Why off market sellers should build commissions into deals
As agents, we always run into issues of compensation when doing off-market transactions. Sellers believe they are getting the best deal when they get a certain price for their sale. Basically, they want $500k for the house. It is their expectation that the buyer will pay the commissions to their agent outside of the transaction. Many times this is the case, but when there is an agent involved, it doesn't work out as well for the seller as they think.
Understanding the Role of Buyer’s Agents
First off, when sellers are interacting with an agent who works on behalf of the buyer, they are in a better position to get the sale completed. Many sellers think that this is just an additional person in the transaction who is looking to get paid. That is not the case. Buyers' agents provide a service to both buyers and sellers in the off-market transaction.
Benefits for Buyers and Sellers
For the buyer, they help provide: - Education and guidance on price - Transactional experience which helps facilitate the sale For the seller, they provide: - An additional person in the transaction who has the incentive to have the deal completed When it is just buyer and seller, oftentimes, there is friction between the two parties as both are trying to get the best deal. When there is a third party to the transaction, they are able to act more objectively. Buyers' agents will eventually get paid for their services. They can help their buyer purchase something that is on the MLS and are guaranteed compensation. Or they can help their buyer purchase something not on the MLS and receive compensation from the seller or the buyer. Keep in mind that these buyers' agents don't work for free.
Traditional Transaction Example
Let's look at a traditional transaction taking place on the MLS. The asking price is $520k with a negotiated agent commission of 4% to be split equally between the buyer and seller agents. The buyer intends to finance 75% of the transaction.
In this case:
Buyer pays: $520k - Seller's agent gets: $10k - Buyer's agent gets: $10k - Seller gets: $500k - Buyer finances: $520k (75% LTV) with $130k down - Buyer cash outlay: $130k (not including closing costs) - Buyer finances: $380k = $1,814/month (@4%, this is $6/$1000 borrowed)
Off-Market Transaction Example
Let's now look at the same transaction sold off-market where the seller wants to represent themselves and not pay any commission to the buyer's agent.
In this case:
Buyer pays: $500k - Seller's agent gets: $10k (the agent charges the buyer the same 2% outside of the transaction) - Buyer finances: $500k (75% LTV) with $125k down - Buyer cash outlay: $135k ($125k down + $10k to the buyer's agent) - Buyer finances: $375k = $1,780/month (@4%, this is $6/$1000 borrowed)
Comparing the Two Scenarios
What is the same here?
The seller still gets: $500k - The buyer's agent still gets: $10k or 2%
What is the difference here?
The buyer has to take an additional: $5k out of their pocket - The buyer saves: $34/month on a 30-year loan (it will take them 147 months to get their $5k back) The seller may be the same, but the buyer is better off buying on the MLS and paying the higher price.
What Should the Seller Do?
The seller should agree to pay the buyer's agent's commission out of their proceeds.
Why?
It increases the amount of money the buyer is willing to pay for the property!
How It Should Be Done
Seller offers the house off-market for $520k with a 3% commission ($15k).
In this case:
Buyer pays: $520k - Buyer's agent gets: $15k - Seller gets: $505k - Buyer finances: $520k (75% LTV) with $130k down - Buyer cash outlay: $130k (not including closing costs) - Buyer finances: $380k = $1,814/month (@4%, this is $6/$1000 borrowed)
How Is This Different?
Seller gets: $5k more - Buyer's agent gets: $5k more and is truly incentivized to make the deal work - Buyer pays the same: $520k and is able to finance it in a traditional way
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