Potential hidden impacts of the NAR commission ruling

Potential hidden impacts of the NAR commission ruling

The National Association of Realtors (NAR) recently settled a lawsuit that contended that MLS (multi-listing service) requirements for sellers to pay both seller and buyer's agent commissions was artificially inflating realtor commissions at around 6% of the transaction price. While commissions have always been negotiable, a significant requirement of this settlement will be that listings on the MLS explicitly not advertise buyer's agent compensation and not require sellers to pay a buyer's agent while continuing to allow for this compensation to be negotiated independently.

On the surface the change appears as though it may reduce real estate transaction costs. But, could the new real estate commission structure unintentionally make the American Dream more elusive for many?

This article examines the heart of these changes, aiming to uncover potential unintended effects on various stakeholders in the real estate market, especially first-time home buyers.

We will investigate how these changes might increase the financial burden for buyers already struggling with affordability, delay homeownership and wealth building, and impact the role of buyer's agents in helping their clients navigate a large and complex transaction. As we explore these elements, our discussion will emphasize the necessary balance between maintaining an industry's sustainability and ensuring transparent consumer pricing for services offered in a real estate transaction.

Impact on first-time home buyers

Increased financial burden

For many first-time buyers, the dream of homeownership is already hindered by the challenge of saving for a down payment and closing costs. With the impending changes in commission structures, buyers are likely to face even higher initial out-of-pocket expenses with the addition of agent commissions. While new attention has been drawn to the negotiability of commissions, they have always been negotiable albeit with wide geographic differences and varying levels of adoption of digital tools offering cost reductions.

This change could manifest in at least a couple of ways:

  • Buyers might need to save more than previously planned, delaying their purchase timeline
  • Increased borrowing due to the higher costs could lead to higher monthly mortgage payments

The shift could unintentionally push the dream of homeownership further out of reach for many, negating some of the intended effect of these commission reforms.

Fewer buyers choosing dedicated representation

Buyer's agents may potentially become viewed as an added expense versus a valuable resource. There is the potential that buyers will rely on the seller's agent in an effort to reduce costs. However, when it comes to a large and complex purchase like a home, often "you don't know what you don't know." This poses several risks:

  • Conflicts of interest could arise more frequently, as seller's agents primarily represent the interests of the seller
  • First-time buyers, often unfamiliar with the intricacies of real estate transactions, could navigate negotiations without adequate representation, potentially leading to less favorable deal terms
  • Pre-purchase efforts including structural, radon, termite inspections, appraisals, and other diligence may be forgone, and unfavorable findings less likely to be negotiated in the buyer’s favor

The reliance on seller’s agents could impact the advocacy that a buyer's agent typically provides in a manner that far outweighs the costs of dedicated representation.

Shifts in agent specialization

Changes in property and client prioritization

Altered commission structures could make it even more challenging for buyers, and especially those at lower price points, to secure dedicated representation. Agents are likely to gravitate even more toward the seller's side of transactions in high value areas further concentrating services unevenly across markets. This shift might result in:

  • Homebuyers who frequently target lower and mid-priced markets may find fewer agents available to assist them
  • First-time homebuyers who tend to need more explanation and coordination throughout the purchase process may find that, when presented with service offerings, are required to articulate their service needs for a type of transaction they've never experienced.

Such a trend would exacerbate the financial challenges for first-time home buyers, who may also struggle to find qualified agents to assist them.

Navigating the new landscape: strategies for buyers

Educating buyers on new models

Understanding the new commission structure is crucial for buyers to navigate the home purchase market effectively. Education should focus on:

  • The details of how commissions are structured, who is responsible for these costs and what the implications are for whose interests are represented
  • The implications of buyer's agent commissions on total transaction costs
  • The suite of services that a buyer's agent will provide to aid the buyer during the purchase process

Real estate professionals and buyer advocacy groups must prioritize creating comprehensive educational materials and resources to help demystify these changes for first-time home buyers.

Wrapping up: reflecting on real estate's new frontier

The expected changes to real estate commissions are set to redefine the field, with significant potential impacts for first-time home buyers. Ironically, these reforms intended to enhance cost efficiency, transparency, and fairness may actually make homeownership less attainable by increasing upfront expenses and potentially eliminating a dedicated agent focused on the buyer's interests.

The intention of reducing overall costs may or may not come to fruition and includes a heavy dependence on the unique qualifications of each buyer and characteristics of each transaction; cash versus financed, first-time versus 'seasoned', high priced versus mid or low, seller's market versus buyer's market, and so forth.