On October 31, 2023, a Missouri court awarded an immense judgment against the National Association of Realtors (NAR) and two large 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 judgment stands. Those who brought the suit may hope for financial independence from the settlement. They can ignore people with no standing in the case. But lower-income people (often people of color) and owners of real property could suffer if buyers must pay for their owner representation.
These may be among the unintended consequences. There are always unintended consequences.
How the System Works Now
In our current system, there is one brokerage fee paid by the seller and divided between the agent(s) representing the seller and the agent(s) representing the buyer. Buyers don’t spend cash to pay for their professional representation. In effect, they finance the cost of that service.
Sellers were previously buyers and didn’t have to pay for brokerage services when they bought. Sellers leave escrow with a lot of cash. Buyers typically bring almost all their cash.
The mortgage amount is tied to the asset’s value and includes the brokerage and other transaction costs. Most buyers finance most of the home cost, including the amount paid to their agent. Buyers cannot borrow more if they pay for other expert services.
The current system is designed to expose 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. There are often multiple offers, which push the values up a bit.
Buyers’ brokers are a crucial and catalytic force in the market. Buyers’ brokers bring in more buyers. Over the years, more buyers push prices up. Sometimes, that’s the result of a bidding war. Home values increase in most markets most of the time.
How the System Reduces Wealth Inequality
Economist Thomas Piketty noted that America had relatively large wealth inequality. The main reason was that many Americans owned a home. Homeowners are far wealthier than renters. In other words, home ownership is the most significant single factor in wealth inequality.
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. More households would remain renters.
When homeowners die, the home can be sold, and the heirs receive their share of the equity. When renters die, there is no real estate equity for heirs. The parties who sued NAR don’t care about the families who won’t buy and their kids who won’t inherit any real estate equity. They ignore the families who will remain renters.
The Ruling will Hurt Lower-Income Buyers
Minorities and other lower-income households with just barely enough cash for down payments are likely to be disproportionately harmed by no or lower-quality representation. They will be less likely to own a home and thereby increase their wealth.
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.
Most Americans with a positive net worth have the bulk of their wealth in their home equity. For many of us, the “hand holding” was important to move from nervousness to homeownership.
Another Factor to Consider
Here is another factor beyond personal wealth or racial equity. Realtors are small business owners and probably the largest category of independent contractors. If 500,000 independent contractors and small business owners suddenly lost or reduced their income, what impact would it have on their community and the economy?
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. You should care if you own property or recognize that home ownership adds stability to society.
Terry Moore, CCIM is an investment real estate broker with a proven history of success in creating value, 1031 (tax deferred) exchanges, and building wealth through apartment investments. He has taught at UCSD, National University’s MBA program, the Appraisal Institute, SD County Tax Assessor, California Association of Realtors and is a National Certified Commercial Investment Member. For more information contact Terry at [email protected], call 619-497-6424 (Direct), 619-889-1031 (Mobile) or visit www.SanDiegoApartmentBroker.com. (License #0091851).