Should you Pay Commission to Buy Your Own Property?

That’s an interesting question! How would that work?

Let’s assume Bob and Mary have been seeing each other for about 5 years. They are thinking about having a child and thinking about marriage.

However, life gets in the way and they decide to live together first and move into a condo. They both give up their rental properties and purchase a $500,000 condo. On their own, neither could really afford it.

The “trial marriage” doesn’t go as well as planned. They decide to split up. Five years have gone by, and their well-located condo is now worth $1,000,000.

They decide to list the property for $1,200,000.

They should get $1,100,000 for sure. That’s what the agent tells them. The agent Liz is a long-time friend of Mary

Now, we are going to look at 3 scenarios:

  1. They sell to a third party,
  2. Bob buys out Mary’s interest, (2 versions)
  3. Mary gets a break on her new Townhouse.

They Sell to a Third Party

Let’s assume that they sell to Fred and Wilma for $1,100,000. We all expect that the real estate agent will be paid. That would be perfectly reasonable. Liz would have taken the listing, advertised the property and shown it to Fred and Wilma. The mere fact that they did not have their own agent wouldn’t disentitle Liz to the full commission.

Bob Buys Out Mary’s Interest (version 1)

In this case, after 6 long months, the highest offer comes in at $900,000. This is just far too low. Bob states that he will stay there, take on the full mortgage and pay Mary her equity.

Remember, this wasn’t the plan. Liz stated that she could get an offer for $1,100,000. It was a “slam-dunk”, just as “easy as pie”. So, that’s the reason for the listing. To simply give up, not sell to a third party and have Bob still stuck with the condo was not the plan. What value has Liz brought to this transaction?

Bob already knew about the property. He lived there. He was a joint owner of the property. He certainly wasn’t introduced to the opportunity by Mary!

Do you think Mary deserves a full commission? That would be a commission based on a $900,000 transaction? Or what about a commission based on just the purchase of Mary’s interest. That would be a commission based on a $450,000 transaction.

Bob Buys Out Mary’s Interest (version 2)

This situation is just a little different. Bob and Mary explain that they are not getting along. They really just want Liz to give them a price and Bob will buy Mary out. Liz says she is not quite sure. Let me test the market, then you will know for sure. That will be better than any opinion that I could give you. I’ll put some ads in the newspaper and run some open houses. Liz generates two new potential buyers and one new potential seller using the condo as her “showpiece” and “mobile office”.

The best offer that comes in is at $900,000. They refuse it and Bob buys out Mary’s interest at $450,000.

Mary knew all along, that Bob was THE purchaser. There’s no surprise here. They were just testing the market. In fact, Liz never provided that opinion. But, Liz did get three new prospects which will hopefully turn into profitable transactions. Is that her compensation for this deal?

Mary gets a Commission break on her new Condo

This situation creates a little bit of discussion. Here, Liz provides ALL of the rollback or incentive money to her friend Mary, when, in fact, BOTH Mary and Bob are her clients.

This would apply to the third party sale, and any $900,000 based commission. It’s arguable that it would not apply if only Bob’s interest were sold. However, that’s questionable should it should be documented clearly, if that is to be the case.

On the side benefits but no commission payable transaction, this should be clear. But, remember, Bob was a client here and only Mary is receiving anything in return. Theoretically, it should not make any difference.

So, DOCUMENT each such arrangement after full and complete disclosure to BOTH parties.

Here, it is KEY to have Bob understand, appreciate and authorize the arrangement.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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