I met with potential future clients the other day. They were referred to me by a past client who highly recommended me. My client sent me the following email and copied his colleague:
“I cannot believe it’s already been 3 years since we worked together to find our home in San Jose. We still love the place, and so happy to have a place we call home. We keep thinking how lucky we were to have a thoughtful and proactive realtor to navigate a stressful phase of our life!
I want to introduce you to a colleague of mine at Apple, [name omitted]. He is beginning his search to buy a home, and would like a great realtor who is familiar with the area to help.
If you are still taking new clients, I will let you and [name omitted] discuss details and next steps!”
I sat with my clients colleague and his girlfriend for two hours discussing the home buying process and answering their list of questions. First time home buyers require a lot more time in the home buying process because they simply have no reference point … no experience in buying a home or obtaining a loan. That is perfectly understandable. That is among the many reasons buyers need a real estate agent – to educate and guide them through the process.
This first time home buyer and prospective new client said to me: “The seller does not pay your commission. I am actually paying it because the commission is embedded in the price of the home.”
Hum? In nearly 15 years working full-time in real estate that was the first time I’d ever heard that perspective. I share my thoughts on commissions below.
Expense of a Sale is Deducted from the Proceeds of the Sale
The seller does not add the expense of the sale to the price of the home. Commissions paid to real estate agents are part of the sellers marketing costs. Commissions are what a seller is offering a Broker to list their home and market it for sale. The cooperating broker fee, or commission offered to the buyer’s agent, is included in the seller’s marketing costs which become an expense of sale.
Most San Hose home buyers purchase their home with a home mortgage. The lender will only lend on the appraised value of the home. This is true regardless of the type of financing.
- List price of a home is $899,000
- Offer price is $870,000
- Appraised value is $870,000
A lender will only lend on the $870,000 appraised value. The appraised value is independent of what the seller initially paid for the home. The seller might have paid $500,000 for the home. The appraised value and offer price of $820,000, minus paying off existing mortgage debt, fees and costs of the sale such as title and escrow fees, property taxes, and commissions is what the seller will net from the sale.
Nowhere in the calculation does a seller “add” commissions to increase the price of the home to cover commissions. In fact, we can change the example above and make it a For Sale By Owner where zero commissions are paid because the seller has not “commissioned” a listing broker. The appraised value of the home will remain the same. The appraiser does not care about the expense of marketing, the expense of selling the home or the amount of debt on the home. The appraiser cares about the condition of the home, the location of the home, and comparable sales in the community. The appraiser does not care what the buyer is willing the pay for the home.
The offer price from the buyer remains the same. While the seller may net more from the sale, the amount the buyer pays remains the same. The price a buyer pays for a home has little to do with the commissions offered to the broker who brings the buyer or the broker who lists the home for sale.
I understand others have a different perspective regarding commissions. I respect them. This is merely my opinion supported by the above scenarios.