Why Does a Seller Pay The Buyer Broker Anyway?
Last time, I wrote about ongoing real estate commission lawsuits. These lawsuits generally focus on the common practice of the seller directly or indirectly paying the buyer’s agent. On its face, it’s a weird system and almost counterintuitive: why would a home seller pay the home buyer’s agent? Why shouldn’t the buyer pay his or her own agent?
Many years ago, this practice started out of a desire for sellers to get the most money for their house.
In the early days of selling homes, there were brokers who helped facilitate home sales but they generally only worked with the people they knew and had a limited ability to attract all possible buyers. But if the broker and their seller client could incentivize other brokers to bring other people they know to come look at the house, the pool of buyers is bigger and the seller can likely get more money for the home than they otherwise could.
The seller incentivizes other brokers to bring a larger pool of buyers by paying them, or by allowing their broker to split their own commission with them.
While we are far removed from that world in many ways, this basic incentive is at the heart of why this practice continues: sellers want to incentivize buyer’s agents to help sell their home for the most money possible and as quickly as possible.
How This (Should) Work Today
Incentivizing a buyer’s agent to show and sell your home still serves several important purposes for the seller:
Casting A Wider Buyer Net: The internet is a game changer here, but it’s a two edged sword. While it allows all buyers to see your house, it also allows everyone to see everyone else’s house too. And in active markets, new homes come online all the time. This can be overwhelming and even many of my younger, internet-savvy buyer clients in recent years rely on me to pre-filter homes based on the information I can find out from the listing and from the seller’s agent. Otherwise, they’ll never get out the door and go see it.
Motivation & Facilitation: Relatedly, not all buyers use the internet in a way that will lead them to a seller’s home independent of an agent. They don’t use the search functions adequately or they don’t have the time to look on their own. Some will simply talk about buying a house but never do so. I need only think of the first house I bought. My wife and I had discussed buying for several years but took no action. Then we met a real estate agent at church and I told him I wanted to buy a house. Two weeks later, we were under contract. I can think of many such examples from homes I’ve sold since. A buyer is much more likely to buy if they know a buyer’s agent.
Helping To Close the Deal: It’s very easy for a buyer to walk away from a contract with their earnest money intact and nothing lost. In probably 20% of deals I’ve closed, the buyer was ready to walk away from it all and it took a good buyer’s agent (sometimes me) to mediate and keep them at the table. While the buyer walks away having lost nothing, a seller on the other hand still has the house and has lost time. Sellers want to sell, they want to move on. In general, they should want the buyer, especially inexperienced, unreasonable ones, to have a professional nearby who has done this dozens of even hundreds of times. More often than not, it helps make the sale process go much more smoothly.
Accountability & Protection: Buyer brokers let people into your home when you aren’t there. It’s a strong expression of trust on the seller’s part1. In Washington State, that trust is based on all licensed brokers submitting to extensive background and fingerprinting checks; making them a bit of a safe quantity. If the seller works with licensed buyer brokers, Washington State has easy ways to protect the seller and can hold that buyer broker accountable should they breach that trust. It’s the thought process behind licensing any profession: protecting consumers from bad actors.
These are among the reasons why sellers should think about incentivizing buyer brokers to bring their own buyers. Is it guaranteed to make every seller more money in every transaction? No, I don’t think so. But overall, it’s a service to the seller that is worth something. It’s worth incentivizing.
Fortunately, Washington State is at the cutting edge in terms of allowing sellers to determine just how much it’s worth to them and how much they want to incentivize buyer brokers. It will depend on market conditions. It will depend on the seller’s individual home. It will depend on their needs and timeline.
For example, in an extreme seller’s market, in a hot neighborhood where a home is almost guaranteed to sell quickly, at a price the seller likes, it probably doesn’t make much sense to offer the buyer broker a big commission. The buyer broker is not providing as much value to the seller.
On the other hand, in a buyer’s market, with a unique home, in a neighborhood where houses are sitting, it may make more sense to offer a higher commission to a broker who can in turn provide value to the seller and help get the house sold!
Still, can buyers pay their own brokers? Should they? And what would that look like? Would sellers be better off? I’ll address that next time.
Still, the buyer broker isn’t often known to the seller. I’ve been asked by some of my sellers to accompany buyer brokers on all visits. Something I’ve been happy to do and is entirely reasonable.
Michael Perrone is a licensed real estate broker in Washington State and is the owner of The Perrone Real Estate Group. You can reach his office at 425-224-6040 or by subscribing and responding to these newsletters.