An Example of Real Estate Agent Commissions

In response to a question about realtor commissions in the post below, let me use this example.

Suppose there is a home for which I am willing to pay, say, $300,000, and for which the owner is willing to sell for anything over $260,000. To simplify matters, let's say that there is a lump sum commission of $20,000 payable to the real estate agent(s). As long as the gains to both buyer and seller exceed this $20,000 there is a mutually advantageous exchange. In this example, since our difference in values is $40,000, there is a potential exchange somewhere between $280,000 and $300,000. 

Why $280,000 and not $260,000, which is what I noted was the seller's reservation price? Because the seller must remit $20,000 to the realtor as a commission for facilitating the sale. (Again, facilitating is a questionable term to use for most real estate agents as far as I'm concerned.) After paying the $20,000 from the sale of the proceeds, the seller is left with a minimum of $260,000.

Now, at what price the house sells depends on the market conditions. If it is a seller's market the selling price will be closer to $300,000. And if it's a buyer's market the selling price will be closer to $280,000. Let's say that market conditions are such that no side has power over the other. We can surmise that the price will be around $290,000. I receive $10,000 surplus (my value for the home above what I actually paid to own it) and the seller, after disbursing $20,000 to the realtor from the proceeds of the sale, ends up with $10,000 of surplus (the price he received above what he was willing to sell the home).

Now, in an extreme seller's market, the price is $300,000, which leaves me with no surplus and the seller with $20,000 surplus. In an extreme buyer's market, the selling price is $280,000, leaving me with the $20,000 surplus and the seller with no surplus.

Lastly, what if I don't bring an agent into the picture. We'll assume that both agents would have split the commission 50:50, with each receiving $10,000 for their efforts of facilitating the sale. (Again, that's a dubious term here.) In a buyer's market and me not using a realtor, I might just offer the seller $270,000. I'm not brining an agent into the picture, which means the seller is not obligated to pay $10,000 to a realtor working on my behalf. If his agent insists he pay him/her the total $20,000, then that's a problem the seller and his agent have to work out; it has nothing to do with me. Nobody else is bidding on the house and both the buyer and his/her agent are better off selling it to me for $270,000, both walking away no better nor worse off than had I brought in an agent on my behalf who had to be paid $10,000 out of a $280,000 selling price. 

If it's a seller's market it's a little trickier, but still the same. I offer $290,000 and both the seller and his/her agent are no better nor worse off had I brought in an agent on my behalf who is due $10,000 and me paying the full $300,000. The seller still ends up with the $20,000 surplus and his/her agent with $10,000 in commission. The difference, however, is that there may be another buyer lined up with no agent representing him/her and that buyer is offering the full $300,000. Since the listing agent is better off if his/her client sells to the latter, then we'd expect him/her to push for that sale, even though the seller is no better off in doing so. In fact, I may have stellar credit and little expected problem obtaining financing for the home, while the latter buyer's credit or financing may be somewhat shaky. The unscrupulous agent is still likely to push for the latter offer since he/she stands to gain an additional $10,000 (minus the broker's part of the commission, of course). 

Comments

[Property]

Excellent read, I just passed this onto a colleague who was doing a little research on that. And he actually bought me lunch because I found it for him smile So let me rephrase that.

[Betonherstel uitvoering]

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