Kate’s Commission-Cutting Crusade

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Blogger’s Note: Kate in the Valley is back -- still house-hunting after five unsuccessful bids, still blogging. In Chapter 3 of her diary, she explains her plan to single-handedly restructure home financing and why it didn’t work:

‘Want to hear about this great idea that I latched onto? Well, it turned out to be not such a hot idea after all, but I’ll get to that later. Anyhoo, I thought it would be Super Smart to restructure the traditional home purchase offer. Traditionally, when you buy a house you just give the purchase money to the seller and the seller pays the 5% commission out of that. But when you think about it, you are agreeing to pay 5% more for the house, and that translates to a bigger down payment, a bigger mortgage and bigger property taxes every year. So I figured it would be brilliant to subtract the 5% off the purchase price and pay the agents’ commissions separately myself. Seems like no big deal, right? Wrong.

Let’s say I agreed to pay $750k for the house. Traditionally, the seller would give the agents $37,500 in commissions and take the remaining $712,500 to pay off his expenses, etc. I need to cough up $150k for the down and take out a $600k mortgage. My property tax is $9,375 per year.

But if I just give the seller his $712,500 directly and then pay the 5% commission to the agents separately, the 5% is reduced to $35,625 (saving $1,875) because it is based on $712,500 and not on $750k. The seller is getting the exact same thing, only the agents’ commission is reduced.

My 20% down is likewise reduced to $142,500 (saving $7,500). My mortgage is reduced to $570k (saving $30k principle and 30 years’ interest on that). My property tax is reduced to $8,906.25 (saving $468.75 each year I own the home). Sure, it requires a little bit more cash upfront to pay the commission separately from the purchase money, but the savings are meaningful, so I absolutely loved this idea!

Guess who absolutely hated this idea? The agents.

Read more: What happened when Kate bid on a house using her new-fangled commission structure...

Their commissions are getting cut to the tune of about $1,000 each, and the comps for the neighborhood are going down a bit. My agent argued that I was only hurting myself by doing this because I was lowering the comps in the neighborhood and saving only a few thousand dollars. So, let me get this straight: I should pay extra for my house so that the comps are up for the neighborhood? That makes no sense. In this scenario, even the seller benefits because the escrow and closing costs are reduced. The only ones taking a hit are the agents, the mortgage brokers, and the title companies because their fees are all based on this reduced purchase price. In fact, when you think about it, it’s the exact opposite of the cash-back scheme, which inflates all those fees.

Ultimately, my agent begrudgingly wrote the offer. The house went into multiples and guess what happened? The seller’s agent refused to counter my offer. Yup, they countered everybody but me. The house went for a price that I would have happily paid, but I was excluded from the bidding. Needless to say, it was an idea that was ahead of its time, and I have stopped using it. When the buyer pool shrinks, the structure may work, though. Feel free to give it a whirl.

Comments? Insights? Let loose.
Photo Credit: Kate in the Valley