How will first-time buyers fare if sellers can’t offer buyer agent compensation?

As real estate practitioners adjust to the practice changes that took effect in August, and the industry awaits final court approval of the NAR settlement in November, questions remain about seller offers for compensation.

The arrangement known as cooperative compensation allows sellers to choose to offset buyer agent costs. By making a compensation offer, sellers communicate to buyers as a marketing tactic that their transaction costs can be reduced.

The settlement requires listing agents to stop offering compensation to buyer agents on Multiple Listing Services (MLSs). However, it expressly allows such offers to be made outside of the MLS. But attorneys and advocates who want to go beyond the settlement say they want to see such offers halted altogether. They do this without having to grapple with the negative consequences of such a change for first-time buyers, veterans and other cash-strapped buyers.

If sellers cannot notify buyers of listings outside of the MLS, many buyers will not have the information they need to determine if a home purchase is financially feasible. For buyers who are in business or who can rely on family wealth to make up the difference, covering their own agent’s costs shouldn’t be a big problem. But for first-time buyers and other cash-strapped buyers – those who aren’t relying on the proceeds from a home sale, who might be taking advantage of a 100% funded VA loan, whose agents can offer various forms of assistance to raise enough money for closing: knowing in advance the seller’s contribution to his agent’s costs can be essential.

Advocates who focused solely on the concerns of home sellers – who have made billions in equity in their properties in recent years – are now creating post-hoc justifications for why eliminating co-op compensation benefits low-net-worth buyers. None of these arguments hold water.

Proponents argue that buyers who want help from the seller can request a concession in their purchase offer. But such a buyer competing with multiple offers will likely see their offer fall to the bottom of the pile. In a bidding war, cash buyers and investors will win, and novice buyers will lose.

Some suggest that buyers could overcome this hurdle by increasing their bid price to win a concession so that the seller would receive the same amount. But this practice would have an inflationary effect on house prices. If buyers were to adopt this tactic broadly, it would “bake in” the price of commissions, where they were not baked in before. Of course, this tactic only works if the house is appraised at the higher value, giving the consumer a higher mortgage and monthly payments.

Proponents also claim that buyers will benefit from “reduced home prices.” But housing economics shows that prices are determined by supply and demand, not fees. High house prices are caused by a housing shortage. Lowering commissions will not cause sellers to lower their prices. They will continue to charge the highest price the market can bear, leaving buyers with additional upfront costs.

The so-called “elegant solution” these proponents present – ​​financing real estate commissions – also leaves buyers worse off. Assuming financial regulators would spend the years necessary to implement the changes, no commission could be added to a mortgage unless the house appraised at the higher value. If the house is not appraised, the financing would be a separate personal loan, increasing the borrower’s debt-to-income ratio, potentially disqualifying him or her from the mortgage or increasing the cost of borrowing. If you include the costs in the mortgage, the buyer will receive a higher interest rate. These ‘solutions’ do not make buyers better off.

Proponents of dubious arguments contribute to the creation of a two-tier system of brokerage services. Sophisticated, privileged buyers will do just fine, but those without a ton of money may be forced to go unrepresented, pay for post-purchase mistakes, make higher monthly payments, or get out of the market altogether.

What does that mean in the long term? If we cut off access to real estate services to first-time and first-time buyers, if investors take inventory and turn it into rental properties, what will our industry look like in a decade or two? These are the questions that advocates seeking to further improve the real estate industry cannot answer. But we must do it if we want to keep the American dream of homeownership within reach for tomorrow’s homebuyers.

Alexia Smokler is Director of Fair Housing Policy & Programs for the National Association of Real Estate Agents.