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I met a gentleman the other day who was thinking about buying a home. As we were speaking about the local market, he said adamantly that he always uses a buyer's agent, but that he did "strange" things that many didn't like.
Playing along, I asked him to explain. He said that when he writes an offer with an agent, he:
Offers full price less the real estate commission.
Includes in his offer the provision that HE will pay the real estate commission at closing (so that it won't come out of the seller's proceeds directly).
His logic was that:
(a) it lowers the effective sale price of the house for tax purposes
(b) reduces the commission because it is being paid on the lower sales price (6% of $94,000 vice 6% of $100,000)
I see a couple of issues with regard to interference in an existing contract between seller and listing agent (although not unresolvable if all parties agree) and with the logic on the tax base issue (in Oregon, tax assessment is NOT based on sales price)
Have any of you seen this used in practice? If so, was it an effective strategy? What other "holes" do you see in the proposal?
A house is priced at $300k, and an hypothetical 6% commission
He is offering $282,000 (and will pay the real estate commission - you didn't say if he is paying the buyer and listing commission, so I'll assume both)
You cannot negotiate a commission in the purchase contract so there must be separate agreements.
There would be a buyer/broker agreement that states the buyer agrees to pay the buyers agent commission at escrow.
The listing agreement calls for the seller to pay a total of 6% commission,
The plano is the contract for the listing agent to pay the selling agent a hypothetical 3% commission.
There must be an amendment to the listing agreement that de-obligates the seller from paying the commission.
There must be an agreement between the listing and selling agent that the plano agreement is void and the buyer will pay the selling agent commission.
There must be an agreement between the buyer and the listing agent that the buyer will pay the listing agent commission.
These agreements should be approved by the respective brokers prior to being signed by the parties.
I've probably missed something in there but it's a first attempt anyway.
A house is priced at $300k, and an hypothetical 6% commission
He is offering $282,000 (and will pay the real estate commission - you didn't say if he is paying the buyer and listing commission, so I'll assume both)
You cannot negotiate a commission in the purchase contract so there must be separate agreements.
There would be a buyer/broker agreement that states the buyer agrees to pay the buyers agent commission at escrow.
The listing agreement calls for the seller to pay a total of 6% commission,
The plano is the contract for the listing agent to pay the selling agent a hypothetical 3% commission.
There must be an amendment to the listing agreement that de-obligates the seller from paying the commission.
There must be an agreement between the listing and selling agent that the plano agreement is void and the buyer will pay the selling agent commission.
There must be an agreement between the buyer and the listing agent that the buyer will pay the listing agent commission.
These agreements should be approved by the respective brokers prior to being signed by the parties.
I've probably missed something in there but it's a first attempt anyway.
I think you are complicating it. Who says you can't set commissions in the contract? Banks do it all the time on short sales.
Buyer simply asserts in the contract that he will pay whatever to the two agents. Listing Agent then needs to modify his agreement with the seller. I suppose you could have an agreement whereby the buyer's agent deals with his MLS coop rights...but you really don't need it.
The only brokerage approval other than normal would be the listing agreement amendment.
Just lost a repo to a another sharp buyer who offers a couple of grand over list and to pay the Bank's closing cost. I don't know if those costs included RE commissions but I would not be surprised.
I met a gentleman the other day who was thinking about buying a home. As we were speaking about the local market, he said adamantly that he always uses a buyer's agent, but that he did "strange" things that many didn't like.
Playing along, I asked him to explain. He said that when he writes an offer with an agent, he:
Offers full price less the real estate commission.
Includes in his offer the provision that HE will pay the real estate commission at closing (so that it won't come out of the seller's proceeds directly).
His logic was that:
(a) it lowers the effective sale price of the house for tax purposes
(b) reduces the commission because it is being paid on the lower sales price (6% of $94,000 vice 6% of $100,000)
I see a couple of issues with regard to interference in an existing contract between seller and listing agent (although not unresolvable if all parties agree) and with the logic on the tax base issue (in Oregon, tax assessment is NOT based on sales price)
Have any of you seen this used in practice? If so, was it an effective strategy? What other "holes" do you see in the proposal?
Thanks...and I look forward to the responses.
I would have no problem with that but for the record....His logic is flawed in my market because the county independantly assesses tax value and it's not based on sales price. The amount of commission is going to be so minimal that it probably isn't worth squabbling to get it done.
I would insist on that check being deposited with attorney title company at time of contract to make sure it's there though.
Or better yet, I would think the easier way to do that would be to offer the lower price on the contract and include a clause that he will rebate to the seller at closing. He gets commission on lower price, seller gets it rebated. It's all on the HUD and added into what he brings the closing table. The seller would probably also like that scenario because it saves him a few bucks. I'm not sure if either scenario is legal by lender guidelines. I would check into that to make sure before committing to it.
<SNIP>
He said that when he writes an offer with an agent, he:
Offers full price less the real estate commission.
Includes in his offer the provision that HE will pay the real estate commission at closing (so that it won't come out of the seller's proceeds directly).
His logic was that:
(a) it lowers the effective sale price of the house for tax purposes
(b) reduces the commission because it is being paid on the lower sales price (6% of $94,000 vice 6% of $100,000)
His logic is incorrect, at least here in my market.
When you sell your house and have to calculate the profit on which you are to be taxed, the commission is deductable, just like capital expenses & improvements. So there is no tax savings.
Yes, there would be a slight reduction in commission. Let's see. 6% of $100k is $6k. 6% of $94k is $5,640. A savings of $360. Not enough to go through the paper shuffling required to have the listing agent & seller change thier original listing agreement, and whatever else might be required. Just offer up $99,640 and let the original commission structure stand.
Can this be done in California? Obviously, out here we are talking about $30K-$48K commission for the average home here. If a company out here makes a job offer that includes realtor fees and the prospective employee does not have a home to sell can this be done on the buying end? Obviously, it also reduces the tax base, any So. Cal agents have an opinion on this?
Dave,
Well that is unusual. As a fellow Oregonian...is he doing a flip where he would be talking about capital gains taxes instead of property taxes? He would get to deduct the real estate agent commissions as part of his bias, where if he paid the full price and the seller paid the commission, he can't deduct the commissions as part of the cost of business. Makes sense from that perspective.
So if he purchased a $100,000 home, and offers $94,000 plus he pays a 6% commission, so his tax bias is starting at $88,360. The seller nets the same with his offer, but the buyers capital gains would have been based on the $100,000 value vs. the $88,360 price. If he can avoid paying 15% capital gains tax on that difference it would save him $1746. That plus the savings in commission would save him $2106. Not a huge savings, on this particular scenario, but if you did a lot of flips or got into more expensive homes, it would add up.
The biggest issue he has is that he is altering the listing contract which is a separate contract. As for olecapt's response, it can be construed as tortious interference of a contract to insert commissions into a purcahse and sale agreement. The bank approves commissions as they have been INSERTED into the contract as third party contingency approval just like a bankruptcy judge, so they actually have a say in the contract. THe listing and buyer agent don't have to accept the lower commission. The seller is still obligated to pay the commission as stated in the listing agreement. Most agents don't kick people when they are down though....Agent commissions ARE NOT part of the purchase and sale agreement. Any agent that thinks otherwise needs to talk to an attorney about tortious interference.
Now having said all the legal junk. If all parties agree, no problem, and Captain Bill is right on.
I'd say pretty sharp cookie. No one ever layed that on me yet.
I do put in my listing agreements with my sellers that my commission is not a negotiation tool. I have had a couple of offers come in from other brokers including in the offer how the commission would be paid. I go back to that broker and explain they have to re write the offer as the seller cannot renegotiate our own agreement just based on his offer. It would not be a legitimate signing but in conflict with another contract.
I tell them to draw up a coop brokerage agreement and we'll do our own agreement, but not in the text of the offer.
I think the buyer in your case is pretty savvy. That would be a strange one to come across.
I met a gentleman the other day who was thinking about buying a home. As we were speaking about the local market, he said adamantly that he always uses a buyer's agent, but that he did "strange" things that many didn't like.
Playing along, I asked him to explain. He said that when he writes an offer with an agent, he:
Offers full price less the real estate commission.
Includes in his offer the provision that HE will pay the real estate commission at closing (so that it won't come out of the seller's proceeds directly).
His logic was that:
(a) it lowers the effective sale price of the house for tax purposes
(b) reduces the commission because it is being paid on the lower sales price (6% of $94,000 vice 6% of $100,000)
I see a couple of issues with regard to interference in an existing contract between seller and listing agent (although not unresolvable if all parties agree) and with the logic on the tax base issue (in Oregon, tax assessment is NOT based on sales price)
Have any of you seen this used in practice? If so, was it an effective strategy? What other "holes" do you see in the proposal?
Thanks...and I look forward to the responses.
I'm in the middle of just such a deal, but doing it for another reason. As the buyer, who is paying the realtor commissions, I'm doing this because I'm paying the realtor in assets, not cash. The assets get counted towards the down payment on the property, because they are assigned an appraised value, and there is a seperate transaction where I legally sell that asset to the realtor, in exchange for the commission fee.
As for your seller doing it, the sales price does help to dictate the tax assessment, if you use the asking price as part of your rationality in disputing your taxes. (which I also am doing). I have a property with a tax value of $213K, listing price of $149K, sales price will come in at $125K. First thing I'm doing is filing a tax appeal based upon the appraisal. Homes are only worth what people will pay for them, and taxes, should be a fair representation of that value.
In addition, as a buyer, if I'm paying the realtor fees, I'm entitled to a tax write off on the expense, and it saves the seller some capital gain taxes due on the "profit" from the sale of a home that has appreciated.
Last edited by pghquest; 02-06-2008 at 09:25 PM..
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Plausible in Southern California?
