Commissioned Study Shows ‘Decoupling’ Agent Commission Is a Bad Bet for Consumers — RISMedia
What if buyers had to pay their real estate agents directly? This question can probably be on the minds of many people as several lawsuits targeting the real estate commission structure persist.
A recent study examined the potential implications of the proposed “decoupling” of agent compensation. He paints a bleak picture, saying that large segments of the population – especially minority, first-time buyers, 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 buy a home,” said Ann Schnare, a Freddie Mac alumna and lead on the report titled “Be Careful What You Ask: The Economic Impact of Changing Estate Agent Fee Structures.”
Schnare co-authored 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 claims come as the real estate industry faces an existential crisis. Court battles targeting the National Association of REALTORS® (NAR) and several leading real estate companies across the United States have put the agent commission structure in danger of being dismantled.
The report highlights the arguments made by plaintiffs and their supporters, particularly in 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 side than what sellers are currently accepting on the sell side.”
In the paper, Schnare and company argue the opposite, saying a buyer-pay commission structure would lead to reduced homeownership opportunities for cash-strapped families and lower net proceeds for many. many sellers.
“Among other things, proponents of this approach have failed to consider an important benefit of the current compensation structure, which is that it minimizes the amount of upfront money needed to purchase a home,” the report states, adding that nearly nine out of 10 homebuyers use a mortgage to finance the purchase of their principal residence.
Using an economic model outlining 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 change in the commission structure.
“If the buyer ends up paying a 3% fee to their realtor, the amount of money needed to close will increase by 42%,” the report said. “While the percentage change in cash requirements decreases with increasing buyer ability to negotiate a better rate, even a 1.5% commission – which has been used to illustrate the potential benefits of self- saying English model – would increase cash needed at closing by 19%.”
For example, the report shows that the assets needed to buy a $250,000 home would drop from around $16,250 to $23,015 if buyers, especially those using a mortgage to finance their purchase, were required to pay agent fees.
However, the impact does not rest exclusively with buyers.
For sellers, the report suggests that adjusted selling prices would have to fall to keep buyer cash needs – and demand – the same. According to the study, price concessions could be as high as 29% for closing a deal with the potential buyer – where they pay a 3% commission to the buyer’s agent – if the buyer was unable or didn’t want to bring extra money.
At the bottom of the example, where the buyer pays a 1% agent fee, sellers would still have to make an 11% concession on the asking price for their home.
“At a minimum, these simple examples suggest that if a significant number of potential buyers are cash-strapped, changing the current compensation structure would inevitably lead to a reduction in market demand and leave many potential sellers and owners in a worse than before,” the report said.
The result, the report adds, would be a drop in demand and the overall homeownership rate, as many potential buyers with little cash savings would be unable to buy a home.
It would also lead to lower property values, which the report said would impact sellers’ ability to trade in larger homes.
Many of the arguments made in the study align with the stance taken by NAR in recent months, as several antitrust lawsuits opposing a number of its association’s longstanding commissions and MLS policies have resurfaced in the big titles.
“Our nation should strive to develop policies and proposals that increase access to the American Dream, not discourage it,” an NAR spokesperson said. “We hope that, as this study suggests, policymakers will recognize that forcing buyers to pay their brokers directly would be a major setback for anyone seeking housing equity.”
Craig Cheatham, president and CEO of The Realty Alliance, told RISMedia that the system proposed by plaintiffs in cases like Moerhl and Burnett would disadvantage the very people the industry is trying to help on their way to home ownership.
“Our industry continues to be misunderstood by outsiders, especially lately by regulators, policymakers, tech entrepreneurs and opportunistic lawyers,” Cheatham says. “We have seen this ignorance cost those who have not done their homework countless times and extraordinary sums as they act on unfounded assumptions about how and why age-old practices are in place. And, unfortunately, members of our industry have had to spend time and money explaining and defending sound practices.
Despite arguments that the existing structure is allegedly anti-competitive, Cheatham believes there is strong evidence that competition is alive and well in the industry.
“The practice of real estate has evolved to its present state not by collusion or price fixing, but by decades of free market adaptations, all designed to alter custom and practice to better serve the consumer 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.