a cooperating broker would be a subagent a cooperating broker would be a subagent

2006) (finding that the features and information available through the MLS at issue are not available through any other service). at 27-28. 169. Anti-rebate laws are discussed in more detail in Chapter IV of this Report. 1991); Austin Bd. The scenarios covered by the FAQs reference Standards of Practice 3-3 and 16-16. Where steering behavior appears to be merely the result of a single firm's unilateral decision not to cooperate with a particular competitor, the Agencies have not pursued enforcement actions. 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. According to one survey, 80 percent of home buyers used the Internet during their home search in 2006, and 24 percent of recent home buyers first located the home they bought on the Internet. For sellers, this may mean setting their own sales price and relying on the wide online exposure of MLS listings rather than broker effort to market their home, and hiring an agent only to list their home in the MLS and for assistance in closing the transaction. . 67. The referral website may then rebate a portion of its referral fee to the consumer, if state law or regulations do not prohibit rebates. "315, Additionally, in October 2006, the FTC charged two more MLSs MiRealSource, Inc. and Realcomp II Ltd. with illegally restraining competition by limiting consumers' ability to obtain low-cost real estate brokerage services. For example, one Workshop panelist who owns a limited-service brokerage noted that in 2004 there were more than 3,500 complaints filed with the Texas Real Estate Commission against brokers and agents, but there has never been a complaint filed against a fee-for-service broker.286 This observation is consistent with what FTC and DOJ staff have learned in discussions with officials in other states.287 Evidence also suggests that home sellers are aware of the prices fee-for-service brokers charge for additional services before they enter into contracts with those brokers. 205. 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. 141. Figure 3 illustrates annual percent changes in real housing prices and commission fees from 1992 through 2005, and provides additional illustration of how fees tend to move in tandem. The source of listings for many of these advertising websites is the MLS. See Lawrence J. Recent research supported by NAR states that "the U.S. real estate industry is a collection of many local real estate markets. Joyce L. Bartoo, Trial Attorney, Litigation III Section . 124. at 27. The staff found that 85 percent of the sellers surveyed were quoted a commission rate of either six or 7 percent by their broker. Meet the continuing education (CE) requirement in state(s) where you hold a license. at 150 n.430. 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). The present law keeps it under control. 45. 187, 187 (2001) ("A number of studies have argued that the uniformity of the commission rate across different properties and regions is an indication of collusive behavior. White, The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like? American Bankers Association, Public Comment 10, at 3 (comment). After the potential buyer has searched the information online and is ready to visit homes in a particular area, the website refers him or her to a local broker. See, e.g., Kunz, Tr. Barnett, Tr. However, because sellers typically do not pay for title searches, abstracts, and many of the other fees associated with closing a residential real estate transaction, the data in this field are likely to closely represent commissions paid by the seller. 2004) (providing a general description of the ForSaleByOwner.com business model). . What is a subagency relationship? 2006 (discussing various theoretical and empirical reasons why the hold-up theory does not appear to apply to fee-for-service brokerage). In other cases, brokers may charge a flat commission fee for certain services or bundles of services. Yet, consumers are paying almost 25 percent more for brokerage services, after adjusting for inflation, than they did in 1998. Of the alternative brokers providing MLS access, 84% reported that they either frequently or occasionally experienced "refusals by other brokers to show homes listed by [their] business," with 49% reporting this as a frequent problem. . 299. See Katherine A. Pancak et al., Real Estate Agency Reform: Meeting the Needs of Buyers, Sellers, and Brokers, 25 REAL ESTATE L.J. A. Hahn, for example, suggested that there may be a transition towards "a new era" in the industry in which real estate firms will develop and use a variety of different business models. Patrick J. Roach, Deputy Assistant Director, Bureau of Competition The Nevada legislature is considering a bill to allow consumers to waive the minimum- service requirements established by the Nevada Real Estate Commission, all of which is part of a package recommended by a minimum-service task force the Commission established. The Agencies have not encountered evidence supporting any of these arguments in favor of minimum-service restrictions. 0. 268. In any instance where a participant discloses a potential short sale, they must also be permitted to communicate to other participants how any reduction in the gross commission established in the listing contract required by the lender as a condition of approving the sale will be apportioned between the listing and cooperating participants. "97, According to NAR's 2006 Profile of Home Buyers and Sellers, 83 percent of home sellers who retained a broker used one who provided the traditional "full" array of services; 8 percent hired a broker who listed the seller's home in the MLS and performed few, if any, additional services; and 9 percent hired a broker to provide a broader array of services, but short of full-service.98, NAR data show that the number of FSBOs consumers who sell their homes without the assistance of a real estate professional has been declining. See Commission Minutes at 4 (July 12-13, 2006) (suspending enforcement); Commission Minutes at 3 (Aug. 9-10, 2006) (repealing rule). Fialkowski, Public Comment 113, at 1. "185 Consistent with this observation, none of the Workshop participants or commenters provided data on commission rates or fees.186 To our knowledge, REAL Trends is the only source that publishes commission rate data. See Olazabal, supra note 19, at 74-75. While cooperation among brokers through a multiple listing service can provide consumers with important efficiencies, cooperation used to adopt rules that hinder rivals can be anticompetitive and, as recent Agency actions indicate, may violate the antitrust laws. 110. According to REAL Trends data, the number of transaction sides per agent declined from 12.7 in 2000 to 10.2 in 2005. 212. Although buyers do not pay a direct fee to their brokers, some portion of brokerage fees likely is built into the prices of homes for sale. See Complaint, United States v. Kentucky Real Estate Comm'n, Civil Act. Rebates are permitted in most states, and brokers in these states may freely advertise their willingness to offer rebates that save consumers hundreds and often thousands of dollars per transaction. refer to the transcript of the Workshop. For example, recent Realogy data indicate that between 2002 and 2006 Realogy's average commission rate declined about 7 percent while the average sales price for the homes they sold increased about 30 percent. 2005). The authors performed regressions analyzing how the contract commission rate was affected by various market conditions and housing variables. The primary evidence presented is the near-uniformity of commission rates in a given market. 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."). In some instances the cooperating and listing agents may work for the same brokerage firm. Most MLSs require that a member broker, upon acceptance of a listing, enter the listing into the MLS database within a short period of time, e.g., twenty-four to seventy- two hours. This Report presents an overview of the information provided and opinions expressed at the Workshop, as well as existing literature and studies, and examines some of the competitive issues raised at the Workshop and in other proceedings.8 Chapter I provides background information on the real estate brokerage industry, including the roles that real estate agents and brokers play in a typical real estate transaction; considers the importance of MLSs; and examines some of the alternative business models used by real estate brokerages. 241. "253 Similarly, another panelist representing a major national brokerage franchise stated that "brokers and agents should be allowed the ability to freely negotiate transaction service pricing with their clients in any way they see appropriate. What is split Agency? 179. Hsieh, Tr. Section A examines the structural features of the real estate brokerage industry. AM. Panelists representing the gamut of real estate business models remarked that they do not see a need for minimum-service laws. . STAT. For example, in states allowing rebates, some brokers operate business models pursuant to which they rebate up to one-third or one-half of their commission to their buyers. Natalya Delcoure & Norm G. Miller, International Residential Real Estate Brokerage Fees and Implications for the US Brokerage Industry, 5 INTERNATIONAL REAL ESTATE REVIEW 12, 29 (2002). This Section examines three types of restraints imposed by state laws and regulations that are likely to reduce competition and consumer choice in the real estate brokerage industry: anti-rebate laws and regulations; minimum-service requirements; and overly broad licensing requirements. For example, one realty company offers a 1% cash back rebate program for home buyers; another offers rebates worth up to $2,250 in the form of HomeDepot or American Express gift cards; and another offers to pay moving costs of up to $1,500 to consumers who buy particular properties. Whatley, Tr. Using that information, as well as Agency expertise, the almost 400 submissions filed in response to the Agencies' request for public comment in connection with the Workshop, and other available information, this Report has undertaken a careful examination of the real estate brokerage industry. 276. 37:1455 (West 2006). In states without minimum-service requirements, a consumer typically can choose an MLS-only package as the lowest price/lowest service level option.275 Minimum- service provisions eliminate the option of buying an MLS-only package, or any other individual service.276 Fee-for-service brokers in minimum-service states must include the enumerated additional tasks in any package of listing services they provide, which often requires the broker to charge a higher price due to the increased costs and time commitments associated with each transaction.277, To illustrate how minimum-service requirements eliminate choice, consider the example of a consumer who is selling his or her home for $271,263 (the average sales price of a home in 2005).278 A consumer who lived in a state without a minimum-service requirement could choose to purchase a basic MLS-only package from a flat-fee broker for about $7,282 ($500 for the MLS-only brokerage package listing fee plus a 2.5 percent commission for a cooperating broker). 1983 FTC STAFF REPORT, supra note 9, at 1. 155. These sellers are referred to as "for-sale-by-owners" or "FSBOs," and they market their homes themselves by placing ads in local media, posting signs, and conducting their own open houses. 174. 249. According to NAR, the MLS has been especially beneficial to smaller brokers, because it "levels the playing field" on which brokers compete. Its data are derived from a survey of the top 500 brokerage firms in the country and a group of rising firms just below the top 500. 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. 213, 217 (2005) (contending that brokers provide value in three areas information intermediation, process knowledge, and social capital in supporting closing needs of buyers and sellers and that even though an online MLS gives buyers greater access to relevant information, most buyers will still need assistance in making sense of this information). According to the author, "[t]he [HUD-1] data clearly reveal systematic variation in the actual home brokerage commission rates according to the three variables examined. "); John C. Weicher, The Price of Residential Real Estate Brokerage Services: A Review of the Evidence, Such At It Is 1 (presented at AAI Conference on Competition in the Residential Real Estate Brokerage Industry Nov. 8, 2005) (noting "a fairly widespread view that brokerage is not a competitive industry" based several perceptions, including: (1) excessive commission rates that are "sticky downward" even as technology reduces brokers' costs; (2) commission rates are higher in the United States than in many other developed countries; (3) lobbying efforts by NAR and state Realtor associations in favor of state laws restricting competition; (4) NAR's successful lobbying of Congress to prohibit banks from entering the real estate brokerage business; and (5) NAR-imposed restrictions on discount and Internet brokers' access to the MLS). 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. In the next Chapter, we turn to obstacles innovators may be encountering. No. Subagency refers to a specific client representation relationship between a property listing broker or real estate agent and another real estate broker or agent who brings in a buyer to purchase the property. 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. "177, Several commenters also provided anecdotal evidence regarding falling commission rates in various areas of the country.178 One commenter, for example, stated: "Real estate is very competitive in Arizona. "[C]ompeting over variables other than price[,] . (Amended 5/10), Multiple listing services shall not publish listings that do not include an offer of compensation expressed as a percentage of the gross selling price or as a definite dollar amount, nor shall they include general invitations by listing brokers to other participants to discuss terms and conditions of possible cooperative relationships. Alternatively, brokers may adopt a combination of flat fees and a commission rate. The complaint against Realcomp alleges that it engaged in anticompetitive conduct by prohibiting information on exclusive agency listings and other forms of nontraditional listings from being transmitted from the MLS to public real estate websites. Shiawee X. Yang & Abdullah Yavas, Bigger is Not Better: Brokerage and Time on the Market, 10 J. No. In a typical transaction, the listing broker may seek the cooperation of other brokers to fulfill the objective of the agency, such as finding a buyer, a tenant/lessee, or a lender. NAR 2006 SURVEY, supra note 4, at 77. See Montgomery County Ass'n of Realtors, Inc. v. Realty Photo Master Corp., 783 F. Supp. Such rules are illegal if they unreasonably restrict competition,308 and the Agencies recently have challenged, as antitrust violations, MLS rules that unreasonably restrict competition by brokers who use alternative business models. In addition, they claimed that the tens of thousands of brokerages, more than two million licensed real estate professionals, and various business models across the country provide consumers with a great deal of choice. 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 While many consumers may be willing to perform search tasks themselves, they may be more likely to continue to rely on brokers for assistance related to the transaction process because it involves expertise derived from broker experience.125 For buyers, this may mean performing much of their early search by themselves online and contacting a broker only after they have become familiar with market offerings and are ready to start placing offers on homes. 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. N.J. STAT. Including home buying and selling, commercial, international, NAR member information, and technology. 1980). at 1369. Nina B. Hale, Assistant Chief, Litigation III Section Action No. 2d 868, 872 (E.D. Member Support is available Mon-Fri, 8am-5pm Central. Most brokers have agents working for them and they collect a portion of those commissions in exchange for providing office space, marketing, and other overhead. Hahn's concerns are more fully developed in his AEI-Brookings Paper, where he describes how the cooperative relationship among brokers in an MLS has the potential to give rise to uniformity in services provided and brokerage fees charged. To view PDF files on this website you need the free Adobe Reader. Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. 122. Fee-for-service brokers often offer an MLS-only package, which allows consumers, who are not permitted by MLS rules to list their homes in the MLS on their own, to list their homes in the MLS by contracting with a broker who is a member of the local MLS.71 For a flat fee (e.g., $500), the broker would list the home in the local MLS and make an offer of compensation in the MLS to other brokers who may cooperate in the sale of the home. See also Lewis, Tr. We refer to all such rebates and inducements generally as "rebates" throughout this Report. A broker who brings the buyer to the listing agent is a subagent of the listing broker. 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. Acknowledging experience and expertise in various real estate specialties, awarded by NAR and its affiliates. In a 1997 study, the authors tested a theoretical model relating commission rates to changes in a local housing market.209 This study addressed both how the distribution of commission rates varied across home prices within a geographic area and with changes in economic conditions across an entire area over time. 4. In other words, the alternative brokers surveyed by the FTC were full-service brokers that undercut their rivals' prices. 54.1-2131(E) (2007). NARs operating values, long-term goals, and DEI strategic plan. A decrease in commission rates does not necessarily imply a decrease in fees. 16. See NAR, Public Comment 208, at 5 (comment) ("Brokerages of different sizes and business models are able to compete on a level playing field because most real estate professionals and firms share their detailed property listing information . One reason is that, if one firm refuses to cooperate with rivals for self- serving reasons when cooperation would have benefited customers, those customers ordinarily would punish the uncooperative firm by taking their business elsewhere. See discussion in Hsieh & Moretti, supra note 139, at 1116 (estimating $1.1 billion to $8.2 billion social waste resulting from excess entry in 1990). Define cooperating broker. Sean P. Gates, Deputy Assistant Director, Bureau of Competition Real estate brokers compete to attract customers in different ways based on price and non-price dimensions. 63. See, e.g., Rules and Regulations of North Texas Real Estate Information Systems, Inc. 5.01-5.02 (amended Sept. 21, 2005), available at http://www.ntreis.net/documents/Documents_262006124924. 332. Access to the VOW and its listings search features is limited to prospective buyers or sellers who have entered into an agreement with the VOW operator that includes a terms-of-use agreement.80 The VOW permits clients to search the database at their leisure until they are ready to contact their broker for assistance in viewing the home, making an offer, etc. Several Workshop panelists and commenters remarked on how the Internet has expanded the amount of information available to consumers, making them more knowledgeable as they enter into real estate transactions. Rutherford et al., Conflicts Between Principals and Agents: Evidence From Residential Brokerage, 76 J. The Agencies have responded to allegations of steering in two distinct ways, depending on whether the steering was unilateral or involved an agreement among incumbent brokers. For example, home sellers who are referred by one broker to another broker sometimes receive rebates. 7, 2006 (describing secret real estate agent referral service operating in Maryland, Virginia, and the District of Columbia that offers outside of the settlement and thus off the books sellers a 1.5% rebate and buyers all of the commission received by the agent above 1.5%). REAL ESTATE FIN. See Yun Presentation, supra note 145, at 3. 9. Many brokers market listings online through their own websites and give their MLSs permission to place their listings on Realtor.com.102 Consumers can view these listings before contacting or forming a relationship with a particular broker. Thus, it possesses sufficient market power to restrain competition. This assistance can include: locating and arranging for inspection of properties by prospective buyers; providing prospective buyers with information such as relative property values and most recent selling prices; helping in the negotiation process; and helping to schedule and prepare for closing of the transaction. REAL ESTATE RES. In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees. E.g., ForSaleByOwner.com, http://www.forsalebyowner.com (last visited April 20, 2007); FSBO.com, http://www.fsbo.com (last visited April 20, 2007); and HomesByOwner.com, http://www.homesbyowner.com (last visited April 20, 2007). Id. The MLS allows broker- members to search and filter homes based on detailed criteria, including property and neighborhood information, offers made on the home, prior sales history, and days on the market.44 In addition to the database of currently available homes, an MLS maintains a database of homes sold through the MLS. 287. See Testimony Summary of Russell Capper, President and Chief Executive Officer, eRealty, Inc. before Federal Trade Commission Office of Policy and Planning Public Workshop on E-Commerce 2 (2002), available at http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/capper.pdf. A discussion of the various private litigation involving alleged MLS-related restraints is beyond the scope of this Report. As a result, Realogy's inflation-adjusted average commission fee increased from about $11,600 in 2002 to about $14,000 in 2006, an inflation-adjusted increase of about 22 percent.191, Rather than using REAL Trends aggregated data, some researchers have analyzed commission rates on a transaction-by-transaction basis to determine the extent to which commission rates vary in relation to a variety of market factors. According to the U.S. Census, the median home sales price in Baton Rouge in 1992 was $73,600. This letter praised the competitive nature of the real estate industry. Promoting the election of pro-REALTOR candidates across the United States. As discussed in more detail in Chapter IV, brokers have certain incentives to "steer" consumers toward those homes that offer the highest cooperating broker commission payment and away from homes listed by brokers known to charge home sellers discounted commission rates. The Agencies have recently investigated allegations of boycotts by groups of brokers. Note 1: The compensation specified on listings filed with the multiple listing service by the participants of the service shall be expressed as a percentage of the gross sales price or as a definite dollar amount. OKLA. STAT. See, e.g., Paul Anglin & Richard Arnott, Are Brokers' Commission Rates on Home Sales Too High? 215. He concluded that these empirical findings are consistent with his hypothesis that "higher commission fees in more expensive cities are dissipated by excessive entry of brokers. 24. This field also includes selling expenses other than commissions, like closing costs and attorneys fees, so it is likely to overstate the actual commission rate. "); 1983 FTC STAFF REPORT, supra note 9, at 66, 68-69 (reporting that as many as three-fifths of recent sellers and three-fifths of recent buyers may have been unaware of the negotiability of commission rates). 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. You can post virtual tours. 295. Use of MLS Rules to Disadvantage Competitors. However, Weicher notes that the magnitude of the sales price effect appears to be small. at 248 ("[A]s Dr. Hsieh and I'm sure many people today have pointed out, the puzzle is why the percentage commission has been so stubbornly persistent. Ohio,302 Virginia,303 and Wisconsin304 recently have adopted this approach. Until the 1990s it was common for the cooperating broker to be a subagent of the listing broker, working on the seller's behalf. See, e.g., J. HOWARD BEALES & TIMOTHY J. MURIS, STATE AND FEDERAL REGULATION OF NATIONAL ADVERTISING 7-19 (1993). 36. As noted in the Complaint, in response to a survey asking brokers whether the Kentucky Real Estate Commission should retain the rebate ban, one broker predicted "[I]f we give rebates and inducements, it would get out of control and all clients would be wanting something. Advancing best practices, bringing insight to trends, and providing timely decision-making tools. See also generally Hepp, Public Comment 117, at 1-3 (alleging various ways in which MLSs across the country have discriminated against nontraditional real estate firms); 1983 FTC STAFF REPORT, supra note 9, at 75 ("Our Consumer and Alternative Broker Surveys suggest the possibility that steering practices may be widely prevalent.").