Benefits of Paying the Buyer Broker’s Commission
Historically, sellers have paid buyer brokers’ commissions. While it might seem odd for the seller to pay the buyer’s representative, there’s a reason that that model has remained in place. In short, it benefits the seller in several ways. When a seller pays the buyer broker’s commission, the seller:
- Avoids lower offers due to the buyer needing to funnel available cash to pay the broker’s commission
- Receives more appointment requests, and receives them sooner after the listing appears on the MLS
- Is less likely to have to work with an unrepresented/under-represented buyer, which can be difficult and may result in fall throughs
What happens when a seller does NOT pay buyer broker compensation?
Buyer paying agent in cash will offer lower purchase price….lower net proceeds
In addition to lower prices resulting from less competition, the purchase prices for these houses will decrease as a reflection of buyers having to incur the cost of paying their own brokers. A seller who is deciding whether to offer buyer broker compensation might suggest one price if he is going to absorb it and a lower price (lower by the amount of commission he would save) if he is not going to pay it. The seller’s net proceeds would remain very similar in both cases, so, for the seller, it is roughly the same thing.
For the buyer, though, it is decidedly NOT the same thing. Realistically, the savings the seller will realize by not paying the buyer broker’s commission will be surpassed by the decrease in the buyer’s offer price. Why? Because the majority of home buyers don’t pay cash; they use a mortgage for part of the purchase. Mortgaged money doesn’t “cost” as much as cash.
Consider a buyer who is putting down 20%. That means that the buyer’s cash responsibility is 20% of the purchase price. So paying 100% of the buyer broker’s commission in cash is much different than paying 20% of that amount, which is what happens if it’s rolled into the purchase price. Yes, the mortgage amount would be slightly higher, but the additional monthly amount would be very small as it’s spread out over the life of the loan.
There are so many cash expenses associated with purchasing a house, including the down payment, the closing costs, the moving costs, and more, that the additional cost of having to pay their agent in cash could be the difference between a buyer moving forward on a property or not. Buyers relying on a mortgage for a portion of the purchase price can afford less (by a gap larger than the broker commission amount). Why should a seller care? Lower net proceeds.
Example of difference in cost when using a mortgage vs. paying in all cash
Commissions are negotiable. For the purpose of this example, the buyer’s broker commission is 3%, but it could be a different amount.
A buyer is considering buying a house priced at $500,000, but, at that price, she must pay her broker 3%, in cash ($15,000). Assuming she is put down 20% as her down payment amount, she’d have $100,000 in down payment and an additional $15,000 in cash for the commission. That is a total of $115,000 in cash.
If, instead, the seller covered that fee (and, therefore, charged 3% more for the house) he would price the house at $515,000. In that scenario, the buyer’s down payment would increase to $103,000. To be fair, there would be some additional costs at that higher price. For example, title insurance would be an additional $69, the additional transfer tax would be under $200 and the additional interest until the end of the month would be around $10 at the most. The
difference in the required cash if she covered her own broker’s commission would still be over $11,500.
For many buyers, this additional cash burden translates into an even lower budget for the purchase, which means the seller is offered a lower amount for the house (lower than the amount of the buyer broker commission). Therefore, the seller’s net proceeds would be less than if he had priced the house at $515,000 and covered the buyer broker’s fee.
Note: the seller does have slightly reduced fees at the lower sale price. The seller would pay transfer tax on a lower purchase price—in our example, it would be a $150 savings. He would also pay his own broker 3% of $500,000 as well as covering the buyer broker’s fee at $500,000, resulting in a savings of $900.
Fewer appointments….lower net proceeds
Some prospective buyers will not look at properties which require them to pay their own agents/brokers because they don’t have the extra cash on hand to do so, or at least not in the price range of homes they are considering. Fewer showings leads to less competition and, therefore, lower offers.
Buyers have, historically, not had to factor in the cost of agent representation as the seller has covered the buyer broker’s commission. Some buyers may instruct their agents not to show them properties that require them to shoulder that cash burden. Keep in mind: the fewer people who consider your property, the less competition for it and the lower the final price. And today, more than ever before, home buyers are engaging buyer agents to protect and guide them; they are not likely to be willing to forgo representation. Even buyers who do choose to request appointments for those houses may take some time to analyze the total cost difference as well as the out-of-pocket difference vs. a listing in which the seller is paying the buyer broker’s commission. That potential lag in setting appointments translates to less compeition and reduces the sense of urgency other buyers will feel when writing offers.
Remember, also, that it’s an uncomfortable conversation for the agent to have to tell the buyer that if they look at a particular property, the buyer will have to come up with the cash to pay their commission. Some agents will not be as enthusiastic about those kinds of properties and may steer their buyers toward others. Ethical? No. Realistic? Yes. The result of fewer appointments and less immediate requests to show the property? Lower net proceeds.
Buyers using discount brokers or representing themselves…lower net proceeds
Another potential effect of sellers not offering buyer broker compensation is a trend in which buyers, to save money, represent themselves or use a discount broker. In either of those two scenarios, the propensity for mistakes and the overlooking of details on the buyers’ side increases dramatically. Transactions in which buyers represent themselves or use discount brokers who may not be as experienced or professional as others have a much higher rate of fall through. Experiencing a fall through is not only stressful, but the houses that have to go back on the market almost always sell for less. The initial “buzz” and feeling of competition diminishes and, worse, some people mistakenly assume there is something wrong with the house, and the fall through indicates a lower value for it. Again, the bottom line is that the seller receives lower net proceeds.
Sellers who don’t pay buyer brokers will receive lower net proceeds
Not to beat a dead horse, here, but isn’t this the crux of the matter? With all of the talk and confusion around the National Association of Realtors (NAR) lawsuit, the burning question amongst prospective home sellers is whether they will save money by not paying the buyer broker’s commission. I hope the above discussion has successfully explained why, in my opinion, the answer is a resounding “no”. I come back to where I started this post: there’s a reason sellers have historically paid the buyer broker’s commission: doing so increases their bottom line (and makes for a less stressful transaction). I expect there will be sellers who insist on putting the theory to the test and opt out of covering buyer broker commission. I am confident that those sellers will realize lower net proceeds. Only time will tell!
I know this was a long post; thanks for sticking with me til the end!
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