Deciding Not To Pay The Buyer's Agent When Selling

A recent court case wherein it was decided that seller's have the right not to pay the buyer's agent (well DUH!) created a lot of furor. The truth is this has been well-established in law and precedent for I don't know how many years. But having the right not to pay them doesn't mean it's smart.

Let's go back to first principles and the way things work. A standard buyer's representation agreement says that they are due x% of the sales price, but that if there is a cooperating broker's fee (Cooperating Buyer's Broker, abbreviated CBB), then that is used to offset that fee. This is actually paid to the brokerage for which the agent works, and the agent only gets a percentage). I generally ask for 2%, because the average CBB in my area is two and a half to three percent, so I can mostly ignore the CBB unless it's below that or significantly above.

The CBB is determined by the seller and their listing agent. You don't have to offer a penny if you don't want to. I'll explain in a minute why this is foolish in many cases, but there's no law against being greedy to the point of stupidity. The buyer and their agent have no input in whether a Cooperating Buyer's Broker fee is offered at all, much less the amount. In fact, it is flatly against the law in California (and I suspect, most other states) to attempt to negotiate a higher CBB, or any CBB when none is offered. Nobody can make a home seller offer to pay the buyer's agent (in reality, their broker).

That said, why do you think sellers started doing it? Your grandparents weren't any more generous or altruistic in selling their homes than you. There was a reason why sellers started offering to pay the buyer's agent, and it still applies today, although you have to dig a little deeper than the surface to discover it.

The vast majority of buyers need a loan. Go ask any loan officer in the country what the most common failure point is in a viable loan. I'm not talking about people with horrible credit, or clearly insufficient income. Those get kicked out of the system in ten minutes, and these days, they usually can't even get the process started - as everyone they talk to wants to know about their qualification level. I'm talking about viable applicants who can actually afford real payments on a real loan that can otherwise be done. That failure point is buyer cash to cover the down payment and closing costs.

Buyer cash is difficult, because in general, it has to be saved dollar by dollar from their regular income stream, and it takes years. On a 700k property, five percent down is thirty-five thousand dollars. If saved $500 per month, that's six years. Most people can't put $500 away per month, and every little financial bump in the road extends it out. Unless they have access to a VA loan, 3.5% down payment for an FHA loan is the absolute minimum these days - and both of these loans require the seller to pay certain costs as they cannot be paid by borrowers and nobody else is going to pay them. Then they need closing costs of the loan on top of that, as well as various and sundry other closing costs. My area may be a little more costly than most, but 5% is a pretty minimal down payment. Adding another two percent or more significantly extends their need to save before they can get onto the property ownership train, and rational buyers know they want to get onto that train sooner rather than later. If they can't buy your property, they'll buy someone else's. Let's repeat that for clarity: If they can't buy your property, they will buy someone else's.

Buyer's may not be able to negotiate a higher CBB (or any CBB where none has been offered), but that doesn't mean they cannot or will not consider the effects of a low CBB (or none) upon their ability to buy a property. Let's repeat that for clarity and emphasis: Buyer's may not be able to negotiate a higher CBB, but that doesn't mean they cannot or will not consider the effects of a low CBB upon their ability to buy a particular property. In other words, by offering a below market CBB (or none), you have essentially removed your property from their consideration. You've essentially sold them someone else's property rather than your own. By the way, market level CBB is priced into what all your comparable properties are selling for. Any buyer's agent they have representing them will be aware of this.

By refusing to pay what every other seller around you is willing to pay for, you've removed your property from their consideration. You know, that's fine if someone with plenty of cash comes along ready to put an offer they're prepared to consummate on the table. But those buyers aren't your typical buyer - most buyers are struggling to find enough cash to make it happen, as soon as they can. Those with larger amounts of cash aren't looking to buy a place to live for themselves - they're investors. Being aware of all of this, they not only are prepared to drive a harder bargain than average, they know all about normal and customary costs and who pays them, and they are typically represented by buyer's agents who are a cut above average in terms of knowing the market and ability to negotiate. Investors in this category are absolute top of the list for being prepared to walk away rather than go above market value - and you being unwilling to offer a CBB knocks your property down in value by more than the cost of the CBB. Most investors are well aware of that, even if they don't have an agent representing them.

Finally, they may not be able to ask for a CBB directly, but buyers can certainly negotiate for 'non-recurring closing costs' as part of the sales price. You don't have to agree, but, again, they don't have to buy your property if you won't. They have this cost obligation, and no cash to meet it if you won't. Do you think you're going to get a consummated sale if you won't help meet it? You might get a contract - but that loan won't actually fund if they don't have every penny of the required cash to close. In case you're unaware, a negotiated contract that can't be consummated is the absolute worst position to be in as a seller. The property is tied up, you can't sell it to anyone else, and there's always the possibility that someone turns to lawyers and court action. When lawyers and judges and juries (oh my!) get involved, you never know what's going to shake out at the end - and while it's going on, the property sits unsold. If you're trying to sell, that's the exact opposite of everything you want. So what's likely to happen? I'll tell you what's likely to happen: After several months of impasse, your listing agent - who wants their commission - starts pressuring you to give in on the non-recurring closing costs. After all, to their way of thinking, they brought you this buyer who wants to buy the property, and there's this contract between you and them for the sale of that property. If it falls through, they have a court case for their commission to be due despite that falling through. So in order to avoid having to pay that commission without having consummated the sale, you agree.

So wouldn't it be better just to agree to pay a market level CBB in the first place, and avoid all that delay and all of those monthly carrying costs of the property - not to mention the hassle of whatever reason you decided you wanted to sell the property in the first place remaining unfulfilled?