Bernice Ross

For years the debate has raged as to whether the seller or the buyer is the one who really pays the commission. The so-called “bombshell Moehrl lawsuit,” currently in litigation, is a frontal assault on how commissions are shared on MLSs that forces the industry to face this question head on.

For all intents and purposes, the tax laws have codified that the sellers, not the buyers, are the ones who pay the commission. The closing statement clearly states how much commission the seller paid. This amount is deductible on the seller’s tax returns, not only at the federal level, but in many states as well.

The one exception to this rule occurs when the buyers sign an exclusive buyer’s agent contract that provides their agent will be paid a certain commission amount. Nevertheless, even when a buyer’s exclusive contract is in place, many times the buyer’s agent only charges the buyer when there is a shortfall.

To be able to deduct a commission on your tax returns requires that you can identify a specific amount you paid and that you can document that amount. Without an exclusive buyer’s agent contract in place, how exactly would you quantify the amount?

That’s not the only issue.

If the buyers are indeed responsible for the commission, exactly when is that commission “paid?” It can’t be when the deal closes, because the buyers haven’t made any payments yet.

One could argue that the commission could come out of the buyer’s down payment, but that could negatively impact the buyer. For example, assuming the buyer put 20 percent down, if they paid part of the commission out of that amount, it would reduce the amount of their down payment. The result would be that they’re stuck paying PMI, which is an expensive proposition that buyers typically try to avoid.

It’s easy to see how this process is fraught with problems. The primary issue is that no one can accurately state exactly how the buyer “pays” in commission, because there is no agreed upon procedure for calculating the amount. Even if there were a procedure, the documentation would be a nightmare.

Serious Issues with Moehrl Lawsuit

There’s a landmine in front of the plaintiffs in the Moehrl lawsuit, courtesy of the Veteran’s Administration.

The VA clearly states in its lender handbook a borrower cannot pay a real estate agent fee or a broker fee in connection with a VA mortgage.

While use of “buyer” brokers is not precluded, veteran-purchasers may not, under any circumstances, be charged a brokerage fee or commission in connection with the services of such individuals.

However, since information on property available for purchase and financing options is widely available to the public from a variety of sources, the VA does not believe that preventing the veteran from paying buyer-broker fees will harm the veteran.

If this is the case, how can the plaintiffs in the Moehrl case prove buyer-broker fees caused them harm?

Even if the plaintiffs were to prevail, veterans would introduce a knotty problem: How would buyer’s brokers be compensated for representing VA buyers if they are prohibited from collecting a commission?

Veterans are a protected class. Any scheme that attempted to change the current situation would run afoul not only of anti-discrimination laws, but probably Fair Housing laws as well.

If the Moehrl litigation were to succeed, the commission sharing on the MLS would most likely end.

The result would be what we see other places in the world where there are no exclusive right to sell agreements and no MLS: we would be reduced to going from brokerage to brokerage trying to see the properties available in our price range rather than being able to view them with a single buyer’s agent or view them online through portals such as Realtor.com, Trulia and Zillow.

Ultimately, the buyers determine how much they will pay for a property based upon the market conditions, regardless of whether it’s listed with a commission on the MLS or without a commission as a FSBO. The bottom line is that the sellers pay the commission, both in terms of the final closing statement and certainly in terms of the tax code.

Bernice Ross is a nationally syndicated columnist, author, trainer and speaker on real estate topics. She can be reached at bernice@realestatecoach.com.