How will first-time buyers fare if sellers can’t offer buyer agent compensation?

As real estate practitioners adjust to the practice changes that took effect in August, and the industry waits for final approval of the NAR settlement from the court in November, questions continue about seller offers of compensation.

The arrangement known as cooperative compensation allows sellers to choose to offset the cost of buyers’ agents. By making an offer of compensation, sellers communicate to buyers, as a marketing tactic, that their transaction costs may be reduced.

The settlement requires listing agents to stop making offers of compensation for buyer’s agents on Multiple Listing Services (MLSs). It explicitly allows for such offers to be made off-MLS, however. But advocates and lawyers who desire to go further than the settlement are signaling that they want to see such offers stopped altogether. They do so without having grappled with the negative impact of such a change on first-time buyers, veterans, and other cash-strapped buyers.

If sellers cannot notify buyers about offers off-MLS, many buyers will not have the information they need to determine whether a home purchase is financially feasible. For buyers who are trading up or can rely on family wealth to make up the difference, covering the cost of their own agent should not present much of a problem. But for first-time and other cash-strapped buyers—those who are not relying on the proceeds of a home sale, who may be using a 100% financed VA loan, whose agents may be layering forms of assistance to put together enough cash for closing—knowing in advance about the seller’s contribution to their agent costs may be essential.

Advocates focused solely on the concerns of home sellers—who have gained billions in equity in their properties in recent years—are now creating post-hoc justifications for why eliminating cooperative compensation benefits low-wealth buyers. None of these arguments hold water.

Advocates argue that buyers who want assistance from the seller can ask for a concession in their purchase offer. But such a buyer who is competing against multiple offers would likely see their offer fall to the bottom of the pile. In a bidding war, cash buyers and investors will win, and first-time buyers will lose.

Some suggest buyers could overcome this hurdle by bidding up their offer price to win a concession so the seller would net the same amount. But this practice would have an inflationary effect on home prices. In fact, if buyers broadly adopted this tactic, it would “bake in” the price of commissions when they weren’t baked in before. This tactic will only work if the home appraises at the higher value, of course—leaving the consumer with a larger mortgage and monthly payment.

Advocates also argue that buyers will benefit from “reduced home prices.” But housing economics shows that prices are set by supply and demand, not by fees. High housing prices are caused by a housing shortage. Lowering commissions will not cause sellers to reduce their prices. They will continue to charge the highest price the market will bear, and leave buyers with an added up-front cost.

The so-called “elegant solution” presented by these advocates—financing real estate commissions—also leaves buyers worse off. Assuming financial regulators would spend the years necessary to make the changes, a commission cannot be added into a mortgage unless the home appraises at the higher value. If the home does not appraise, the financing would be a separate personal loan, raising the borrower’s debt-to-income ratio, potentially disqualifying them from the mortgage or making the cost to borrow go up. “Rolling the fees into the mortgage” leaves the buyer with a higher interest rate. These “solutions” do not leave buyers better off.

Advocates presenting dubious arguments are helping to create a two-tiered system of brokerage services. Sophisticated, privileged buyers will do fine, but those without a pile of cash may be forced to go unrepresented, pay for mistakes after purchase, make higher monthly payments, or drop out of the market altogether.

What does that mean in the long term? If we shut off access to real estate services for first-time and entry-level buyers, if investors snatch up the inventory and turn them into rentals, what will our industry look like in a decade or two? These are the questions that advocates who want to upend the real estate industry further cannot answer. But we must, if we want to keep the American dream of homeownership within reach for tomorrow’s homebuyers.

Alexia Smokler is the Director of Fair Housing Policy & Programs for the National Association of Realtors.