WEEKLY PRACTICE TIP
Buyer Wants to Pay the Commission
Q: I am representing a buyer who has told me he wants me to write an offer wherein he will pay the commission. He stated that he wanted to reduce the purchase price by the amount of the commission. Is that permissible? Can I do that safely?
A: There is nothing wrong, per se, with a buyer agreeing to pay the commission in a transaction.
When you think about it, the buyer always pays the commission because usually the buyer brings the cash to the transaction, to give to the seller, to give to the brokers. And, from the transactional viewpoint, the result is the same: The seller nets the same amount of money either way, the buyer pays the same amount either way, and the brokers usually get the same amount either way (although the parties usually want to pay the commission based on the amount of the stated purchase price, which, in this scenario, is less than it otherwise would have been by the amount of the commission).
For example, if there were a $1,000,000 sale price and a 6% commission to the brokers, then, in a usual transaction, the buyer brings $1,000,000 to escrow, the seller pays the brokers $60,000 and nets $940,000. In the proposed scenario, the sale price is $940,000 which the buyer pays and the seller nets, and the buyer pays the brokers (presumably) $60,000 for a total of $1,000,000.
(Note: The proposal from a buyer may be that the buyer pays not just the commission but also other seller expenses such as transfer taxes and other closing costs. While this Tip discusses, for the sake of simplicity, only a buyer paying commissions, remember that the same principles apply if a buyer is paying more of seller’s costs than just the commission.)
But, the problem is that buyers usually want to engage in this type of transaction so as to either (a) reduce the assessed value for property tax purposes; or (b) because they are attempting a tax-basis transfer per Prop. 60 or Prop. 90 and want to reduce the purchase price of the replacement property. In either case, the tactic may not work because the county tax assessor is free to assess the property at market value, regardless of the stated sale price. And, in the case of an attempted property tax-basis transfer, an assessment at market value could result in the property being assessed at full market value and a loss of the lower tax basis – a huge penalty. See Weekly Practice Tips: “Prop 60 – Market Value;” and “Tax Exemptions Prop 60 and 90”
PRACTICE TIPS:
Buyer’s Agents
1. If you are approached by a buyer to write an offer wherein the buyer would pay the commission, do not engage in any discussions about the tax consequences of the transaction, or agree with the buyer’s premise that this will reduce taxes. Instead, tell your buyer in writing that s/he must discuss any tax consequences with her/his legal and tax advisors.
2. Then tell your buyer that s/he should just instruct you how s/he wants the contract written, and not discuss any tax or legal consequences with you.
3. Approach the listing agent to explain your buyer’s proposal. Advise the listing agent that you will obtain a buyer representation agreement from the buyer wherein he will agree to pay the full commission in cash into escrow prior to close of escrow, to be split 50-50 with listing broker and selling broker.
4. Tell listing agent that s/he would then have to create an addendum to the listing agreement which would exempt the seller from the obligation to pay a commission on this transaction only. See below for proposed language for such an addendum.
5. Have your buyer sign a Buyer Representation Exclusive (ZipForms form BRE) indicating the amount of the commission to be paid and the address of the property on which you will be writing the offer.
6. Then, write the offer at the price agreed upon net of the commission amount, and specify in that agreement, on an Addendum form:
“Seller and Buyer agree, as a material term of this Agreement, that Buyer will pay the commission due to the brokers in this transaction in the amount of $_______, by bringing a cashier’s check or other good funds to escrow in that amount prior to the close of escrow, and sign instructions in escrow to disburse said amount to the brokers in the transaction. Seller shall have no obligation to pay a commission to the brokers at the close of escrow of this transaction. BUYER AND SELLER HAVE BEEN ADVISED TO SEEK LEGAL AND TAX ADVICE FROM APPROPRIATE PROFESSIONALS REGARDING THIS ARRANGEMENT, AND SPECIFICALLY REPRESENT THAT THEY HAVE NOT RECEIVED ANY SUCH ADVICE FROM THE AGENTS IN THIS TRANSACTION.”
Listing Agents
7. If approached by a buyer’s agent with a proposal for the buyer to pay the commission, discuss the steps above with your seller and that you will need an addendum to the listing agreement exempting the seller from the obligation to pay a commission in that transaction.
“Seller and Listing Broker agree that, in the event a Purchase Agreement between Seller and __________, Buyer, closes escrow, and Buyer has agreed in that Purchase Agreement to pay the commission in the amount due to the brokers in the transaction as specified in this Listing Agreement then, upon the payment of that commission by Buyer, Seller shall have no obligation on that transaction to pay a commission to Listing Broker per the terms of this Listing Agreement.”
9. Likewise, advise your seller that s/he should discuss the proposal with her/his tax advisor as well.