Why Savvy Seller’s Will Continue to Pay Buyer Agent Commissions
The media has been making a big deal about the recent NAR settlement however legally there is absolutely no change to commission structures. Because of the Sherman Anti-Trust Act, Relators could never price fix, meaning that commissions have always been negotiable. While most sellers in Bergen County typically choose to pay between 2%- 2.5% to the buyer’s agent, the commissions on the NJMLS for buyer’s agents range from $.01 - 4%.
I think the narrative of “sellers will now save on commissions” is clickbait that is short-sighted and doesn’t take into account the benefits to the seller of paying the buyer’s agent. I believe that savvy sellers who understand the process will continue to offer payment to buyer agents because doing so is more advantageous for them in the long run.
Perspective Shift: The Buyer Pays Everything
The seller has the property. The buyer and bank have the money. The buyer agrees to give the seller money for the property to be delivered in a certain condition. So if the property is in the condition that both parties agree on, other than their lawyer fee, the seller doesn’t pay a dime prior to closing. The buyer on the other hand is fronting the cost of the home inspection, the appraisal, the mortgage origination fees, and insurance reserves.
If you look at the HUD, as it is now, it appears that the seller pays for the commissions, however, nothing is actually coming out of the seller’s pocket. It is the buyer’s/ bank’s money that is being deducted from the seller’s proceeds. As it is now, an unofficial seller’s concession is built into the list price. At closing the seller designates that amount to be deducted for commission and then claims both commissions as a tax write-off.
Benefit to the Seller
In addition to being able to write off both commissions, by paying the buyer’s agent (unofficially offering a seller’s disclosure) this allows buyers to offer more money for the seller’s home. Let’s do the math! We know commissions vary but I am going to use a $500k home at 4% commission split between two agents where the buyer is putting down 20% to keep it simple.
Purchase Price: $500,000
Seller’s Agent: 2% = $10,000 (Paid by Seller)
Buyer’s Agent: 2% = $10,000 (Paid by Seller)
Buyer’s Closing Costs = $15,000
Down Payment= $100,000
In this scenario the buyer needs a minimum of $115,000 in cash to close and the rest will be paid via a loan through a mortgage. Since the buyer’s agent fee is an unofficial seller’s credit they are paying that $10,000 over the course of 30 years which comes out to $28+ interest a month.
For buyers who do have that extra $10k that could go toward their agent’s commission, they can now use that money to either overbid by a larger amount (that will be paid over 30 years) or to put it toward an appraisal gap waiver.
While it is a sad reality, it is a reality that those with less money, spend more to borrow the same amount than their counterparts with more savings. I think the biggest impact is seen in buyers with tighter budgets. If they don’t have that extra $10k, it is more of an incentive to overbid on the home so that $10k can be paid over $30 years and not upfront.
For sellers, it makes sense to “pay” the $10k for the buyer agent’s commission in order to sell their home $25k above asking. At the end of the day they walk away with an additional $15k plus a $10k tax write-off.