ASTONISHING GAME CHANGE - SELLER IS NOT REQUIRED TO PAY BUYER AGENT COMMISSION

Nearly all real estate brokers in the Greater Seattle Area join the NWMLS (Northwest Multiple Listing Service) and nearly all the listings that buyers can find online are from NWMLS. For many years, NWMLS required the seller to list and provide the buyer agent commission (which is usually set at 3% by the seller/listing agent in the Greater Seattle Area) when listing the property. That’s the reason that your buyer agent tells you that you don’t need to pay him/her. Some aggressive buyer agents may even tell the buyers that they can receive money (i.e., a rebate) from the buyer agent at the closing. The buyer agent’s rebate to the buyer is from such buyer agent commission. However, effective 10/1/2019, NWMLS no longer requires the seller to pay the buyer agent commission. Under the new NWMLS rule, there are three options: (1) the seller can still provide the buyer agent commission as usual, (2) the buyer can require the seller to pay the buyer agent commission in the offer; or (3) the buyer can directly pay the buyer agent commission.

What does this mean to the buyers and the sellers?

Because no data is available at this point, we cannot say for sure. Our estimation is that:

  • In the non-hot areas, the seller will likely still list the buyer agent commission as before to attract the buyer agents to bring more buyers;

  • In the hot areas, if there is a chance of a bidding war, the best strategy for the seller is to not provide the buyer agent commission when listing the property. The competing buyers will be afraid to request high buyer agent commission in their offers, or even directly pay their buyer agents. Thus, although the sale price of the property may slightly change, the net price that the seller can take home can be increased 1% - 2% due to due to lower or no buyer agent commission to be paid by the seller.

For example, let’s compare two offers for a $970k listing price property.

  • Offer A: $1M offer price and the seller is responsible for 3% buyer agent commission (i.e., $30k).

  • Offer B: $970k offer price and the buyer directly pays $30k buyer agent commission to the buyer agent

You would think these two offers have no differences for the buyer and the seller, as the net price for the buyer in both offers appears to be $1M and the net price for the seller in both offers appears to be $970k. However, an experienced listing agent would tell the seller that the seller also needs to pay excise tax and listing agent commission based on the closing price. The excise rate in King county is a progressive 1.1%-3% based on the closing price. For a $970k property, the excise tax is $11,516. For a $1M property, the excise tax is $11,900. The difference in excise tax is $384. The listing agent commission is usually 3% for traditional brokers. Thus, there is another ($1M-$970k) x 3% =$900 difference. In other words, the seller loses $900+$384=$1,284 if choosing Offer A over Offer B. In the real world, the difference is even higher as the seller’s closing costs, such as the seller’s portion of escrow fee and the owner’s title insurance that is usually paid by the seller at the closing, are often tied to the closing price.

That’s not the end of story. The experienced listing agent will also warn the seller if the buyer uses a loan to finance the deal. Under the current market, there is a high risk that the lender’s appraisal result is less than $1M for a $970k listing price property. Now it’s not only just a difference of a few thousand dollars, but also prompts the big question: can the buyer close it? Consequently, if advised by the experienced listing agent, the seller will choose Offer B.

For the same appraisal concern, the buyer will worry about losing his/her earnest money, which is usually $20k-$30k in this case, especially if the buyer waives financing contingency. In addition, the buyer may also save some money by using Offer B as the buyer’s closing costs, such as the buyer’s portion of escrow fee and the lender’s title insurance that is usually paid by the buyer at the closing, are often tied to the closing price too. Consequently, if advised by an experienced buyer agent, the buyer will choose Offer B as well.

How does this affect the buyer’s and seller’s choice of realtors?

The above examples clearly show that both the buyer and seller need to find an experienced buyer agent and listing agent respectively to advise them in evaluating different offers. Writing an offer is not just a numbers game. You need your agents to fully understand the financing and tax implications.

Moreover, it is ideal if the buyer agent or the listing agent can provide a high rebate or charge a low commission, enabling the buyer to win the property using less money and the seller to take home more money.

For example, if the buyer uses a buyer agent who charges 3% buyer agent commission, the buyer may have to use Offer A. However, if the buyer uses another buyer agent who charges 1% buyer agent commission, the buyer can even make a better offer than Offer B. Consider Offer C: $970k offer price and the buyer directly pays $10k buyer agent commission to the buyer agent.

Let’s make the case more realistic and introduce the cash offer scenario, which is not uncommon for hot homes in the Greater Seattle Area. This raises a million-dollar question:

Is there magic: can a low price and financed offer beat a high price all cash offer?

Still use the above example and assume that the Offer A is an all-cash offer and Offer B is financed or mortgaged. After submitting Offer B, the experienced buyer agent would ask the listing agent whether there is any competition. The listing agent may say that we have another Offer A $1M cash offer. As the buyer agent only charges 1% commission, the buyer has more room to raise the offer price even if he/she uses a loan, and makes the offer more attractive. For example, the buyer can make Offer D: $990k offer price and the buyer directly pays the $10k buyer agent commission to the buyer agent. Certainly, the experienced buyer agent would advise the buyer to make sure that he has an extra $20k in cash to make up the difference if the loan appraisal comes back at only $970k. The experienced buyer agent would also advise the buyer to obtain the underwriter pre-approval from the lender to contingent the loan approval solely on the appraisal result, so that the buyer can confidently waive the financing contingency or convince the seller that there is no financing concern.

The seller compares Offer A and Offer D. For Offer A, the net price for the seller after excise tax, the buyer agent commission, and the listing agent commission is $1M - $11,900 - $30,000 - $30,000 = $928,100. For Offer D, the net price for the seller after excise tax and buyer agent commission is $990k - $11,772 - $0 - $990k x 3% = $948,528. There is $948,528 - $928,100 = $20,428 difference. In the real world, the difference may be even higher as the closing costs are often tied to the closing price too. Thus, the seller would seriously consider Offer D, as the seller can put $20k+ more in their pocket. The experienced buyer agent will also tell the buyer and the lender to evaluate the loan risk and make the Offer D sweeter to convince the seller that the Offer D is almost like a cash offer and the buyer can close the deal by:

  • Presenting the lender’s underwriter pre-approval letter to contingent the loan approval solely on the appraisal result, and presenting the funding statement to show enough cash cushion, even if the appraisal result may be lower than the offer price;

  • Waiving the financing contingency; and/or

  • Raising earnest money and/or releasing the earnest money to the seller early;

As long as the seller is convinced that the buyer has no problem closing the deal, it is highly likely that the seller will choose Offer D over Offer A to take home $20k more. This shows how a lower price and a financed $990k offer can beat the $1M all-cash offer.

There is no magic. You cannot beat a high priced all cash offer if the other conditions remain the same. However, under the above scenario, using the high rebate or low commission from the buyer agent, there is a significant chance that you can beat the cash offer with careful and thoughtful offer drafting, and excellent communication skills from the experienced buyer agent.

I got it, but are there really such low commission and highly professional agents? Sounds too good to be true.

Congratulations! If you read thus far, you’ve found us - OLAIE.com

Our broker team includes lawyers, accountants, and real estate gurus. We have the highest ethical standards and professionalism, and we think creatively to help you close deals. We can also offer 2%+ rebate to our buyers to win the deal and 0.5% or 1% listing agent commission to the sellers to sweeten the deal.

Find out more about Olaie at www.Olaie.com.

Feel free to distribute this article to your families, friends, or colleagues in its entirety so that they can understand the implications of the new NWMLS rule if they are buying or selling homes.