Vol 3:3 Follow the Money: The Invisible Social Contract in Real Estate
Who pays for what, Buyer or Seller, and how Realtors get paid only really makes sense in the bigger picture where buying and selling are inseparable pieces of the same shape, like Yin and Yang.
There is a tacit social agreement in place that has become largely invisible, creating unnecessary confusion, misunderstandings and sometimes even resentment. It goes like this:
Buyers are responsible for funding four things – their down payment, their due diligence costs (home inspections, well water tests, etc…) their mortgage default premium if their down payment is less than 20% and their closing costs, the greatest of which is the Manitoba Land Transfer Tax.
That’s a lot of cash to come up with (although the mortgage default insurance premium will be rolled into the mortgage). Having to pay a Realtor commission on top of that would be onerous, so, that becomes the province of the Seller, who, ideally, has access to a source of income in the equity of his or her home.
Sellers, for their part, are responsible for funding two things – the fees of both Realtors involved in the sale of their home and closing costs, which are typically far less than that of the Buyers.
To the buyer, it is going to feel like their Realtor’s service is free, emphasis on “feels like”. In fact, the Buyer is deferring that payment until the time when they become the Sellers of the property. To the Seller, on the other hand, if they have forgotten or weren’t aware of the “free” service the Seller before them paid on their behalf, paying the entirety of the commission when it is his turn to sell can feel like getting the short end of the stick.
In reality, what goes around, generally comes around – all buyers are eventually sellers and all sellers, buyers. (Renters, you have a place at the table here too - the rent you pay is directly connected to market value.) Embedded in every purchase price, is a real estate commission fee.
The Special Case of Private Sales
Sellers who want to sell their homes privately don’t sidestep the social contact, but enter into an amended version of it.
The motivation for selling privately is almost always to save the money that would have been spent on professional real estate fees. That’s fair. If you can do the work of the listing agent, go for it.* We live in the land of the free, after all. But buyers expect to share in those savings, and when a private Seller lists his or her home for the same price as a comparable property in their neighborhood that was sold using Realtors, they out roadblocks in the way of their success.
*A few years ago, legislation was passed that gave private Sellers access to the mighty MLS system. I say “mighty” and I mean it. I’ve worked in real estate in a time when you had to visit every single real estate brokerage to discover the full range of homes to choose from – and even then you couldn’t be sure you were seeing all that there was to see. It was a system that gave Realtors too much power and wasted the time and money of the Buyers and Sellers alike. Long live the mighty MLS as it is the great equalizer and liberator of the people - we should all revere and safeguard it.
As soon as private Sellers, most commonly clients of businesses like CommFree and now Purplebricks, gained access to the MLS, their properties started to attract the attention of represented Buyers who couldn’t tell the difference between private and represented listings. (This is by design. Only Realtors have access to the portion of the MLS which reveals who owns the properties and who is offering them for sale.) This, in turn, has put a lot of pressure on private Sellers to offer to pay for the Buyer’s agent. Which, for the most part, they have been doing.
There has been a movement to have Buyers pay the fees of their Realtor themselves, but it hasn’t ever really gotten off the ground. Buyers are pushed to come up with all of the cash that is required to buy a property as it is, and with home ownership becoming more and more difficult to attain, I don’t see this changing anytime soon.
So, the private Seller, motivated to save money - which as a frugal single parent coming from a Mennonite background I totally get, BT - pays CommFree hundreds of dollars for access to the MLS, saving money that the Buyer will expect to share in, and then ends up paying the fees of the Buyer’s Realtor as their prize because they are advertising largely to represented Buyers.
On top of that, they have to do the work of the listing Realtor too - some tasks more successfully than others, I observe. This is a whole other article for another time, but I will say this: it has occurred to me several times to wonder if businesses like CommFree have signed their own death warrant by offering MLS access to their so-called “private” clients.
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