Sales Concessions

[TJSum]

This article was in Saturdays Washington Post, it looks like appraisers are not the only ones who debate about sales concessions and how they are to be dealt with. The bold type in the question was my highlight...


http://www.washingtonpost.com/wp-dyn/content/article/2007/12/14/AR2007121401063.html

Between Concessions and Commissions, a Murky Kind of Math

By Benny L. Kass
Saturday, December 15, 2007; Page F08

Q: We engaged a real estate broker to sell our house. The listing agreement obligated us to pay a 5 percent commission based on the sales price. The broker found a buyer, but to get him to sign the contract, we agreed to give a 3 percent "seller concession."
As we understand the situation, to allow the buyer to get a larger loan, the deed will be recorded at the $500,000 price, and the $15,000 concession will be shown as a seller credit. Our broker has advised us that his commission will be based on the full $500,000, even though we will not be receiving that amount. Is he correct?


A: Many homeowners are discovering that if they want to sell their houses, they have to provide some sort of monetary concession to their buyers.

In your case, you were prepared to reduce the net cost of the house by giving the buyer a credit for $15,000, or 3 percent. This is a common marketing tool, used long before the subprime mortgage meltdown.

Most buyers would use this credit to cover some of the costs involved in closing, such as fees and taxes. The effect is that the buyer is able to finance these charges through the mortgage rather than pay them in cash.

Lenders generally will allow such concessions as long as they do not exceed a certain percentage of the overall purchase price. Usually, the ceiling is 5 to 6 percent, but that varies depending on the details of the loan.

If, before you signed the sales contract with the buyer, the real estate agent gave you a sample settlement statement showing that the commission you would have to pay would be based on the full $500,000, that would be acceptable. Disclosure solves most disputes, and in my experience, many real estate professionals do provide such advance information to their clients.

However, if there was no discussion before you were legally obligated to sell your house, I believe that you should pay the broker based only on the reduced price -- after all, the $500,000 price is a sort of legal fiction to satisfy mortgage rules. If instead you had agreed to directly pay some of the buyer's expenses and reduce the recorded selling price by that same amount, no one would expect you to pay the higher commission.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.

 

[Marcia Langley]

TJ,

That is an interesting article.

As a consumer of real estate agent's services, I have never resented their commission and wouldn't quibble over the part attributed to concessions.

I agree with the ones who said it should be spelled out in the agent/seller agreement. Up front disclosure is good.

I suppose people could shop for an agent who would contract with them for the reduced commission but I imagine it will be fairly consistent among various agents in any given market.

 

[PropertyEconomics]

In my market, when those concessions happen, the sales comission is almost ALWAYS paid on the lower amount and its set out in the same addenda that the concessions are agreed to.
Perhaps agents here are a bit more honest than they are there. You have a decision to make.

 

[Richard Carlsen]

Commissions are based on the listing agreement between the Broker and the Seller. Typically, it is essentially a unilateral agreement that is performance based (For the Brokers best efforts to bring an acceptable PA, the Seller agrees to pay a commission of X%, etc.).

The Selling Price is part of a totally different agreement (contract) between the Buyer and the Seller within which the purchase price is one of the items agreed upon. The two contracts (listing agreement and purchase agreement) are between two different parties for two entirely different purposes. The Buyer is not a signatory to the listing and the Broker is not a party to the purchase agreement.

The Commission in the listing agreement and the purchase price (including any seller concessions) are not connected. That said, if the Seller is adding dollars to the contract to pay for buyers closing costs/pre-paids etc. there might be an agreement between the Seller and the Broker that the commission is to be paid on the net sales price and not on the gross sales price. This happens all of the time but has nothing to do with the sales price.

 

[Jim Hill]

AVM Question

How would a lender using a AVM having handle concessions in any transaction?

Jim Hill

 

[Mike Garrett RAA]

The commission should be based on the sales price of the purchase agreement. What a slippery slope doing other wise would be.

Some appraisers have stated the value of the property should be based on the NET to the seller. What a night mare that would be.

The sales price is the sales price and is the basis for everything in the transaction. If we have two identical properties and they both sold for exactly the same amount, say, $250,000 but in one case the seller used an agent and the property sold with financing and in the other case the owner sold it for cash without the aid of an agent.

Does that mean one is worth $250,000 but the other is worth $220,000 because there was no agent and no loan? This is the fallacy of cash equivalency in today's real estate market. It does not represent the market. How many cash transactions do you see in your market?

 

[TJSum]

I am sure most sellers would want to pay the commission to their agent based on the net proceeds, but how many sellers would know to do this when signing the listing agreement? It would be up to the agent to explain this up front, and how many would do that, only the truly honest ones.

There have been lengthy debates on the forum how to treat sales concessions. I agree that the seller always does look at his "net" and that the concessions always does effect the selling price. But on the other hand, in some first time home buying markets, these seller paid concessions are very routine, typical and EXPECTED. So I can see both sides of the argument. But when both are true, I feel we have to take the expectations of the each market into account and adjust accordingly. If it was as black and white as the dollar per dollar adjusters state, in all circumstances, how come the guidelines are not clearly written that way?

IMHO I think the "lawmakers" who wrote this policy, put the gray area in there to promote homeownership for the first time home buyers, who typically need closing help. If this closing help option was taken away from this market, the main buyers would be investors who would not need any closing help, and they would turn the properties into rentals. In the big picture, they wish to promote homeownership so they allow this gray area into the guidelines.

 

[Elliott]

Mike said, The commission should be based on the sales price of the purchase agreement. What a slippery slope doing other wise would be.

My experience has been that, typically(90%), the commission is based
on the sales price. In todays market, the buyers first offer comes with
the demand that 3% of the buyers closing costs be paid by the seller.

Its much more rare that the seller has picked up on the 'inflated'
commission and then you see the addendum where the seller says,
the commission shall be $x,zzz. Usually this happens when there
has been real negoiations and there are multiple counter and counter
counter offers.

'Cash' purchases? 15 to 20%. Its becoming more common.

I read about a recent auction where a builder tried to sell
150 homes, sold about half of them, typically they'd been
appraised or listed at $600,000 and sold at auction for $400,000.
The builder exercised his reserve price on the other half.
I assume his lender was standing next to him and occassionally
whispered in his ear.

 

[Mike Boyd]

Up to the point where the seller signs his agreement to the purchase contract, commissions are negotiable. If it is listed for $500,000 and a contract is written for $500,000, the agent is owed the full commission.

However, if the terms of the purchase contract are asking for a seller concession, the owner has a right to refuse the offer. Or, he can negotiate with the agent the amount of the commission and effectively reduce the amount to be paid. Both the agent and the owner have to make a decision.

Once the owner signs the offer to purchase, accepting the offer, it's a done deal.

 

[Richard Carlsen]

How many cash transactions do you see in your market?

Actually Mike, on a waterfront house that I am doing as we speak, there are two CTNM, 1 L/C and 2 Cash. Some buyers are swinging some good deals. Cash talks and BS walks, as they say.

One thing everyone fails to remember is this:

House 1 was listed with broker at 6% commission and sold for $200,000.

House 2 was listed with broker at 3% commission and sold for $200,000.

House 3 was a FSBO and sold for $200,000.


Question: What did the buyers of House 1, 2 and 3 pay for their houses?

That's right: All of the buyers paid exactly the same price ($200,000) for their house. The commission paid by the seller or the lack of a commission had no effect on the price each of the buyers ended up paying.

However, if some uninformed appraisers wish to continue to press for using the sellers net as the sales price, then it can just as well be argued that the buyers costs to acquire the property (points, pre-paids, ordinary closing costs) must be added into the selling price since without paying these costs, the buyer could not have acquired the house without paying all cash; and then there would be some closing costs.

The bottom line is that the definition of Market Value only considers one transaction and that is the one between the buyer and the seller as contained in the PA. The sellers costs of sale, tax consequences, etc are not germane just as the buyers financing charges are not part of the transaction.

So please, please forget commissions and just stick to what the definition of Market Value requires us to consider.

Why make life hard? m2: