When the Andersons closed on their dream home last fall they felt that they had 
received a bit of a bargain. Because of a soft housing market and because of an abundance of available real estate, the Andersons were able to negotiate the price of their new home down to $400,000. Hidden real estate costs artificially inflate the true value of homes and have lingering financial downsides The sellers, the Beauchamps, were grateful to be out from under the house because it allowed them to finally move so that they could be closer to their grandchildren.
For them, the $400,000 was less than they had wanted to sell for but the final price still gave them a small profit over what they had bought the house for in 2001. At the surface, it appears that this was a win win arrangement for both the Beauchamps and the Andersons. But there is a flaw with this system that most buyers and sellers aren’t aware of – the buyers often have a 6% overage amount that they end up paying as part of the closing transactions. It works this way: When the Beauchamps and the Andersons agreed to the $400,000 selling price, they both understood that the commissions for the both the seller’s agent and the agent for the buyer would need to come out of the closing number.
For a $400,000 home, with 3% going to each realtor, the total amount of the commission would be $24,000. This is standard practice +/- with nothing out of the ordinary. However, this payout to the Realtors means that the home itself didn’t actually sell for $400,000 but was instead bought for $376,000 (the $400,000 price minus the $24,000 in commissions). While knowing that the closing cost of the property included the commission costs doesn’t change the amount that the Andersons had to bring to the closing, it does greatly affect what happened next.
When the deed was presented for recordation at the county courthouse, it came with a transfer tax, based on the selling price of the home, that was split between the Beauchamps and the Andersons at the closing. This tax amount varies depending on the state (you can find an overview of transfer tax rates here – http://www.taxadmin.org/fta/rate/B-0306.pdf). In Pennsylvania, where Family Abstract, Inc. lives, the transfer tax can be as high as 4%. This percentage can have a huge financial impact on the amount of money that changes hands depending on how we access the final cost of the home – are we talking $376,000 or $400,000? Let’s say that in this case the transfer tax was based on the recorded price of the house being $400,000. A 4% transfer tax on this amount would mean a transfer tax total of $16,000 split between the buyer and the seller. Now let’s say that the recorded final price of the home was $376,000. At a 4% transfer tax, the total fees recorded would be $15,040 – a difference of $960 less. This is real world money that generally comes out of the money that the buyers borrowed for the purchase. $960 borrowed at a 6.5% rate over the terms of a 30 year mortgage could mean an extra payment of $2,184.43 over the life of the loan.
This whole scenario begs the question: how fair is it that today’s home buyers and sellers are also being double-taxed on the amount that they payout in commissions? Shouldn’t the real estate laws instead offer an exemption that is based on the cost of the home minus commissions and other payments? The bottom line is that this is an unfair practice that double-taps home buyers in Pennsylvania and other states. Because it doesn’t take into account the true value of the “net” real estate being bought and sold in the state, this iniquity also adds fuel to the fire for both buyers and sellers who feel that that real estate commissions are an outdated and largely unfair practice to begin with.
We need to get away from these unfair business practices that penalize home buyers. Instead, we, as an industry, need to start questioning the way we have been doing business so that we can fix the parts that are broken and use innovation to develop new solutions that bring new value to home buyers. If Realtors® don’t change the existing real estate models, home buyers will force them to change anyway.
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