Who Really Pays The Commission?

Many Real Estate Bloggers have started looking very closely at the commissions and whether or not the seller is paying them, or ultimately the buyer is paying them. It's all bound up in the larger discussions of whether the buyer should have control over the amount of money paid to the buying agent, and whether or not the agents on both sides have their own economic carrots pointing in the same direction as their principles.

Kris Berg at the San Diego Home Blog bravely took the side of "the seller pays the commissions" against what appears to be growing view of "in reality the buyer pays the commission, because ultimately they are the one bringing their wallets to the closing".

You can read her post here. It also made the 15th Carnival of Real Estate as a winner. Kudos for the cunning "I posted on my birthday" defense silencing any critics. :-P

My view is that both viewpoints are right. In the abstract sense the buyers do pay the commission, though I tend to think it is the seller for practical purposes paying the commission.

The commission decided on by the seller is a clear marketing expense in trying to sell the house. On the other hand, no matter what it is you buy as a consumer, be it a can of soda, a pair of shoes, a car, or indeed a house, ultimately the consumer is paying for that marketing expense. That's how those unbranded cans of soda labeled simply "Cola" are in supermarkets for half the price of "Coke" or "Pepsi". There's no marketing expense for the consumer to cover with a higher price.

In fact some no name brand products are exactly the same as the brand name products, made in the same factory, just shipped in different packaging and priced cheaper. I usually make a once a month pilgrimage to Costco to stock up on some staple products for just this reason.

However with houses, people really don't give any more than a passing thought to the "branding" or other marketing attempts of whatever agency is listing a property. If two houses are identical, with the same price, the sign out the front and commission rate isn't really a factor to a buyer. (Unless of course a smart buyers agent has established an agreement for a certain minimum commission rate from their buyer when signing the buyers rep agreement. If one house was offering a tiny co-broke and the minimum was going to kick in, then that may be a factor in choice of house.)

Sellers do have a choice between having their property listed and going the FSBO route. And certainly when sellers try the FSBO route it's NOT with the high minded thought of saving the buyer from "ultimately paying the commission".

Though to be fair when buyers make an offer on a FSBO they do know that it's a FSBO and can usually try and get a piece of the sellers savings by making a lower offer. (Which does lend some weight to the argument that the buyer ultimately pays the commission. Though I would tend to think they just want to use leverage on getting a lower price.)

In terms of saving the seller money; going FSBO, or coughing up 6% seems damned if they do, and damned if they don't. FSBO offers lower expenses, but paid upfront and a low hope of successful sale. Getting an agent means nothing up front, no direct costs if the house fails to sell, but a meaty slice off the profits off the investment if it does sell.

The commissions do look offensively large on the HUD-1. The failure to educate the public about how the commission is split is a source of a great many problems for realtors.

The simple truth is that a house is a commodity, and you can't convert it's value to cash without selling it. To do that you need to market it, and that costs money. In the end buyers do just look at the price of the house, and decide to make an offer on it. Once at that point of the process, the amount of marketing expenses a seller has, is essentially irrelevant to the buyer.