When acting as a cooperating broker, either as a subagent or buyer's agent, Standard of Practice 3-1 provides the cooperating broker ascertain the terms of compensation, if any, before beginning efforts to accept an offer of compensation. See supra Chapter I.B. See Hahn, Tr. Reg. 681, 689 (2005). Weicher's calculations use average home sales prices, not median home sales prices. "158 He noted that between 1998 and 2005, while the number of home sales increased about 50 percent, the number of NAR members increased about 67 percent.159, Some commenters stressed the ease with which one can become an agent. This study apparently incorporates the data and relevant findings of an earlier study conducted by the authors. A real estate sales agent may be employed by: a. any member of the public. 14. 233. NAR and its affiliated Institutes, Societies, and Councils offer a wide selection of real estate training options. The antitrust laws generally do not require firms to cooperate with their competitors. 5. In the twenty-five years since the Realty Multi-List case, the Agencies have brought a number of antitrust cases involving anticompetitive effects associated with an MLS. A. Overview of the Typical Real Estate Transaction, At its most basic, real estate brokerage is about matching a home seller with a home buyer.9 As one panelist, who represents a major brokerage franchise, remarked, a home seller wants to "negotiate the best possible price in the quickest possible time. 189. 245. MLS-only packages are packages where, for a flat fee, the fee-for-service broker agrees to list the seller's home on the MLS by making a unilateral offer of compensation and cooperation to all of the other brokers within the MLS. Id. at 86 ("The [I]nternet is an ideal platform for marketing real estate. 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." It varies greatly. 131. 325. (Amended 5/10) M. Your resource for all things Real Estate. 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. Thus, it possesses sufficient market power to restrain competition. Competition among brokers is primarily local because real estate is fixed in a geographic location, and buyers and sellers often want some in-person interaction with a broker who has experience and expertise relevant to that particular location. In terms of branding, the broker may invest in and create a brand or affiliate with a national or regional franchisor that provides a brand with certain reputational value and an advertising campaign. Each of the next four largest firms enjoyed less than 10% of the listings and sales. at 39; Perriello, Tr. However, the cooperating broker finds a buyer for the listed property. 08.88.401 (Michie 2005). "); Hsieh & Moretti, supra note 139, at 1086 ("The apparent uniformity of commission rates presents an enormous puzzle, especially if one believes that the cost and effort necessary to sell a house do not increase one to one with the price of housing. Throughout this Report citations to "Tr." & ECON. Other referral websites do not display aggregated listings, but use Internet marketing to advertise their referral services and rebates to consumers. If that cooperation cannot be obtained, it is possible that an entrant might fail even if it is more efficient and provides a more attractive combination of price and service to consumers. some collusion between brokers through the [MLS] . 27, 2007). 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"). with housing prices. . The authors used a sample of 388 home sales in calendar year 1991 from the multiple listing service. 1983 FTC STAFF REPORT, supra note 9, at 107-116. 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). To view PDF files on this website you need the free Adobe Reader. The questionnaire is available at http://www.ftc.gov/opp/workshops/comprealestate/questionnaire.htm. Most fee-for-service brokers offer sellers two or more service packages, and many offer an additional itemized list of optional services. 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. Id. Prudential Real Estate purchased eRealty. 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). 124. See also Blomquist, Public Comment 194, at 1; Forgues, Public Comment 118, at 1 ("Here in Tucson, Arizona, competition amongst real estate agents is fierce. . 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. See, e.g., Earman, Public Comment 73, at 1-2 (average commission is "well under 6%"); Giorgianni, Public Comment 200, at 1 ("My average commission has dropped over the last ten years from 3% to about 2.25%."). See Olazabal, supra note 19, at 91-100; see also Early, Tr. 228. The agenda, transcript, and other information relating to the Workshop are available at the Agencies' websites at http://www.usdoj.gov/atr/public/workshops/reworkshop.htm and http://www.ftc.gov/bc/realestate/workshop/index.htm. 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. "170 If the market were competitive, according to the Association, commissions could fall as much as by half.171 The Association calculated that, assuming the standard of living is the same today as it was in 1990, when the average commission was 6.1 percent, the commission rate necessary to generate the same real return today would be only 4.34 percent.172, In contrast to the views of the Association, NAR173 reported in its public comment that the residential real estate brokerage industry is "fiercely competitive" and that commission rates "are set by market forces in order to attract clients. 162. ANN. We have not found any increased incidence of undisclosed dual agency problems associated with limited-service brokerage. of Realtors v. E-Realty, Inc., No. See also AEI- Brookings Paper, supra note 3, at 12 (access to the MLS is a "potential bottleneck" in the large positive impact that the Internet could have for home buyers and sellers). Typically, agents solicit listings, work with homeowners to sell their homes, and show buyers homes that are likely to match their preferences. "256, One panelist noted that, given the clear benefits of rebates to consumers, it is "hard to find a good articulated defense" of rebate prohibitions.257 Proponents of such provisions claim that they protect consumers from false and misleading offers of rebates and help ensure that consumers choose brokers on the basis of the quality of the service, rather than price. A buyer who is rebated half of this would receive $3,459. The complaints accompanying the consent agreements alleged that each of the six MLSs individually controlled key inputs necessary for a listing broker to provide effective real estate brokerage services, and that each respondent's policy was a joint action by a group of competitors to refuse to deal except on specified terms.313 The rules or policies challenged in the complaints state that information about homes is not allowed to be made available on popular real estate websites unless the listing contracts are exclusive right to sell listings (i.e., that require compensation no matter how the home is sold). 184. . A powerful alliance working to protect and promote homeownership and property investment. Id. In most states, there exists a single licensing board. In addition, in response to an FTC questionnaire, respondents from Colorado, North Dakota, Vermont, and Washington noted that complaints against limited service brokers were minimal or nonexistent. A discussion of the various private litigation involving alleged MLS-related restraints is beyond the scope of this Report. Given how important competition is to consumers in this industry, the Federal Trade Commission ("FTC") and the Department of Justice Antitrust Division ("DOJ") held a public workshop in October 2005 ("Workshop") to address issues affecting competition in the residential real estate brokerage industry.6 Panelists at the Workshop included traditional real estate brokers, brokers offering nontraditional business models, state regulators, and academics.7. 549 (1988). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. Specifically, these panelists pointed to rules that keep exclusive agency listings from being uploaded to national real estate websites like Reator.com.310 Recent NAR data show that 77 percent of home buyers search the Internet for homes, and that 24 percent of home buyers first found online the home they ultimately purchased.311 Thus, online exposure appears to be crucial to marketing a home, and, to the extent that successful marketing tends to lead to a higher selling price and shorter time on the market, it is reasonable to assume that homes without such exposure are likely to take longer to sell or sell at lower prices. See Hearing, supra note 1, at 30 (statement of Rep. Richard H. Baker, member House Comm. In such a case, the subagent works with the buyer as a customer but owes fiduciary duties to the listing broker and the seller. Tex. "); Paulsen, Public Comment 364, at 1 ("If the public felt there was a set fee I would not be asked what my rate is to sell a house. It is clear, however, that rebate prohibitions harm consumers by preventing price competition.258, Over the last two years, several states have imposed so-called minimum-service requirements on brokers. "291 Further, a discount broker also noted that requiring minimum services runs contrary to the concept of fiduciary duty: Consistent with these panelists' comments, the Consumer Federation of America issued a report in June 2006 addressing competition in the real estate industry.293 This report criticized minimum-service laws, contending that they "discourage competition" by "making it difficult for internet-based or other limited service firms to function."294. 280. at 27-28. Promoting the election of pro-REALTOR candidates across the United States. In addition to the MLS-only package, many fee-for-service brokers offer other services. American Bankers Association, Public Comment 10, at 3 (comment). Austin Bd. 122. See Hsieh & Moretti, supra note 139, at 1089 ("as long as the commission rate is fixed, the amount of time that realtors devote to prospecting and farming relative to actually selling a house or finding an appropriate house for a buyer increases as the market becomes more and more competitive, that is, as more realtors are chasing after the same number of customers"). REV. See, e.g., JustRealEstate.org, http://www.justrealestate.org (last visited April 20, 2007). 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. (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. Legislative and Regulatory Restrictions on Competition. 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. 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."). 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 Mark S. Nadel, A Critical Assessment of the Standard, Traditional Residential Real Estate Broker Commission Rate Structure, 23, American Enterprise Institute-Brookings Joint Center for Regulatory Studies (Oct. 2006), available at http://www.aei-brookings.org/publications/abstract.php?pid=1119. See, e.g., Thompson v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1579-80 (11th Cir. 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. According to one panelist, "there are no significant barriers to entry or expansion in the residential real estate industry. Further, NAR membership is required for all agents and brokers that belong to the vast majority of MLSs in the United States. AEI-Brookings Paper, supra note 3, at 12. See Hahn, Tr. Id. 17. 54 As previously noted, brokers using the MLS reduce the costs of matching buyers and sellers and can market their service to a large set of potential clients. 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. 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. Even though national average commission rates have fallen steadily since 1991 and commission rates appear to vary inversely with housing prices, it appears that rates are sufficiently inflexible to cause commission fees to move in tandem with housing prices. 156. 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.