John Adams is a real estate broker, investor and author. He answers real estate questions every Sunday at 3 p.m. on WGKA-920 AM. He welcomes your comments at Money99.com, where you will find an expanded video version of this column.
My recent column on questions you should ask a buyers broker actually brought more questions than I expected, as well as a complaint. I will respond to the commonly asked questions today.
Q: You said that, typically, the home seller pays the full commission, including a fee to the agent working with the buyer. That doesn’t make sense to me. Why shouldn’t each side, the buyer and the seller, pay their own agent?
A: That’s a great question, and in a perfect world, that’s the way it would happen.
However, the reality is that the buyer is often strapped for cash. in fact, most often the buyer is trying desperately to minimize their cash outflow in order to save for the costs associated with the purchase.
These typically include moving, buying needed appliances, redecorating, and lots of other expenses we refer to as incidentals.
That reality translates into this reality: Homes which can be purchased with a minimum of cash are more attractive to buyers than homes which can not.
Since every seller wants to sell as quickly as possible, the listing agent encourages them to include in the commission a sufficient sum to pay a cooperating broker.
In addition, the practice allows the listing agent to “double-dip” if the listing agent is able to sell the home without a cooperating broker, as often happens. The compelling rationale for this practice is “We sold the house — what’s the difference?”
Q: Isn’t it a conflict of interest for an agent who is not working as a buyer’s agent to receive a portion of the commission that the seller is paying to the listing agent? It sounds like that agent is actually representing the seller’s best interests, not the buyer?
A: That is exactly the argument put forth by brokerage firms which choose to only represent sellers or buyers, but never both. And there is something in that thought process which rings true.
However, I must report (and admit) that I worked with hundreds of buyers very closely in their search for a home in years gone by. At that time, buyer brokerage was unusual, though legal.
In each of those sales transactions, I acted as a sub-agent of the listing broker, and technically represented the seller. In fact, I had a “fiduciary obligation” to the seller. But the truth is that I almost never had even met the seller, and could not have acted in their interest had I even wanted to do so, which I did not.
In fact, I wanted to see my buyers get the best possible deal they could in the transaction, and then hopefully recommend me to friends, neighbors and associates.
You might suggest that my acts were a violation of my fiduciary obligations to my client, who, at that time, was my client. That may be the case, but that is what happened.
Q: Don’t you feel bad about that?
A: No, I do not.
Q: OK, but what about this? We all know that the real estate commission is usually a percentage of the purchase price. Isn’t it true that by helping the seller obtain a higher purchase price, you were actually helping yourself obtain a higher commission? Isn’t that a direct conflict of interest?
A: Actually, in a substantial number of my transactions, our initial offer set the final commission as a fixed dollar amount, so that the commission did not enter into anyone’s negotiation strategy.
Also, the commission differential is typically less than $70 per thousand dollars of purchase price, so half of that is hardly worth describing as a “breach of duty.”
Q: Quite frankly, after reading your column, I have decided to simply bypass agents altogether and only work directly with owners. Won’t that solve the problem?
A: Yes, it will. Under your scenario, the commission and who represents whom is clear from start to finish. However, that complicates matters.
For starters, the majority of homes available “for sale” in today’s market are already listed with traditional real estate brokers, and the commissions are already negotiated between the listing broker and the seller.
Even if you approach the seller directly and offer to purchase the home without a commission, the seller is contractually not at liberty to do so, either now or in the near future.
In addition, by choosing to seek a home without the benefit of a real estate professional, you are forfeiting an extremely valuable resource and a knowledgeable ally to guide you through the minefield on the path from looking at homes to actually owning one.