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The changes that are expected to come if the proposed settlement by the National Association of Realtors is approved could benefit buyers, sellers and Realtors alike, the nonprofit watchdog Consumer Federation of America said in a new report it released on Thursday.

The report gets to the heart of some of the biggest concerns from Realtors who are still parsing through what the proposed settlement could mean for them, the industry and the clients they serve. 

The report repeated the research from CFA and other researchers who believe that commissions will decline as a result of the sweeping changes NAR agreed to make by July. But it was also filled with silver linings — and work ahead — for an industry on edge.

Steve Brobeck | Consumer Federation of America

“Any additional costs to homebuyers are likely to be modest and relatively short-term and will be more than offset by long-term savings and improved service quality,” said Stephen Brobeck, a CFA senior fellow who wrote the report. “Any transitional costs are likely to be dwarfed by the long-term benefits of uncoupled commissions accruing to all home buyers and sellers.” 

The timing of all the changes that could come after NAR makes the reforms it agreed to under a landmark settlement agreement could depend on answers to questions that quickly emerged after details of the settlement were released.

Realtors who spoke with Inman have expressed concern that first-time homebuyers will be left at a disadvantage if sellers — whose agents will no longer be allowed to advertise commissions offered to buyer agents in the multiple listing service — don’t offer to pay the buyer’s broker.

“I feel bad for buyers, particularly first-time buyers,” said Margaret Belmonte, founder and broker of Leading Edge Real Estate. “And I feel bad for VA [buyers] because they can’t pay the fees.”

The short term could include sellers continuing to offer buyers help to pay for agent commissions, CFA wrote in its report. That’s until the industry adapts or makes other changes.

Calls to finance commissions

While CFA has often raised the ire of agents who dispute its findings, the watchdog agrees with many in the industry who are calling for reform in the mortgage industry to allow buyers to finance a portion of their agent’s commission. 

This, Brobeck wrote in the report, would ensure buyers who don’t have the cash to pay their agent could still compete.

“Such a solution would reduce the up-front closing cost that buyers need to have available in cash, which is what most critics of decoupling have focused on,” Brobeck wrote.

Currently, Fannie Mae, Freddie Mac and the FHA don’t allow buyers to finance commissions into their mortgages. The pressure to allow this financing will grow, Brobeck wrote.

Stephen Cooley

Indeed, Realtors have said they expect buyers would welcome the opportunity to finance their agent’s compensation, if they needed to and if given the opportunity. 

“They have no idea how to navigate paying their agent,” said Stephen Cooley, broker for Stephen Cooley Real Estate. “I believe the buyers will still want to finance the buyer’s compensation into the purchase of their home.”

The CFA suggested commissions are already factored into home prices, pointing to statements from university professors and the Department of Justice that sellers already factor in part or all of the expected buyer-broker commission.

It concluded that buyer mortgages are already being used to pay their agents’ commissions, in the form of higher home prices. Adding competition that could lower commissions would then reduce the amount buyers need to finance for their homes.

CFA said it would take time for home prices to drop if commissions decline. But that process would happen faster if the federal government, Fannie Mae and Freddie Mac all prioritized the work of allowing compensation to be financed.

The group proposed a framework where the lenders distinguish between loans where buyers pay their agents on their own and those where sellers offer a credit to pay the buyer broker and add that to the final sales price.

While that process plays out, first-time homebuyers can ask for concessions from sellers to cover additional closing costs.

Agent flexibility

The pressure that’s expected around buyers paying for their decoupled commission could lead to agents and brokerages offering more flexibility around services, CFA wrote.

“We would not be surprised, for example, if groups of agents emerged to serve the market of first-time home buyers,” CFA wrote. “These agents would have detailed knowledge of all government and non-profit subsidy programs and would charge lower rates in the expectation of higher sales volumes.”

Buyers who find their own homes to buy “would be charged much less than one who requires an agent to search dozens of properties over many months,” CFA wrote.

On the flip side, sellers who overprice their homes would pay their agent to work hard to find a buyer.

“Experienced agents who know how to efficiently facilitate the sale or purchase of properties would be able to charge more than agents who recently received their license,” CFA wrote. “But the latter would typically charge less so consumers involved in relatively simple sales transactions may choose to work with them.”

Flat fee and discount brokerages are likely to thrive in this environment, it said.

Even if mortgage financing isn’t available for compensation, CFA wrote, most first-time homebuyers would be able to afford additional closing costs from having to pay agent commissions directly.

“All these consumers will benefit from a lower-cost and transparent marketplace where prices are more closely aligned with service quality,” CFA wrote. 

Buyers would be less likely to work directly with a listing agent if they could finance their commissions, Brobeck wrote.

Commission compression

Effectively ending shared compensation and creating a competitive marketplace is likely to bring down commissions, CFA believes.

Even conservative estimates assume that commissions will decline by at least 20 percent with researchers, including the Federal Reserve Bank of Richmond, estimating that consumer costs could drop by anywhere from 20 percent to 50 percent.

What’s more, if buyer agents don’t offer flexibility around compensation, CFA wrote, more buyers will simply work directly with a listing agent.

“The extent of buyer agent willingness to be flexible on compensation will have a strong effect on the number of buyers who bypass these agents and work directly with listing agents,” the watchdog wrote in its report.

In such scenarios, listing agents who are double-ending would feel compelled to charge less than 5 percent to 6 percent commission, CFA said.

“However, these sales would be less likely to occur, and buyer brokerage would be more likely preserved, if buyers could easily finance agent compensation through mortgages that were no larger than current loans.”

CFA also said that commissions are sustained at a higher rate because a low barrier to entry for Realtors has led to 1.56 million people getting their licenses to compete to sell about 5 million homes per year. 

“Consequently, in the current system, most agents have little experience selling property, earn relatively low incomes, and feel pressure to maintain high commission rates,” CFA wrote. 

Indeed, a recent study — also from the CFA — found that 49 percent of real estate agents sold either one or no homes last year.

Email Taylor Anderson