Until the Federal Trade Commission blasted the real estate industry for the subterfuge of sub-agency in 1983, the seller reigned supreme in the real estate transaction. And many brokers and agents would like to keep the seller on the pedestal, regardless of the effect on the buyer and his/her agent. But is that really a smart policy for the long run? Shouldn't the buyer and the seller be equally represented as principals?

     With the introduction of single agency, buyer's agency, and exclusive buyer's agency, it would seem that parity has arrived, but it hasn't. As long as sellers and listing agents control the sales commissions, buyers can't be truly represented, and it is just a matter of time before they find that out. The net result is that the real estate industry is paying lip service to buyer representation without giving buyers agents the contractual muscle to protect their own commissions as well as their clients' interests. Without an equal say in the distribution of commissions, they can't really equally represent the buyer in the transaction - there is always that little bit of compromise that must take place to get the deal done, and it is almost always in the seller's favor.

     What buyers and their agents don't realize is that they have the power to turn the tables. They just don't know it yet. There are those who believe that in spite of what any listing contract says, it is, in fact, the buyer who pays for both the listing agent's and their own buyer's agents commissions, regardless of whether the agents are single agents, transactional agents or dual agents. Those are just semantics, because it isn't about representation at all - it is about who controls the transaction.

     A groundswell of consumers and buyers agents are beginning to say that it isn't the seller at all who pays the commission. It is the buyer who not only pays but finances the commissions over the term of their loan!

     Think about it and it won't sound so farfetched. The seller and the agent agree to a sales price for the home, but have you ever heard of a sales price that didn't include the sales commission? For proof, look at the difference between appraisals and selling prices, and the selling prices are almost always higher. Seldom do appraisers include commissions paid in property evaluations. There isn't even a line for it on a typical report. Appraisers look only at the property comparables, including new homes, FSBOs and foreclosures.

     Second, the commission is supposed to come out of the seller's equity. Equity means ownership. That which is already paid for. Anything over and above that is profit, paid for by the buyer. If the commission is added into the sales price, how can the seller "own" the commission? - If a homeowner has to bring money to the closing, then it could be fairly said that the commission is paid out of equity, but if the seller is going to walk away with a check, then the seller has a profit - one recognized at least by no less an institution than the Federal Government. And that profit can only come from the buyer's side of the transaction.

     Third, the distribution of the commission typically takes place before the seller receives a check. That is one of the reasons the real estate lobby supports having closing agents - they want to make sure they get paid! But who pays the money? - the buyer's lender - after all liens, claims, and commissions are satisfied. Then the buyer spends the next 30 years paying the lender back. Therefore, it is the buyer who pays the commissions for both agents.

     The real estate paradigm could shift seismically if buyers ever realized the power they really have, and the sands are shifting already. What would happen if the buyer paid the real estate commissions instead of the seller? The whole real estate industry house of cards would come tumbling down, and in the rubble, a new business model would emerge, one in which the buyer holds the whip hand. What would the buyer feel about the listing agent getting the highest price and the best terms for their client then? It wouldn't be long before buyer's agents were reducing fees to listing agents.

     By not clarifying who pays for the commissions and how, the real estate industry is leaving itself open to more criticism. The belief that the seller pays for the commissions is steeped in tradition, not in economic reality. Even buyers don't believe it - otherwise, why do two out of five go to the closing table unrepresented? Why do most sellers consider selling their homes without an agent before hiring one, and when they do, why do they try to reduce the agent fees?

     How much simpler and much less contentious if everyone agreed that it is the transaction proceeds which pay both agents, let it be dispersed by the closing agent in a contract that is fairly worded for both sides and leave it at that? Or better yet, let the listing agent list the home for what fees they would like, and let the buyer's agent charge what fees they want and let both buyer and seller agree to pay the fees out of the transaction proceeds, pending lender approval, of course.

     As you can see, who pays the commissions isn't the point - it is about who controls the transaction. The only way buyers will ever get fair representation is to cooperate only with contracts that do not assign ownership to the commission funds.

-Written by Blanche Evans-