Understanding Real Estate Commissions- The Long and the Short of it

I get asked this a lot- "who pays your commission?"

The short answer:  The seller.

The long answer? Keep reading...

Most transactions in our market are either short sales (where the lender eats the commission) or REOs (where the bank pays the commission). BUT if you are in the unique position to be selling a home that has some equity YOU are the one who will be paying the commission to both the listing and selling agents.

Here are some common concerns when it comes to commission:

How is commission determined?

The commission is agreed upon when you (the seller) and your listing agent sign a listing agreement prior to the property going on the market. Also in the listing agreement is your authorization for the listing agent to advertise what the buyers agents commission will be.

If I am unhappy with the offer I received on my home can I renegotiate your commission?

Well.... yes and no. What is published in MLS as the "cooperating broker compensation" (technical term for what the buyer's agent gets) is binding even if it is an error- UNLESS you have a very understanding and cooperative buyer's agent on the other side of the deal who is willing to take something other than what is advertised.

What you have already agreed to pay your listing agent can be renegotiated after you receive offers on the property, but honestly it is really bad form. It is the same as agreeing to pay your mechanic for fixing your car then when you pick it up after he does the work you try to get him to cut you a deal. If your home is on the market a while and you are concerned about selling it for much less than what you had planned, the time to approach your agent with your concerns is before they bring you offers. Since commission is agreed upon between the listing firm and the seller, the buyer and their offer are not a party to it so the two should be treated separately. A good time to bring up a commission reduction may be when you discuss a price reduction, and the terms can be changed in a Modification of Terms Agreement. Most of us agents are very sensitive to your concerns and very cooperative and will work with you the best we can within the guidelines set forth for us by our broker, but with that said we do have to make a living.

Can I offer the buyer's agent an increased commission to entice showings?

Yes!! The typical commission split is 50/50, meaning 3% to each agent. That is not set in stone though, so if you want to be more competitive you can offer a 4/3 split or a 3/2.5 split- it is completely up to you and your agent and can be laid out in your listing agreement.

I still don't understand! What am I paying for? How much is it again?

You should never be afraid to ask questions- ESPECIALLY when you are about to sign on the dotted line! As a general rule I go over the listing agreement with my sellers in grave detail so I know I did my best in helping them understand. If your agent does not do this, please ask questions before you sign. A good agent will not have a problem with this and will answer your questions until you are fully satisfied. In addition, when you invite an agent over to your house to discuss listing it for sale, they should bring with them an estimated closing statement that will have real dollar amounts on it estimating your costs in selling your home. This will change as offers come in and taxes and interest are prorated, etc, but for every price reduction and every offer received your agent should be giving you one of these. This document WILL have the commission clearly itemized on it. Please look at it so you are not surprised at closing time!

For more information on this or any other commission/real estate related topics, please do not hesitate to contact me.

There Are NO Guarantees When You Buy A Short Sale!

The learning curve is getting pretty steep when it comes to short sales lately. There are still surprises cropping up that are teaching us all a valuable lesson- there are no guarantees when you buy a short sale.

Recently some clients of mine who were buying as an investment received an accepted offer on a short sale. The home had two loans (first with Bank of America the second with Chase) but only the second was being paid off short. Our approval came relatively quickly, but once it came we were all shocked to find out that we only had 7 days to close escrow! Being a cash deal this is entirely possible but since it was right before Christmas it was going to be tight. Disclosures were signed and our home inspection was scheduled for day 3 of 7. Just before the home inspector was supposed to go out to the property the listing agent called and informed me the house had sold at the trustee sale that morning.

What does that mean?

It means my buyers don't get the house because someone else owns it now.

Bank of America, even though they had ASSURED all parties involved there was no sale date set, and had fully cooperated with the short sale proceeded with foreclosure just two days prior to the new buyers taking possession of the property. All of us were in complete shock. Not only did we not see it coming, but Bank of America was being completely paid off in the sale transaction and would be made whole through the sale. They undoubtedly lost tens of thousands of dollars in foreclosing instead.

So what is the lesson here?

In this scenario based on the information available none of the parties involved could have known the house was going to trustee sale. There was nothing noted on the tax records or on Foreclosure Radar and the listing agent was given false information. However- that is not always the case. When you are buying a short sale it is vital that your agent and the listing agent and the owner of the property are diligent in working with the bank and staying abreast of the public records to be sure the information being conveyed by the bank is in fact accurate.

The secondary lesson to this is essentially to not get your hopes up. There are a couple disclosures you sign as a buyer that let you know that there are no guarantees when buying a short sale, and situations such as this are the exact reason why you sign such disclosures. Don't get me wrong, it certainly does not make it any easier, but if you know and understand from the very beginning that this outcome is a possibility it makes it a much easier pill to swallow.