What would happen if homebuyers were required to pay their real estate agents directly? That question may likely be on many people’s minds as several lawsuits aimed at the real estate commission structure persist.
A recent study looked at the potential implications of indulging the proposed “decoupling” of agent compensation. It paints a bleak picture, asserting that large segments of the population—specifically minority, first-time, low- and middle-income buyers—would be significantly suppressed in the market in the scenario.
“Changing the current compensation structure could affect potential buyers’ ability to qualify for a mortgage and purchase a home,” said Ann Schnare, a Freddie Mac alum and lead of the report titled “Be careful what you ask for: The Economic Impact of Changing the Structure of Real Estate Agent Fees”
Schnare co-wrote the study, which was commissioned by HomeServices of America, with Amy Cutts, chief economist at the National Association of Credit Management, and Vanessa Perry, a business professor at George Washington University.
The study and its assertions come as the real estate industry faces an existential crisis. Courtroom battles targeting the National Association of REALTORS® (NAR) and several prominent real estate companies across the U.S. have put the agent commission structure in danger of being dismantled.
The report highlights the arguments made by plaintiffs and their supporters—specifically in the Moehrl et al. v. The National Association of REALTORS® et al. lawsuit as an example—alleging that if buyers paid their agents directly, “they would be more likely to negotiate lower commissions on their end than what sellers currently agree to on the sell side.”
In the paper, Schnare and company argue the contrary, asserting that a buyer-paid commission structure would result in reduced homeownership opportunities for cash-constrained families and lower net proceeds for many sellers.
“Among other things, proponents of this approach have failed to consider an important benefit of the current compensation structure, namely, that it minimizes the amount of upfront cash that is required to buy a home,” the report read, adding that nearly nine out of every 10 homebuyers use a mortgage to finance the purchase of their primary residence.
With the help of an economic model depicting the financial impact of changing the current compensation structure, the report shows that first-time, low-income, middle-income and racial minority buyers would be the most affected by a shift in the commission structure.
“If the buyer ends up paying a 3% fee to their real estate agent, the amount of cash required at closing would rise by 42%,” the report reads. “While the percent change in cash requirements declines with increases in the buyer’s ability to negotiate a better rate, even a 1.5% commission—which has been used to illustrate the potential advantages of the so-called English model—would increase the cash required at closing by 19%.”
For example, the report shows that assets required to purchase a $250,000 home would increase from roughly $16,250 to $23,015 if buyers—specifically those using a mortgage to finance their purchase—were required to pay agent commissions.
The impact doesn’t rest exclusively with the buyers, however.
For sellers, the report suggests that adjusted sales prices would have to decline to keep the buyer’s cash requirements—and demand—the same. According to the study, price concessions could get as high as 29% to close a deal with the potential buyer—where they are paying the buyer’s agent a 3% commission—if the buyer were unable or unwilling to come up with additional cash.
On the lower end of the example—where the buyer pays a 1% agent fee—sellers would still have to make an 11% concession in the asking price for their home.
“At a minimum, these simple examples suggest that if a significant number of potential buyers are cash-constrained, changing the current compensation structure would inevitably lead to a reduction in market demand and leave many sellers and potential homeowners worse off than they were before,” the report states.
The result, the report adds, would be a drop in demand and the overall homeownership rate as many potential buyers with small cash savings would be unable to buy a home.
That would also drive property values down, which the report states would impact the ability of sellers to trade up to larger homes.
Many of the arguments made in the study align with the position that NAR has taken in recent months as several antitrust lawsuits opposing a number of its association’s longstanding commission and MLS policies have resurfaced in headlines.
“Our nation should be working to develop policies and proposals that increase access to the American Dream—not deter it,” says an NAR spokesperson. “We hope that, as this study suggests, policymakers will recognize that requiring homebuyers to pay their brokers directly would be a major setback for all those pursuing housing equity.”
Craig Cheatham, president and CEO of The Realty Alliance tells RISMedia that the system that plaintiffs proposed in cases like Moerhl and Burnett would disadvantage the very people that the industry has been working to assist on the path to homeownership.
“Our industry continues to be misunderstood by outsiders, most notably lately by regulators, policymakers, tech entrepreneurs and opportunist attorneys,” Cheatham says. “We have seen this ignorance cost those who did not do their homework countless times and extraordinary amounts of money as they acted on unfounded assumptions about how and why time-honored practices are in place. And, unfortunately, members of our industry have had to spend time and money to explain and defend solid practices.”
Despite arguments that the existing structure is allegedly anticompetitive, Cheatham believes there is a solid case that competition is alive and well in the industry.
“Real estate practice has evolved to its current state not through collusion or price fixing, but through decades of free market adaptations, all designed to tweak custom and practice to serve the consumer better and better while maintaining a sustainable business model to allow real estate professionals to continue to exist to meet the needs of buyers and sellers,” he says.