The second in my series of articles devised to tick off real estate brokers appeared in the Arizona Republic today. (Here is a more permanent link to a longer version of the article.) Torquing the brokers is not really my intent, just a secondary consequence. Next week we get to Ardell DellaLoggia’s issues, which may just spark a riot at the Arizona Association of Realtors.
Here’s today’s article in full:
The conventional wisdom in real estate is that the seller pays the sales commission to both the listing agent and the buyer’s agent. Is that really the way things work? To find out, follow the money.
Imagine a closing conference. Normally, we don’t have these in Arizona. Buyers sign their documents at one time, sellers at another. Neither party need ever set foot in Arizona, for that matter.
But for the sake of discussion, picture a settlement conference. Let’s invite everyone who has a seat at the table, so to speak, so we can see who pays whom.
At the head of the table is the escrow officer, who will be getting paid escrow fees and title insurance premiums.
Next comes the County Recorder, who will receive a recordation fee. At the next seat is the County Assessor, who will receive property tax payments. Then comes the insurance underwriter, who will get the hazard insurance premium.
The seller will get a big pile of money, some of which will be passed along to the seller’s mortgage lender.
The two Realtors will both get paid, of course.
The buyer’s lender arrived at the table with a big satchel of cash, but the lender will be taking some of it back in the form of loan origination fees and pre-paid interest. Moreover, the money the lender brought is really the buyer’s money. It was lent on the surety of the home and the buyer’s income and credit.
In fact, everyone seated at that closing table is going to be pocketing money — with one exception.
That one exception is the buyer, who pays for everything else, either out of pocket or on credit. The seller doesn’t pay the Realtor commissions — or anything else. The seller gets paid by the buyer — as does everyone else.
If you’re putting money into your pocket, you’re getting paid, no matter how the transaction is structured. If you’re taking money out of your pocket, you’re paying. The buyer pays for absolutely everything associated with the sale of a home.
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Rod says:
When I was in RE school the instructor was talking about Buyer Agency and his point was that this service was Free to the Buyer. To make the point, he asked of all the people in the room that had bought a house, who had ever paid their Realtor. I raised my hand to indicate, “YES”. “Really?” he asked. I said, “Well, I was the only one that brought money to the table.” The concept that the seller pays is ignorant. All commissioned sales people rely on the buyer to get paid. The Mr. Mackey sound alike is just trying to perpetuate a common myth.
July 22, 2006 — 12:33 pm
Wally Neal says:
Greg … I enjoy reading your articles, posts, etc. You have an interesting writing style.
However … regarding “Who pays?” You seem to have overlooked the fact that on a HUD-1 the real estate commission comes out of the seller’s net proceeds … the bigger the commis, the less the net … while the buyer’s side of the HUD-1 is not affected at all, no matter how big, or small, that number is.
And there are other substantial transaction costs on the seller’s side of the HUD-1. Are you saying the buyer is paying these as well?
There are very few sellers, most likely zero, who would have any respect for your “Who pays”.
Nice style … but really stupid.
July 22, 2006 — 5:00 pm
Greg Swann says:
Hi, Wally,
Well, as it turns out, the only thing wrong with your analysis is everything. How the funds are reflected on the HUD-1 is irrelevant, as is the seller’s opinion. Facts are facts. The article I wrote today demonstrating that buyers always pay their own closing costs no matter how the deal is ostensibly structured may help you clarify your thinking.
July 22, 2006 — 9:00 pm
Nick Molnar says:
Does your thinking hold up if you change nothing except swapping a house for a pile of gold bars? Currency is not the only thing of value someone gives away during a real estate transaction. It’s just the only thing with a relatively fixed value.
July 23, 2006 — 5:54 pm
Greg Swann says:
That’s a RESPA violation! ;->
Seriously, this is not that hard. Budweiser has marketing costs associated with their product. When you sit down for a beer, who pays the pro rata share of those marketing costs, you or Augustus Busch?
July 23, 2006 — 7:10 pm
Tim says:
geez Greg, why do you say such blasphemy!
Now you’ll have to write about how increasing that sales price by the seller to offset seller paid closing costs for the buyer, artificially increases sales prices. That will get you a lot of fans.
🙂
August 14, 2006 — 11:45 am
Greg Swann says:
Hi, Tim. It’s here: “The seller paid my closing costs — with my money!” I don’t know that it artifically increases prices. What I look for is a margin between asking price and probable appraised value. We can’t do it if it blows the appraisal, since the buyers almost always are doing this because they have no cash.
Real estate in real life: Women buy homes, men sell houses. If I can give the seller list and take 3% back at the closing table, Dad can go around to all the neighbors and say, “You better believe I got full price!” That’s underground negotiating leverage.
August 14, 2006 — 12:01 pm
Scott says:
If you bothered to take a simple econ 101 class, by week 2 you’d discover that the entire premise of your article is wrong.
November 26, 2006 — 5:53 pm
Invest To Freedom says:
Nice spin my friend……
I understand you are telling the consumer what they want to hear and this probably helps your business in some way.
However, basic economics tells you that your theory is flawed and you are misleading the consumer.
The transaction is a lot more complex than simply who brings the check.
What about the Sellers equity? The Buyer (or Mortgage Company with an appraisal on fair value) cut the check for the negotiated and agreed upon price between Buyer and Seller.
So at face value it looks as if the Buyer is paying for all the fees.
BUT
The Seller agreed to give up a portion of their equity of fair value that they earned from investing in that home. They are paying the Brokers fees to facilitate the transaction at their expense and pay for the Buyer to have a representative to work on the Buyer’s behalf.
You are following the money in the wrong direction.
The Buyer paid the Seller $200K and this is a fair price for the home……..
Is this a fair enough assumption?
However, the Seller has $50K in equity that they paid into the home over time or out of their pocketbook… Once the $200K is paid by the Buyer to the Seller….That $50K in equity is the Sellers money. That is the money used to pay the Brokers Fees….
If there were no Buyer’s Agent and you were the Seller, is your goal to sell your home UNDER market value?
Probably not…..
Something to think about:
If your Buyer’s agent would be so quick to simply crumble to you and give you back a portion of those fees, how strong do you think their negotiating skills were during the rest of your transaction.
Were they working in your best interest or were they simply in a hurry and in dire need of a check to pay their own mortgage payment?
Is that the kind of professional you want representing you?
January 13, 2007 — 12:23 pm
Jayson says:
I think it depends on the market, right? If it’s a buyer’s market then the seller probably ends up paying the commissions and if it’s a sellers market then the buyer probably pays.
February 1, 2008 — 8:53 pm
Barb says:
Thank you for all the valuable information on your site. I was searching the internet about some information about closing cost.
We are in the process of buying our first home. Unfortunately, after reading your block over and over, I still don’t get it.
If we buy a house for let’s say 100K and asking the Seller to take over the closing costs (VA Mortgage) would we come up with 100K plus the closing costs?
You also wrote: The buyer pays for absolutely everything associated with the sale of a home. Could you p l e a s e explain this?.
Were is the money for the commission coming from?
I really would like to understand the whole process to make some good decisions.
Thank you so much!
Barb
September 9, 2008 — 9:49 am