How will first-time buyers get a price if sellers can't offer compensation to a buyer's agent?
As real estate professionals adjust to practice changes that took effect in August and the industry waits for final approval from the court in November, questions about sellers' proposals persist.
The arrangement, known as cooperative reimbursement, allows sellers to choose to reimburse buyers' agents for their expenses. By offering a rebate, sellers use it as a marketing tactic to tell buyers that their transaction costs can be reduced.
It requires listing agents not to make offers of compensation for buyer's agents on Multiple Listing Services (MLS). However, it expressly allows such offers to be excluded from the MLS. But advocates and lawyers who want to go further than regulation indicate that they want such proposals to be stopped altogether. They do so without grappling with the negative impact such a change would have on veterans and other cash-strapped shoppers.
If sellers fail to notify buyers of off-MLS offers, many buyers will not have the information they need to determine whether a purchase is financially feasible. For buyers who are shopping or can rely on family wealth to make up the difference, paying their own agent's costs shouldn't be too much of a problem. But for first-time and other cash-strapped buyers—those who don't rely on the proceeds of a home sale, those who can take advantage of a 100% financed VA loan, agents may have various forms of assistance to raise enough cash. closing – it may be important to know in advance about the seller's contribution to the agent's costs.
Advocates have only focused on the concerns of home sellers who have made billions on their properties in recent years — now creating post-hoc justifications for why eliminating co-op compensation benefits low-net-worth buyers. None of these arguments hold water.
Advocates argue that buyers who seek help from the seller can ask for concessions in purchase offers. But such a buyer, competing with multiple offers, will likely see their offers fall to the bottom of the pile. In a bidding war, cash buyers and investors will win, while first-time buyers will lose.
Some suggest that buyers can overcome this hurdle by offering their own bid price to earn a discount so that the seller nets the same amount. But this practice will have an inflationary effect on house prices. In fact, if buyers were to widely adopt this tactic, it would “improve” the price of previously uncooked commissions. This tactic will only work if the home is of course appraised at a higher price – leaving the consumer with a larger mortgage and monthly payment.
Advocates also argue that buyers will benefit from “home depreciation.” However, these prices are not determined by fees, but by supply and demand. High housing prices are caused by a lack of housing. Lowering commissions will not cause sellers to lower their prices. They will continue to charge the highest price the market will bear, leaving buyers with an additional upfront cost.
The “elegant solution” offered by these lawyers – financing real estate commissions – also makes buyers worse off. Assuming the financial regulators take the years it will take to make the changes, the commission cannot be added to the mortgage unless the home is appraised at a higher value. If the home doesn't appreciate, the financing will be a separate personal loan, increasing the borrower's debt-to-income ratio, forcing them out of the mortgage or increasing the cost of borrowing. “Rolling the fee into the mortgage” leaves the buyer with a higher interest rate. These “solutions” do not leave buyers in a better position.
Lawyers who present dubious arguments help create a two-tiered system of brokerage services. Sophisticated, privileged buyers will do well, but those without a wad of cash may be forced to lack representation, pay for post-purchase mistakes, higher monthly payments, or leave the market altogether.
What does this mean in the long run? If we close off access to services for first-time and entry-level buyers, what will our industry look like in a decade or two if investors take inventory and turn it into rentals? These are questions that advocates seeking to further elevate the real estate industry cannot answer. But if we want to make the American dream of home ownership accessible to tomorrow's homebuyers, we must.
Alexia Smokler is the director of Fair Housing Policy and Programs National Association of Realtors.
