Is this a concession?

[larryhaskell]

There is a statement in the purchase agreement of a property I'm appraising that has me puzzled. I was wondering if this was permitted. Those of you who are licensed realtors may have a better idea. Here is the statement.


"Buyers are licensed mortgage brokers and hold licenses as real estate salespersons in the state of CA. They are affiliated with XXXXXX Loan Corporation. Buyers will be credited in escrow by ABC Realty Inc. in an amount equal to two and one-half percent of the purchase price of the property at 123 Maple St."

Thanks as always.

 

[Anonymous]

It may be that the buyers are collecting a normal commission on the sale of the subject property which they happen to be buying. If that is the case the collection of a commission is not a sales concession since the sellers would pay the same sales commission regardless of who the purchaser of the property was. If the real estate company or mortgage company have some ownership interest in the subject than this payment could well be a concession, more information is needed.

 

[Bob Ipock]

The 2.5 % is the buyer's (who is actings as his own agent) cut. His employer, ABC Realty is lallowing the 2.5% to be credited to the buyer/Agent rather than to ABC Realty as a comission. This is a very common income tax dodge used by buyers who also happen to be agents.

 

[Richard Carlsen]

Most states (at least in Michigan) require that if you are licensed either as a broker or sales person, you are required to disclose it to the seller even if you do not earn a commission of the sale. It is presumed that if you are licensed, you have an advantage over the other party and therefore must disclose it to them so they have the opportunity to protect their interests.

There is nothing wrong with taking a commission on a property you are buying and no, it is not a concession to the buyer. It is a cost of sale to the seller. The more normal way of doing it, and one that I have done several times in selling a house to myself, is to forgo the commission and reduce the sales price by the amount of the commission offered to a cooperating broker. It is sort of silly to pay a higher price for a house, then receive a commission and then pay taxes on that commission. But there may have been some circumstances we are not aware of.

In short, I would no consider it a concession.

 

[larryhaskell]

Bob:

Just for clarification, ABC Realty is the listing office. I understand that the buyers are getting a commission but that just didn't make sense. Not only will the commission be treated as income as Richard pointed out but the transfer tax is calculated on the sale price so it would seem you would want the lowest sale price possible. God I hate being cynical.

 

[Bob Ipock]

The difference in transfer tax would only be a few bucks. The resaon for this being done is very simple. Say the house is $100,000 and the buyers are borrowing 90%....that would mean a $10,000.00 down payment. If there commission of $2500.00 is CREDITED to them that means they only need $7,500.00 out of pocket for the down payment.

If they took a price reduction of $2,500.00 ($100,000.00 less $2,500.00= $97,500) they would need out of pocket cash of $9,750.00.

The price reduction would only save them $250.00 (out of pocket cash) while receiving the $2,500.00 as a CREDIT would result in needing only $7,500 out of pocket cash.

We have become a people that want to borrow ALL WE CAN and use as little of our "cash" as possible.

 

[Mike Garrett RAA]

The key is that they must disclose the fact they are licensed (at least in my state) in the contract. It occurs quite often here that the when a licensed real estate agent purchases a property the commission is deducted from the sales price rather than paid in cash to the agent/ buyer.

When I bought my home this year there was a direct reduction of the sales price by 4% of the base price of the home. The funny thing is that the appraiser appraised it for the sales price and in order to justify his value conclusion he used older sales and made no adjustment for time.

Can get even more complicated. When I act as an buyer's agent, I often gift back 1/2 of my commission to the buyer when a new home is involved. That money is usually applied to the down payment or closing costs. No it is not a concession, it is a gift.