There was an interesting debate at a settlement today at Family Abstract, Inc. The buyers of a $600,000 dollar property were pontificating on the idea that they, as buyers, paid all the commission. The sellers of course, were certain that the commissions were being paid by them! The buyers complained, You simply raise the price of the home to include the commissions. In fact, he said, "Every home in America is probably overpriced by 6%"! The sellers complained that there realtor suggested they upgrade certain items and that the $36,000, "THEY" have to pay in commissions will barely cover the costs of renovations!
Buyer asks: If your realtor is going to pay my realtor... "Why would I ever hire a (realtor) negotiator to negotiate against the person that is ultimately paying her"? HMMMM??
Buyer asks: If the $36,000.00 being paid is commission, then why am I paying transfer tax on the full $600,000.00 and not$564,000? HMMMM??
Seller ask.... Is my home worth $600,000 or was it really $564,000 HMMM?? Do they both make a good point?
Ethics, morals and values aside, is there any other business in America today that places the salesperson on one side of the transaction to be paid by the salesperson of the other side of the transaction and not by the client that hired them?
As far as recording...I never really thought about it before, but math does not lie! When the deed is 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 Sellers and the Buyers 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, 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 $600,000 or $536,000?
Let's say that in this case the transfer tax was based on the recorded price of the house being $600,000. A 4% transfer tax on this amount would mean a transfer tax total of $24,000 split between the buyer and the seller. Now let's say that the recorded final price of the home was $564,000. At a 4% transfer tax, the total fees recorded would be $22,560 - a difference of $1440 less. This is real world money that generally comes out of the money that the buyers borrowed for the purchase.
$1440 borrowed over the terms of a 30 year mortgage could mean an extra payment of over $2,500.00 over the life of the loan. This is a significant amount for what may amount to a clerical mistake. This approach to determining transfer taxes has been around for many years. Unfortunately this may mean that the majority of homes in the greater Philadelphia area, which are subjected to this 4% transfer tax rate, are actually being artificially valued at 6% above what they are actually worth because of automatically factoring in the cost of the buyer and seller commission payments. 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?