The time has come for mortgage companies to rethink their prohibitions against home buyers being able to finance the buy-side of the real estate brokerage sales commission as part of the home-buying transaction.
Bans against such financing exist because the realty commission is not part of the asset value of the property and is not a contractual obligation of the buyer, and thus, in theory, shouldn’t be included in the buyer’s financing. However, the ban against buy-side commission financing distances buyers from their own brokers, creates conflicts of interest and perpetuates a split system that’s a detriment to real estate.
The seller’s payment of the brokerage commission, and particularly the buy-side portion of that amount, exists mainly on paper since it is the buyer, not the seller, who brings to the closing table the funds from which the commission is paid. The seller selects the listing broker, negotiates the commission and signs the listing contract, but the seller doesn’t write a separate check as payment to the listing brokerage company. Rather, the seller authorizes payment of the commission from the proceeds of the sale. Thus: no buyer, no purchase money; no purchase money, no commission check. The commission isn’t part of the asset value of the property, but it is part of the purchase price, so what’s the difference?
Buyers don’t write separate checks at the settlement table to pay for other closing costs they’ve agreed to incur as part of the transaction. That means those costs, which might include title insurance, escrow or attorney’s fees and the like, can be included in the buyer’s financing, so why would the brokerage commission be any different?
The seller, not the buyer, is obligated to pay the brokerage commission as a provision of the listing contract. Yet this seller-sidedness comes from outmoded sub-agency practices, in which the buy-side broker represented the seller’s broker, not the buyer. Those practices are now uncommon. More often, the buy-side agent represents the buyer, even though the buy-side commission comes through the settlement process. That’s ridiculously complicated and almost nonsensical.
The ban against buyer financing of the brokerage commission might seem harmless, but it perpetuates the split system, which creates certain bizarre problems of its own. The angst over so-called “discount” brokers and the supposed need for state minimum-service laws, to take one example, could be alleviated if the buyer and seller paid separate commissions to their own brokers. And, to take another example, the perverse incentive that induces some agents to steer buyers toward higher-split listings would be removed if the split system were restructured.
It would seem an error in the opposite extreme to permit buyers to finance the entire brokerage commission agreed to by the seller, but why couldn’t lenders allow the buyer to assume the obligation to pay the buy-side piece of the commission and finance that portion of the total? That would be a useful step toward a system in which buyers negotiated separate fees directly with their own representatives in the transaction.
The ability to detach part of the commission from the purchase price also would lower the new buyer’s annual ad valorem property taxes and thus reduce the cost of home ownership. That would be especially valuable in high-cost housing areas, where many new buyers are already stretched to their financial limits.
A loan program that would enable buyers to finance the buy-side portion of the commission could be an intriguing competitive advantage for the lender who introduced such a scheme. Buyers would be able to compensate their own broker for the services they needed, wanted and received. Buyer’s agents would be able to offer their services to a larger number of buyers. And buyers and buyer’s agents alike might be more inclined to recommend that buyer-friendly lender to other borrowers as well.
All that’s needed is some innovation in the mortgage sector to find a way to introduce buy-side commission financing.
Who will be the first to step up to this golden opportunity?
Marcie Geffner is a freelance reporter in Los Angeles.
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