There’s always something to howl about.

Who pays the buyer’s agent? Once we’ve divorced the commissions, we can stop worrying about it

Joke Number one:
Q: If you came upon the Buddha in the guise of a hot dog vendor, what should you say?
A: Make me one with everything.

Joke number two:
Q: Top Drawer Listing Agent, why do you charge a 7% commission to list a home for sale?
A: Because the lenders won’t pay any more than that.

Jonathan Greene at Real Opinionated invited me to participate in a debate he is having on the question of who pays the sales commissions in the transfer of residential real estate. Todd Tarson has already weighed in with an argument I consider unassailable, so I would rather veer off in another direction: Divorcing the buyer’s agent’s compensation from the listing agent’s commission.

I have written a ton on this subject, with my views changing over time, so please forgive me for digging into the archives:

There’s a lot more, but the Cliff’s Notes version is that I agree with Todd: Except in a Short Sale, the buyer brings every dollar to the closing table, so every disbursement of dollars comes from the buyer. The seller brings the house. The idea that the seller is paying anything is an vestigial artifact of sub-agency, a reflection of the fact that the seller hires the listing agent to market the property, and, therefore, in most cases sets the amount of the buyer’s agent’s compensation.

It is plausible to argue that the seller pays the lister and the buyer pays the buyer’s agent, and, while I don’t agree with that argument, it’s not worthwhile quibbling about it.

Instead, it would be much more worthwhile to completely divorce the commissions, so that what should now be true de facto will be true de jure: The seller would negotiate with and pay only the listing agent on the seller’s side of the HUD-1. The buyer would would negotiate with and pay only the buyer’s agent on the buyer’s side of the HUD-1.

There are many salutary benefits to this:

  • Buyer’s agents will no longer skip “the talk” about agency and compensation.
  • Well-prepared buyers will save some money.
  • Buyer’s agents will no longer need to fear FSBOs.
  • Listers will have nothing to gain or lose from BUBBAs.
  • Dual Agency will become much more rare — and will be much better policed by buyers.
  • The Top Secret Paranoia Cult of the MLS will be dissolved.

This could happen tomorrow. All that is necessary is for lenders to rewrite their underwriting guidelines. Right now, they permit up to 7% in commissions coming from the seller’s side of the HUD-1, plus up to an additional 3% in concessions for non-recurring closing costs (which are also paid out of the borrower’s funds). If, instead, they allowed no more than 3.5% for sales commission on each side of the HUD-1, the commissions would be divorced, the seas would be parted, the lions would lay down with the lambs and peace unending would envelope the Earth.

Well, maybe not all that, but most of the knottiest problems in real estate would go away overnight. The absolute worst part about the vestigial sub-agency in our current commission structure is that it makes buyers lax in their oversight of their agents. Sellers believe they are paying, even though I argue that they are not, and they behave accordingly. Buyers believe they are not paying, my counter-claim be damned, and so they behave as if lax representation has no enduring consequences. Divorcing the commissions will make both parties aware of the need to oversee their agents diligently, and this will be better for everyone — most especially for better, more responsible Realtors.

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