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.
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. For the buyer they help provide education and guidance on price and provide transactional experience which helps. For the seller, they provide another person in the transaction who has incentive to have the deal completed.
When it is just buyer and seller, often times there is a 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.
Let's look at a traditional transaction taking place on the MLS. Asking price of $520k with a negotiated agent commission of 4% to be split equally between the buyer and seller agents. 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) $130k down
Buyer cash outlay $130k (not including closing costs)
Buyer finances $380k = $1,814/month (@4% this is $6/$1000 Borrowed)
Let’s now look at the same transaction sold off market where the Seller wants to represent themself and not pay any commission to the buyer agant.
In this case:
Buyer pays $500k
Seller’s agent gets $10k (the agent charges the the buyer same 2% outside of the transaction)
Buyer Finances $500k (75% LTV) $125k down
Buyer Cash outlay is $135k ($125k down + $10k to the Buyers agent )
Buyer finances $375k = $1,780/month (@4% this is $6/$1000 Borrowed)
What is the same here?
The seller still gets $500k
The buyers 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 his proceeds.
Why? It increases the amount of money the buyer is willing to pay for the property!
Here is how it should be done:
Seller offers the house off market $520k with 3% commission ($15k)
In this case:
Buyer pays $520k
Buyer’s agent gets $15k
Seller gets $505k
Buyer Finances $520k (75% LTV) $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
Brian Allen
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