Reader question: We are preparing to place our home for sale in the spring market. As we interview real estate agents, they differ on who pays the commission in the real estate transaction. This difference is curious to us. How would you answer the question?
Monty’s answer: Who pays the real estate commission is an age-old question where even real estate agents cannot agree on the answer. The conflict is the reason you hear competing theories on the subject. The real estate industry is opaque about commissions and relies on a revenue model over 100-years-old.
The home seller explanation
When a real estate agent and a home seller engage, the most common answer will sound something like this. “The buyer pays the commission because we add the commission on top of what you expect to get in the sale.” Occasionally you may hear this explanation. “The seller pays the commission. When this transaction is complete, the commission only appears on the seller’s closing statement.” Another theory is that the seller and the buyer likely split the fee in some fashion during price negotiations.
The home buyer explanation
The explanation to the buyer is the opposite. “The seller pays the commission in the sale price. It does not affect you.”
The actual answer
When evaluating a home’s fair market value, appraisers review similar properties in the same area, about the same size, age, and style and with similar amenities. Appraisers find the market value approach more critical than the cost approach and the income approach. Appraisers do not consider whether a real estate agent was involved in the sale. There is no adjustment for commissions on the form. This fact suggests that commissions do not affect sale prices. Sale prices change from buyer to buyer. For example, a contract will terminate on Friday and the home re-sold the following Monday, but the sale price is rarely the same. The Monday sale price is either higher, or lower than Friday’s price. Often, the other price can be considerably different. Often, the other price can be considerably different. Here is an article on Dear Monty at https://dearmonty.com/determining-a-homes-value/ about what a home is worth that may add value for you. Here is and article about how to pick the best agent. Good luck.
Which party pays the commission, or part of the commission is a chicken and egg conundrum. It affects both parties. The seller’s equity is lower, and the buyer’s payment is higher when there is a commission. The logical answer is that the commission is buried in the cost of the house, regardless of how one perceives it.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty.