For years, our industry has fervently debated who really pays the commission — the buyer or the seller. This debate turned up at the final session of Inman Disconnect, where one attendee argued that it’s the buyers who actually pay the commission because it’s embedded in the purchase price. Here’s why this argument is wrong.
With more than 1,000 Inman posts, Bernice Ross is a long-time contributor whose weekly column on real estate trends, luxury, marketing and other best practices publishes every Monday.
For years, our industry has fervently debated over who really pays the commission — the buyer or the seller? The so-called “bombshell” Moehrl lawsuit is a frontal assault on how commissions are shared on the multiple listing service (MLS) that forces the industry to face this question head on.
This debate over who pays the commission turned up at the final session of Inman Disconnect, where one attendee made the impassioned argument that it is the buyers who actually pay the commission because it’s embedded in the purchase price.
This argument is wrong for a variety of reasons.
What the tax laws say
For all intents and purposes, the tax laws have codified that the sellers, not the buyers, are the ones who pay the commission. The closing statement clearly states how much commission the seller paid. This amount is deductible on the seller’s tax returns, not only at the federal level but in many states as well.
The one exception to this rule occurs when the buyers sign an exclusive buyer’s agent contract that provides that their agent will be paid a certain commission amount. Nevertheless, even when a buyer’s exclusive contract is in place, many times the buyer’s agent only charges the buyer when there is a shortfall (e.g., the buyers agreed to pay their agent 3 percent and the MLS amount to the buyer’s agent was 2.5 percent.)
To be able to deduct a commission on your tax returns requires that you can identify a specific amount you paid and that you can document that amount. Without an exclusive buyer’s agent contract in place, how exactly would you quantify the amount?
If the buyers are indeed responsible for the commission, exactly when is that commission paid? It can’t be when the deal closes, because the buyers haven’t made any payments yet.
One could argue that the commission could come out of the buyer’s down payment, but that could negatively impact the buyer. For example, assuming the buyer put 20 percent down, if they paid part of the commission out of that amount, it would reduce the amount of their down payment. The result would be that they’re stuck paying private mortgage insurance (PMI), which is an expensive proposition that buyers typically try to avoid.
A different approach would be to pro-rate the buyer’s “commission,” but how would the prorations work?
Assuming a 30-year fixed-rate mortgage for $250,000, the pro-rated amount would be $7,500 or $20.83 per month. If the amount were added to the loan and pro-rated over the life of a 30-year loan at 4.0 percent fixed, that amount would be $35.81 per month — but how would that be accounted for on the person’s tax returns?
Furthermore, how would buyer rebates and agent contributions to the cost of sale be documented, and what changes would have to be made to the TILA-RESPA Integrated Disclosure (TRID) requirements to handle these changes?
It’s easy to see how this process is fraught with problems. The primary issue is that no one can accurately state exactly how the buyer “pays” commission, because there is no agreed upon procedure for calculating the amount. Even if there were a procedure, documentation in terms of the loan, the closing process and the reporting for tax purposes would be a nightmare.
A landmine waiting to blow
In a recent article, I outlined serious issues that exist within the Moehrl complaint. There’s a landmine in front of the plaintiffs, and the U.S. Department of Veterans Affairs (VA) is the entity that put it there.
The VA clearly states that a VA borrower cannot pay a real estate agent fee or a broker fee in connection with a VA mortgage. The VA’s lender handbook sets for the guidelines for both broker and agent fees in Chapter 8, Section 3.
Fees or commissions charged by a real estate agent or broker in connection with a VA loan may not be charged to or paid by the veteran-purchaser.
Veterans, of course, can use a broker’s or agent’s services, but the rule again emphasizes that the veteran cannot pay a commission to any agent or broker.
While use of “buyer” brokers is not precluded, veteran-purchasers may not, under any circumstances, be charged a brokerage fee or commission in connection with the services of such individuals. Since information on property available for purchase and financing options is widely available to the public from a variety of sources, VA does not believe that preventing the veteran from paying buyer-broker fees will harm the veteran.
Even if the plaintiff were to prevail, there are a number of problems for the decision in Moehrl that could block its implementation:
- How would buyer’s brokers be compensated for representing VA buyers if they are prohibited from collecting a commission?
- Veterans are a protected class. Any scheme that attempted to change the current situation would run afoul not only of the protected class laws, but probably the Fair Housing laws as well.
- The biggest challenge to the plaintiffs in Moehrl is contained in the following statement found on the VA website: “Since information on property available for purchase and financing options is widely available to the public from a variety of sources, the VA does not believe that preventing the veteran from paying buyer-broker fees will harm the veteran.”
If the Moehrl litigation were to succeed, the commission sharing on the MLS would most likely end. The result would be what we see in other places throughout the world where there are no Exclusive Right to Sell Agreements and no MLS — we would be reduced to going from brokerage to brokerage trying to see the properties available in our price range rather than being able to view them with a single buyer’s agent or view them online through portals such as realtor.com, Trulia and Zillow.
The bottom line is that buyers determine how much they will pay for a property based on the market conditions, regardless of whether it’s listed with a commission on the MLS or without a commission as a For sale by owner (FSBO).
Ultimately, it’s the sellers who pay the commission, both in terms of the final closing statement and certainly in terms of the tax code.
Bernice Ross, President and CEO of BrokerageUP (brokerageup.com) and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.