69. Evidence from Recent Changes in Real Estate Agency Law, 43 J. L. & ECON. States require real estate brokers and agents to be licensed. In December 2005, NAR filed a motion to dismiss the lawsuit. A form of alternative dispute resolution whereby a neutral third party listens to each party's position and makes a final decision. at 34 (Internet cited by 80% of home buyer respondents, while yard sign cited by 63%). Proponents of minimum-service requirements typically argue that these requirements purportedly: (1) protect consumers; and (2) protect brokers. "180, Some commenters identified discount and fee-for-service brokers as key drivers of price competition. Finally, this Chapter addresses gaps in consumer knowledge that may exist despite the extensive information now available on the Internet. Access recent presentations from NAR economists and researchers. 257, 257 (1998) ("Much of the literature argues that there is . Drawing on commission rate data from the 1983 FTC Report and examining census data on commissions from the period of 1980 to 1998, Hsieh (and his co-author) found evidence suggesting that regardless of home selling prices, commission rates appear fairly stable around 6 percent over the relevant time period and across markets.222 Hsieh studied 282 cities over eighteen years and found that in cities with higher housing prices (and thus higher commission fees and higher profit opportunities for agents): (1) there are more real estate agents relative to the city's workforce; (2) these agents are less productive (measured by sales per agent or sales per hour worked); and (3) wages for agents are not higher than they are in cities with low housing prices. 62-13-403, WI. It is well established that the antitrust laws prohibit an unreasonable agreement by a group of brokers that they will withhold cooperation from a particular broker. "Thus, with the increase in housing prices, the brokerage fee (in dollars) for selling a median-priced home increased even as the commission rate fell. Based on the foregoing, the FTC and DOJ recommend the following to help maintain competition and protect consumers in the real estate brokerage industry: 1. 128. A cooperating broker may represent either the seller or the buyer. Mar. See also NAR, Public Comment 208, at 12 (comment) ("[NAR] does not conduct research on commission rates out of concerns that the research results have the effect of setting a 'focal point' for practitioners to set their commissions."). All confidential disclosures and confidential information related to short sales must be communicated through dedicated fields or confidential remarks available only to participants and subscribers. Such entities are likely to gain financially from increased entry into the brokerage industry. 20, 2005), available at http://www.usdoj.gov/atr/public/comments/209229.htm; Letter from DOJ to the New Mexico Real Estate Commission (Nov. 2, 2005), available at http://www.usdoj.gov/atr/public/comments/212656.htm. See Ann Morales Olazabal, Redefining Realtor Relationships and Responsibilities: The Failure of State Regulatory Responses, 40 HARV. See Nadel, supra note 25 at 23. The real estate brokerage industry has been characterized by cooperation among brokers and agents for well over a century, going back to the first real estate boards and MLSs.321 Under the MLS system, listing brokers rely on cooperating brokers to procure a buyer in the majority of transactions.322 The emphasis on cooperation continues today, as reflected in statements made at the Workshop and in public comments filed with the FTC and DOJ. 103. at 27-28. at 225. On the service dimension, they can offer more assistance or convenience to customers. The only exception to this is in the case of the appointment of designated agents, as outlined in paragraph 10. "); Hsieh & Moretti, supra note 139, at 1086 ("The apparent uniformity of commission rates presents an enormous puzzle, especially if one believes that the cost and effort necessary to sell a house do not increase one to one with the price of housing. Austin Bd. One panelist who worked with eRealty, an early discount broker that operated a VOW,83 described aspects of its business model. 4849, available at http://www.legislature.mi.gov/documents/2005-2006/billengrossed/House/pdf/2005-HEBH-4849.pdf. See TexasDiscountRealty.com, Home Sellers, http://www.texasdiscountrealty.com/sellers1.htm (last visited April 20, 2007). Overall, the evidence suggests that while commission rates may vary modestly with housing prices and overall market conditions, they do not tend to vary in proportion to changing home prices. Acknowledging experience and expertise in various real estate specialties, awarded by NAR and its affiliates. "152 In Mid-America Real Estate Co. v. Iowa Realty Co., the court found that one company accounted for over 50 percent of all residential real estate transactions in Des Moines, Iowa, (when FSBO sales are considered) or approximately 60 percent of all sales completed through the local MLS in Des Moines.153 In a study of the State College, Pennsylvania, area, researchers found that "the largest brokerage firm maintained 31% of the listings and 30% of the sales. Recent research supported by NAR states that "the U.S. real estate industry is a collection of many local real estate markets. John H. Crockett, Competition and Efficiency in Transacting: The Case of Residential Real Estate Brokerage, 10 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 209, 211 (1982). Id. "190, Data reported to the Securities Exchange Commission by Realogy, the largest brokerage firm in the United States, are consistent with these findings. See also FTC OFFICE OF POLICY PLANNING, REPORT OF THE STATE ACTION TASK FORCE (Sept. 2003), available at http://www.ftc.gov/os/2003/09/stateactionreport.pdf (analyzing state action immunity doctrine). at 41. But when competition occurs primarily along such dimensions, brokers may expend more resources providing additional services than the value of those services to consumers.217, According to Hsieh, real estate agents may be competing intensely but do so primarily by expending resources to gain listings rather than competing by lowering their commission fees, a phenomenon Hsieh calls the "tragedy of the commission. See William C. Goolsby & Barbara J. Childs, Brokerage Firm Competition in Real Estate Commission Rates, 3 JOURNAL OF REAL ESTATE RESEARCH 79 (1988). Even though national average commission rates have fallen steadily since 1991 and commission rates appear to vary inversely with housing prices, it appears that rates are sufficiently inflexible to cause commission fees to move in tandem with housing prices. at 81-82; Lewis, Tr. Barnett, Tr. 5 (American Enterprise Institute-Brookings Joint Center for Regulatory Studies, Working Paper 05-11, 2005) [hereinafter AEI-Brookings Paper]; GAO, REAL ESTATE BROKERAGE: FACTORS THAT MAY AFFECT PRICE COMPETITION (GAO-05-947) 15 n.33 (2005) [hereinafter GAO REPORT]. 4:04-CV-10175, 2004 WL 1280895, at *8-*9 & n.5 (S.D. See also Tradii, Public Comment 340, at 1; Wharton, Public Comment 179, at 1. 6 (New York University School of Law, New York University Law and Economics Working Papers 51, 2006); GAO REPORT, supra note 3, at 3, 12-13 (MLS may encourage price conformity by, for example, by requiring that each listing state the fee split that the cooperating broker will receive. Tex. . 15. Stay current on industry issues with daily news from NAR. See Farmer, Tr. Some have suggested, however, that the industry has not yet experienced the sort of sweeping benefits to consumers in the form of cost savings and service enhancements that have been seen in other industries from the use of the Internet and other technology.101 This Chapter examines how the Internet has increased consumer access to information about real estate and how this increased access has in turn affected consumer behavior. C-3300 (1990). Moreover, a realistic price structure is engendered. As a result, there has been a dramatic number of new agents and new entrants into the industry in recent years. See, e.g., VA. CODE ANN. Mary Ethel Kabisch, Administrative Assistant, Litigation III Section, John R. Read, Chief, Litigation III Section 202-307-0468 or John.Read@usdoj.gov, CHAPTER II: THE INTERNET'S ROLE IN REAL ESTATE BROKERAGE, CHAPTER IV: OBSTACLES TO MORE ROBUST COMPETITION, Competition provides American consumers lower prices, better quality services, and greater choice. See also Hsieh & Moretti, supra note 139, at 1078; Hsieh, Tr. Listing brokers may verify the pre-qualification letter. NAR's 1,600 local and state member boards control approximately 80 percent of the approximately 1,000 MLSs in the United States. No. 35. Specifically, by requiring NAR-affiliated MLSs to adopt rules that will allow brokers to withhold their clients' listings from VOW brokers by means of an "opt out,"319 it enables traditional brokers to block their competitors' customers from having full on-line access to all of the MLS's listings. Commission "fees" are the total dollar amount paid by consumers for real estate brokerage services. According to one panelist, "there are no significant barriers to entry or expansion in the residential real estate industry. at 4. Speakers are identified by last name. 202. The staff found that 85 percent of the sellers surveyed were quoted a commission rate of either six or 7 percent by their broker. Thus, if fee-for-service brokers are forced to raise their prices in response to minimum-service requirements, consumers who choose full-service brokers are also likely to pay higher prices for real estate brokerage due to a reduction in the competitive constraint provided by fee-for-service brokers. 225. For example, for each additional agent entering the industry a licensing fee is paid. 109. at 26. "87 eRealty gave a 1 percent rebate to buyers and also took listings from home sellers.88, The panelist emphasized that this business model took the MLS "a step beyond" cooperation and compensation in a business-to-business exchange and used the "power of the information in [the MLS] to better serve consumers. See Steve Sawyer et al., Redefining Access: Uses and Roles of Information and Communication Technologies in the US Residential Real Estate Industry from 1995 to 2005, 20 J. However, in many cases, individual brokerage firms exist under common ownership or as part of a franchise system. "); 1983 FTC STAFF REPORT, supra note 9, at 37 ("At the MLS level, there is, in fact, no effective competition at the present time, and almost all brokers are, therefore, members of one system in each local community.") See Amended Final Judgment and Order, United States v. Kentucky Real Estate Comm'n, Civ. Geoffrey K. Turnbull, Real Estate Brokers, Nonprice Competition and the Housing Market, 24 REAL ESTATE ECONOMICS 293, 295 (1996). The obstacles discussed so far in this Chapter represent concerted efforts of real estate incumbents to insulate themselves from new and innovative types of competitors. Often, at the recommendation of their brokers, prospective buyers receive a letter of pre- qualification from a lender or mortgage broker, which is presented at the time of offer. See supra notes 117-118 and accompanying text. Local broker marketplaces ensure equity and transparency. The reduced susceptibility to unilateral steering of cooperating brokers who rebate underscores the importance of the Agencies' efforts to educate state legislators and regulators about the competitive harms that may be caused by anti-rebate laws. NAR 2006 SURVEY, supra note 4, at 44. 152. See also Yun, Tr. 310. (2007). 19. In effect, real estate becomes by virtue of the multiple listing service 'a more liquid commodity. They found a counter-cyclical pattern for commission rates. Contact the Webmaster to submit comments. The authors did not identify the source of the U.S. commission data. 9321 (2007) (decision and order), available at http://www.ftc.gov/os/adjpro/d9321/070323decisionorder.pdf. 57. "218 The "tragedy" of relatively inflexible commission rates, according to Hsieh, is not just that consumers receive more services and fewer commission fee reductions than many consumers might prefer, but that the agents themselves are no better off.219 Because the ratio of agents to buyers and sellers has increased, agents have to work harder to find clients and consequently spend less time actually closing transactions.220 In this manner, a larger number of agents dissipates the increased profit opportunities by incurring additional expenses to close transactions. In 2005 real estate broker commissions exceeded $60 billion. The ability to buy individual brokerage services, without purchasing the full package offered by full- service brokers, is increasingly important to consumers. 345, 350 (1997) (noting that agency relationships can be created by actions). at 55 ("[I]t's not surprising to me that we observe non-price competition if, in fact, there isn't a lot of price competition." Broker marketing can include paid advertisements in television, radio, print, or online media; informal networking to meet potential buyers and sellers; and giving away pumpkins at Halloween. Broker IDX websites enable home sellers to get greater exposure for their listings, and enable home buyers to search listings, both on national IDX websites (e.g., Remax.com), and on broker websites focused in a local area. 209. Steering refers to any action taken by a broker or agent to avoid cooperating with a particular competitor. Hahn believes that rebating will have a positive impact on consumer welfare, and sees no compelling economic rationale for not allowing rebates since they are a form of price competition that should improve efficiency by putting pressure on brokerages to provide better services at lower prices. FSBOs often offer payment to a broker representing a buyer. 330. cash payments) and inducements, such as gift certificates, coupons, vouchers, and discounted or free services relating to buying and selling a home, to buyers and sellers.67 These are incentives that typically are offered by cooperating brokers to home buyers to encourage them to use the brokers' services. See also GAO REPORT, supra note 3, at 20. See Yun Presentation, supra note 145, at 3. 2 of the MLS antitrust compliance policy. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s). at 83. Realty Multi-List, 629 F.2d at 1373-74 (citing A. Austin, Real Estate Boards and Multiple Listing Systems as Restraints of Trade, 70 COLUMBIA L. REV. "157 Another panelist, a NAR economist, stated that in 2004 "253,000 [licensees] entered the market, became realtor members, and 127,000 dropped out, indicating that the market is fairly dynamic, that there's free entry, free exit. Second, consumers may be unaware of the possibility that their brokers may have conflicting interests that lead them not to provide the consumer with the best possible advice. A home selling for $100,000 more, or $172,000, would pay a commission rate of 5.73%, for a commission fee of $9,901. Specifically, these panelists pointed to rules that keep exclusive agency listings from being uploaded to national real estate websites like Reator.com.310 Recent NAR data show that 77 percent of home buyers search the Internet for homes, and that 24 percent of home buyers first found online the home they ultimately purchased.311 Thus, online exposure appears to be crucial to marketing a home, and, to the extent that successful marketing tends to lead to a higher selling price and shorter time on the market, it is reasonable to assume that homes without such exposure are likely to take longer to sell or sell at lower prices. American Bankers Association, Public Comment 10, at 3 (comment). "A subagent is a cooperating agent who works for a listing broker-salesperson in the sale of a property. In the residential real estate industry, competition is vitally important because buying or selling a home is one of the most important financial transactions a consumer will ever undertake. Hahn, Tr. at 14. State laws and state real estate commission regulations prohibiting rebates are referred to generally as "rebate prohibitions" or "rebate bans." C-3449, 116 F.T.C. 65. In fact, many listing agents will be purposefully slow to respond to inquiries from discount brokers. Other analysts have expressed similar views. 270. Rebates currently are prohibited by law, however, in ten states: Alabama;230 Alaska;231 Kansas;232 Louisiana;233 Mississippi;234 Missouri;235 New Jersey;236 North Dakota;237 Oklahoma;238 and Oregon.239 In addition, Iowa240 prohibits rebates when the customer uses the services of two or more brokers during a real estate transaction. 281. A Report by the 221. at 1089 ("the cost of finding a customer increases with the number of realtors in the market, without necessarily generating additional benefits to the consumer"). Second, requiring buyers' brokers to disclose the potential for dual agency to the seller (and obtain a waiver) would eliminate the danger of undisclosed dual agency. "); Turnbull, supra note 162, at 296 ("[S]ince no direct pricing of service levels is allowed, the housing market and broker market lose an important channel normally responsible for ensuring that the services are provided to the point where the marginal value to clients equals the marginal cost to brokers."). "204, A 1988 study analyzed the relationship between the commission rate offered to cooperating brokers and the selling price of the home.205 The sample data were comprised of 532 home sales drawn from 1983 and 1987 sales data in the Knoxville, Tennessee, Board of Realtors' MLS.206 The study found that the cooperative commission rate was negatively related to the sales price of the home and positively related to the percent of the list price achieved by the seller.207 The authors concluded, "[t]hese results provide strong evidence that the presumption by previous researchers that real estate brokerage firms are unwilling to negotiate differential rates is inaccurate."208. As discussed in Chapter I of this Report, rebates are a meaningful component of price competition between brokers in states that do not prohibit rebates. at 74-75; Sambrotto, Tr. C-4167; Information and Real Estate Services, LLC, FTC File No. Fixed Commissions and Social Waste in the Real Estate Industry, 111 JOURNAL OF POLITICAL ECONOMY 1076, 1088 n.17 (2003) (suggesting that it is a "puzzle" why brokerage contracts are not "non-linear," where the agent receives a fixed fee and a commission for any price above some minimum value); Levitt & Syverson, supra note 16, at 20-21 (suggesting a non-linear compensation scheme, but noting that it may be difficult to implement because the homeowner is less informed than the agent about the home's market value); see also Nadel, supra note 25, at 43-60 (suggesting a fee-for-service rate structure). Under the terms of the settlement, which was approved by a federal judge, the Kentucky Real Estate Commission agreed to cease enforcement of its rebate prohibitions,245 allowing Kentucky consumers to avail themselves of the benefits of increased competition through broker- offered rebates, discounts, and other inducements.246, During the course of the investigation, DOJ found evidence that brokers wanted to restrict rebates because they understood that rebates are a form of price competition. For a discussion of the positive network effects associated with MLSs, see 13 HERBERT HOVENKAMP, ANTITRUST LAW 2220b4, 2223b3 (2d ed. 73. See Kunz, Tr. See Glenn Roberts, Jr., New Mexico Rescinds Controversial Real Estate Rules, INMAN NEWS (July 17, 2006), available at http://www.inman.com/InmanNews.aspx?ID=54526. 51. In recent years, the Agencies have become aware of actions taken by state legislatures, industry regulators and private actors that have the effect of restricting competition in the real estate brokerage industry. Advocates for minimum-service requirements claim that ordinary people are "plainly unable" to handle their real estate transactions, and thus argue that states need to mandate the number of services real estate brokers provide to ensure that consumers receive assistance from an experienced professional.282 Along similar lines, at least one proponent of minimum-service requirements suggests that they are necessary because consumers who hire fee-for-service brokers are subject to so-called hold-up; once a consumer has entered into an exclusive agreement with a fee-for-service broker, the consumer effectively is locked into acquiring from that broker all of the additional brokerage services that subsequently may be needed.283, Another argument is that consumers expect real estate agents to perform certain tasks, and that these laws merely meet consumers' expectations.284 For example, one panelist, the executive director of the Texas Real Estate Commission, noted that minimum-service requirements can "prevent [] false claims by those who sign an agency agreement with a client, promise to provide representation, place the property on the Internet, and then walk away from any further involvement in the real estate transaction. 7. Specifically, both studies find that homes owned by agents sell for more than other homes, even after controlling for housing characteristics that are likely to affect prices. Pursuant to the state's administrative proceedings, the Tennessee Real Estate Commission scheduled a public hearing regarding the rebate ban's final repeal for May 2007. Commenters and participants in the real estate brokerage industry report steering behavior. The commission "rate" is the percentage of the home sales price that the broker retains as a commission. 299. Other referral websites do not display aggregated listings, but use Internet marketing to advertise their referral services and rebates to consumers. at 235 ("there's relatively free entry into the profession and into the real estate brokerage business . at 101 (noting that several types of business models operate under the Century 21 franchise). Generally speaking, agents work directly with consumers and brokers supervise agents. . In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees. Carney, supra note 198, at 339 (excluding five areas with insufficient observations for new homes, in 59 percent of the remaining market areas the mean commission rate paid was statistically significantly higher for existing homes than for new homes). 43, available at http://www.lrc.ky.gov/record/06RS/SB43.htm. 238. In addition, in states that do not prohibit them, brokers may offer rebates (i.e. See Farmer, Tr. Based on weighted average sales price of new and existing homes in 2005 ($271,263), the buyer's broker's share of a $13,834 commission would be $6,917. Federal Trade Commission and One broker described the competition that he faces as follows: "In about 95 percent of the leads I get, I have competition from at least one other Real Estate Agent, and on listing appointments, I am often competing against [two] to [three] other Agents, and I lose quite a few [to] those who list with lower commission rates. 276. If you owe a fiduciary duty to someone, you must act in the. 161. Lucy Malcolm, Paralegal, Litigation III Section What is split Agency? Real estate brokers compete to attract customers in different ways based on price and non-price dimensions. at 198-99. . D. One Explanation of the Seemingly Contradictory Descriptions of Broker Competition. A number of developments have raised competitive concerns, particularly laws and regulations in some states that limit consumer choice of real estate brokerage service offerings and that prohibit rebates to consumers, anticompetitive agreements among brokers, and industry practices that impede competition. One panelist noted that, in her experience as a broker, lenders' increased use of technology has streamlined the mortgage process, causing the average time from contract to closing to fall from forty- five to sixty days, to thirty days.37 The HUD-1 form required by the Real Estate Settlement Protection Act ("RESPA") is a centerpiece of the closing and requires a detailed listing of the flow of funds from buyer to seller and the use of funds, including selling and buying expenses associated with the transaction and the amount of commission paid to each broker. 277. Fee-for-service brokers offer home sellers the option to purchase less than the full bundle of services traditional brokers provide. See, e.g., STEVE SAWYER, LOCAL REAL ESTATE MARKET COMPETITION: EVIDENCE AND INSIGHT FROM AN ANALYSIS OF 12 LOCAL MARKETS 3 (2005), available at http://www.realtor.org/publicaffairsweb.nsf/Pages/Sawyer05?OpenDocument (noting existence of "micro- markets" within metropolitan areas. 9. NAR has cautioned against comparing U.S. and foreign commission rates, claiming that there are too many country-specific factors involved to permit simple comparisons across countries, and the authors of the 2002 study concede that "[d]ata on such differences is not readily available and beyond the scope of this study." In light of the contrasting views presented above, it is reasonable to ask what empirical evidence reveals about commission rates and fees in recent years. 145. . The multiple listing service shall not disclose in any way the total commission negotiated between the seller and the listing broker. at 150 n.430. 18. 2004). This case resulted in a consent decree, under which MiRealSource is prohibited from adopting or enforcing any rules or polices that deny or limit the ability of MLS members to enter into exclusive agency listings, or any other lawful listing agreements, with home sellers.316. See Whatley, Tr. First, some fear that sellers using fee-for-service brokers foist additional work onto full-service cooperating brokers and jeopardize the transaction due to the sellers' inexperience. 164. In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. 113. Civ. Continuing education and specialty knowledge can help boost your salary and client base. at 1082. Further, many provide links to ancillary service providers, such as title insurance companies, escrow services, and home inspectors, and also provide sample forms related to real estate transactions, such as sample purchase or lease agreements.93. Any superceding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount. 244. In terms of branding, the broker may invest in and create a brand or affiliate with a national or regional franchisor that provides a brand with certain reputational value and an advertising campaign. 114. See Commission Minutes at 4 (July 12-13, 2006) (suspending enforcement); Commission Minutes at 3 (Aug. 9-10, 2006) (repealing rule). An exclusive brokerage agreement is defined as "a written brokerage agreement which provides that the broker has the sole right, through the broker or through one or more affiliated licensees, to act as the exclusive limited agent, representative, or transaction broker of the client or customer that meets the requirements of section 339.780." Since the consent decree was entered, consumers in Kentucky have benefited from new reduced price business models. He explained that his company had received letters from states demanding that it stop doing business until it became licensed as an agent because "the services that you offer rise to the level of an agent."305. John R. Read, Chief, Litigation III Section Analysis of commercial market sectors and commercial-focused issues and trends. NAR 2006 SURVEY, supra note 4, at 34. "); Large, Public Comment 241, at 1 ("our average commission per transaction side has dropped 13% this year compared to last year as a result of competition from discount brokerage business models operating in our market"). However, that dynamic may not operate as well in industries, like real estate brokerage, where many consumers have significant limits on their knowledge, thus making it easier for competitors to steer business away from new or maverick brokers, or to otherwise withhold necessary cooperation, without the knowledge of their customers.
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