The Wall Street Journal gets it right on commissions

Posted on January 31, 2008 by Jim Duncan

I wonder if anyone else will notice? From today’s Real Estate Journal:

But like everyone else, buyer agents don’t work for free. At first glance, it seems like the seller pays them, since most are paid at closing from the commission costs that the seller pays, just as in the past. In reality, buyers pay for everything, since sellers routinely factor these costs into the asking price for the home. (ed. note: and the buyers are the ones getting the loan) The typical real-estate commission ranges between 5% and 6%, split between the buyer and seller agents. Since the median price of an existing home is currently $208,400, that means a buyer is effectively paying between $5,210 and $6,252 for representation in a typical transaction.

The buyer’s agents who advertise their services as “free” seem to be attempting to fool someone – themselves, their clients or both.

Who can blame them, though? That’s the way it’s always been, so why change?

From the NAR Code of Ethics:

Standard of Practice 12-2
REALTORS®may represent their services as “free” or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTOR® to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97)

To learn more about divorcing the commissions start here and here.

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About Jim Duncan

A Charlottesville Realtor who tries to stay on the bleeding/cutting/functional edge of technology and real estate trends. I have been selling real estate for the past 10 years, lived in C'Ville for twenty+ and am married to one of few Charlottesville natives left.
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  • http://www.daltonsazhomes.com/blog Jonathan Dalton

    But they don’t necessarily get it right on pricing the home. Show me where all the FSBOs are with their prices reduced by a few percentage points because there’s no commission involved? They don’t exist.

    It’s still more common to find an overpriced FSBO than one where the prices is lower because of the lack of commission.

    If commissions were divorced, would all prices in the MLS suddenly drop by 2 – 3 percent? Absolutely not.

    The buyer pays as part of their mortgage. But the seller also “pays” by having a reduced net. It’s two sides of the same equation.

  • Jeanne Breault

    Right out of Gregg Swann’s playbook! :-)

  • http://www.realcentralva.com Jim Duncan

    Many unrepresented sellers do in fact lower their prices by a commensurate amount, but ultimately it’s up to the buyer’s agent and the buyer to determine fair market value.

    If commissions were divorced, the prices in the MLS, while not immediately, would find their equilibrium and the buyer’s agent fee would not be dependent on whatever the sellers’ agent is offering.

    If Buyers’ Agents actually signed Buyer Agency agreements (which I do) and negotiated their fees up front (which I do) they wouldn’t – and more importantly- the perception of the public wouldn’t be that buyers agents only go to the properties offering higher commissions.

    As I’ve said before – we all win.

  • http://www.realestatevirginiabeachhomes.com Dennis Blackmore

    I have never liked the remark “the seller pays my commission”. It is worn out and any buyer who does the math knows reality. I agree with Jim’s remarks with disclosure upfront. Your client (buyer) will probably be shocked with your honesty.

  • http://www.realdiablog.com Danilo Bogdanovic

    Awesome post! As primarily a Buyer’s Agent myself, I always tell my clients that I get paid from the seller’s proceeds, but it’s factored into the price of the home so they are actually paying for my services out of their own pocket (and over the course of 30 years with interest if you really think about it).

    Unfortunately, other agents are so honest. And they don’t have to be accoriding to the NAR CoE. I can’t believe that NAR would actually put that into the Code Of Ethics. No wonder so moany consumers give the CoE zero weight.

  • http://www.realcentralva.com Jim Duncan

    Unfortunately, other agents are so honest

    Is this supposed to be “other agents are not so honest?