White, supra note 47, at 4. The authors used a sample of 388 home sales in calendar year 1991 from the multiple listing service. See Robert W. Hahn et al., Paying Less for Real Estate Brokerage: What Will Make It Happen? DOJ alleged that the rules, embodied in a so-called VOW Policy, limited competition from real estate brokers using innovative business models and the Internet to offer better services to their clients. A. 18. "142, Although nationwide market shares provide little information about local market concentration, national-level data do demonstrate that there are many brokerage firms and agents, and that most brokerage offices consist of a small number of agents. See Hearing, supra note 1, at 30 (statement of Rep. Richard H. Baker, member House Comm. For example, the most recent NAR survey of home sellers and buyers found that the majority of home sellers contact only one listing agent before hiring one to assist with the sale of their home.129 Further, there is evidence that some consumers of brokerage services are not necessarily aware that commission rates are negotiable.130 This may be especially true of buyers who pay for their brokers' services indirectly via the purchase price of the home.131 Although some Workshop comments suggest that consumers' awareness of their ability to negotiate over the price and terms of brokerage services is increasing,132 perhaps due to the increasing numbers of discount brokers that have entered the industry over the past few years, some consumers do not negotiate over commission rates. Avoiding fee-for-service listings without disclosure to buyers, however, may raise issues concerning the fulfillment of fiduciary duties. To facilitate a particular transaction, "[b]rokers can help sellers (and buyers) to varying degrees throughout the entire transaction process: helping the seller set the asking price, guiding buyers when they formulate their offers, providing guidance through the maze of paperwork faced by buyers and sellers and recommending reliable inspectors, lawyers, mortgage brokers, etc. See Whatley, Tr. See NAR, CODE OF ETHICS AND STANDARDS OF PRACTICE OF THE NATIONAL ASSOCIATION OF REALTORS, STANDARD OF PRACTICE 17-4 (effective Jan. 1, 2006), available at http://www.realtor.org/mempolweb.nsf/pages/code. The broker typically would retain the flat fee whether or not the home ultimately sells. See GAO REPORT, supra note 3, at 7-8. 1980). 72. 26. Split Agent (noun): a licensee assigned by a broker to represent a buyer or seller in a transaction, usually in an in-company dual agency situation. The latter reading would ultimately seem to leave the choice up to the client as to who receives or presents the offers and counteroffers. Any superceding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount. Secure .gov websites use HTTPS The multiple listing service shall not have a rule requiring the listing broker to disclose the amount of total negotiated commission in his listing contract, and the multiple listing service shall not publish the total negotiated commission on a listing which has been submitted to the MLS by a participant. Peggy Bayer Femenella, Bureau of Competition "190, Data reported to the Securities Exchange Commission by Realogy, the largest brokerage firm in the United States, are consistent with these findings. No. As part of its investigation, the FTC conducted a survey of 154 "alternative" brokers in 1979. For example, one panelist explained that "what you see in the MLS is more detailed information [than is displayed on IDX websites], but again, [brokers] have access to that [information in the MLS], and [brokers] can provide that to the consumer. at 34 (Internet cited by 80% of home buyer respondents, while yard sign cited by 63%). 269. 277. The full transcript is available at http://www.ftc.gov/opp/workshops/comprealestate/051209transcript.pdf and http://www.usdoj.gov/atr/public/workshops/rewagenda.htm. A representative of a self-described "alternative real estate brokerage company" reported: "I have had agents tell me personally they have been instructed by their broker not to show our properties. NAR a logical source of commission data, given its size and access to MLS data through its local associations does not study or report commission rates. MLSs are the primary source of home listings information because they contain real time information on virtually every home listed for sale in a given area, except FSBO homes. In the 1980s and 1990s, several local MLS boards banned exclusive agency listings from the MLS entirely. In addition, there is no indication that the marketplace is incapable of addressing situations where cooperating brokers may face additional work to close a transaction.299 Cooperating brokers can make unilateral choices as to whether or not the compensation offered by the home seller through the MLS, as well as that offered directly by their buyer, is sufficient payment for the effort that may prove necessary to close a transaction. A second effect of minimum-service requirements is that they reduce the competitive constraint fee-for-service brokers place on full-service brokers.281 A full- service broker who wants the business of a consumer considering fee-for-service brokerage will need to offer a lower commission rate and/or increased quality to induce the consumer to choose to purchase the additional services the broker offers. Review your membership preferences and Code of Ethics training status. . 1325, 1346 (1970)); accord Metropolitan Multi-List, 934 F.2d at 1580 ("Market power turns on the number of brokers who use the service, the total dollar amount of annual listings, and a comparison of the rate of sales using the multilisting service to the market as a whole. 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). 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. 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." Although these IDX websites, as explained more fully below, provide critically important avenues for brokers to advertise their listings to potential buyers and their agents, these websites are not a substitute for the MLS. Even though an agent's commission increases with the price of the home, he or she likely retains no more than 1 to 2 percent of the sales price (after paying the cooperating broker and the agent's brokerage firm).137 Therefore, the agent may be less willing than the consumer to take the risks associated with getting a higher sales price, such as waiting for what might be a better offer and perhaps having to do additional work.138 Likewise on the buy side of the transaction, the broker may be less interested than the consumer in negotiating the lowest possible sales price because a lower sales price translates into a lower commission for the broker, likely requires additional work, and may increase the risk that the transaction falls through with no commission paid to the broker. See Weicher, supra note 167, at 121 ("Goolsby and Childs find that the commission rate declines about 0.06 to 0.11 percentage points for each $10,000 increase in home price, e.g., from 5.90 percent to 5.84 or 5.79 percent."). 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. "); GAO REPORT, supra note 3, at 7-8 ("A discount broker may advertise a lower commission rate to attract listings, but the broker's success in selling those homes, and in attracting additional listings in the future, depends in part on other brokers' willingness to cooperate (by showing the homes to prospective buyers) in the sale of those listings."). Alternative brokers providing MLS access tended to be "full-service brokers, offering to consumers the same package of services as the traditional brokers." DOJ, South Dakota Real Estate Commission Permits Real Estate Brokers To Offer Rebates And Inducements (Aug. 17, 2005), available at http://www.usdoj.gov/atr/public/press_releases/2005/210637.htm; DOJ, West Virginia Real Estate Commission Permits Real Estate Brokers To Offer Rebates And Other Discounts (May 4, 2006), available at http://www.usdoj.gov/atr/public/press_releases/2006/215961.htm. Austin Bd. 303. NAR 2005 SURVEY, supra note 38, at 59. 168. at 29-30; AEI-Brookings Paper, supra note 3, at 13 n.49; Nadel, supra note 25, at 4-5. 1980) (membership in the MLS becomes essential to a broker's ability to compete effectively on equal terms); GAO REPORT, supra note 3, at 12. David Meyer, Bureau of Economics Tex. at 146. See also id. Access recent presentations from NAR economists and researchers. 1992). As the FTC and DOJ have explained in letters to several states, minimum-service requirements harm consumers in two ways.274 First, minimum-service requirements frustrate consumer choice by reducing the options available to consumers in the marketplace; consumers who would otherwise choose a lower-cost fee-for-service option are harmed if they can no longer choose their preferred option because it does not comply with state minimum-service requirements. . of Realtors, FTC Dkt. at 89; American Bankers Association, Public Comment 10, at 3. Access to the MLS is one of the most important services that real estate brokers traditionally have offered. As the authors explain, the commission rate captured in the sample is "the contract rate and therefore does not reflect any adjustment or changes that might be renegotiated between the house seller and the agent at the time of sale." What is split Agency? NAR and its affiliated Institutes, Societies, and Councils offer a wide selection of real estate training options. See id. 155. Workshop panelists reported how some MLS rules discriminate against brokers who enter into exclusive agency listing agreements, which provide that the broker is entitled to compensation only when the home is sold by an agent, and not in the event the home seller sells the home on his or her own.309 This is the type of agreement used in most fee-for-service transactions. 681, 689 (2005). In situations where the cooperating full-service broker is an agent of the buyer, but provides assistance to a seller to help close the sale, they claim that the broker risks becoming an undisclosed dual agent. "330 A Workshop panelist who owns a fee-for-service brokerage recounted his experiences: Brokers also filed public comments alleging that competing brokers have withheld cooperation with, or engaged in harassment of, discounters. A subagent can be an unaffiliated cooperating broker. 100. For example, a VOW operator may or may not also be a discount broker. city or state) under examination, as home prices increased, commission rates decreased.200 However, despite a lower commission rate, the results imply the dollar magnitude of the commission fee paid was considerably higher for higher priced homes.201 The study also found that commission rates associated with sales of existing homes were higher and less varied than rates associated with new homes.202 On average, the commission rate paid on sales of existing homes was approximately 1.2 percentage points higher than the rate paid on new home sales.203 Finally, the study found that commission rates in transactions involving cooperating brokers were on average approximately 0.4 percent higher than rates in non-cooperative transactions. Inquiries concerning this Report should be directed to: James C. Cooper, Deputy Director, Office of Policy Planning 202-326-3367 or jcooper1@ftc.gov, Anne Marie Cushmac, Counsel to the Assistant Attorney General Usually, the cooperating broker is the (selling) broker who found the buyer who offers to buy a piece of property listed with another (listing) broker. Joyce L. Bartoo, Trial Attorney, Litigation III Section This factor is discussed in detail in Chapter IV of this Report. at 97-98 (noting the variety of tools available to FSBOs). Generally speaking, agents work directly with consumers and brokers supervise agents. Now more than ever, it is critical for REALTORS across America to come together and speak with one voice. The seller then assumes responsibility for future tasks related to the sale of his or her home. "); Abdullah Yavas, Impossibility of a Competitive Equilibrium in the Real Estate Brokerage Industry, 21 J. Chapter IV addresses obstacles to a more competitive market environment, including government-imposed impediments, MLS rules that can cause anticompetitive effects, and the importance of broker interdependence. In September 2005, DOJ's Antitrust Division sued NAR, alleging that its nationwide rules violated Section 1 of the Sherman Act. However, in many cases, individual brokerage firms exist under common ownership or as part of a franchise system. However, Weicher notes that the magnitude of the sales price effect appears to be small. The growing popularity of some of these new business models is likely linked to consumers' increasing use of, and comfort with, the Internet. 241. 167. [I]t is apparent that the activity within this study is still ongoing within the industry. See Lewis, Tr. 157. In one case, ForSaleByOwner.com sued the State of California for enacting a law purporting to require it to become licensed as a broker, alleging that this action violated the First Amendment because the California statute in question specifically exempted newspapers from licensing requirements.306 The court held that California's disparate treatment of newspapers and FSBO websites ran afoul of the First Amendment: B. United States v. Nat'l Ass'n of Realtors, 2006 WL 34344263, at *14 (N.D. Ill. Nov. 27, 2006) (denying motion to dismiss where group's collective action enabling brokers to unilaterally withhold listings from innovative competitors "is backed up by sanctions and further is alleged to promote, inter alia, express and tacit anti-competitive collusion and to provide a [group]-created mechanism to punish overly aggressive competition from any Internet-based broker"). Cooperating broker who is an agent of the listing broker but not strictly a subagent of the seller. In my own experience, I have already lost listings to brokers who have offered to take the listing at a lower brokerage fee. Instead, their fiduciary duty and their allegience lies with the listing agent. If you owe a fiduciary duty to someone, you must act in the. There is some overlap between the categories because certain business models fit into more than one category. The questionnaire is available at http://www.ftc.gov/opp/workshops/comprealestate/questionnaire.htm. Rutherford et al., Conflicts Between Principals and Agents: Evidence From Residential Brokerage, 76 J. Most fee-for-service brokers offer sellers two or more service packages, and many offer an additional itemized list of optional services. GAO REPORT, supra note 3, at 17, 20-21. A-00-CA-154 JN, 2000 WL 34239114, at *4 (W.D. In addition to the MLS-only package, many fee-for-service brokers offer other services. 172. Consumers differ in their willingness, ability and opportunity to use the Internet to perform functions traditionally provided by brokers. The degree of rate uniformity we found clearly is inconsistent with a market characterized by the particular kind of vigorous competition common in many other markets."). See supra Chapter I.C.3. 215. Contact the Webmaster to submit comments. The MLS facilitates the offering of unilateral offers of compensation to cooperating brokers, according to NAR. Cooperating Broker Compensation Agreement - Pennsylvania Association of C-3300 (1990). Gregory P. Luib, Assistant Director, Office of Policy Planning Suggested Rules additionally Regulations for a Commercial/Industrial MLS Separately Incorporated but Completely Owned by a Board of REALTORS. 328. Higher profits may accrue to participants in the industry not subject to intense entry and profit dissipation. 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 Lewis, Tr. at 149. One panelist, a past president of NAR, stated that an inexperienced seller handling the transaction on his or her own poses several risks to the buyer and the transaction, which cooperating brokers must act to avoid if they want the transaction to close successfully. PDF Consultant's Legislative Report on Agency Relationships - Hawaii at 68 (describing the option). at 14. State commissions, frequently composed of real estate brokers, oversee drafting of and compliance with these laws and regulations.14. For a discussion of exclusive agency contracts and other types of listing agreements, see supra Chapter I.A.2. 246. LA. A NAR economist explained at the workshop that any average commission rate reported by a prominent entity such as NAR could be used by industry participants as a focal point for collusion on commission rates. See Yun Presentation, supra note 145, at 3. See, e.g., Information and Real Estate Services, LLC, FTC File No. Should another broker in the MLS procure the buyer that ultimately purchases the seller's home, the fee- for-service broker is typically obligated under MLS rules to pay the cooperative compensation listed on the MLS to that broker. Durham, Public Comment 15, at 1. Commenters and participants in the real estate brokerage industry report steering behavior. 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.
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