Via Freakonomics, the L.A. Land weblog at the Los Angeles Times has a shaggy-dog story about a buyer who came up with a brand new way to shoot herself in the foot: Pay all the commissions herself, regardless of the terms of the listing agreement and the HUD-1 procedures currently in place:
I thought it would be Super Smart to restructure the traditional home purchase offer. Traditionally, when you buy a house you just give the purchase money to the seller and the seller pays the 5% commission out of that. But when you think about it, you are agreeing to pay 5% more for the house, and that translates to a bigger down payment, a bigger mortgage and bigger property taxes every year. So I figured it would be brilliant to subtract the 5% off the purchase price and pay the agents’ commissions separately myself. Seems like no big deal, right? Wrong.
She actually worked it out to honest math, which is more than lenders and title companies can do. But of course the sellers couldn’t go along with this, even if they had wanted to, without being released from the listing agreement.
Per the purchase contract, the buyer would pay 5% of the full purchase price outside of escrow (a RESPA violation?), and the seller would pay an additional 5% at the closing table, per the terms of the listing contract. The agents might well have hated this idea — it is stoopid, after all — but not for financial reasons. Double-dips all around! Who could object?
Even so, just because the buyer made a thoughtless mistake — no doubt against the better advice of her agent — this doesn’t mean she’s wrong. Except in a short sale, the buyer pays for everything that gets paid for at the closing table. It would be a boon to consumers to make our processes reflect this fact.
Technorati Tags: compensation for buyer representation, disintermediation, real estate, real estate marketing
Vicki Lloyd says:
This actually is done to get the recorded value at the lower amount. In California, the property tax is set at 1% of the recorded sale price, and is permanently limited to a 2% increase per year, until re-sold.
With written agreement of all agents, (and possibly a modification to the listing agreement) the buyer can pay the commission and include it on their section of the HUD-1. This works for cash heavy transactions where the buyer has the ability to come up with the additional 5% cash. Of course, the loan is based on the recorded value, so the buyer has to look at all the numbers to be sure it will work.
July 18, 2007 — 4:00 pm
Robert says:
There is an important point here – the buyer actually pays for everything, not the seller, despite how the process is set up. I once got a haughty lecture from an agent about how she worked for the seller, he was paying her, she couldn’t help me, etc. I pointed out that if I didn’t write the check, mr. seller wasn’t going to give her a dime, so I might be worth at least an equal amount of respect as her dear seller.
I got a big smirk, but a month later when the place still hadn’t sold, she sure called me often to ask if I’d want to buy the house…
July 20, 2007 — 8:44 pm