A recent court decision attempts to solve one problem will likely create a situation where many Americans are going to be locked out of home ownership.
On October 31, 2023, a Missouri court awarded an immense judgment against the National Association of Realtors (NAR) and two brokerage firms, Keller Williams and HomeServices of America. “The plaintiffs claimed real estate commission rates are too high, buyer brokers are being paid too much and that NAR rules and corporate defendants’ practices lead to set pricing.”
Appeals and sister lawsuits are likely for a decade. Our nation, minorities, and real estate owners are likely to be damaged if this line of thought becomes national policy. Buyers would need to pay for their broker’s service at the close of escrow or forgo professional representation on their biggest purchase.
How the System Works Now
Currently, the seller pays one brokerage fee, which is divided between the agent(s) representing the seller and the agent(s) representing the buyer. Buyers finance the cost of the home and the brokerage costs; they don’t pay cash at closing for their agent’s services. The current system makes it almost impossible to finance brokerage costs beyond what sellers fund.
The current system exposes the property for sale to as many qualified buyers as possible. Values increase because more buyers, even those with barely enough cash, can compete to buy homes. Home values increase in most markets most of the time.
How the Court Decision Could Change the System
Most potential home buyers lack an extra $5-20k for down payment and closing costs. If a buyer must accumulate more cash to buy a home instead of financing the cost of their broker, that reduces the number of homes purchased. In other words, more households will remain renters.
Homeowners are far wealthier than renters. Homeownership is the most significant single factor in wealth inequality. When homeowners die, the home can be sold, and the heirs receive their share of the equity. When renters die, there is no equity for heirs, only a stack of rent receipts.
If buyers don’t have professional representation in the biggest purchase of their lives or must pay for that representation when they are stretching to buy a home, fewer households will buy. Lower-income and minority families will be disproportionately disadvantaged. They will be less likely to increase their wealth.
Consider this fact. For many families, maybe most, home equity is not just their biggest asset but maybe their only financial cushion.
There’s another way a policy based on the Missouri decision will make it harder for lower-income families to buy a home. Buyers’ brokers are a crucial and catalytic force in the market.
In addition to bringing in more buyers, buyers’ brokers help buyers navigate a transaction process that can be very scary. Most of us were at least uncomfortable, if not scared when we bought our first home. We worried a lot. “I’m going to sign a loan for HOW MUCH?!?” What if there is a job loss, sickness, transfer, or the market slumps?”
Many agents who serve first-time buyers act a bit like an encouraging older sibling. When Sandy and I bought our first home, our agent loaned a small amount to cover some unexpected costs. We repaid the agent about as much as a dinner out each month for a few years. The home we bought grew our net worth a lot and fast.
For many of us, the “hand holding” was essential to move from nervousness to homeownership.
The Danger
The American system of buying and selling real estate enables many people to buy a home and increase their wealth. If buyers are not allowed to finance the costs of their brokerage representation, that system will likely change in ways that mean fewer households will buy, and real estate values will increase more slowly. More people will probably be renters for life and have less financial cushion.
The American real estate sales system costs more than most other countries, but our home ownership is higher than most other countries. Cost and value are not the same. You should care if you own property or recognize that home ownership adds stability to society.
If You Want a Further Divided Nation, Do Nothing
If you would like more people to be able to purchase a home, ensure elected officials understand why homeowners should continue to be able to finance the cost of their agent. Currently, buyers finance the value of their agent. If the Missouri case becomes national policy, then fewer buyers would ever become homeowners because it would take more time, months, or years to save for the additional cost of brokerage fees.
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What are your thoughts about putting a massive obstacle in the path of people who want to buy a home?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”