Pay Attention, Buyers: Debunking the “Seller Pays the Commission” Myth

Posted by nithi.vivatrat on January 21, 2009

Complicating the issue with real estate commissions is a widespread belief that only the seller pays the commission, not the buyer.  Mark S. Nadel, a DC lawyer who writes on public policy issues, debunks this myth:

“Sellers who agree to pay a 6% commission to their real estate broker and to accept a bid of $500,000 for their home are, therefore, actually willing to settle for net proceeds of $470,000.  Since the sellers’ broker has agreed to accept a net $15,000 commission for his or her own services, the sellers would accept a $485,000 bid from a buyer if there was no buyer’s agent to compensate.  If, however, the buyer has an agent, and the sellers’ agent has promised half the $30,000 commission to that agent, then, to enable the sellers to clear $470,000, the seller must demand $15,000 more from the buyer.  Thus, the commission to the buyer’s agent ultimately comes out of the buyer’s pocket.”

Let’s walk through this example step-by-step again for clarity.

1. Seller Sally signs a listing agreement agreeing to pay 6% commission, where half goes to the listing broker, and the other half goes to the buyer’s broker.
2. Later, Sally accepts a bid of $500,000 for her home.
3. This results in $30,000 of brokerage commissions ($500,000 X 6%).
4. This means Sally was willing to accept net proceeds of $470,000 ($500,000 - $30,000).
5. Since Sally’s listing broker gets a commission of $15,000 (half of the $30,000), we know that Sally would have been willing to accept a bid of $485,000 if there was NO buyer’s broker (net proceeds of $470,000 + listing commission of $15,000).
6. But since there WAS a buyer’s broker, the buyer needs to offer an ADDITIONAL $15,000, for a total of $500,000, in order for Sally to clear net proceeds of $470,000.

So who ended up paying for the commission?  Not Sally the Seller.  No, it was the buyer who paid the commission by having to make a higher offer.

These days, many buyers now do their own research, identify the property they want, and know the offer they want to make.  This has become more common with the availability of online real estate data (including sites such as Zillow, Trulia, and Realtor.com) which has eroded the information advantage of the traditional broker over the consumer who does her research.   Yet, when it comes time to conduct the transaction, buyers still end up having to get a broker, who does little more than contact the listing agent (who often was already contacted by the customer) to make an offer.

Yet, this agent gets paid on a commission basis, rather than a calculation of how much value was provided.  The buyer did all the work, all the research, identified the property — but still has to pay the broker a percentage commission.  SmithAdams provides an alternative.

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