A Coming Clash of Discounts
In time, the buyer's brokers might have to accept the discounts all too common on the list side today. This would be a big change. Leaving little or nothing to rebate to the buyer.
~~~
So we have talked about discount brokers on both the list side and the buy side. And how the buy side discount works is with a buyer rebate.
For now, this rebate is somewhat guaranteed because sellers are reliably continuing to offer that typical three percent to the buyer’s broker. The money technically moves from the seller to the listing broker to the buyer's broker to the buyer. But arguably this is tantamount to an involuntary money transfer from the seller to the buyer as an inducement to buy the house. Stop and think about that for just a moment.
But what if the seller says: Hey wait a minute, we just negotiated a five percent lower Purchase Price, why should I give the buyer another 1.5%, in cash, on top of that?
Good question!
Well surely once a buyer’s broker has been paid, he has every right to do whatever he wants with his money, including giving some of it to his client, the buyer. Right? Of course.
But what if the seller says I'll pay the buyer's broker some reasonable fee, perhaps exactly what I am paying my own listing broker. But I will not pay him so much that he has enough money to give part of it away to the buyer.
What would that look like?
Well, I don't think much would change on the listing side. There, the fees already vary from $500 to three percent or more, depending on who you hire and what they do.
But now let's look at the buy side, with a very typical five percent total listing as an example. The listing broker keeps two and pays out three to the buyer's broker. But the seller says: No, I'll pay both sides two percent and no more. Well, the buyer's broker then has a dilemma. The buyer is expecting a 1.5% credit at closing (or whatever the discount deal), leaving the buyer's broker 0.5% for his time and effort.
So instead, maybe the buyer's broker will again offer the buyer half. One percent to the broker and one percent credit to the buyer. That might work for a $500,000 house. But what about a $150,000 townhouse? I don’t know.
And what if the seller says, I'll pay three percent total…the two brokers can split it. Well again, it might work for a $500,000 house.
Think this is unrealistic? Some time ago, a broker in our firm listed a house for three percent total. She paid out 2.4% (typical in our market) to the buyer's broker and kept 0.6% for herself. Certainly not fair; but her fear was that other brokers might not show the house if she paid out any less. And the price point of the property was high enough that she was okay, if not thrilled, with the 0.6%.
But as we have discussed, in this mature internet age, I think this fear is misplaced. Brokers can no longer hide properties from their buyers. So today, I would strongly encourage our listing broker to split the three percent in half. If that is not enough for the buyer's broker to show the house, let him explain that to his buyers. If there is not enough money for the broker to offer a rebate to his buyer and still make a living…well this is a matter to be worked out between the broker and his buyer.
My take: This process should not be a money transfer in disguise. Since the seller is paying the commissions on both sides, the seller should reasonably benefit from the discount on both sides. As far as I am concerned, this should have always been the case. It has only been the lingering fear that buyer’s brokers would not show the property that has allowed the whole buyer rebate form of discount to exist in the first place.
Just think about that. Sellers are paying buyer’s brokers so much above and beyond what is actually required, that the brokers have enough to pay (rebate to) the buyer.
So in time, the buyer's brokers might have to accept the discounts all too common on the list side today. This would be a big change. Leaving little or nothing to rebate to the buyer.
And if the buyer's broker is not willing to accept these discounts, then he will have to ask the buyers themselves to pay part of his fee. So not only could the buyer rebates disappear, but the buyers may well have to start paying their own broker.
Time will tell. I am really not sure what the future holds, but it will be interesting to watch. But again, it seems to me that what the business needs more than anything is more rational pricing and more competitive pricing.