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Old 12-07-2012, 06:53 PM
 
7,282 posts, read 8,390,715 times
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This whole nonsense of an idea that the seller agent (listing agent, might not be the same) is paying the buyer agent has a lot of bad consequences. Some are obvious, such as entering into a purchasing process with your supposedly on your side buyer agent being paid by the very people who benefit financially from you paying more, not less for the house to that same principle being applied to the buyer agent. A buyer agent that benefits financially from you, the buyer paying more for the house, not less and somehow that is a good thing.

Well, think about this:

The seller is in many cases if not most, going to be able to deduct the cost of the seller/listing agent commission from any capital gains and thus won't be taxed on that money.

Now it comes to you, the buyer. Since as buyers are so often told and chided for if they dare to disagree, that the services are provided at no cost to the buyer, what happens at tax time?

So here are some questions and lets see how much sense they will make and how they affect buyers:

When a house is sold, it often triggers a reassessment for tax purposes. We are told that the tax assessment represents the market value of the house barring any factors such as market pressures that affect the selling price. There are some standard exemptions in certain states, counties or municipalities but leave that alone here, it doesn't factor in.

What is one factor that affects market value? The selling prices of homes in general because as home prices rise, so do tax assessments. Following?

So the big question is:

Since the commission paid to the buyer agent comes from the seller/listing agent (and full circle from the seller as agents often say), does the buyer obtain a benefit or liability from this supposed "free" buyer agent service?

Now before you answer that simple question, isn't it true that the sales price of the home is NOT recorded with a consideration for the buyer agent commission? In other words, the recorded sales price is not reduced to account for the commissions paid but the seller is allowed (in most cases) to deduct the commission for tax benefit purposes?

So, doesn't this have the effect to increase the sale prices and isn't the buyer going to pay higher taxes for the entire time they own that house? I say yes, the buyer will pay more property taxes because the recorded sales price is not discounted for any commissions as far as the tax assessor is concerned. All of the sales in the area contribute to factoring the market values and therefore the tax assessments.

In the end, the buyer pays more tax. The buyer will pay that tax for as long as they own the house.

So buyer, you are being represented by someone who is paid to get you to pay as much as possible for the house, then your property tax assessment increases because that entire seller/buyer agent commission is taxed as part of the property value.

Aren't free things great?
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Old 12-07-2012, 07:11 PM
 
Location: The Triad (NC)
26,871 posts, read 57,924,091 times
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Pass that monograph over to an editor for clarity and point.
If it still makes sense to you... post again.
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Old 12-07-2012, 07:15 PM
 
Location: DFW - Coppell / Las Colinas
29,948 posts, read 34,553,963 times
Reputation: 35946
Quote:
Originally Posted by MrRational View Post
Pass that monograph over to an editor for clarity and point.
If it still makes sense to you... post again.
Now that some states have legalized Pot we'll probably see more rambling vague posts.
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Old 12-07-2012, 07:45 PM
 
Location: Scottsdale, AZ
1,987 posts, read 3,790,095 times
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Nowhere that I have ever lived did the sale of a home trigger reassessment for tax purposes. Homes are assessed on a periodic basis by the taxing authority, usually the county, and assessments are based on complex (often indiscernible) calculations that are not on individual properties but on all the properties in the area. The only time a home may be reassessed individually is if a major improvement is made, like an addition etc., or if the tax payer requests a review (which sometimes backfires).

While I doubt I will convince you otherwise, I will just use the history of Multiple Listing Services to help you better understand commissions. The first MLS was established in 1968 and they were not widely used until the 1970's. Prior to that if you wished to buy a home you had to use the sellers agent, who typically received the full 7%. There was no "buyer agency". This made it difficult for small agencies to compete. It also meant that buyers could only see homes listed by their agency, which did a good job of locking them into buyer broker agreements right up front. If you wanted to see a home listed by broker A they would have you sign an buyer broker agreement before you could see the home. From then on they would only show you Broker A homes. The NAR and many local associations recognized the value of co-operating and with the availability of computer systems they devised a policy of co-operating. This meant you could earn commissions from both listing homes and selling other brokers listings even if it meant getting only half the commission. Buyers could see homes from ALL brokerages. Since then competition has driven commissions down to 6%, sometimes 5% (typical with REO and SS homes) or even less. Both buyer and seller have benefited.

You may have heard this before, but any buyers agent that drives the price up to pad their commission is only risking their career (for a few measly dollar). Adding a $1000 to a transaction only adds $30 to their commission (assuming 3%) it is not worth it. You are better off helping the client get a lower price and getting a referral for doing a good job.

And yes, the seller can deduct the cost of selling (actually they add it to their basis) assuming there are any capital gains owed, usually if it is a primary home there is a $250K-550K exemption. It does not raise the buyers tax 1 penny.
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Old 12-08-2012, 05:34 AM
 
3,183 posts, read 2,726,999 times
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Quote:
Originally Posted by Mack Knife View Post
This whole nonsense ...

Now before you answer that simple question, isn't it true that the sales price of the home is NOT recorded with a consideration for the buyer agent commission? In other words, the recorded sales price is not reduced to account for the commissions paid but the seller is allowed (in most cases) to deduct the commission for tax benefit purposes?
Not in Florida. Typical costs of the sale are excluded from the taxable value. From my local tax appraiser on how they arrive at taxable value after a sale;

"The net proceeds of the sale of the property, as received by the seller, after deduction of all of the usual and reasonable fees and costs of the sale, including the costs and expenses of financing, and allowance for unconventional or atypical terms of financing arrangements."
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Old 12-08-2012, 07:09 AM
 
Location: Gilbert - Val Vista Lakes
6,069 posts, read 12,678,138 times
Reputation: 3809
Quote:
Originally Posted by Mack Knife View Post
...
In the end, the buyer pays more tax. The buyer will pay that tax for as long as they own the house.

So buyer, you are being represented by someone who is paid to get you to pay as much as possible for the house, then your property tax assessment increases because that entire seller/buyer agent commission is taxed as part of the property value.

Aren't free things great?
In Arizona the property tax is not based on the sale price of a home. However, for the sake of discussion, let's assume that you are correct.

So, assuming that the property tax is predicated on the home sales price, here is one solution which you can negotiate with a buyers agent:

Buyer negotiates with the buyers agent:

  • Seller has offered a 3% commission to the buyers agent.
  • Buyer agrees to pay the 3% commission on the purchase price in out of pocket cash and
  • seller is to agree to lower the negotiated purchase price of the home by the same 3%.
  • Price of house is negotiated prior to informing the seller that buyer will pay the commission.
Since buyer does not trust the agent to negotiate a lower price on his behalf, he solves that problem by offering the agent an incentive.
  • Buyer agrees to pay buyers agent a bonus of 10% for each dollar negotiated below the listed price, in addition to the 3% commission that the seller has offered to pay.
$330,000 Listed price
$300,000 Negotiated purchase price. Agent saved buyer $30k. Bonus is $3k.

Buyer owes buyers agent 3% of $300,000 plus 10% of $30,000 = $9,000 + $3000 = $12,000

Next, seller lowers the negotiated purchase price to $270,000 because he doesn't have to pay the buyer agent commission. Sales is properly recorded as $270,000 and the property is taxed at $270k instead of $300k.

Problem Solved
?

Let's look to see what we have with that structure:
  • The buyer must pay the $42,000 out of pocket,
  • Buyer also has to pay the down payment for the mortgage.
  • The majority of people buying a $300k home do not have the extra $42,000
  • They prefer to have the commission financed in the mortgage.
  • In many cases, the time value of money "may" be to the buyers advantage to finance the $42k at a low interest rate and invest the money in order to have a higher return.
That is probably one of the reasons the commission was structured this way many years ago.

But wait, there's more!!!

The $270,000 has set a comp for the community, which will effectively lower the sales prices of neighboring homes within the next few months by 3%, which may have a rippling effect over the next few years.

Another Possibility
  • Negotiate to pay the agent a portion up front and more in 30 days, in exchange for a 25% commission reduction.
  • Commission will be $30,000 as in the above example plus the performance bonus
  • Total commission to buyer will be $22,500
  • Buyer pays 25% up front $7,500
  • In 30 days buyer pays another 25%, $7,500
  • At close of escrow buyer pays the balance of $7,500 to buyers agent
  • Buyer also pays the $12,000 bonus at COE for negotiating $30k below list.
  • Seller reduces sale price by $30,000 because buyer is paying the commission
  • Buyer is out of pocket only $34,500 instead of $42,000.
  • Buyer saved $7,500 by paying part of the commission up front.
There are many ways that things can be negotiated.
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Old 12-08-2012, 10:12 AM
 
Location: El Dorado Hills, CA
3,670 posts, read 7,980,422 times
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Quote:
Originally Posted by AZJoeD View Post
Nowhere that I have ever lived did the sale of a home trigger reassessment for tax purposes. Homes are assessed on a periodic basis by the taxing authority, usually the county, and assessments are based on complex (often indiscernible) calculations that are not on individual properties but on all the properties in the area. The only time a home may be reassessed individually is if a major improvement is made, like an addition etc., or if the tax payer requests a review (which sometimes backfires).
.
In California they can re-assess based on the sales price and date. We even have a "Supplemental Tax" disclosure that says the buyer may be assessed a supplemental amount of property tax if the appraised value goes up upon sale. Part of that is we pay our property tax in advance. Tax year is July - June and we pay for that year in Nov and Mar. Very possible to have extra tax. In our case, buying during the down market, we got a rebate in our property taxes after it was reassessed.

Though Texas is a non-disclosure state, I have to say the 2 houses I bought while living there got assessed the next year at exactly the price I paid. They have ways of finding out...

Of course, this has nothing to do with income tax or capital gains.
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Old 12-08-2012, 11:21 AM
 
Location: DFW - Coppell / Las Colinas
29,948 posts, read 34,553,963 times
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Quote:
Originally Posted by NinaN View Post
Though Texas is a non-disclosure state, I have to say the 2 houses I bought while living there got assessed the next year at exactly the price I paid. They have ways of finding out....
Our Appraisal Districts are licensed appraisers and subscribe to the MLS. It's not Disclosed to the public on the tax records or if you build a new home or a FSBO which would not be in the MLS.

Non Disclosure means to the Public, not to licensed Agents or Appraisers. I've custom built my last 2 homes. The Apprasial District has gotten mad at me that I will not provide my closing statement to prove it's value / sales price. I've told them to take a hike and appraise it like real appraisers do. It's always worked out in my favor.
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Old 12-08-2012, 12:48 PM
 
Location: Lexington, SC
4,281 posts, read 10,294,366 times
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I was of the belief that in some locales, they automatically reassessed based on selling price. Am I incorrect?
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Old 12-08-2012, 01:17 PM
 
Location: Martinsville, NJ
6,159 posts, read 10,898,990 times
Reputation: 3939
Quote:
Originally Posted by Mack Knife View Post
<<Snipped from a much longer post>>

So buyer, you are being represented by someone who is paid to get you to pay as much as possible for the house,
Completely untrue. Let me correct it for you.
Buyer, you are being represented (if you have signed a representation agreement) by someone who has agreed to represent you, and to work in YOUR best interest, including to negotiate a purchase under the best terms and conditions possible for YOU. Your representative will be paid by the agent of the seller, if you and your agent have chosen to use the most commonly used compensation agreement. You are free to choose another compensation agreement if you prefer.
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