Proposed national lawsuit settlement could be detrimental to veterans, first-time homebuyers

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Homebuyers that rely on the expertise of real estate agents could end up paying more for a house if terms of a proposed national lawsuit settlement are approved.

And unless a change is made to financing regulations, that commission will be added to the up-front costs, which could negatively impact first-time buyers, lower-income buyers and veterans relying on a VA loan to purchase a home.

The National Association of Realtors (NAR) recently agreed to pay $418 million to settle class action lawsuits related to broker commissions. Included in the deal is enhanced transparency regarding who pays commissions to the agents representing sellers and buyers.

For what seems like forever, once a home sale closed, the seller traditionally paid both fees, with a somewhat customary — but not mandated — 3 percent to their own agent and another 3 percent to the buyer’s agent.

While that arrangement, as well as the percentage, was always negotiable and will remain so, the lawsuit settlement — if approved by the courts and Department of Justice — calls for a clear separation of commission responsibilities.

But because current banking regulations don’t allow the commission to be included in the mortgage financing, it means the buyer will pay that fee at the same time they may already be stretched thin by the down payment and closing costs.

“Buyers are already at such a disadvantage in this market and now they’re adding one more burden,” said Sharon Quataert, real estate broker and owner of Sharon Quataert Realty of Greece.

It’s important to know the settlement likely won’t be approved before July, so the proposed changes are pending. But the industry is preparing.

“Realtors in their everyday life are able to solve problems on the fly, so they’ll adjust and flex to make things happen,” said Jim Yockel, CEO of the Greater Rochester Association of Realtors.

What won’t happen: a drastic reduction in home prices just because the seller won’t be responsible for the buyer’s end of commissions.

“I saw one story that said it could bring home prices down to pre-pandemic prices,” said Corey James Moran, salesperson at Elysian Homes by Mark Siewic and Associates. “Really, they’re going to drop 60 percent because of a 3 percent commission?”

What may happen: Buyers could be tempted to forgo working with their own agent and tackle the process by themselves, hoping for a little guidance from the seller’s agent along the way. Real estate agents obviously say that’s not wise, and for good reason.

For one, the seller’s agent has just one responsibility, and it’s to the homeowner.

“Some buyers may go directly to the listing agent, and that’s not healthy,” said Mike O’Connor, president of the Greater Rochester Association of Realtors, “because the listing agent is representing the seller. The listing agent’s fiduciary duty is to the seller.”

Another reason going it alone can be detrimental: When it’s time to submit an offer, the expertise of a market-savvy agent can be critical, from not only knowing what to include in the offer but how to write the offer.

“If you don’t do it every day, then there’s no way you can be as good at it as someone who does,” Quataert said. “It’s like doing your own taxes or writing your own will.”

Indeed, agents for the buyer do a whole lot more than just open the door at showings and fill out paperwork.

The good ones get a deep understanding of what the buyer wants and needs in their next home, and then helps them find it. They also will use their market expertise to craft a strong, competitive offer, one that protects the buyer if things go sideways with the assessment or other matters.

“We can also connect you with the right lender,” Moran said. “And when the offer gets accepted, there’s keeping that relationship strong. You’re going to refinish the bathroom? We know somebody. You’re going to paint the walls? We know somebody. You want to build a deck? We’ve got somebody for that.”

Some of what seems like common sense could come into play once the settlement is in place. The seller, through negotiations, may still agree to pay the buyer’s commission, whatever that number may be. It is, after all, in the seller’s best interest to maximize the number of buyers’ agents that are guiding homebuyers to showings.

“You want to list your house so it shows the best and you get the most people through the door, so I expect most sellers will still offer to pay the commission,” Moran said. “Bidding wars are what’s driving everything now and buyers’ agents bring more people to a listing. Are you going to risk selling for $75,000 to $100,000 over list just to save your 3 percent?”

Said O’Connor: “In a seller’s market, sellers are reaping the benefits of having the number of offers they’re getting.”

That said, there are plenty of buyers willing to spend, and sellers may assume the chance of a first-time buyer outbidding the rest of the market isn’t likely, so they’ll worry only about paying the commission to their own agent only.

“You might say, ‘Well, then you’re going to have less traffic,’” Greg Sher, managing director at national mortgage firm NFM Lending, said during a recent Ten Minutes Talks by HousingWire. “Yeah, you’re going to have less first-time homebuyer traffic, sure, but there’s no shortage of people with money who want to buy houses right now, so this really boxes first-time homebuyers out.”

That’s because first-time buyers seemingly would be most likely to need an agent guiding them through the process, but they could be one of the groups least able to afford to pay commission fees up front.

There’s an easy solution, O’Connor said: Allow those commission fees to be included in the amount borrowed.

“There is no way now for banks to allow the buyer’s percentage to be financed,” he said. “So that means on top of the down payment and closing costs, the buyer must pay for the commission up front as well. Until the banks are able to finance it as a separate line item, it’s going to be an issue.”

The change seems rather easy to make, but it begins with government home loan agencies like Fannie Mae and Freddie Mac, and government traditionally doesn’t move quickly.

“I’ve talked to many local people in the lending community and they haven’t heard anything, but they also don’t think it’s that complicated,” Yockel said.

Also being hurt by the proposal: veterans, because of regulations with VA Home Loans through the Veterans Benefits Administration. The VA program prohibits a borrower from paying any real estate commissions.

“It’s really putting it to our veterans in a manner it was never intended,” Quataert said. “That’s probably the biggest population of buyers that will get hurt by this.”

And that’s perhaps why the NAR, lenders and government officials will modify rules to eliminate new hardships on veterans and first-time buyers.

“I can’t seem them letting our industry, which is such a big driver of economic activity, live in limbo for too long,” Yockel said.

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