Countdown To Chaos (episode 4): 🗞 Four Compelling Reasons Sellers Should Continue To Pay Buyer Agent Fees

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What’s On My Mind: Sellers Should Continue To Pay For Buyer Representation

14 Days & Counting

As of the date of publication of this article, we are 14 days away from sweeping changes to the real estate industry, courtesy of the recent commission class action lawsuits. Are you ready? Is the industry ready?

Two of the biggest changes are (1) sellers can no longer offer buyer agent compensation in the MLS; and (2) all buyers must sign representation agreements with their agents assuming responsibility for payment of services.

In today’s edition of my Countdown To Chaos series, I'm looking at four compelling reasons sellers should consider paying for the buyer's agent going forward into the New Normal. Historically this wasn't discussed, it was just done. It was widely known how much the buyer agent would be compensated because the number was published in the MLS.

I'm not going to comment on the propriety of past practices, but I will say that taking the offer of compensation out of the MLS is the dumbest idea ever and a huge step backward for transparency, but hey, what do I know as a longtime consumer fraud attorney and real estate broker? Cue the eye roll.

I've already heard from sellers directly, and heard plenty of stories from other agents, that sellers can't wait to reclaim the 2.5-3% previously reserved for the buyer's agent for their own pocket, but is that really the smartest play for sellers interested in getting top dollar and the best terms on the sale of their property? I am strongly in the NO camp.

Please note as you read this publication that my licensure, expertise and focus are California, but my observations can be used to ask specific questions to listing agents in any state.

Let's start with a few universal truths about selling a home to achieve the top price and best terms.

Universal Truths When Selling A Home With The Goal Of Top Dollar

Universal Truth #1: to achieve top dollar and the best terms on the sale of your property, you need as many buyers as possible competing to buy your property. One buyer at the table won't even offer you list price if he or she has a good agent. And they will know they are the only player when the counter offer doesn't come back on a Seller Multiple Counter Offer (SMCO) form. Two or a few buyers will compete, but likely not as vigorously as with many buyers.

I feel so strongly about this Universal Truth that I previously developed a proprietary formula I use with my seller clients to ensure that we have the maximum number of competing buyers at the table. Ask me about it if you are thinking about selling your residential property.

Universal Truth #2: listings that linger on the market are frequently stigmatized, with buyers and their agents wondering why the property is still on the market if it's so great. The same questions come up when the MLS shows a property has fallen out of escrow. Assumptions are generally made that there is a problem with the property, not the buyer.

Universal Truth #3: Buyers have four options when it comes to buyer agent representation. The buyer can (1) bring a highly paid top notch agent who will make sure the transaction runs and closes smoothly; (2) bring a low-budget, mediocre (or worse) agent who will either cause problems or do nothing; (3) come without an agent and slow things down because nobody is available to explain things and answer questions; or (4) use the listing agent or somebody on that agent’s team to represent their buying interests.

Universal Truth #4: buyers are generally cash strapped when it comes to buying a home. They want to maximize down payments, insurance for new insureds is astronomical right now, loan costs and closing costs are a big chunk of change and paying out of pocket for inspectors is often a surprise expense. Adding the cost of a good agent to their expenses is going to be more than many can bear. Cross-refer to Universal Truth #1.

So given the context of the Universal Truths, let's look at each of the reasons I think a seller would be making a mistake by not paying for the buyer's agent.

4 Compelling Reasons Sellers Should Pay For Buyer Representation

Reason #1: Maximum Exposure For Your Property Brings Top Dollar

Most people think that a listing in the MLS and sign in the yard is all it takes to sell a house. While those two strategies bring exposure, your goal as a seller (via your listing agent) is to bring as many people as possible to see your property, fall in love with it and fight other buyers to own it. Refer to Universal Truth #1.

In recent years, with a lack of listings, one of my primary tasks when working with buyers has been to encourage them to broaden their search area beyond that one neighborhood they were sure they had to have. Seeing in the MLS that you are willing to pay or entertain concessions to cover my buyer's agent fees will make your property more attractive, and my buyer client might be more inclined to take a look and hopefully fall in love.

You want to incentivize an army of agents to introduce your property to their buyers. The MLS alone only works if buyers are searching your specific neighborhood on all the platforms that publish MLS data. It takes smart, experienced agents to open up buyer eyes to alternatives like your property.

Reason #2: You Want Escrow To Run Smoothly & Close

Escrow (or Settlement if you're in a state where attorneys close real estate transactions) can be the trickiest part of a real estate transaction. Often an aggressive schedule is spelled out in the contract because sellers want the deal buttoned up sooner rather than later. Inspections have to be scheduled and the resulting reports have to be reviewed. Remediation costs may need to be investigated. Issues may come up with title. Insurance has to be obtained. A raft of paperwork needs to be signed.

As you might imagine, there are what feel like a hundred different ways for escrow to fall apart.

Escrow problems can lead to heartburn, delay and/or a deal unraveling. An experienced buyer agent on the other side will manage the escrow obstacles, and manage his/her client and their expectations.

Your odds of a smooth escrow are infinitely enhanced with a good buyer agent and if you're paying or conceding top dollar, the buyer can afford a good, experienced agent.

If your escrow crashes and burns, you're faced with going back on the market, and instead of being 7-14 days on the market ("fresh"), you'll be adding the number of days you were in escrow to your number. 😱 Refer to Universal Truth #2.

Reason #3: Knock, Knock You're Served!

If you google "buyer's remorse," the definition literally cites car purchases and home purchases. If you won't pay for the buyer's agent, the buyer might be tempted to do without an agent. A lay person will simply not be able to manage escrow on their own and you'll be stuck with your stale listing going back on the market. And that's the best case scenario.

Let's say the unrepresented buyer (or under-represented buyer if the buyer had to go low budget on a substandard agent) manages to close escrow on their own, what happens when they are not happy with the property after the deal closes? A lawsuit-happy buyer will be a disaster for you, as a seller.

If there is a good agent on the buy side because you paid for it, you have somebody to talk the buyer off the lawsuit ledge. Failing that, that agent is going to be insured and that helps put you a little further from the hot seat.

Reason #4: Sellers Are Usually In A Better Position To Absorb Extra Costs

This reason is more compelling if you stand to make a big gain on your sale, but if you do, you are also likely looking at big taxes on that gain. Paying the buyer agent is a cost to you that can be offset against your gain.

Given the other reasons it serves you to have solid representation for the buyer, and the fact that paying for that representation is a deductible cost for you, why wouldn’t you pay that commission? 🤔

How To Pay For The Buyer Agent In The New Normal

So, assuming I've convinced you it's in your best interest to have a qualified agent representing your buyer and you are willing to pay for that agent, how do you make it happen?

In the Old Normal, you as a seller would have signed a listing agreement agreeing to pay typically 5-6% in commissions. Then the listing agent would have decided how much to offer the buyer agent, and posted the amount in the MLS with the rest of the property details.

This commission field is being disabled in all MLSs, effective 8/17 (at the latest). This is due to one class action case in one small midwestern state imposing stupid rules on agents and MLSs nationwide.

How to advertise a commission for buyer agents by sellers has been a hotly debated topic in the real estate industry since the class action case was settled in March. Some very large players in the industry believe it is still ok to advertise the commissions anywhere except the MLS. Others argue that would fly in the face of the spirit of the settlement.

There is another way. The alternate strategy is to simply be ready as the seller to entertain a concession request in offers to cover the buyer agent commission. The advantage to this strategy is that buyers simply make their best offer, with or without a concession request, and you line up all the offers with your agent and evaluate the bottom line number. This is the most straight forward approach.

Either route (advertising a commission someplace or entertaining concession requests) gets a seller to the same point, but I contend the second strategy is the most efficient.

Do Not Let Your Listing Agent Engage In Dual Agency

As a former consumer fraud attorney, dual agency makes me crazy! Dual agency is where one agent represents both the buyer and the seller. "There is simply no universe where two competing parties (the buyer and the seller) can both maximize their outcome via one representative, no matter how noble the representative", as I previously wrote in Part 3 of this series.

Even another agent on the listing agent's team is a risk if that person is junior to the listing agent and beholden to the listing agent for his or her livelihood. There just isn't enough protection to both the buyer and the seller in this scenario.

Technically, dual agency also applies to any agents under the same broker, whether or not they are on the same team, and where the broker has any influence over one or both of the agents, I would steer clear. The cleanest agency comes from separate brokers who can separately and zealously represent their respective clients.

To put it simply, you don't want your listing agent sharing your secrets with the buyer, and the buyer shouldn't want their secrets shared with you.

This is going to be on you as the seller to insist on. I'm already hearing plenty of agents and agent coaches saying the New Normal will be the golden era of dual agency. Do not play along. The odds of one side or the other getting less than zealous representation are too high. If there is litigation, dual agency is a risk card that will be played. Don't be the party that allowed it. Write a prohibition into your listing agreement.

Final Thoughts

I’ve provided not just one, but four good reasons that sellers should want to pay for good representation on the other side. Did I convince you? Let me know in the comments. I’m genuinely interested in hearing from consumers how they are reading the situation with the new rules.

So mark your calendars! The New Normal is upon us, effective August 17th. My own MLS is removing the commission field sooner. 

Next week I’ll be sharing my thoughts about what consumers can expect from buyer agents in the New Normal with the formal agreement requirements.

Disclaimer - you are not my client unless we have a written agreement in place. This article is offered for informational and/or entertainment purposes only. Neither I nor Silicon Beach Properties nor eXp Realty, Inc. is responsible for the consequences of how you implement the content of this publication and nothing herein is intended to address your specific situation. Additionally, the New Normal is very much in flux and the information contained herein may be outdated (legally and/or factually) by the time you consume this content, so consult a professional licensed in your jurisdiction for advice.

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