How Buyer Agent Commissions Paid As Seller Concessions Affect Value Negatively

Post Update:  Since I wrote this post originally about buyer agent commissions paid as seller concessions affects the property value, there has been an update that I was hoping for.   Thankfully both Fannie and Freddie (prominent secondary mortgage market entities, ensure the majority of U.S. mortgages, collectively recognized as government sponsored enterprises [GSEs]. Initially private, they functioned with governmental authorization and oversight throughout their history) have both weighed in on the Sitzer litigation and have stated that where it is customary in the market for sellers to offer cooperative compensation they will not be including the amount of seller concessions paid for commission (again where customary) against limitations of mortgage financing concessions.  What this means is where loan products for investment properties cap this amount at 2% and purchase transactions at 3% to 9%, these numbers figures will be free of commission additions.  This is a huge win for homebuyers nationwide.

We have heard in the media that a seller not offering cooperative compensation to a buyer for representation will cause home prices to go down.  Many critics quickly retort by saying sellers are not going to be generous in reducing their price for the home since the buyer does not have representation.  However, in the future, the seller will have no choice but to do so.  I am Robbie English, Broker and REALTOR with Uncommon Realty. Let’s dig into buyer agent commissions paid as seller concessions affects the property value.

In the intricate dance of real estate transactions, the concept of seller concessions looms large, wielding the power to significantly impact the perceived value of a home. As a seasoned real estate professional and national real estate instructor, I often find myself navigating the labyrinth of seller concessions, educating both agents and clients alike on their nuanced effects on property valuation.  It is a topic that directly refers to the National Association of REALTORS (NAR) pending lawsuits and pending settlement agreements because should a buyer agent commission be reimbursed through seller concessions in the real estate transaction, it drops the value of the home.

There is an update coming… wait for it

Now before we go any further, let’s clear something up.  When an appraiser performs an appraisal, they do not include agent commissions (seller side nor buyer side) as an adjustment to the value of the property.  Even if an appraiser wanted to, they would need a copy of the seller’s listing agreement to be able to back up such adjustments because real estate commissions have never been “standard” and the Multiple Listing Service (MLS) has only had a non-mandatory offer of compensation for a buyer agent when one was offered.  Additionally, the claim that real estate agents have inflated prices to cover their commission inserts the accusation that appraisers are in cahoots (or have a deal) with appraisers to be misreporting actual property values which is simply untrue and would violate their accuracy and the standards to which they follow in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).

When talking about buyer agent commissions paid as seller concessions affects the property value, I need to address Seller Concessions.  Seller concessions, those financial incentives provided by the seller to sweeten the deal for the buyer, can take various forms. Whether it’s covering closing costs, offering to buy down interest rates, or shouldering certain ongoing expenses like buyer agent commissions or HOA fees, these concessions sway the final sale price and consequently, the perceived market value of a property.  A real estate sale which has comparables (other homes that have sold in the same market area, size requirements and relevant time) that did not have seller concessions, would not see a reduction in market value.  This is because, the comparable’s market values would not be reduced by the cost of those concessions.

At first glance, one would not think that the buyer agent commissions paid to a buyer in the form of seller contributions to a buyer would have anything to do with the pricing of the home, and they would be correct.  However, when it comes to using that sale as a comparable for other sales in the future, an appraiser as well as a competent real estate practitioner would in fact, have to back that seller concession out of the price to provide the correctly adjusted price (with other factors and adjustments related to that property).  In saying this, it does not matter what the seller’s concession to the buyer is for, the fact remains that the amount of money must be removed from the sales price to have an accurate sale price.

One fundamental principle that must be grasped in understanding the influence of seller concessions on home values is the need for accuracy in comparable market analysis (CMA). As a real estate educator, I emphasize the importance of meticulous CMA techniques, steering clear of the pitfalls of “quick CMA” models that overlook crucial variables.  Many practitioners who run their businesses off of a “quick CMA” style of report are in fact not creating an accurate representation of the subject property’s value or suggested pricing.  Pricing off of the price per square foot with general information and not a detailed comparative market analysis is one of the many reasons that sellers see disparaging amounts between their real estate agent’s comparative market analysis and the appraiser’s appraisal report.

Fannie Mae, or the Federal National Mortgage Association, sheds light on this matter by explicitly stating in its definition of market value that it should reflect the normal consideration for the property, uninfluenced by special financing arrangements or concessions. This underscores the significance of accurately accounting for seller concessions when determining the market value of a home.

When conducting a comprehensive CMA, it’s imperative for real estate agents to meticulously dissect the sale price of comparables, factoring in any concessions that may have been extended to the buyer. Failure to do so leads to skewed perceptions of market value, potentially jeopardizing the integrity of the transaction.

Let’s delve into a hypothetical scenario to illustrate the impact of seller concessions on property valuation. Suppose a comparable property sold for $100,000, but the seller offered $3,000 in closing cost assistance to the buyer. Following best practices for accuracy, this concession should be subtracted from the sales price to obtain a more accurate representation of the property’s value. Thus, the adjusted value of the comparable would be $97,000.  In this example, the property still sold for $100,000.  However, when this sale is used as a comparable for future sales, the property’s actual market value would be $97,000 right off the bat.

It’s crucial to recognize that seller concessions aren’t inherently negative; they serve as strategic tools to facilitate transactions and attract buyers. However, their influence on home values must be meticulously accounted for to ensure transparency and fairness in the real estate market.  So when it comes to buyer agent commissions being paid to a buyer by a seller to reimburse the buyers for those fees, the value of the property is reduced by the concessions used in the transaction therefore causing a negative factor in the growth of market value.

Should this become a trend in real estate where the seller offers cooperative compensation for a buyer to have representation and then offers it as a seller concession, it is going to negatively impact home values that will not be first seen in market values but will be seen when it comes to using those sales in subsequent home valuations for future sales which will reduce the market value for future home sales impacting everyone’s property values.

As you can see, the argument is that sellers are not initially just going to reduce their prices when cooperative compensation is not offered however when it is paid through seller concession, market values will be reduced by the amount of seller contributions therefore causing the prices that sellers command for their homes to be negative impacted.

The intricate interplay between seller concessions and property valuation underscores the importance of diligence and precision in real estate transactions. By adhering to rigorous CMA practices and meticulously dissecting the impact of concessions, real estate professionals can uphold the integrity of the market and empower clients to make informed decisions.

Remember, I am a real estate professional with Uncommon Realty and not a licensed appraiser.  What I present to you will represent an estimated sale price for this property. It is not the same as the opinion of value in an appraisal developed by a licensed appraiser under the Uniform Standards of Professional Appraisal Practice.