How homes are sold in the United States is designed to ultimately benefit sellers. The system is designed to:
1. maximize the seller’s profits, often tax-free through capital gains deductions.
2. Provide a professional buffer to reduce conflicts and liabilities, which can be very costly for sellers.
As you probably know, home sellers have brought litigation concerning our current system. They argue that sellers are being essentially forced to pay both sides of the commission.
Who pays real estate agent fees? All costs are included in the home's purchase price, meaning the buyer ultimately pays these costs.
An easy way to understand who pays what in a real estate transaction is to realize that the seller brings the property to the table, and the buyer brings the money to the table. The final purchase price, written at the top of the purchase contract, is the amount the buyer pays through their down payment and loan, from which all fees and costs are subtracted.
Present Value:
To illustrate how important it is for the buyer to be able to finance the commission, let’s consider a $25,000 commission. This fee, paid by the buyer, spread over a 30-year mortgage at today’s interest rate, has a Present Value of just $3,300. This explains why buyers often don’t worry about their agent’s commission—it’s a relatively small amount when spread over time, and they get the benefit of a professional ferrying them through a complicated process.
PV = \frac{25,000}{(1 + 0.07)^{30}}
Now, let’s calculate it:
PV = \frac{25,000}{(1.07)^{30}}
PV = \frac{25,000}{7.612255}
PV \approx 3,282.72
So, the present value of $25,000 spread over 30 years at a 7% discount rate is approximately $3,282.72.
Given that the system is designed to benefit sellers in so many ways and that by offering to pay the buyer’s agent’s commission, the seller is allowing the buyer to finance this cost, it makes sense that the seller would be happy to pay the commissions ostensibly. I know this personably to be true because I have sold several of my own properties over the years, and I’ve helped hundreds of people sell their properties over more than 20 years, I would be more than capable of representing a buyer for my own deals. But I have never done it, I have always paid a buyer’s agent’s commission on my own deals, and I’ve done it happily.
When you are thinking about the discussion around real estate agent commissions, I would conclude with this:
1. The seller is the true beneficiary of the home selling system we have in the US, financially in any case.
2. When the seller agrees to pay the buyer agent’s commission, they are simply facilitating a method for the buyer to finance these costs. This makes the process more profitable and less stressful, reduces risks for themselves, and keeps costs somewhat manageable for buyers.
And remember, buyers today are sellers tomorrow.
I'd love your feedback. If you have a real estate question, please let me know!
Oliver Burgelman Real Estate
Broker Associate
Vanguard Proiperties
DRE# 01388135
415.244.5846 | [email protected]
