2d 868, 872 (E.D. "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. (Amended 11/98). For example, a broker in Alexandria, Virginia, competes with other brokers able to meet the needs of consumers who are buying and selling homes in the area; this is likely to include other brokerage firms located in and around Alexandria, but not those located in California. 329. 110. MO. at 1369. A powerful alliance working to protect and promote homeownership and property investment. See United States v. Nat'l Ass'n of Realtors, 2006 WL 34344263 at *14 (N.D. Ill. Nov. 27, 2006), available at http://www.usdoj.gov/atr/cases/f219800/219889.htm. Instead of working with customers directly, brokers often provide agents with branding, advertising, and other services that help the agents complete transactions. 33. Offering research services and thousands of print and digital resources. See Amended Final Judgment and Order, United States v. Kentucky Real Estate Comm'n, Civ. While states properly are concerned with issues of consumer fraud, there is no evidence that rebates have harmed consumers or that rebate bans improve service quality. A discussion of the various private litigation involving alleged MLS-related restraints is beyond the scope of this Report. at 38. C-4167; Information and Real Estate Services, LLC, FTC File No. (Amended 5/10) M. Your resource for all things Real Estate. For example, home sellers who are referred by one broker to another broker sometimes receive rebates. 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. 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. at 32. See Complaint, United States v. Kentucky Real Estate Comm'n, Civil Act. Cal. In fact, NAR has agreed that disclosure creates "appropriate expectations" for all parties in the transaction to avoid undisclosed dual agency.301 Further, licensing laws or regulations could be amended to clarify that negotiations with a party who has chosen not to use his or her broker for such negotiations do not imply an agency relationship. See, e.g., Metropolitan Multi- List, 934 F.2d at 1579-80; Austin Bd. "247 Another broker predicted: "This [lifting the rebate ban] would turn into a bidding war, lessen our profits and cheapen our 'so-called' profession. 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. See FEDERAL TRADE COMMISSION, THE RESIDENTIAL REAL ESTATE AND BROKERAGE INDUSTRY: LOS ANGELES REGIONAL OFFICE STAFF REPORT VOLUMES I AND II AND THE BUTTERS REPORT 9 (1983) [hereinafter 1983 FTC STAFF REPORT], available at http://www.ftc.gov/bc/realestate/workshop/index.htm. 134. "290 The chief operating officer of a major website that provides selling aids to FSBOs commented that "there seems to be no demand on the part of the consumer for [minimum-service] laws. 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. Georgia salespersons pre license level 08 chapter 4 - Course Hero Subagency usually arises when a cooperating sales associate from another brokerage, who is not the buyer's agent, shows property to a buyer. (Amended 11/96), Note 2: Multiple listing services, at their discretion, may adopt rules and procedures enabling listing brokers to communicate to potential cooperating brokers that gross commissions established in listing contracts are subject to court approval, and that compensation payable to cooperating brokers may be reduced if the gross commission established in the listing contract is reduced by a court. of Realtors, FTC Dkt. To compete on price, they can offer lower commissions to home sellers and, where permitted, rebates to home buyers. For example, the head of a major real estate brokerage franchise stated that "while we have no reason to believe that the states' motives [in adopting minimum-service laws] are anything but well-intentioned, neither Century 21 nor our parent company, Cendant, believes that minimum standards legislation is truly necessary. 214. 24. Several Workshop panelists expressed a similar view. See, e.g., Zillow.com, http://www.zillow.com (last visited April 20, 2007). 2 of the MLS antitrust compliance policy. Id. 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. Blanche Evans, Where Real Estate Associations Stand On MLS-Entry-Only Listings, REALTY TIMES, Feb. 24, 2005, available at http://realtytimes.com/rtapages/20050224_mlsentryonly.htm. ."). (Revised 11/96), This shall not preclude the listing broker from offering any MLS participant compensation other than the compensation indicated on his listings as published by the MLS, provided the listing broker informs the other broker in writing in advance of their submitting an offer to purchase and provided that the modification in the specified compensation is not the result of any agreement among all or any other participants in the service. See supra Chapter I.A.3. 117. 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. For example, one Workshop participant who operates a flat- fee brokerage stated that about 30 percent of his clients who sign up for a flat-fee listing eventually purchase additional brokerage services.74 This panelist's website offers the flat-fee listing at $595, but also offers two other packages: "flat-fee plus," which costs an additional $1,500 and includes negotiation and post-contractual assistance, and full- service brokerage for a discounted percentage fee.75 Further, many fee-for-service brokers allow their clients to cancel their listing agreement at any time, leaving consumers free to pursue other brokerage or non-brokerage options if they become dissatisfied with the broker's service. See Darryl W. Anderson, Minimum-Service Requirements in Real Estate Brokerage: A Response to Maureen K. Ohlhausen, ANTITRUST SOURCE, Jan. 2006, at 3-4 (arguing that minimum-service requirements are procompetitive because they foster price negotiations before entering a representation agreement over what a fee-for-service broker will charge for all the services required by law). Think about it. One broker observed: "Rebates will increase competition and give consumers more choices in service." 627 (2005); Steven D. Levitt & Chad Syverson, Market Distortions When Agents are Better Informed: The Value of Information in Real Estate (NBER Working Paper 11053, 2005), available at http://www.nber.org/papers/w11053. "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. "254 A panelist representing an online referral network that offers rebates to buyers characterized state rebate prohibitions as "barriers to competition" because rebates facilitate "price competition and deliver value back to the consumer. 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. 5. STATUTES. The evidence presented above shows a dramatic increase in agent entry in recent years coupled with claims of intense competition among brokers. Suggested Rules additionally Regulations for a Commercial/Industrial MLS Separately Incorporated but Completely Owned by a Board of REALTORS. through the local or regional [MLS]."). DOJ subsequently filed an amended complaint to take the revisions into account. See Hsieh, Tr. Sean P. Gates, Deputy Assistant Director, Bureau of Competition In an address at the beginning of the Workshop, (then Acting) Assistant Attorney General Thomas Barnett observed that minimum-service laws and regulations can be viewed as no different from states passing a regulation that says: "When I walk into McDonald's and order a hamburger, I'm told that I also have to buy some french fries, because the state has decided that it might be deceptive or misleading or bad if I only got the hamburger, paid for it and didn't realize I wasn't going to get the french fries." Indeed, several panelists, representing both fee-for-service and more traditional business models, suggested such disclosure as a preferable alternative to minimum-service laws that as practical matter ban fee-for-service brokerage.295. at 172 ("There are no barriers to entry in our industry . at 4. Moreover, because real estate broker commissions are typically a percentage of the home sales price, the dollar amount charged by real estate brokers has increased significantly in recent years as home sales prices have escalated.2 And, because the amount home sellers pay their real estate broker is built into the home sales price, both home buyers and sellers bear this expense.3, The residential real estate industry has undergone a number of substantial changes in recent years. Understanding Agency Relationships - RILiving As a member, you are the voice for NAR it is your association and it exists to help you succeed. For example, brokers may reduce the time they spend servicing each customer face-to-face because customers conduct a portion of the time-consuming listings searches on their own.81 Although brokers offering VOWs differ from other brokerages in their innovative uses of the Internet, in other respects they operate like other brokers. Both Rutherford et al. 295. "10 Brokers reduce the transaction costs of matching buyers and sellers and also provide their clients with ancillary services related to the transaction. Further, NAR membership is required for all agents and brokers that belong to the vast majority of MLSs in the United States. Hahn, Tr. 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). See, e.g., VA. CODE ANN. 14. Cooperating Broker | Super Brokers Glossary 45. Maureen K. Ohlhausen, Director, Office of Policy Planning 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. Mississippi S.B. The Agencies should continue to provide state legislators and industry regulators with information concerning the competitive consequences of state legislation and regulations that threaten to or already do restrict competition and consumer choice in the real estate brokerage industry, and take enforcement action in appropriate circumstances. 54. 187. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose suchlike information to their client before the client makes an offer to purchase other lease. 061-0267; Monmouth County Ass'n of Realtors, Inc., FTC File No. 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. Panelists representing the gamut of real estate business models remarked that they do not see a need for minimum-service laws. 47. We do not, for example, allow consumers to save money by hiring doctors who cut costs by not sterilizing surgical instruments or washing their hands."). with housing prices. Several companies offer services to help FSBO sellers. Id. * (Revised 11/04). In particular, in light of the evidence presented above regarding the relatively limited competition among traditional brokers on the price dimension, innovators should not be discouraged by industry policies or government regulations from offering more flexible commission rates. 151. Id. 1983 FTC STAFF REPORT, supra note 9, at 1. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. "181 Another agent at a full-service firm reported that "since we go up against limited service firms all the time, we are having to reduce our commission rate to keep the client. 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. Thus, it possesses sufficient market power to restrain competition. 4:04-CV-10175, 2004 WL 1280895, at *8-*9 & n.5 (S.D. 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. Lydia B. Parnes, Director, Bureau of Consumer Protection at 34 (Internet cited by 80% of home buyer respondents, while yard sign cited by 63%). There are three principal types of listing agreements. The court denied NAR's motion, holding that collective action that "purports to regulate how [competitors] will compete in the marketplace" can, if proven, constitute a restraint of trade.320, C. Steering As a Possible Obstacle to Greater Price Competition. 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. Subagent Definition, See Hearing, supra note 1, at 5 (testimony of David G. Wood), available at http://financialservices.house.gov/media/pdf/072506dgw.pdf. See Yang & Yavas, supra note 154, at 23 (1995) (reporting that only 12 percent of listings in the State College, PA MLS in 1991 were sold by the listing broker); 1983 FTC STAFF REPORT, supra note 9, at 37 ("approximately 66 percent [of sales] involve more than one broker"). 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. The increased ease with which home buyers and sellers can perform tasks that once were the exclusive domain of real estate agents and brokers likely has been an important factor in the increased demand for innovative, non-traditional real estate brokerage services.4 In fact, the Internet has surpassed the yard sign as the most important marketing tool to reach consumers.5. 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. 327. The question raised is whether this cooperating broker is a subagent of the Seller based on the Seller's listing and the MLS system, or an implied agent of the Buyer based on the actions of the agent in "representing" Continued from page 1 In 2006, the FTC charged six different MLSs the Austin Board of Realtors, Information and Real Estate Services, LLC, Northern New England Real Estate Network, Inc., Williamsburg Area Association of Realtors, Inc., Realtors Association of Northeast Wisconsin, Inc., and Monmouth County Association of Realtors, Inc. with violating Section 5 of the FTC Act by adopting MLS rules that limit the publication and marketing on the Internet of certain sellers' homes, but not others, based solely on the terms of their respective listing contracts.312 The FTC obtained consent agreements with all six MLSs. Christopher P. Adams, Bureau of Economics In the majority of transactions, the commission fee is determined by multiplying the commission rate negotiated in the listing contract by the home's actual selling price. Id. "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. 45:15-3.1 (West 2006). In sum, it is clear that minimum-service requirements restrict choice by not allowing consumers freely to choose what real estate brokerage services they wish to purchase or not purchase. 324. "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. One panelist observed that "[brokers] are cooperative with the competition in ways unheard of in any other industry that I know of. "150, In any case, competition among brokerages tends to be local, and brokerage shares calculated at the local level can be far higher than those suggested by national data.151 For example, in Re/Max International, Inc. v. Realty One, Inc., the plaintiff's expert presented "essentially unchallenged" testimony explaining that "[i]n a majority of the 161 cities and towns in northeast Ohio, the [two] defendants' combined market share exceeds 50%. See Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. 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. This business model is likely to benefit consumers who do not want to forgo broker assistance completely but who feel comfortable handling many aspects of the transaction without such assistance. 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. 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. One panelist who is a fee-for-service broker describes this as his "flat-fee plus" option, where, in addition to listing the home in the MLS and placing it on several websites, he provides the seller assistance once the buyer is found. 34. However, the authors' statistical results suggest commission rates are relatively inflexible.213 This result is consistent with the findings based on Real Trends data described above: as home sales prices have increased since 1991, commission rates have declined, but not in proportion to increases in home sales prices. 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. See infra Chapter IV. 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. What is co-broking, and why does it matter? Id. Cooperating broker who is an agent of the listing broker but not strictly a subagent of the seller. See Commission Minutes at 4 (July 12-13, 2006) (suspending enforcement); Commission Minutes at 3 (Aug. 9-10, 2006) (repealing rule). 72. Both the MiRealSource and Realcomp complaints allege that the conduct was collusive and exclusionary, because in agreeing to keep non-traditional listings off the MLS or significant public websites, the brokers enacting the rules were, in effect, agreeing among themselves to limit the manner in which they compete with one another, and withholding valuable benefits of the MLS from real estate brokers who did not go along. Share sensitive information only on official, secure websites. At the time of publication of this Report, the Rhode Island legislature is considering minimum-service requirements. [I]t is apparent that the activity within this study is still ongoing within the industry. As such, these obstacles have received particular attention from the Agencies. 91. 217. Although there is no legal impediment to consumers buying and selling homes on their own, the large majority of consumers choose to work with a real estate broker. Learn how to properly use the logo and terms. Reppert, Public Comment 294, at 1. Although neither commenters nor Workshop panelists presented evidence to explain the cause of relatively inflexible rates, this phenomenon has meant that the price that consumers paid for brokerage services rose considerably during the recent run-up in housing prices. NAR, Home Buyer & Seller Survey Shows Rising Use of Internet, Reliance on Agents (Jan. 17, 2006), http://www.realtor.org/press_room/news_releases/2006/hmbuyersellersurvey06.html. 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). 108. 56. 1999). Because broker fees are paid indirectly, buyers may be less likely to negotiate over them. b. the number of sales the agent will likely close in that price range during their first year. See Yun Presentation, supra note 145, at 3. Id. Fialkowski, Public Comment 113, at 1. But see NAR 2006 SURVEY, supra note 4, at 74 (69% of sellers contacted only one agent; 74% of sellers found their agent through either a referral or a prior relationship with the agent). When exercised, the opt-out provision prevents Internet-based brokers from providing all MLS listings that respond to a customer's search, effectively inhibiting the new technology. America's largest trade association, representing 1.5 million+ members, including NAR's institutes, societies, and councils, involved in all aspects of the residential and commercial real estate industries. Legislative and Regulatory Restrictions on Competition. J. 182. Yun showed evidence of entry as a result of the recent housing market boom, as well as evidence that NAR membership has varied directly with housing prices for at least the past 20 years. 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. A-00-CA- 154 JN, 2000 WL 34239114, at *4 (W.D. Weicher, supra note 167, at 124. 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. See Rutherford et al., supra note 16, at 629 ("Given that the agent receives a small portion of the transaction price as commission, the agent's goal of maximizing the expected commission may diverge from the seller's goal of maximizing the selling price. See, e.g., Massachusetts Bd. 39. Some commentators have argued that buyers may have the misimpression that their brokers' services are free. 69. 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."). While many buyers may see this as a benefit that allows them greater control over their home-buying process, brokers may also benefit. In contrast to VOWs and to brokers' "brick and mortar" offices, websites that rely on an IDX datafeed contain less information than the actual MLS database, and that information may be out of date.104 If a broker opts to not participate in the IDX, which NAR's rules allow, none of the broker's listings are included on the IDX datafeed, and he or she cannot operate a website based on an IDX datafeed. at 111. at 149 (listing several features of real estate websites, including property photos, virtual tours, rich text, mapping functionality, and neighborhood information); Sambrotto, Tr. "174 NAR rests its conclusion in large part on particular attributes of the industry, which, according to NAR, "resemble[] a perfectly competitive industry structure with production at the lowest possible cost and consumers benefiting from competitively determined prices.