THE COMMISSION CONVERSATION

Who pays commissions in a real estate transaction?

The media and many in the real estate industry commonly present the idea that the seller pays the commission in a transaction, but this is a misconception. While it's true that the funds for the commission ultimately come from the proceeds of the sale, it's important to understand that these proceeds originate from the buyer's payment for home (the purchase price). Therefore, it's more accurate to say that the buyer indirectly covers the commission costs through the purchase price of the property.

In a typical real estate transaction, the commission is negotiated between the seller and their listing agent. At the close of the sale, the commission is deducted from the seller's proceeds by the closing company. However, these proceeds represent the funds paid by the buyer to purchase the property. The closing company then distributes the commission to the listing agent and the buyer's agent, if applicable.

While sellers may feel the financial impact of the commission indirectly through the final sale price, they do not make a separate payment to the agents. Instead, the commission is a portion of the total proceeds paid by the buyer to purchase the home.

This distinction is crucial because it highlights the fact that the buyer's payment encompasses not only the property's value but also the associated costs such as the commission. Understanding this concept provides a clearer picture of how real estate transactions are structured and financed.

Why is a real estate transaction structured this way?

The structure of a real estate transaction, where the commission is ultimately covered by the buyer through the purchase price, serves several important purposes:

1. Financial Flexibility for Buyers: Real estate transactions involve various costs, including closing costs, taxes, and fees. By incorporating some of these costs, such as the commission, into the purchase price, buyers have the flexibility to finance these expenses over time through their mortgage. This can make homeownership more accessible to a broader range of buyers who might not have the immediate funds to cover all transaction costs upfront.

2. Minimizing Upfront Expenses: Buying a home already requires a significant upfront investment in the form of a down payment and closing costs. By including the commission in the purchase price, buyers can reduce the burden of additional upfront expenses. This can make purchasing a home more feasible for buyers who have saved for a down payment but may not have substantial savings beyond that.

3. Working Within Lending Guidelines: Lenders typically disallow buyers from including commission costs in their loan amounts. This restriction poses a challenge for buyers who may not have extra cash readily available. Moreover, certain loan programs, such as VA loans, prohibit buyers from directly covering real estate commissions, regardless of their willingness to do so. This further complicates the financial dynamics of the real estate transaction, particularly for buyers relying on specific loan types.

4. Simplifying the Transaction Process: Having the commission integrated into the purchase price streamlines the transaction process. Instead of buyers needing to arrange separate payments for various fees and costs, everything is consolidated into the purchase price and financed through the mortgage. This simplification can make the transaction smoother and more manageable for all parties involved.

5. Alignment of Interests: Structuring the transaction in this way aligns the interests of both buyers and sellers. Sellers can still negotiate the commission with their listing agent, knowing that it will ultimately be covered by the buyer. This ensures that both parties have a vested interest in reaching an agreement that is mutually beneficial.

Overall, this structure facilitates real estate transactions by providing buyers with greater financial flexibility, reducing upfront expenses, simplifying the process, and aligning the interests of both buyers and sellers.

How does the real estate industry work locally?

Long before any court rulings or lawsuit settlements the local real estate industry was working to make changes in how the real estate transaction works. As described by the Northwest Multiple Listing (NWMLS) leadership; “Beginning in 2019, and continuing in 2022, NWMLS made changes to its rules, forms, and processes that address the issues raised by the national litigation and outlined in the proposed settlement agreement. NWMLS’s changes enhanced transparency, consumer choice, and negotiation opportunities related to broker compensation.

NWMLS’s most recent efforts, in cooperation with Washington Realtors, culminated in revisions to the Washington state ‘Agency Law’ that were effective January 1, 2024. As a result, Washington law already requires brokers to enter into a services agreement to represent a buyer, which is one of the primary ‘practice changes' in the proposed settlement agreement.

While NWMLS’s system of rules and forms, together with the revised Agency Law, provide both buyers and sellers with complete transparency, choice, and control of broker compensation, NWMLS and its members will continue to take advantage of every opportunity to enhance the quality of real estate brokerage services in the Northwest.”

NWMLS, which serves the vast majority of Washington state including the greater Puget Sound region, is owned by its member real estate firms and not affiliated with the National Association of Realtors. Unlike other MLSs, NWMLS’s system provides buyers and sellers with choice, negotiation opportunities and transparency of broker compensation.

Who is Lake & Company?

Founded in 1982 to meet the real estate needs of our Puget Sound neighbors. Lake & Company stands as Seattle’s most productive locally owned independent real estate company. Because Lake & Company is not a franchise our brokers are not dependent on corporate approval to make decisions. This gives us flexibility to respond quickly to market conditions and the individual needs of each client and property. A spirit of trust and friendliness cultivated within the walls of our office extends into the neighborhoods and communities that we live in and surround us. Lake agents are like family, working collaboratively with one another and with their peers in the industry.

At Lake & Company we believe the process is all about you. For over four decades, Lake & Company has built a solid reputation by providing clients with attentive service, superior marketing and professional expertise. When you work with Lake & Company, you can count on total commitment from your agent, backed by our Guarantee. If, for any reason, you are not satisfied with the service provided by Lake & Company, you will be released from the Listing Agreement or Buyer Brokerage Services Agreement upon request.

We believe in real estate and home ownership, and therefore have fun helping people achieve it. To your success!