First-time Hoosier homebuyers might face a new hurdle that could make it more difficult to afford a house.
An antitrust settlement reached in March with the National Association of Realtors is bringing more transparency to what for decades has been a bedrock of the industry: the standard 6% sales commission.
Standard policy dictated that home sellers pay the commissions of both their agent and the buyer’s agent, each of which are normally set at 3%.
However, the terms of the settlement decouple those commissions, leaving buyers on the hook to pay their real estate agent’s costs unless other terms are negotiated with the seller.
For first-time homebuyers who have scraped up enough savings to afford a down payment, tacking on the additional commission cost could be a significant financial barrier, explained Doug McCoy, director of Indiana University’s Center for Real Estate Studies.
“It’s 3%, which is a minor percentage of the purchase,” he said. “But from a cash perspective, it’s a big deal.”
For instance, a person buying a $300,000 house would now pay an additional $9,000 to cover the realtor’s costs. That’s on top of the standard 20% down payment that would total $60,000.
“People might have decent jobs, but if they haven’t really set aside much money … that could be really hard on them to come up with another $9,000,” McCoy said.
The changes come as home prices across the state have spiked more than 40% since the summer of 2020, according to IU’s Indiana Business Research Center. At the same time, the average mortgage rate jumped from under 3% to over 7%.
That means the monthly payment on a median-priced home in the Indianapolis metro area swelled from $1,126 to $2,200 — nearly doubling homeowner costs in just three years, the research center reported.
‘THE AMERICAN DREAM’
Adding in agent costs for buyers in an already red-hot sellers’ market could force out some low-to-moderate income Hoosiers who can’t afford the extra fees, according to Nicolas Wyse, a real estate broker and past president of the Elkhart County Board of Realtors.
“Those are the people that we really shouldn’t be trying to hurt and we should be trying to help,” he said.
A smaller pool of buyers is also bad for sellers, who could receive fewer — and less competitive — offers, creating a “negative effect on both sides” regarding pricing, Wyse argued.
That’s a scenario that banks and home lenders will likely fix as the housing market adapts to the changes brought on by the settlement, according to IU’s McCoy.
If first-time homebuyers can’t afford to pay agents’ commissions out of pocket, banks are likely to allow those costs to be tied up in monthly mortgage payments, he said. Spreading an additional 3% over a 20-or-30-year mortgage will make the extra fee barely noticeable, McCoy noted.
“We’ve always had this social policy of trying to help people get a home,” he said. “It’s the American dream. I don’t see us going away from that and now saying, ‘OK, you can only get a home if you pay this entire commission with your own cash.’” Homebuyers should also keep in mind that who pays agents’ costs, and how much, is and always h a s been negotiable, e x pl a i ne d Candy Bair, a REMAX real estate agent in Anderson. Sellers can still agree to pay a buyer’s commission, and many might do that to make their home offer more attractive, she noted.
“Buyers may also choose to write into any offer a contingency requiring the seller to cover the cost or even request other concessions,” Bair wrote in an email.
‘BUSINESS AS NORMAL’
Although changes to how commission payments are structured might impact some buyers, the settlement is ultimately a win for transparency in the housing market, Bair said.
Buyers’ agents are now required to present a separate form explicitly detailing how much they are charging. Before, commission agreements were listed and hidden in the dozens of pages of documents presented to buyers when closing on a home.
“Explaining the buyer agency agreement to clients is an opportunity for a candid conversation about responsibilities, expectations, timelines and priorities,” Bair explained.
That could actually lead to more buyers negotiating costs with their real estate agent, leading to more competition among agents who might be willing to drop a percent of their commission fee to win a client, McCoy explained.
More savvy buyers could also make it harder for sub-par real estate agents to enter the market, thinning the ranks of ineffective agents, noted Wyse from Elkhart County.
“(Buyers) should be able to ask more pointed questions like, ‘What are you actually going to do for me, mister real estate agent?’” he said. “If they’re not able to demonstrate their value, then it’s not going to be easy to just hand them a check.”
Some economists have projected the settlement with the National Association of Realtors could fundamentally change how buyers, sellers and real estate agents operate.
None of this is disrupting Wyse’s day-to-day operations. So far, he said, the biggest impact is correcting and dispelling misinformation about what the settlement means to clients.
“By and large, it’s business at normal,” he said. “I think the only real changes are going to be on the back end for agents and how we communicate.”
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