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Well, the whole "seller pays/buyer pays" distinction that some people want to go to the mat over is a bunch of hogwash anyway. Everyone knows, though some don't want to admit it, all the money in the transaction comes from the buyer.
1) Buyer has money. Seller has house.
2) Buyer hands over money. Some of it goes to fees (real estate commissions, closing costs, other). The rest goes to seller. Seller hands over house.
Simple. Gross from buyer, minus fees, equals net to seller..
They describe how the incidence of a tax -- that is, who bears the economic burden -- is not necessarily the party who pays. In involves concepts such as price elasticity of demand and price elasticity of supply. If you had the good fortune to study economics at the university level, the article should be a good refresher.
While the above articles are about taxes rather than commissions, the same economic concepts apply.
They describe how the incidence of a tax -- that is, who bears the economic burden -- is not necessarily the party who pays. In involves concepts such as price elasticity of demand and price elasticity of supply. If you had the good fortune to study economics at the university level, the article should be a good refresher.
While the above articles are about taxes rather than commissions, the same economic concepts apply.
TL;DR -- your analysis misses the point.
Well, we're not talking about tax here, not literally, rather about fees and handling costs. As I say, in a RE transaction the buyer brings all the money; that's gross revenue; then from the gross revenue the various costs are deducted (RE commish, closing costs, etc.) and the remainder is net proceeds to the seller. Discussions about "seller pays" or "buyer pays" are semantics in this context; used for marketing and promotional purposes, but it's still "gross minus handling costs equals net".
Well, we're not talking about tax here, not literally, rather about fees and handling costs.
The economic analysis of an X% tax is identical to the economic analysis of an X% commission.
Quote:
Originally Posted by rabbit33
As I say, in a RE transaction the buyer brings all the money;
I don't disagree -- but please note that in a state that levies a sales tax, the buyer brings all the money on, say, the purchase of a box of Kleenex, a Ford F-150, a gallon of milk, an iPhone, a new shirt, or a Big Mac.
Quote:
Originally Posted by rabbit33
that's gross revenue; then from the gross revenue the various costs are deducted (RE commish, closing costs, etc.) and the remainder is net proceeds to the seller.
I don't disagree with the financial accounting -- but please note that in a state that levies a sales tax, the same financial accounting applies to the purchase of a box of Kleenex, a Ford F-150, a gallon of milk, an iPhone, a new shirt, or a Big Mac.
Quote:
Originally Posted by rabbit33
Discussions about "seller pays" or "buyer pays" are semantics in this context.
There I disagree with you, because financial accounting is not the correct way to analyze the imposition of a commission (tax) upon the residential real estate industry as a whole.
*****
The economic analysis of commission structures is identical to the economic analysis of business taxation. Once tax-induced changes in behavior throughout the industry are accounted for, the final distribution of the economic burden of taxes is called its economic incidence. It is also referred to as the tax burden faced by individuals in their roles as consumers, workers, and investors.
One of the fundamental lessons of economics is that the entity that bears the statutory burden of a tax has nothing to do with where the burden of that tax ultimately falls. "Statutory burden" means the entity that must fill out a tax form & send it off to the IRS or to local taxing authorities. In the following, you can substitute real estate buyer & seller in to the analysis of a tax on a corporation being allocated among customers and business owners.
Any statutory burden of a tax (or commission) on a transaction is allocated as follows:
X% is borne by customers in the form of prices higher than they otherwise would be
Y% is borne by employees in the form of total compensation (and hours worked) lower than they otherwise would be
Z% is borne by business owners (shareholders) in the form of profits lower than they otherwise would be
...where X+Y+Z=1.0 (that is, X%+Y%+Z%=100.0%)
The burden of that statutory tax is always allocated to a combination of customers, employees, and business owners (shareholders).
There quite literally is no place else for the tax to flow: it must go to a combination of the three.
Apply the same analysis to the residential real estate industry, and you'll see that commissions (taxes) are borne not solely by a single entity but rather by all entities in the transaction (buyer, seller, brokers, agents) based on the price elasticity of demand for housing, price elasticity of supply for housing, and the supply of labor.
The economic analysis of an X% tax is identical to the economic analysis of an X% commission.
I don't disagree -- but please note that in a state that levies a sales tax, the buyer brings all the money on, say, the purchase of a box of Kleenex, a Ford F-150, a gallon of milk, an iPhone, a new shirt, or a Big Mac.
I don't disagree with the financial accounting -- but please note that in a state that levies a sales tax, the same financial accounting applies to the purchase of a box of Kleenex, a Ford F-150, a gallon of milk, an iPhone, a new shirt, or a Big Mac.
There I disagree with you, because financial accounting is not the correct way to analyze the imposition of a commission (tax) upon the residential real estate industry as a whole.
*****
The economic analysis of commission structures is identical to the economic analysis of business taxation. Once tax-induced changes in behavior throughout the industry are accounted for, the final distribution of the economic burden of taxes is called its economic incidence. It is also referred to as the tax burden faced by individuals in their roles as consumers, workers, and investors.
One of the fundamental lessons of economics is that the entity that bears the statutory burden of a tax has nothing to do with where the burden of that tax ultimately falls. "Statutory burden" means the entity that must fill out a tax form & send it off to the IRS or to local taxing authorities. In the following, you can substitute real estate buyer & seller in to the analysis of a tax on a corporation being allocated among customers and business owners.
Any statutory burden of a tax (or commission) on a transaction is allocated as follows:
X% is borne by customers in the form of prices higher than they otherwise would be
Y% is borne by employees in the form of total compensation (and hours worked) lower than they otherwise would be
Z% is borne by business owners (shareholders) in the form of profits lower than they otherwise would be
...where X+Y+Z=1.0 (that is, X%+Y%+Z%=100.0%)
The burden of that statutory tax is always allocated to a combination of customers, employees, and business owners (shareholders).
There quite literally is no place else for the tax to flow: it must go to a combination of the three.
Apply the same analysis to the residential real estate industry, and you'll see that commissions (taxes) are borne not solely by a single entity but rather by all entities in the transaction (buyer, seller, brokers, agents) based on the price elasticity of demand for housing, price elasticity of supply for housing, and the supply of labor.
Youre just putting out a bunch of truisms. Obviously the impact of a change in RE commissions will affect all the parties to a given transaction, and in fact the effect will vary from transaction to transaction. MY point was that the terminology "buyer pays/seller pays" is used, constantly, to reassure people that they don't need to worry about THAT cost or THIS cost - "oh, don't look over there, look over here!" It's the old four-square used car deal form in a more sophisticated format, with real estate. Sales people use various forms of obfuscation to confuse people into spending more money, and in my lifetime of experience when you pin them down to the fundamentals, it sweeps all the details and technical terminology to the side and lets you see what's really going on.
A theoretical review of economic theory really isn't germane to the discussion.
Youre just putting out a bunch of truisms. Obviously the impact of a change in RE commissions will affect all the parties to a given transaction, and in fact the effect will vary from transaction to transaction.
Clearly, it isn't obvious to some people as they post inaccuracies based on financial accounting, which is irrelevant to who bears the economic burden.
Quote:
Originally Posted by rabbit33
MY point was that the terminology "buyer pays/seller pays" is used, constantly, to reassure people that they don't need to worry about THAT cost or THIS cost - "oh, don't look over there, look over here!" It's the old four-square used car deal form in a more sophisticated format, with real estate. Sales people use various forms of obfuscation to confuse people into spending more money, and in my lifetime of experience when you pin them down to the fundamentals, it sweeps all the details and technical terminology to the side and lets you see what's really going on.
I've never seen a four-square used case deal form.
I've never had any difficulty understanding the economic burden is different from the financial accounting.
Quote:
Originally Posted by rabbit33
A theoretical review of economic theory really isn't germane to the discussion.
There I disagree with you. It is ALWAYS germane. Always.
On Point had the guy who started this legal action on their show earlier this week. It was really informative, and it's clear this guy (a lawyer who has had a real estate license since he was in high school) is a hard-core advocate for sorting out the system, and this was his approach.
I highly recommend it if you want to learn more about the background on this case. It provided a lot of context.
Just because the buyer brings all the money to the closing doesn't mean that all the costs of closing the deal are being borne by the buyer. A quick look at the closing statement shows that the real estate commission is coming out of the SELLERS proceeds to pay for the real estate company's services.
Had there been no real estate company involved in the transaction, there would have been no deduction from the Seller's proceeds to pay the realtor's commission. How much clearer could it be that the Seller is paying the realtor's commission?
On Point had the guy who started this legal action on their show earlier this week. It was really informative, and it's clear this guy (a lawyer who has had a real estate license since he was in high school) is a hard-core advocate for sorting out the system, and this was his approach.
I highly recommend it if you want to learn more about the background on this case. It provided a lot of context.
I read your linked article. Here are the main points that I got out of it:
1. Commission rates can't be "fixed". They must be negotiable.
My comment: That's nothing new. It's been that way for about 50 years. Many people didn't know that, and many realtors probably stated (incorrectly) that the commission rate is fixed, but, by law, they can't be "fixed". They must be negotiable.
2. Apparently, listing brokers on a co-brokered deal cannot now include the buying broker's commission in the commission that the seller pays. They must charge the seller only the amount that goes to the listing broker. The buyer's broker must negotiate a separate commission from the buyer.
My comment: To me, this is a bunch of hogwash. If the listing agent has already obtained a signed listing that says the owner of the house will pay X percent commission if the realtor finds a buyer who completes the purchase, then what business is it of anyone else if the listing broker splits that commission with another broker who brings a buyer?
This is simply a sub-contract deal between real estate brokers. It's no different than a building contractor contracting with an owner to build a house and then subbing out certain parts of the construction project. As long as the subs meet the same building specifications that the owner required of the prime contractor, then it doesn't matter if the prime contractor subs out some, or all, of the work. That's no different whatsoever than a listing broker agreeing to pay part of his commission to another broker who brings a buyer who completes the purchase that is satisfactory to the seller.
I read your linked article. Here are the main points that I got out of it:
1. Commission rates can't be "fixed". They must be negotiable.
My comment: That's nothing new. It's been that way for about 50 years. Many people didn't know that, and many realtors probably stated (incorrectly) that the commission rate is fixed, but, by law, they can't be "fixed". They must be negotiable.
2. Apparently, listing brokers on a co-brokered deal cannot now include the buying broker's commission in the commission that the seller pays. They must charge the seller only the amount that goes to the listing broker. The buyer's broker must negotiate a separate commission from the buyer.
My comment: To me, this is a bunch of hogwash. If the listing agent has already obtained a signed listing that says the owner of the house will pay X percent commission if the realtor finds a buyer who completes the purchase, then what business is it of anyone else if the listing broker splits that commission with another broker who brings a buyer?
This is simply a sub-contract deal between real estate brokers. It's no different than a building contractor contracting with an owner to build a house and then subbing out certain parts of the construction project. As long as the subs meet the same building specifications that the owner required of the prime contractor, then it doesn't matter if the prime contractor subs out some, or all, of the work. That's no different whatsoever than a listing broker agreeing to pay part of his commission to another broker who brings a buyer who completes the purchase that is satisfactory to the seller.
.
The fundamental issue is the fiduciary responsibility of the buyer's agent to the buyer.
According to the article, the co-broker commission acts as an incentive to steer buyers to those properties that publish the highest commission and avoid those properties that pay zero or a smaller commission. Steering a buyer to those properties that are in the co-broker's financial best interest is contrary to a fiduciary responsibility to show a buyer those properties that are in the buyer's best interest irrespective of the agent's financial best interest.
There are instances where there is a breach of the fiduciary responsibility to the seller:
"And I saw the focus on exploitation. They would create these fiduciary relationships with consumers and then use those relationships to do all kinds of bad things to them. The main driver, of course, was the 6% commission. They would tell people that it's 6% because I have to share my fee with another broker, and then they would do everything they could to try and make sure the other brokers didn't sell the house."
When hiring a subcontractor, the contractor remains responsible for the performance of the subcontractor. This is not the case in the co-broker relationship.
I have worked with sales compensation plans for many years and agree commissions in most cases drive performance -- that why we called them "incentives."
Last edited by Maddie104; 03-30-2024 at 06:27 AM..
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