The Real Estate Industry may face a massive-disruption in business model, due to a recent ruling siding with home buyers/sellers – saying that commissions are unnecessarily high, and that the current system sets pricing such that buyer’s can not have any say in the fees paid.
Often times, realtors say that the “seller pays a commission” but in actuality— the buyer is taking out a loan that is going to cover the full purchase price (minus any down payment) of the home and commissions are deducted from that purchase price. Some analysts say this artificially inflates the price of homes, and there’s hidden interest on that borrowed money to pay the Commission, that borrowers have to pay over a 30 year period.
For example, on a 600k home in the current 7.5% interest market, the 5% commission financed, would be 30k paid over 30 years. This equates to $45,515 over the life of the loan – or 15k additional in financed interest.
From an accountant’s perspective this begs another question: would “one-time” commissions paid by buyer, be tax deductible— since they are a necessary expense for the deal to Suffice. For a deal to come to fruition, you often must have a loan with interest paid and attorneys plus real estate broker fees. These are not optional fees and the buyer usually has little say in them. That’s not how the system was designed to be, but in actuality that’s how it is practiced. In our opinion, buyers should get a tax break on all closing costs paid, since mortgage points are already in that bucket. They are a necessary cost in order for a deal to Suffice.
Critics say that making a buyer pay for the fee out of pocket will push many folks out of the market. Because they need that fee to be rolled in as a borrowed cost versus paid out of pocket at one time. So even a negotiated commission of 3% on a $600,000 home of $18,000 is not something most people can afford all at once. Further, agents are saying that people have no idea how much time and effort it requires to get a buyer to the closing table. Buyers see over 50 homes and spend dozens of hours of realtor time.
Both sides have viable points and it will be interesting to see what happens in the buyer-seller real estate commission environment in the years to come
Do you have inquiries concerning mortgage rates or real estate costs that are deductible in a commercial/residential home purchase? Reach out for a free consultation on your Closing Statement/1099-S tax form.