Should Sellers and Buyers Compensate Their Own Agents?

Let me start by offering two thoughts. First, I am NOT an attorney. Second, Real Estate fees or commissions are NEGOTIABLE by law. Brokers and their agents are REQUIRED to disclose their fees and how they are earned to their prospective clients. Local market may “appear” to establish a “range” of fees that work or do not work as far as listing and selling Real Estate but it is still the client’s choice as far as whom to hire and what they will pay. That being said, some consumers are better at negotiating than others. This plays out when offers are written, submitted and responded to.

Also, let me clarify two words which often appear to be similar. A BROKER runs the business and hires AGENTS to represent the BROKERAGE. Sellers and buyers sign contracts with BROKERS and typically have one or more, such as with a “team”, designated AGENTS working for them. Now to the article.

Real Estate fees are a “marketing expense”, a cost of doing business. What do sellers and buyers expect of their representatives? REALTORS have a Code of Ethics that mandates standards regardless of the amount of compensation, meaning that we cannot fail to perform in trade for lower commissions. Non-REALTORS have state license laws that likely mirror the Code of Ethics.

Generally speaking in my market, sellers agree to pay a negotiated fee to their agents if their property goes to settlement. Listing agents market their listings to the public through a variety of means. If the use the multiple listing service they typically offer some specified compensation to the buyer agent who successfully sells and settles their property listings. While the MLS does NOT require the offer of compensation, there are reasons to offer a market-oriented compensation to encourage property showings and offers that must be managed. The reason is simple:  agents representing buyers are expected to have formal, written contracts and they should include any fees and how they are earned. While practices may vary, in my experience, buyer agents are willing to accept compensation from listing agents with the specific understanding that their buyer-clients will offset any difference between what the buyer agreed to pay their agent and what a specific listing agent is offering through the MLS. The key question is will a buyer be willing to pay anything directly to their agent AND pay a “fair market” price to the seller? Do they even have the funds but I will go into that later.

All that being said, there is NO STANDARD fee and COLLUSION between firms is against the law. However, competition is NOT! I read a number of studies and articles over the years in addition to working with many sellers who had been unsuccessful trying to sell their properties with other agents. It is my opinion that property listings that offer less compensation than their local competition tend to take longer to sell and often achieve lower prices.

The main point of this article is that some consumers think that buyers and sellers should each compensate their own brokers rather than forcing sellers to essentially provide the funds to their listing  broker that typically result in buyer broker compensation as an incentive to show property listings. We can argue that the fees come from a sale that is paid for by the buyer but that is not the main point.

In addition to issues with transparency and logic, the typical scenario has led to unethical buyer brokers “pushing” listings with higher compensation. It also “seems” to suggest a conflict in terms of how the money flows but what is the alternative?

If we ever reach a point where buyers must compensate their own brokers, what will the effect be? Will prices be expected to come down? That would seem fair and would in theory not impact seller proceeds as the theoretical price reduction would be somewhat consistent with lesser fees paid their listing broker that now flow to the buyer broker.

However, the REAL question is this:  how many buyers have the cash to pay their typical closing costs, including the mortgage “down payment” (typically a minimum of 3.5% of the purchase price) AND whatever they negotiate with their buyer broker? There would be some but NOT ALL. What happens to those who cannot? Does that exclude them from buying and owning their own home?

While the argument would be that the purchase price would be reduced somewhat consistent with the fee due the buyer’s broker, the difference is that mortgage financing has typically covered the purchase price INCLUDING the fee to the buyer broker.

In my experience, I have worked with many sellers who had to offer a “seller assist” to buyers who did not have the cash on hand to cover their total acquisition costs where the listing broker paid the buyer’s  broker. Many of my buyers needed a “seller assist”. Mortgage financing has allowed such “concessions” or seller assists depending on the type of financing being used.

If I looked over my past transactions I would guess that making buyers compensate their own brokers, as logical as that might sound, would have eliminated ANY chance of their buying their own home.

As a simple example, if a buyer is buying a $100,000 home putting down 5% ($5000) and financing $95,000 with their buyer broker being compensated $5000, reducing the purchase price by $5000 to $95,000 with the same 5% down would only reduce the down payment by about $250, give or take. The buyer is “saving” only 5% of the $5000, NOT the whole $5000 they would need to pay their broker. Where is the buyer supposed to come up with the remaining $4750 to pay their own agent/ broker?

I have heard some chatter about mortgages including the buyer broker’s fee on top of the purchase price but that makes no sense. In that scenario, what would be the threshold for an appraisal to protect the lender in the event, however small, of a mortgage default?

As with many things that “appear to make sense”, BE CAREFUL what you wish for. There are ALWAYS consequences and the unintended ones can be painful!

Remember, when it comes to buying or selling what is typically your biggest asset requiring your largest overall investment in money, time and effort,

There is no time for inexperience, empty promises or false expectations.

HIRE WISELY:  We are not “all the same”!

Bright MLS September 2023 Delaware County PA Residential Housing Report

Showing Time, using Bright MLS statistics, has released its Local Market Insight report for single-family homes in Delaware County, Pennsylvania through September 2023. If you would like more information about this or any other County or any specific municipalities in the Delaware Valley, please contact me or visit my website, AndrewWetzel.com. I am only a phone call, an email or a text away! I respond promptly to all inquiries.

The Real Estate market continues to be affected by wildly fluctuating economic news. Experts do not seem to agree on where we are going! The economic news, specifically inflation and threats of a recession, has substantially elevated the mortgage interest rate and made some buyers apprehensive, wondering if this is the “right time” to buy. Will the interest rate and purchase prices continue to rise or will they fall? Many sellers seem reluctant to sell houses with low interest rates and/ or question the cost of their “next home”! Inventory levels have fluctuated but many sellers seem to think there is still a “sellers’ market” throughout the County. The fact is that some areas are still experiencing competition while others are not. As always, Real Estate and mortgage professionals can help you as you decide what to do and, if you decide to sell or buy, assist you with the planning and preparation that will maximize your chances for success.

The economy is an “uncontrollable variable” and consumers will evaluate it and the interest rate however they wish. The popular phrase these days is “date the rate and marry the house”. This means that you may be able to refinance the interest rate later if it declines but the focus should be on getting the best house for your needs and wants. Of course, there is no guarantee that the interest rate will decline in the near future and it may rise even higher. There is also no guarantee that prices will fall if you wait to take action. Overpaying and/ or buying the wrong house can be very costly. What is a buyer or seller to do?

As far as pricing, supply and demand typically suggest that prices should decline when inventory rises or activity decreases. This is not guaranteed in Real Estate unless a seller really wants or needs to move. Some houses are still getting well above the “asking price” while some areas have more houses taking price reductions than new listings coming on the market.

Generally speaking, price reductions are now a more frequent occurrence with some properties taking multiple reductions to generate interest. The downside of that may be two-fold. First, I see many of what I call useless/ senseless price reductions. By that, I mean that they do not re-position the house to attract the interest of a different group of buyers. What then is the point? Second, if a specific house is not exactly what a buyer or group of buyers is looking for, they may sit and watch how low a price may go before doing anything. Pricing requires a strategy or purpose.

As is typically the case, you cannot “time the market”:  selling and buying are personal decisions, typically emotional ones justified with logic. As always, your experience may differ depending on your location and how you have been personally impacted by the economy and other “variables”.

As always, this report compares current year-to-date results to one year ago, same time period. As with all Real Estate statistics, two things are true. First, the performance within individual zip codes can and will vary significantly from the overall County. Real Estate is local and results can vary from neighborhood to neighborhood and even block to block. There is no such thing as a “national” Real Estate market any more than there is a national weather forecast so, whether you may be thinking about selling or buying, please contact me for details about your areas of interest. I can provide current information and keep you informed about the evolving market. Deciding whether it is the right time to sell or buy is a personal decision typically involving a number of variables, some of which you have no control over. I can provide the knowledge and insight to help you decide what works for you.

My second point is that, unfortunately, all Real Estate statistics involving sold data are stale. This is especially true if you are relying on Internet valuation models which use recorded data rather than up-to-date MLS information. Even then, while a sale may be reported as having settled or closed today, the real question is when was the offer negotiated? Typically, financed sales can take 45 to 60 days to close so the market today may be different from when the offer was presented and negotiated. Up-to-date information, even if not perfect, is important!

As far as the statistics, there were 5216 new “For Sale” listings through September 2023 compared to 6414 through September 2022, a decrease of 18.7%. There were 4160 “closed” sales through September 2023 compared to 5496 through September 2022, a decrease of 24.3%. These are obviously huge changes. The median selling price through September 2023 was $315,000, up 5.0% from one year ago. The decline in the number of newly listed properties impacted the number sold while slightly increasing their selling prices. Again, this was County-wide and may not reflect your local experience.

The number of currently available “Active” properties (648) is 2.9% below one year ago. The Days on the Market (DOM) (19) is down slightly (3 days) from one year ago and the “Sold to List Price” ratio (100.4%) is up 1.1% from last year, showing the evolving market. The MSI (Months of Supply) is 1.5 months, compared to 1.3 months one year ago, still a strong “sellers’ market”.

The decreased inventory combined with pricing and demand have created our current market although the impact of higher interest rates, even if historically low, remains to be seen. Again, these numbers vary throughout the County:  the underlying data shows a wide range of results in all categories among the 49 different municipalities in Delaware County.

This is historically the time when sellers take their properties off the market to avoid activity over the Holidays and decide when to resume their marketing. Some will wait for Spring when they will likely face competition. Depending on their motivation, I encourage sellers to plan and prepare for resuming the marketing in January if the weather is conducive. That may provide them with a good opportunity if there is little competition.

Buyers can continue to monitor the market and, assuming they are prepared to take action, they can evaluate new listings and price reductions to see if any properties appeal to them.

Thank you for reading this information. Remember, when it comes to selling or buying what is likely your biggest asset and largest overall investment in money, time and effort,

There is no time for inexperience, empty promises or false expectations! 

HIRE WISELY:  We are not “all the same”!