How does the seller get money to pay the commissions? They get it from the money paid by the buyer. How does the buyer get the money to pay to seller? Mostly financing through banks or mortgage institutions. So buyer is the one who pays the 6% commission for the Realtors and another 1-2.5% commission for the mortgage broker. Let us do a little math based September 2007 California median price of a single family home is $530,830:
Realtor commission - 6% of $530,830 is $31,850
mortgage broker commission - typically 1.5% - on 80% of $530,800 home value is $6370.
Total commissions paid on $530,830 home is about $38,200.
So buyer ends up spending $38,200 excessively on a $530,830 home just as commissions. This is lot of money and it takes years to save and several years to pay the loan. By eliminating this $38,200 dollars, buyers can save $231 on their monthly mortgage payments and about $44,000 dollars of total interest payments on their mortgage.
So Why did NAR and financial institutions made us to believe that sellers pay the commission:
1. If buyer pays the commission then buyer has to shore up traditional 20% of down payment ($106,000) and another $38,200 for commissions. If a buyer has mobilize this much amount then number of buyers will shrink and Realtors have less buyers to make commissions.
2. If buyer pays the commission then loan amount shrinks by $38,200 and financial institutions total loan volume shrinks and so do their profit.
So for NAR & financial institutions manipulated the system for their convenience to make us to think that sellers pays the commission. And in real, buyers financed the seller to pay these commissions and when a buyer moves into his home he has already lost the 7% of the total price of the home. In this internet world 6% Realtor commissions doesn't make any sense and it should be reduced to 3%. Just by reducing commission to 3% we could have eliminated 3% of total mortgage credit in this country. Based on forecasts this year's end real estate commission paid will be $55 billion and if we could have eliminated 27.5 billion dollars. Government should stop bailing out financial institutions and make the NAR to return 3% commission. And with $27.5 billion dollars refund from NAR, government can help another 51,400 people in California to get loans and make housing more affordable.
Buying a home should be treated like buying a car and NAR should stop their spinning machine stating that it is an emotional experience non-sense. Let us force our senators and congressmen to force the Realtors to reduce their commissions and save billions of hard earned dollars of home buyers. Also, buyers instead of depending on government to force the NAR to reduce their commissions they should ditch traditional methods and start buying using non-traditional methods. Check the sites like http://ForSaleByOwner.com, http://craigslist.org, http://HelpUSell.com or other new home selling/buying sites which works on less commissions.
