Why not a bigger commission?
July 11, 2008 9:36 AM   Subscribe

Would it ever make sense -- or be legal or moral -- to offer more than normal real estate commissions?

Lets say a house is estimated based on comparables at around $400,000. If the seller lists the house at that price and there are two real estate agents involved in the sale and they each get the usual 3% commission, then they would each get $12,00 and the seller nets $376,000. (Leaving aside taxes and other closing costs.)

On the other hand, lets say the house lists and sells at $450,000... but with a 4.5% commissions to the agents. Each agent would get $20,250, $7,250 more than before, and the seller would net $409,500, or $33,500 more than in the first scenario.

I understand that this assumes that the buyer can be convinced into buying a house for more than it might be worth, but estimating the value of a house is never an exact science, especially if the market is changing rapidly or if the buyer really, really likes the house and there is more than one interested potential buyer. And one or both of the agents might be especially persuasive that the buyer should buy this house rather than one on which they would be making a smaller commission.

My questions: Does this make sense? Does it happen? Is it legal?
posted by RandlePatrickMcMurphy to Work & Money (18 answers total)
 
When we bought our house it was spelled out clearly on the contract that the commission was 6% -- three percent to each agent. I would not -- and I mean absolutely not, no matter how much I liked it -- sign a contract for a house that was paying 9% commission to the real estate agents. That would mean me paying a bigger price, getting a larger mortgage, etc, etc, and not because the house was worth it but because the agents were taking home a bigger piece of the pie.

I can't imagine many buyers (particularly with the way the market has softened in the US) would be willing to pay that sort of premium either.

In summary: to me at least, it doesn't make sense. Does it happen? Maybe, but I am not sure why it would. Is it legal? I have no idea.
posted by kate blank at 9:50 AM on July 11, 2008


What really happens is sometimes a house is marketed with a bonus which is separate from the commission. You generally see this with new construction.
posted by konolia at 10:05 AM on July 11, 2008


Any buying agent who would cooperate in a scam like that is unethical and should be avoided. By both house buyers and house sellers.
posted by Nelson at 10:07 AM on July 11, 2008 [1 favorite]


When I buy a house I have no idea what the real estate agents' commission is (or are) and I don't care. I've never used an actual buyer's agent, and if I did commission someone to help me buy a house I would not pay them a percentage of what my buying price was - what sense would that make? I have sensed on at least one occasion that the real estate agent agreed to lower her fee in order to make the deal happen, but that's between the seller and the agent, it's completely invisible to me (I think an agent might have once mentioned that she was lowering her fee to the seller to make our deal happen, but for all I know that was total BS - in any case it's no concern of mine).

Anytime you buy a house that is not "for sale by owner" you know that a percentage of the price is going to one or more real estate agents. But that has no effect on what you are willing to pay for the house.
posted by thomas144 at 10:17 AM on July 11, 2008 [1 favorite]


The same logic would apply to a sale in general at the normal 3% commission. 3% of 450k is more than 3% of 400k. The agent always has an incentive to sell you the priciest house they can.
posted by smackfu at 10:19 AM on July 11, 2008


Freakonomics disagrees with smackfu, saying that while they get 13500$ on the 450k deal, and they only get 1200 on the 400k deal, the 1k extra to them isn't likely to make enough difference that they want to put in the amount of work needed to get you the extra 50k.
posted by Iteki at 10:31 AM on July 11, 2008


As a real estate agent, it is highly unlikely you could get $50,000 more for the house, especially in the current market, regardless of commissions paid to agents. If the home sale includes cooperation by a buyer's agent (legally representing the buyer), then they should be able to tell the home is overpriced for the area and market. If the buyer's agent steered the people toward a house because it increased the agent's bottom line, they are not following the law or ethical guidelines. On the other hand, a listing agent's job is to get as much money from the home sale as possible.

What you do see often is the Seller's Bonus as mentioned above. It generally states there is an extra $1000 (or appropriate value) on top of the 3% for bringing in the buyers and closing. That bonus can also be qualified, such as bringing a full price offer or an offer by a certain date - those can get a bit cloudy, as it is the buyer's agent's responsibility to get the best price possible for their clients.

To clarify, generally a buyer's agent fee is paid out of the seller's portion - this is not always the case, though. If you had a buyer's agent and then ended up purchasing the home from a "For Sale By Owner" through your agent, then you could be responsible for the 3% commission that was agreed upon in your buyer's agency contract. In the case of a home listed by another real estate agent, there is already an expressed commission agreement in the listing, and thus your agent's 3% is paid out of that.
posted by shinynewnick at 10:42 AM on July 11, 2008


I would not -- and I mean absolutely not, no matter how much I liked it -- sign a contract for a house that was paying 9% commission to the real estate agents. That would mean me paying a bigger price, getting a larger mortgage, etc, etc, and not because the house was worth it but because the agents were taking home a bigger piece of the pie.

In New York State, the commission for both agents is paid by the seller. Your state may vary.
posted by Lucinda at 10:49 AM on July 11, 2008


You're right, Lucinda, the commission for both is paid by the seller, but the scenario set up by the OP was one where the commission was 9% and the house was selling for 50K more. So I wouldn't be responsible for covering the commission, but I would be paying 50K more for the same house to cover this "extra" commission -- and that is something I wouldn't do.
posted by kate blank at 10:54 AM on July 11, 2008


@Iteki's post, I was going to say the same thing. Legal, I don't know, but what I've always thought I'd like to do when I go to sell a house would be to add an incentive... Say I list the house at $500,000 and expect $450,000. I might give them 6%, but also offer, say, 15% of the difference between closing and $450,000. So if they can get $500,000, the 6% on the $50k isn't a lot (actually, it's $3,000, but pretend that's not a lot), but they also get a $7,500 'bonus' on the extra $50,000 they bring in.

Again, legality, I don't know, and the numbers were arbitrary.
posted by fogster at 11:02 AM on July 11, 2008


I don't have any idea whether it's legal or not, not knowing jack-all about real estate law. But it seems perfectly moral, so long as the buyer knows that the agent is working for the seller -- I mean, it's just the market working. If there's competition among buyers such that buyers are willing to pay more, why shouldn't agents be paid more for creating that competition/finding those buyers?
posted by paultopia at 11:06 AM on July 11, 2008


If there's competition among buyers such that buyers are willing to pay more, why shouldn't agents be paid more for creating that competition/finding those buyers?

Because one of the agents is supposed to be working for the buyer -- ostensibly to negotiate a lower price. Hence, the problem with paying buyer's agents on commission per sales price.

Offering a higher commission to the seller's agent makes perfect sense for a motivated seller.

Offering an hourly or flat fee to the buyer's agent makes perfect sense for a buyer.
posted by GPF at 11:36 AM on July 11, 2008


In theory, maybe this would work. In the current market, which is largely saturated with homes for sale, small variations in price make a big difference to buyers. It might be ethical, but if I were the buyer, I'd ask about commissions. The buyer is present at closing and will know the commission at that time. If I were a buyer, and saw an above-normal commission at closing, I'd walk.

If anything, the Internet is changing the way people buy real estate. I expect to see commissions decline.
posted by theora55 at 1:09 PM on July 11, 2008


Thr opposite sometimes happens (speaking of the UK market here). The agent convinces the seller to accept a lower offer, and the buyer rewards the agent with a bribe.
posted by Leon at 3:49 PM on July 11, 2008


GPF: aaah, I wasn't aware that one of these people was supposed to be working for the buyer. Then yes, it would be rather unethical for that one to take extra cash from the seller for getting a higher price...
posted by paultopia at 10:23 AM on July 12, 2008


Then yes, it would be rather unethical for that one to take extra cash from the seller for getting a higher price

Absolutely, and we unfortunately see it quite often. Selling bonuses are sometimes tied to bringing a full-price offer to the table, which shouldn't happen unless it is an extremely tight market and it is the home the buyer wants. It leaves no room for negotiation, which is one of the things a buyer's agent is being paid to do.
posted by shinynewnick at 8:09 AM on July 14, 2008


Response by poster: Thanks for helpful comments (and offline suggestions).

Iteki, I completely agree with the freakonomics analysis of real estate agent incentives. Real estates agents may be nice, decent, honest people, but fixed commissions mean that their self-interest is in seeing a transaction take place; whether it is good or bad for the buyer or seller is really pretty secondary. At least that's been my experience and analysis. And I think a soft market with fewer transactions only exacerbates that tendency.

In fact the freakomics thinking was a big part of what prompted this question - how do you change the incentives to make the agent (or both agents) want to sell for the highest price possible rather than just want to sell at any price, and to make them sell THIS property rather than some other one. Obviously a lot depends on the susceptibility of the buyer to the agent, but I suspect that a soft market in which there are fewer than usual sales will tend to make agents who deal with buying and selling every day relatively more persuasive than it will make buyers who do this once every couple of years at most any smarter.

Final question if anyone's still paying attention: the commission is listed in the final contract, but is it revealed to potential buyers anywhere else while the property is being considered (assuming the agent doesn't say anything)?
posted by RandlePatrickMcMurphy at 10:44 AM on July 14, 2008


the commission is listed in the final contract, but is it revealed to potential buyers anywhere else while the property is being considered (assuming the agent doesn't say anything)?

If the agent doesn't say anything, I can't think of many ways the buyers could find out the commission structure. A buyer's agent should explain the 3% they are due is generally paid by the seller, but there are other circumstances, etc.

For the most part, any information sheet from the Multiple Listing Service your local agents use would not show anything related to agent comments (Dog in house, call 24 hours in advance, potential bonus), commission structure, or the owners of the home (although this is found easily in public records). The information sheet will also generally exclude anything about the listing agent so that a buyer doesn't contact them directly once they are working with another agent.

In my non-legal opinion, if a contracted buyer's agent was potentially getting a bonus for selling the home (incentive based or not) beyond the 3% agreed upon in the buyer's agency contract, they are at least under an ethical responsibility to reveal that to their client. Your legal duty is to the buyer's best interests, and if you truly believe that this house is worth X price, then you should be able to explain that and the bonus without any hesitation.
posted by shinynewnick at 11:42 AM on July 18, 2008


« Older Tank Man is Everyman   |   Looking for bike rides around San Diego Newer »
This thread is closed to new comments.