8, 2005), available at http://www.usdoj.gov/atr/public/comments/209203.htm; Letter from FTC and DOJ to Michigan State Sen. Alan Sanborn (Oct. 18, 2005), available at http://www.ftc.gov/os/2005/10/051020commmihousebill4849.pdf; Letter from the FTC and DOJ to Governor Matt Blunt (May 23, 2005), available at http://www.ftc.gov/opa/2005/05/mrealestate.htm; Letter from the FTC and DOJ to Alabama Senate (May 12, 2005), available at http://www.ftc.gov/os/2005/05/050512ltralabamarealtors.pdf; Letter from the FTC and DOJ to Loretta R. DeHay, Gen. Official websites use .gov Indeed, antitrust agencies have challenged private associations' restraints on truthful competitor advertising. C-3449, 116 F.T.C. James E. Larson & Won J. See 1% Realty, Buying a New Home, http://www.onepercentusa.com/buy.htm (last visited Mar. State laws and state real estate commission regulations prohibiting rebates are referred to generally as "rebate prohibitions" or "rebate bans." See C.F. 59 858-353, TENN. CODE tit. at 160-61 (noting that consumers now may research online not only homes for sale, but also the entire buying and selling process). See U.S. Census Bureau, Median Sales Price of Existing One-Family Homes by Selected Metropolitan Areas, available at http://www.allcountries.org/uscensus/1202_median_sales_price_of_existing_one.html. In short, changes in home sales prices have relatively small effects on commission rates. As explained in Chapter I, brokers must have access to the MLS in order to compete effectively. Civ. 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. at 90. Shiawee X. Yang & Abdullah Yavas, Bigger is Not Better: Brokerage and Time on the Market, 10 J. Part 5: Suggested Rules & Regulations for a Commercial/Industrial MLS Id. This broker pays a referral fee typically a portion of the commission to the referral website that aggregated the MLS data. The latter reading would ultimately seem to leave the choice up to the client as to who receives or presents the offers and counteroffers. 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. 301. See DEL. The ability of novice entrants to attract clients relative to more experienced agents was not discussed at the Workshop and, likewise, is not addressed in this Report. 2d 868, 870-71 (E.D. 2 of the MLS antitrust compliance policy. NAR 2005 SURVEY, supra note 38, at 29. Section D reports one panelist's attempt to make sense of the evidence presented in Sections A through C. A. For more on types of rebates offered in Kentucky and nationwide, see, e.g., Mariwyn Evans, Law: Consumer Rebates, REALTOR MAGAZINE ONLINE (Jan. 1, 2006), available at http://www.realtor.org/rmoprint.nsf/pages/lawjan06; Jessica Swesey, Internet stock brokerage pioneers enter online real estate, INMAN NEWS (Apr. In this Section we discuss the following non-traditional business models: (1) full-service discount brokers; (2) fee-for service brokers; (3) VOW brokers; (4) websites that provide advertising and other assistance to sellers who choose not to use a broker; and (5) referral networks.65, Discount brokers offer buyers and sellers full-service real estate brokerage services at a price lower than the prevailing commission fees.66 For example, a discount broker may offer all of the services provided by a traditional broker for a 3 or 4 percent commission in an area where 6 to 7 percent is the prevailing rate. See also Perriello, Tr. The norm years ago was 7%, then 6% . Several panelists and commenters cited Real Trends estimates of commission rates. Structural Features of the Real Estate Brokerage Industry. This study apparently incorporates the data and relevant findings of an earlier study conducted by the authors. State anti-rebate laws and regulations and their effect on price competition and consumer choice are discussed in Chapter IV.A.1 of this Report. No. DOJ subsequently filed an amended complaint to take the revisions into account. 317. 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. See NAR, Public Comment 208, at 15-16; Delcoure & Miller, supra, at 15. 28. Therefore, a real estate broker must keep confidential any information that may weaken a principal's bargaining position. Id. Kunz, Tr. At the same time, as housing price growth accelerated from 2001 through 2005, real commission fees rose about 25 percent. Reppert, Public Comment 294, at 1. Real estate study .docx - The purpose of a liscense Article 126. 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. 198. See, e.g., Kunz, Tr. In such instances, entitlement to cooperative compensation offered through MLS would be a question to be determined by an arbitration hearing panel based on all relevant facts and circumstances including, but not limited to, why it was impossible or financially unfeasible for the listing broker to collect some or all of the commission established in the listing agreement; at what point in the transaction did the listing broker know (or should have known) that some or all of the commission established in the listing agreement might not be paid; and how promptly had the listing broker communicated to cooperating brokers that the commission established in the listing agreement might not be paid. See the NAR website (http://www.realtor.org/law_and_policy/mls/ild/regulator_letters.html) for more details on the association's instructions and suggested content. Competition among brokers based on service to consumers includes a wide range of possibilities. 54. See Katherine A. Pancak et al., Real Estate Agency Reform: Meeting the Needs of Buyers, Sellers, and Brokers, 25 REAL ESTATE L.J. A form of alternative dispute resolution whereby a neutral third party listens to each party's position and makes a final decision. "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. at 82-83. Michigan H.B. REALTOR.com, http://www.realtor.com (last visited April 20, 2007) (according to its website, REALTOR.com is the "Official Site of the National Association of REALTORS"). See TexasDiscountRealty.com, Home Sellers, http://www.texasdiscountrealty.com/sellers1.htm (last visited April 20, 2007). NAR's policy permits traditional brokers to discriminate against other brokers based on their business models, denying them the full benefits of MLS participation. "); see also, e.g., Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312, 317 (7th Cir. See id. ForSaleByOwner.com Corp. v. Zinnemann, 347 F. Supp. See, e.g., Massachusetts Bd. VA CODE 54.1-2132(C) (effective July 1, 2007) ("A licensee engaged by a seller in a real estate transaction may, unless prohibited by law or the brokerage relationship, provide assistance to a buyer or potential buyer by performing ministerial acts. According to one panelist, "there are no significant barriers to entry or expansion in the residential real estate industry. All Rights Reserved. at 20. For a discussion of exclusive agency contracts and other types of listing agreements, see supra Chapter I.A.2. REV. c. the . "); Abdullah Yavas, Impossibility of a Competitive Equilibrium in the Real Estate Brokerage Industry, 21 J. Namely, a broker's success typically depends on securing significant cooperation from direct competitors. at 41. Advocates for minimum-service requirements also claim that when one side of the transaction is a home seller who is a party to a limited-service listing agreement rather than a traditional full-service broker, cooperating brokers who represent buyers may face special risks. Proponents of this argument state that this outcome is more likely to occur with a fee-for- service listing than a traditional listing because the person soliciting buyers is the home seller who is not regulated as a real estate licensee and thus has less concern about attempting to solicit clients who are already represented. 25. Buyers typically do not pay their brokers directly.25 Rather, listing brokers compensate cooperating brokers according to the terms stated in the MLS listing, which usually specifies an unconditional offer of compensation to any broker that is the "procuring cause" of the sale.26 For example, a listing broker who charges a 6 percent commission may offer to compensate a cooperating broker with 3 percent, half of the listing broker's commission. Research on a wide range of topics of interest to real estate practitioners. 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. Fulfill your COE training requirement with free courses for new and existing members. at 179 ("While some consumers may be sophisticated enough to represent themselves in some or all of the steps of a transaction, most are not."). "Procuring cause" refers to the efforts of the primary broker, who brings a buyer to the listing and causes the transaction to be completed. at 46 (49.6% of sample paid 6%, while 27.9% paid 7%). 65. In response to these investigations, the South Dakota and West Virginia Real Estate Commissions rescinded their regulations prohibiting rebates, thereby enabling consumers in those states to receive more benefits of competition.250 The Tennessee Real Estate Commission voted to suspend its rules and is in the process of rescinding them entirely.251, No Workshop panelist who commented on rebate bans found any justification for them. ANN. Denis A. Breen, Assistant Director, Bureau of Economics According to Hsieh, in a booming real estate market, relatively stable commission rates imply higher commission fees per transaction and an increased profit opportunity for agents. . See id. 13. 1983 FTC STAFF REPORT, supra note 9, at 107-116. GAO found that a "key factor" in the expansion of the Internet is the extent to which information about properties listed in an MLS is widely available. Durham, Public Comment 15, at 1. "); Bourgoin, Public Comment 30 at 1 ("[T]he FTC did a study which was completed and published in 1983. This Report, however, does not draw on any non-public information gathered during investigations conducted by the FTC or DOJ or obtained through litigation brought by the Agencies. When a broker first meets with a party to discuss the possibility of hiring the broker to help sell a home, the broker may provide relevant information, such as an opinion of value, or offer other services to the party in an effort to get a listing contract. REAL ESTATE FIN. The important role played by more listing information being made directly available to consumers underscores the benefits of the antitrust actions against collective action to reduce the availability of such information. Some consumers choose to sell their homes without any assistance from a real estate broker. In other words, commission rates are relatively inflexible. 202. 327. See GAO REPORT, supra note 3, at 13-14, 21. See PATRICK WOODALL & STEPHEN BROBECK, CONSUMER FEDERATION OF AMERICA, STATE REAL ESTATE REGULATION: INDUSTRY DOMINANCE AND ITS CONSUMER COSTS 3 (July 2006), available at http://www.consumerfed.org/pdfs/CFA_Real_Estate_Commissioner_Report.pdf. VOWs are Internet websites through which brokers offer brokerage services online to their registered clients.78 The unique feature of VOW operators is that these brokers offer their clients the ability to search online the same MLS information that other brokers provide to their clients through other delivery methods, such as hand delivery, mail, fax, or email.79 Under NAR rules, VOWs may provide clients with more MLS information than can be provided by publicly accessible broker websites that are governed by NAR's Internet Data Exchange ("IDX") policy, discussed in Chapter II. Cooperating Broker | Super Brokers Glossary Since cooperating brokers do not directly participate in negotiating listing contracts, rebates offer a way for them to compete on price.164. However, the cooperating broker finds a buyer for the listed property. Charles Schneider, Executive Director, James C. Cooper, Deputy Director, Office of Policy Planning In such a case, the subagent works with the buyer as a customer but owes fiduciary duties to the listing broker and the seller. 30. The public comments are available at http://www.ftc.gov/os/comments/realestatecompetition/index.htm and http://www.usdoj.gov/atr/public/workshops/reworkshop_rewcomments.htm. Patrick J. Roach, Deputy Assistant Director, Bureau of Competition 162. Id. 78. First, it appears that many consumers are not fully apprised of their marketplace options. at 68 (describing the option). These websites often will also provide potential home buyers with general information on neighborhoods, such as demographics, crime rates, and school quality. The questionnaire is available at http://www.ftc.gov/opp/workshops/comprealestate/questionnaire.htm. "179 Another commenter observed that "[t]he 6% commission of long ago has decreased to 4 or 5% on the majority of deals. Sub-agents bring buyers to view homes but they don't represent them that is, they don't work on the buyers' behalf. 113. And you can have that information easily searched and frequently searched by buyers from their own homes on the [I]nternet."). 108. Continuing education and specialty knowledge can help boost your salary and client base. 165. at 172; NAR, Public Comment 208, at 12 (comment). 154. At the time of publication of this Report, the Rhode Island legislature is considering minimum-service requirements. Based on the 1992 median price, home sales price indices from the Office of Federal Housing Enterprise Oversight (see http://www.ofheo.gov/HPI.asp) imply median home sales prices of $71,920 in 1985, $63,620 in 1989, and $73,600 in 1992. 133. 237. The Agencies have not encountered evidence supporting any of these arguments in favor of minimum-service restrictions. Contact the Webmaster to submit comments. There is some overlap between the categories because certain business models fit into more than one category. The Internet's Effect on the Real Estate Industry, By placing more information in the hands of consumers, the Internet has facilitated the growth of nontraditional business models such as fee-for-service brokers, VOWs, and broker referral networks that allow consumers opportunities to substitute their efforts for those of the broker, in many cases in return for lower fees. Finally, this Chapter addresses gaps in consumer knowledge that may exist despite the extensive information now available on the Internet. Access to such websites, however, is a key input in the brokerage of residential real estate sales in the respective MLS service areas. See AEI-Brookings Paper, supra note 3, at 19. The importance of the MLS as the primary source of information about homes currently for sale and prices at which comparable homes have sold is discussed in Chapter I.B. Kunz, Tr. "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. 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. White, supra note 47, at 4. refer to the transcript of the Workshop. One agent claimed that, due to the prevalence of discount brokers, real estate agents "are confronted with the question how much can you reduce your commission? 96. "[C]ompeting over variables other than price[,] . While it is not possible to quantify the relative inflexibility based on information reported by the authors, supplemental information can be used to compute a rough approximation. 238. The ability to buy individual brokerage services, without purchasing the full package offered by full- service brokers, is increasingly important to consumers. Both Rutherford et al. 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. 155. with housing prices. A 2002 study analyzing commission rates in the United States and several other countries concluded that U.S. commission rates "should equal something closer to 3.0% versus the common 6% or 7% fee." 215. 242. Instead, the consumer would have to purchase a traditional package of brokerage services for $13,563 or $16,275 (at 5 or 6 percent commission, respectively) or, depending on what was allowed by state law, purchase an augmented MLS-only brokerage or flat-fee package that satisfies the state requirements, which probably would require an additional expenditure of $100 to $1,500 over the basic MLS-only package for a total of $7,382 to $8,782, respectively.279 Alternatively, faced with a higher price for a fee-for-service broker's base level package, a consumer may decide to perform the entire transaction on his or her own. Id. hristopher M. Ries, Trial Attorney, Litigation III Section 47. See also Whatley, Tr. In addition, in states that do not prohibit them, brokers may offer rebates (i.e. REALOGY, REALOGY BUSINESS OVERVIEW 4 (Dec. 2006), available at http://library.corporate- ir.net/library/19/198/198414/items/223251/RealogyDecember06%20Final.pdf. 18. at 178-79; Sambrotto, Tr. This contract often specifies the commission the homeowner will pay the listing broker if the home is sold within a specified period of time, how the home is to be listed in the MLS, and, as discussed below, the share of the commission to be offered by the listing broker to a so-called "cooperating broker," who works with the buyer.19 The listing broker typically markets the home, both within his or her brokerage firm and to other brokers in the community, by uploading the listing data, including the offer of compensation to cooperating brokers, into the MLS database so that the information can be disseminated to cooperating brokers, who in turn can inform potential buyers of the listing. of Realtors, FTC Dkt. 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. For example, Weicher calculates that although the average commission rate as reported by REAL Trends fell by 16 percent (6.1 percent to 5.1 percent), because the average price of existing housing increased during this period ($128,400 to $236,000), the average inflation-adjusted commission per transaction increased by 11 percent in dollar terms between 1991 and 2004.187 More specifically, Weicher's analysis indicates that inflation- adjusted commission fees per home sale declined by approximately 7 percent between 1991 and 1998, but increased 19 percent between 1998 and 2004.188 The GAO, also using REAL Trends' commission rate data, reached the similar conclusion that commission rates do not appear to have changed enough to offset rapidly rising home prices in recent years.189 Specifically, the GAO observed that a decrease in commission rates from the prevalent 5.5 percent in 1998 to an estimated 5 percent in 2005, a 9 percent decrease in commission rates, was more than offset by a 58 percent increase in the median inflation-adjusted home sales price.
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