Home Selling in Franklin>Question Details

Graham M. Lo…, Real Estate Pro in Franklin, TN

Who Really pays the commission?

Asked by Graham M. Lombardo, Franklin, TN Sat Oct 6, 2007

We all know that on paper at least, the seller pays the negotiated commission. But in reality, is that really the case. Seller's don't price adjust to some extent to compensate for this expense? Just curious to see what this esteemed body of experts has to say on this subject.

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It is like a Zen koan. There is no right or wrong answer.

There is one pile of money to divide at closing. The buyer (& his bank) put the money there. So we know for sure the pile originated with the buyer. The pile goes to the seller because that's what the contract says. So now the seller legally owns the pile. At closing, everybody gets a piece of the pile, including the broker, and seller gets what's left. Did the buyer pay the commission because the money pile originated with him or did the seller pay it because the pile was passed over by the buyer? Why did the man keep driving around the block? His blinker was stuck.
4 votes Thank Flag Link Sat Oct 6, 2007
Most of the money in most sales comes from the new lender. So if you want to wax philosophical about it, the mortgage lender pays the commission. But, no, wait, mortgage companies really get their money from Banks and from selling paper on Wall Street.... So it is the investors on wall street .... No, no, wait.... the banks get their money from depositors, stockholders and yet more banks.... Stop. stop. There is no money unless the government authorizes it and prints it.. --- So the government pays the commission... Who pays the government? The taxpayers...... So where do taxpayers get their money? From their jobs, from selling and making and growing stuff. Ah ha ! I think I have the answer! Stuff pays the commission!!

Still blowing philosophical econ at you... Money is a store of value. It has no value of its own. The value of money lays in the perceptions and belief of its holders and its seekers that it can be used either now or in the future (and in the case of debt - in the past) to obtain goods and services that people think they need or want. Money would not exist if it were not for the beliefs of those who seek it and hold it.
A very high percentage of the six billion people on the planet share this belief. The percentage is so high that with the exception of a few cult members, essene purists, hermits and madmen, it is a nearly universal faith.

I put the idea out, now, that since I claim that money only exists because so many of us believe in it and have faith that it exists, that it is faith and belief that pay the commission.
3 votes Thank Flag Link Sat Oct 6, 2007
Jim Walker, Real Estate Pro in Carmichael, CA
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It's hard to analyze yourself - what do you look like - what do you sound like - do your jeans really look good?
I have a perspective of a couple other real estate markets - Spain and Mexico. There most properties are listed as a "net listing". The seller will take a certain amount for his property and the agents will advertise the property at a price higher than that in order to get their fee.
Those markets also do not have any MLS - because exclusive listings are abhorrent to most people. No MLS and therefore no comparable sales available to the general public or even to the real estate agents themselves.
The result of this is average commission rates much higher than what we average here. Also, buyers are very uninformed as to what true values are.
The commission paid in the US can definitely be attributed to the buyer theoretically - yet - the buyers benefit hugely from this imputed commission with a more fluid market and open information for all.
This is a very good real estate market - buyers and seller reap great rewards from this system. I've worked in both types of markets - the US is by far the best for everyone involved. Too bad we cannnot export real estate practices as we export Big Macs.
2 votes Thank Flag Link Sat Oct 6, 2007
Mario Pinedo,…, Real Estate Pro in Cupertino, CA
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Hi Graham. You are absolutely right. The buyers are the ones that pay for the commission indirectly when they buy a property as the sellers take the expense into account when they set their asking price. However, since the asking price is usually based on other comparable sales, the sellers are comparing their property to the sale prices of other properties for which the sellers also paid the commission. That's why it is important that listing agents mention sales concessions that were made so that agents who prepare comparative market analysis later can take the sales concessions into consideration. For instance, if a seller gave a buyer a $10,000 credit at the close of escrow, the actual sale price was really $10,000 less than shown in the MLS. If the $10,000 credit is not mentioned in the MLS sold detail, valuation based on comparable sales gets distorted. That's just a side note that I thought I should mention here.
Web Reference: http://www.go2kw.com
2 votes Thank Flag Link Sat Oct 6, 2007
Ute Ferdig -…, Real Estate Pro in New Castle, DE
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The buyer will pay, only what the buyer will pay. So regardless of what adjustment the seller might make (to allow for commission) the buyer won't pay any more, than the market will bear.

So... since the price is basically going to be the same (as far as the buyer is concerned) regardless of who pays the commission... the only person who's bottom line changes, due to commission is the seller. Leaving me to believe that the seller pays commission.
1 vote Thank Flag Link Sat Feb 23, 2008
Alan May, Real Estate Pro in Evanston, IL
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I think Jim covered the points very well, I second his philosophical opinion.
1 vote Thank Flag Link Mon Oct 8, 2007
If you look at a Settlement Statement, it plainly states "Paid from Seller's Funds at Settlement". Maybe the government should reword and rewrite the HUD-1. I can see the other points of view and some validity in the facts, I'm not an attorney or accountant, just my humble opinion. Maybe they could answer the question as to whether the buyer can take the commission off his income tax.
1 vote Thank Flag Link Sun Oct 7, 2007
You are right to a point, sellers do adjust price (only to the extent that they can based on the market value), to compensate for the listing and sales commissions...and yes, the buyer is the one who pays for the home which does mean they ultimately cover the expense of commissions included in the purchase price. What people fail to see, is that if a buyer does not have his/her own representation, it is a RARE and NEVER occasion when a seller says "Hey, since we dont have to pay your Buyer's Agent, Im going to lower the sales price of my home to you." Real Estate Services are a "cost of sale" yet buyers and sellers are quick to try and dissect who's really paying commissions. In reality, it isnt any different than any other purchase you make....when was the last time you bought a car and asked "Just how much of your advertising salesman's commission am I paying out of the price of this car?"
1 vote Thank Flag Link Sat Oct 6, 2007
You can look at it two ways: the buyer brings all the money, so the buyer pays the commission.
Or: The house sells for $X, and the seller pays the commission out of (hopefully) their profit.

IMO, the seller pays the commission. The house sells. The seller has the money. What the seller does with it is their business.
1 vote Thank Flag Link Sat Oct 6, 2007
Actually, Graham, the Seller has an actual contract on paper with the Listing Company(not the agent) and the Listing Company has agreed to offer a portion of that commission to cooperate with another Real Estate company who has a client "willing to buy"....this cooperation agreement is to help the Seller bring more Buyers to their property....Of course, Sellers include this number as a cost in figuring their expenses for selling and for the past 10+ years, the increase in value has usually covered this in this area......The market value of the home is what a willing and able Buyer is going to pay and this would have nothing to do with the marketing expense and fee structure of the Listing Company....Laura
0 votes Thank Flag Link Thu Mar 12, 2009
Just to make sure we don’t let this dead horse rest too long (grin), Jan seems to have nailed the technical point; seller. In practice, the market seems to split the costs.

When approaches by an unrepresented buyer at an open house, we often hear requests for their buyer-side of the commission. In a similar fashion, the homeowner may make the same request for their seller-side if there is not another agent involved. With both sides seeing the chance to save their money, both feeling a right to it – who needs an agent… unless the two sides (gasp) might not come to an agreement on the money, right?
0 votes Thank Flag Link Tue Dec 16, 2008
Keith- I agree that the commission is not really thought about when purchasing, and to some extent this is unfortunate. But I will stick with my assumption that when MOST seller's figure out what their net is after closing, they are indeed considering ALL closing expenses including commission. I also agree that local market conditions to SOME extent control pricing, but that commissions do figure into again Most seller's math. At least it does when I purchase and sell for myself. I also educate my Seller's and Buyer's to this possibility. Again, just my 2 cents worth.
0 votes Thank Flag Link Sat Feb 23, 2008
Graham
in most cases the commission agreed to is not a factor in the sales price. The market sets the price. Sellers often have the mistaken impression that they control the price. A good Realtor will educate the seller on the local market conditions so the seller is able to make a wise choice about the listing price. Listing price is a marketing tool, sales price is the answer providee by the market.

Most sellers do not want to listen to the market.
0 votes Thank Flag Link Sat Feb 23, 2008
Keith Sorem, Real Estate Pro in Glendale, CA
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When you get down to it, it comes out of the sellers proceeds.
Web Reference: http://getprequalified.com
0 votes Thank Flag Link Sat Feb 23, 2008
When the Builder is building a new home, he adds that cost to his other building costs because he knows that he is paying it at closing.
0 votes Thank Flag Link Sat Feb 23, 2008
Angela wrote:
Real Estate Services are a "cost of sale" yet buyers and sellers are quick to try and dissect who's really paying commissions. In reality, it isnt any different than any other purchase you make....when was the last time you bought a car and asked "Just how much of your advertising salesman's commission am I paying out of the price of this car?"
~~~~~~~~~~~~~~~~~~~~~~~~~

Hi Angela, you must not have heard about the secret book about selling/buying a home that every buyer and seller seem to have read (because they all quote the identical phrases), but none of us real estate agents have heard about. :)
0 votes Thank Flag Link Mon Oct 8, 2007
I'm going to go with Carrie on this one - chicken or egg - result is the same.
0 votes Thank Flag Link Sat Oct 6, 2007
Ute,
It sounds like Germany and Spain are very similar. The disclosure part is also very interesting. I asked my local agent in Barcelona about termite or property inspections. She thought I was from Mars. No inspections in that market. Even with properties that are dated in the centuries! We definitely have a great market here.
0 votes Thank Flag Link Sat Oct 6, 2007
Mario Pinedo,…, Real Estate Pro in Cupertino, CA
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Well, it is kinda like asking "Who came first the chicken or the egg?" While the commission may be built into the price, or the price includes the commission, the seller pays the commission out of his proceeds. If the seller negotiated down for the buyer, he still owes the commission.
0 votes Thank Flag Link Sat Oct 6, 2007
The seller usually does. When you go to closing, you can see who gets what commission.
Web Reference: http://www.iansellsnola.com
0 votes Thank Flag Link Sat Oct 6, 2007
Hi Mario. Thanks for sharing your perspective. It's always fascinating to see how real estate is handled in other countries. It does help putting things into perspective as we have a tendency of taking it for granted that everybody does things the way we do. When we hear how things are done in other parts of the world, we appreciate our own system more. I am from Germany and only bought and sold a condo there and I remember that I did not use a real estate agent because most of the work was done by the real estate attorney. I also remember that the real estate commissions were a lot higher than they are in the U.S. There is no MLS there either and it is harder to ascertain the value. You basically look in the newspaper and see what others ask for similar properties. I actually don't even remember any written disclosures or buyer inspections. Isn't that amazing.
Web Reference: http://www.go2kw.com
0 votes Thank Flag Link Sat Oct 6, 2007
Ute Ferdig -…, Real Estate Pro in New Castle, DE
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