission with their seller. The list agent with the seller's approval decide on how much to share this commission with the buyers agent aka co-operating agent's company.  But I have heard it argued that since the buyer sets the price and funds the contract it could be said the buyer ultimately pays in the end.  Best of luck.
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June 24 2010
"The seller pays the commission, it costs buyer 0 dollars."

That statement is just inaccurate. As Rob said, the seller negotiates the amount of commission paid. However, the buyer brings the funds. Everything that is paid out impacts what the seller (or bank) is willing to accept, since any rational sellers would be concerned with net profits (or greatest mitigation of loss). Commission is a pretty decent chunk of change, and to say the act of paying it has zero cost implication to the buyer is foolish.
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June 24 2010
Semantics abound. But buyer agent is paid out of the sellers proceeds. So, outside of any administrative or retainer fees, the buyer hires an agent for "essentially" no cost to themselves.
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June 24 2010
Usually the seller pays the commission - the terms are stated in the Listing Agreement as to the amount, which is usually a percentage of the sale price.
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June 24 2010
Typically, the seller pays the commission per the listing agreement.
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June 24 2010
Profile picture for Honestly Realty
I think everyone agrees that the Buyer is ultimately the one that funds the entire transaction, cash or note.
If the Buyer's agent at settlement agreed to waive his $5,000. commission and the Seller agreed to his original net, who would save the $5,000.
The buyer would bring $5,000. less funding to the table.
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June 24 2010
It is always the buyer that provides the cash or cash equivalent that pays the commissions.  This is true even if the buyer puts zero down, where the buyer will repay his bank the tranaction commissions over time after the bank paid them at closing.   The buyer always pays.

But hey, WAIT A MINUTE!   Didn't the seller pay by reducing his net?

What came first, the chicken, the egg, or the lame question?
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June 24 2010
In your latest example of the waving of the $5,000 buyer's agent commission.  There would be a $5,000 credit somewhere on the HUD-1 settlement statement, unless the list agent considers it earned by them.  If it is a credit to seller then the seller saves it.  If it is a credit to the buyer it would have to reduce the purchase price by $5,000 or be disclosed toward the buyers cost to close or a POC if paid by the buyer's agent to the buyer.  The lender might have a problem with the $5,000 paid to buyer at closing depending on the loan type, closing costs and purchase price.  My company pays the buyer 20% of what we receive as a commission as buyer's agent.  This is disclosed as a POC to buyer as rebate paid after the closing.  It is very deal dependent. 
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June 24 2010
Profile picture for Pasadenan
Roberto Ribas has it exactly right...

It usually is paid by the escrow account from a check written by the escrow company, which usually is funded by money that the buyer brings to the table.  But if a short sale or foreclosure, the lender will be the one bringing the extra money to the table to pay the agents; whereas if the seller is selling near or below what they owe but are not asking the lender for a "short sale", it it the seller that will be bringing money to the table to pay the agents.  The seller almost never writes a check out to either agent or broker.

And if the agents really work for free, the contract will state they are paid 0% and no fees.

And then there are agents like Linda in Nevada that not only collect the % commission from the escrow account, but also collects an additional negotiated fee from the buyer.
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June 24 2010
Profile picture for Pasadenan
And in the long run, it makes no difference who pays the fees; in the life cycle of buying, owning and selling a house, one loses about 10 to 16% in transaction costs that have to be factored in somewhere, so the best answer is "the home owner does".
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June 24 2010
Profile picture for Honestly Realty
Pasadenan - you got it right.  The new home owner buyer pays all of the costs.  So a true picture is the buyer pays the buyers agent even though he does not write a check. 

Another example:
Realtors are always trying to stop seller paid transfer taxes.  NAR says this increase in transaction fees reduces home affordability.   Why, because the seller has to increase his price to keep the same net.  The buyer pays the transfer tax.
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June 24 2010
Profile picture for SoCal_Engr
In a typical real estate transaction, the seller pays both the listing and buying agent.

The cost of this service is bundled into the asking price for the house and passed on to the buyer.

Like mortgages, there is no such thing as "no cost". It's all semantics, and where you choose to hide the bean. Realtors who insist on claiming that they are "no cost" are, in my view, in the same class as lenders who tell clients that their loan is coming at "no cost", instead of being honest and saying "no upfront cost".
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June 24 2010
If your the buyer - get an Agent!  It is free and paid for by the seller.  Don't be foolish and try to buy without an agent!  Buying a house is a big purchase and you should take advantage of using an Agent.
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June 24 2010
Profile picture for Pasadenan
More proof of what NAR really stands for....
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Not Able to Read!
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June 24 2010
The question is NOT who pays the commission, but what BENEFITS do the seller and the buyer receive in exchange for paying the professional fee to the listing agent and the selling agent.

Needless to say, BOTH parties benefit from agent representation.

The listing agent does the MARKETING of the property for the seller and is responsible for the contract.

The buyer's agent (also called the selling agent) makes sure the property is priced CORRECTLY so the buyer does NOT overpay but rather pays the FAIR market price and performs the due diligence beyond the four corners of the property for the buyer. If the buyer pays $5K a professional fee to the selling agent, however the property was priced $25K ABOVE the comparable homes in the neighborhood.....hm, the buyer is still $20K ahead in this game.

Now, let's consider that some homes are priced more than $25K above the market....all over sudden, the buyer agent is a great friend for the buyer to have in the transaction....

At this point, does it matter "who" pays the commission? 
The buyer agent has earned every penny he/she is paid. 

And YES, the service was FREE. 
Both agents are paid only if there is meeting of the minds and their clients choose to consummate the transaction. 

In case there is NO settlement, it means that the listing agent spent time and money marketing the seller's home, and the buyer's agent spent time and money to show the buyer 10-20-30-xx homes and do the research without being compensated. 

FREE service is an understatement. 


 

 
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June 24 2010
Profile picture for Honestly Realty

Socal_engr,  you are exactly right.  The problem is that NAR addresses the issue in their Standards of Conduct and completely condones the behavior that buyer agent services are Free.  They are not free.  Even Lem Marshall (attorney for VAR) has stated in a recent short sale class that the buyer brings all the chickens to the settlement table.  Then the chickens are divided to the seller's payoff, closing fees, agent commissions and seller's equity.  Who brought the chickens to the table?  Lem does not like to discuss commission percentages so he uses chickens.

I will bet that every broker in this discussion writes in to the buyer broker agreement terms similar as follows:  "...buyer's agent will be compensated in the amount offered by the Seller's agent"

Am I wrong?

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June 24 2010
Profile picture for SoCal_Engr
In all honestly, I'm over this discussion. It's gone back-and-forth, and I'm sure that everyone involved understands the truths, half-truths, and flat-out-lies involved. If the consumer is stupid enough to believe that the agents involved in the real estate transaction are truly free (i.e., do not add to the cost of the transaction), then the consumer deserves whatever follows.

If the agents want to persist in the white-lie that buyer's agents are "free" to the buyer, so be it.

Unfortunately, as a society, we are lazy and stupid - and prefer to be misled and subsequently cry "foul" than to put in the modicum of effort necessary to browse the Internet and become informed on our business dealings.The only thing to do is swim upstream...and make sure my kids are smart enough not to swim downstream with the crowd.
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June 24 2010
Profile picture for SoCal_Engr
@ Vivianne - I give you credit for a slick debating move. If you don't want to look like an idiot taking on the question directly - reshape it to something you can provide a better answer for, and then answer that question instead.

For what it's worth, I agree that agents are not guaranteed a paycheck. However, agents also do not take on clients with the expectation of not getting paid. It would probably be better phrased that agents work "on spec", without a guarantee of pay unless a sale is closed. Just like any other commissioned sales job.
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June 24 2010
Profile picture for Pasadenan
So the real question to Vivian's hypothetical scenario, is how many buyers will walk from a agent if one offer falls through?  Almost none?  Then the selling agent still gets paid, don't they?

And saving money if it doesn't appraise sufficiently?  You have to be kidding!  The lenders won't fund your loan if it doesn't appraise sufficiently, and if you bother to put a funding contingency in your offer, you still walk away without overpaying.

But since we are in a declining market and the property will appraise at present market value instead of market value 6 months from now, you are still over paying, and Vivian and all the rest of the NAR people will encourage you to overpay, just like they did at the height of the bubble.

Yes, pay them to rob from you and to make you over pay!  That is why they are members of NAR.
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Not Able to Reason.
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June 24 2010
"The problem is that NAR addresses the issue in their Standards of Conduct and completely condones the behavior that buyer agent services are Free.  They are not free.  Even Lem Marshall (attorney for VAR) has stated in a recent short sale class that the buyer brings all the chickens to the settlement table."
***************

Let's agree that it is the BUYER, not the seller, who compensates the listing broker and the selling broker.

The equation still stays the same. The listing broker was hired by the seller to represent the best interests of the seller, and the selling broker was hired by the buyer to represent the best interests of the buyer.


 
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June 24 2010
Profile picture for SoCal_Engr
"Let's agree that it is the BUYER, not the seller, who compensates the listing broker and the selling broker."

Since you're conceding that both brokers/agents are being compensated, I'll let you have it either way..."BUYER" or "SELLER". The salient point is that if the brokers/agents are being compensated, then they aren't "free". It's nice to know you agree.
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June 24 2010
Nothing is free!  Although it is true the seller is under contract (listing agreement) to pay the commission and the listing broker is under contract (MLS agreement) to pay the co-operating broker his share it is really the buyer that pays the commission.  If there were no agents involved then the majority of sellers would be just as happy selling their home to a buyer and receiving 5% less which would be exactly what they would receive if they had broker representation.  The only person bringing money to the table is the buyer, hence the buyer is paying the commission.

Simon Mills
Mills Realty
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June 24 2010
Profile picture for Honestly Realty
Thank you everyone for a great discussion.  If we could only get NAR to remove this dishonest and truthless Standard of Practice.
Article 12-2.
http://www.realtor.org/mempolweb.nsf/pages/code
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June 24 2010
Profile picture for SoCal_Engr
@ Honestly Realty

Unfortunately, I think you're fighting a losing battle. "Standards of Practice 12-2" reads...

REALTORS may represent their services as "free" or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the Realtorto obtain a benefit from a third party is clearly disclosed at the time.

Unfortunately, the wording is in complete and real-world is only a difference of semantics and line-cutting, but there is room to wiggle through. Is it deceptive in actual application? Yes. But, there you are.
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June 25 2010
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