Why Buyers Do Not Pay Commissions on Listed Properties

A real estate company is misinforming the public by saying that buyers actually pay for real estate commissions on listed properties. According to information on their web site, "the buyer is the only person bringing a checkbook to the closing, and both commissions come out of the money the buyer provides."

While it is true that buyer's bring the money to the table, the seller's costs of sale are not the buyer's expense or responsibility. If buyers actually paid commissions, they would be paying the purchase price PLUS sales commission. However, this is not the case with listed properties.

The truth is that commissions on listed properties are actually deducted from the seller's side of the closing statement--not the buyer's side.

This means that the seller receives the purchase price first, and then his or her costs of sale are simultaneously deducted to result in net sale proceeds. The notion that buyers pay commissions on listed properties makes about as much sense as employers paying for their employee's income tax deductions. For example--an employee's paycheck--he or she must receive his or her pay first (aka. gross pay) before taxes are simultaneously deducted to result in the employee's net pay.

Likewise, buyers do not pay the seller's costs of sale on listed properties, because these costs are deducted from the seller's gross sale proceeds, which gives them their final net sale proceeds.

It needs to be said that inciting consumer bitterness with skewed information is wrong. It is better to bring about positive changes in the real estate industry without distorting the truth. Buyers can save money by negotiating buyer rebates with agents or brokers in states where it is allowed. It is not proprietary to the company mentioned in this news story.

In Response to 60 Minutes Story

The following was in response to a story done by a reporter for 60 Minutes entitled "Chipping Away at Realtor's Six Percent.". Many comments posted in response to this story were from misinformed people who made unfair sweeping generalizations against all real estate professionals.

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In Washington State, commissions are negotiable. It is illegal to set commission rates. I am sure that this is the case in all 50 states, since this is a form of price-fixing--an antitrust violation. If sellers want to lower commission rates, then they need to speak up and negotiate it down. If listing agents "don't allow" less than 6%, then THOSE listing agents need to be reported. However, to say that all real estate agents and brokers are bad is, not only ridiculous, but it is also a sweeping generalization that is unfair to those who are honest, good, and who work very hard for the clients they serve.

As far as rebating buyers, some states don't allow this. However, in the states where it is allowed, a buyer can negotiate a rebate with ANY exclusive buyer's agent--or any real estate agent, for that matter. Exclusive buyer agents, however, only work for buyers. They are non-traditional, as discount brokers are, and their priority is to get their clients the lowest price possible on the properties they buy.
Exclusive buyer agents are truly pro-consumer. They don't take listings, and neither do the companies they work for, so there is never a chance of dual agency--which is a conflict of interest.

Dual agency is a conflict of interest, because a seller expects their agent (and their agent's company) to get the highest price possible for their property, while a buyer expects their agent (and their agent's company) to help them negotiate the lowest price possible.

When there are two agents working for the same real estate company, and they are working on opposite sides of each other in the same transaction--these commitments are conflicting. This is dual agency, or "dual representation," on the part of the company.
Dual agents are required to remain neutral to both parties, meaning, that neither buyer nor seller receive the level of service they originally expected, and signed-up for. However, with Dual Agency, the real estate company makes double commissions. It is a long-standing practice in the real estate industry called "double-dipping."

The company being interviewed in this news story has contradicted itself by claiming that they do not allow dual representation (as stated on their web site), yet they take listings--so if a buyer wants to make an offer through them, on a home listed with their company--this is dual representation (aka. dual agency) on the part of the company. A dual agent will make money from both sides of the same transaction, while remaining neutral to both sides. Who is really benefitting here?

Buyers can completely avoid dual agency by hiring an Exclusive Buyer's Agent or broker, because they do not take listings--and neither do the companies they work for. They will also work very hard to save their clients money, because a satisfied client means the possibility of a long-term business relationship.

A True Greater Good in the Real Estate Industry

There was a recent blog from a Realtor discussing the "Skyhook Theory" in real estate. He basically explained that this theory encompasses the principle of finding a greater good in the things we do--and that aspiring to do this makes us better people. While I earnestly believe and agree that finding the greater good in all things is the ideal way to be, the reality of the situation in the real estate industry, is that the greater good is generally neglected when it comes to consumers.

The greater good in the sense of the real estate industry is not just about touting superior service, because a higher level of service should go without saying. I believe that the greater good goes much deeper than that. It should be about ensuring equal footing for buyers and sellers alike. It should be about real estate professionals doing everything they can within their power to prevent either side from being exposed to dual agency--which is a conflict of interest.

It should mean that traditional real estate companies demonstrate a willingness to relinquish the age-old tradition of double dipping--which happens when one real estate company collects commissions from both sides of the same transaction. It should mean that the real estate industry, as a whole, be completely honest with real estate consumers about all available agency options--including Exclusive Buyer Agency.

Not so long ago, real estate was ruled by seller representation. This is no longer the case. The real estate industry is, and has been, transforming to a level playing field between buyers and sellers. As more consumers become aware of dual agency, they are realizing that it is not in their best interests to consent to it, because dual agency is a conflict of interest. The way buyers can be assured that an agent is truly working for them, is by hiring an Exclusive Buyer Agent, or an Exclusive Buyer Broker.

Until the real estate industry owns up to what is truly in the best interests of consumers, we cannot really begin to speak about a greater good in the real estate industry.

The Importance of Honest and Direct Communication in Real Estate

The relationship between real estate consumers and real estate professionals is that of a partnership, and a team. It means that they are working together to get the best possible results, whether one is buying or selling real estate. It is of great importance to have direct and honest communication. Without establishing this, goals cannot be accomplished, and trust can break down. Having honest and direct communication will put a working team on the right path. Important issues will be clear, and there will be synergy between team members.

According to a book called "Tools for Teams: Building Effective Teams in the Workplace" by Leigh Thompson, Eileen Aranda, and Stephen P. Robbins:

"Finally, teams develop synergy. Synergy means that team members together achieve more than each individual can. Whereas group members combine their efforts to achieve their goals, teams reach higher performance levels." (Thompson, Aranda, Robbins p. 6)

An effective team is not developed through hearsay. I recently declined a buyer referral because the buyer wanted to communicate through a third-party, instead of communicating directly. Working under these conditions does not make sense, because it leaves too much room for misunderstandings to develop. It should go without saying that real estate is not the place for hearsay. It is important that prospective clients are willing to communicate honestly and directly. Clients should be open, honest, and straight-forward about their situation. This allows an agent or broker to give them the best level of service.

Direct and honest communication prevents the possibility of a misunderstanding or confusion. It is not only a matter of principle, but it is also a matter of common sense, because it is critical that clients maintain clear communication with their agent or broker during a real estate transaction.

Keeping these things in mind will ensure success, synergy, and positive results, as well as, a satisfying closing experience for all members of a real estate team.