NAR argued that its VOW policies do not violate the Sherman Act because they merely empower individual brokers to opt out and therefore "restrain" nothing. This study apparently incorporates the data and relevant findings of an earlier study conducted by the authors. Overall, Form CBC is used to deal with compensation between brokers. Real Estate Subagency in California: What Prospective Agents Need to 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. Furthermore, given that the targeted selling price will impact the time the asset stays on the market, the agent's desired time on the market may diverge from that of the seller."). Further, NAR membership is required for all agents and brokers that belong to the vast majority of MLSs in the United States. In addition to the MLS-only package, many fee-for-service brokers offer other services. It is a standard question now. 100. 4. 6, 2006), available at http://www.inman.com/inmannews.aspx?ID=50907. In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. In those investigations, however, the Agencies have not found evidence sufficient to establish an agreement jointly to steer clients away from or boycott a particular rival and have declined to bring an antitrust case. 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 . Multiple listing services may, as a matter of local discretion, allow participants to offer cooperative compensation as a percentage of the net sales price, with net sales price defined as the gross sales price minus buyer upgrades (new construction) and seller concessions (as defined by the MLS unless otherwise defined by state law or regulation). 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. MO. 189. 1992). Fees, measured in constant 2006 dollars, are based on median home prices so as to represent what a typical consumer would pay in real estate commissions to sell his or her home. 49. 129. In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees. See GAO REPORT, supra note 3, at 7-8. See, e.g., California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980) (entity claiming state action immunity from federal antitrust laws must demonstrate that its actions are (1) pursuant to a clearly articulated state policy intentionally displacing competition with an alternative regulatory scheme and (2) actively supervised by the state or a qualified government agency or official). 2004) (providing a general description of the ForSaleByOwner.com business model). As one broker- panelist explained, in addition to real estate brokers, many other actors are necessary to assure a successful closing, including the mortgage lender, the insurance agent, the home inspector, the termite inspector, the surveyor, the appraiser, the closing attorney (in some states), the title company, and the escrow agent.35 According to this panelist, the seller's broker and the buyer's broker "will work together to make sure that all parts of the transaction are facilitated appropriately," including "working through the transaction itself, meeting the home inspector, helping the seller and/or the buyer understand what the results of the inspection were, overseeing repairs, making sure that things that are necessarily time-sensitive get responded to in a time-sensitive manner."36. 17. 9321 (2007) (decision and order), available at http://www.ftc.gov/os/adjpro/d9321/070323decisionorder.pdf. 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. American Bankers Association, Public Comment 10, at 3 (comment). Brokers and agents (hereinafter, "brokers")15 usually are more informed about the local real estate market and the process of a real estate transaction than most home buyers and sellers.16 This informational advantage derives from two sources. 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. 6. 93. These licensing statutes form the framework for state regulation and oversight of the profession by establishing requirements for licensure (such as minimum age, education, and experience) and various requirements and prohibitions regarding business practices and conduct. NAR, Public Comment 208, at 6 ("In a few markets, some firms may have a larger than usual market share, but market shares are known to change measurably from one year to the next."). "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. "89 As he explained, consumers "expect systems, servers, to do the grunt work of searching for homes, gathering data on schools and neighborhoods, monitoring new listings, and the reporting whenever a listing fits their profile, [and] scheduling appointments . There were contrasting views among Workshop participants and commenters about the extent to which brokers compete on the price dimension. Empowers REALTORS to evaluate, enhance and showcase their highest levels of professionalism. 45. Id. Reppert, Public Comment 294, at 1. 150. A-00-CA- 154 JN, 2000 WL 34239114, at *4 (W.D. "); Southern Motor Carriers Rate Conference v. United States, 471 U.S. 48, 62-63 (1985) (public utility commission not the state itself); Goldfarb v. Virginia State Bar, 421 U.S. 773, 791-92 (1975) (attorney fee schedule established by county bar association was not immune from antitrust liability). 152. See Olazabal, supra note 19, at 74-75. NAR's 2006 Survey estimated that FSBOs account for about 12 percent of home sellers, with an additional 5 percent of sellers first trying the FSBO route, but then retaining a broker to complete the sale.99 NAR's 2005 data estimated FSBOs at approximately 13 to 14 percent, and noted that this number has been steady since 2001, and is lower than it was for the 1990s: 19 percent in 1991; 17 percent in 1993; 15 percent in 1995; 18 percent in 1997; and 16 percent in 1999.100, II. "154 A study of real estate transactions obtained from the Lincoln, Nebraska, MLS reported that although homes in the sample were listed by fifteen brokerage firms, "[t]wo of these firms listed 75% of the properties in the sample, with the remaining listings fairly evenly distributed between the other thirteen firms. at 113-14. 233. Through a cooperating broker agreement, the cooperating broker earns a share of the commission paid at the close of the sale. Listing brokers may verify the pre-qualification letter. In effect, real estate becomes by virtue of the multiple listing service 'a more liquid commodity. 3 (Mar. Including home buying and selling, commercial, international, NAR member information, and technology. Rather, minimum-service requirements discourage competition and raise prices for consumers. Although consumers benefit to some extent from all of these forms of competition, the available data suggest that brokers may compete less on price than would be expected in a competitive market. See Farmer, Tr. ON LEGIS. 83. 103. 279. Another gap in consumers' knowledge albeit one that does not necessarily affect competition in the real estate brokerage industry may be that consumers are not fully informed as to what, if any, duties they are owed by their broker. Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. at 3. With regard to the risk of a broker not receiving compensation because the home seller deals directly with the buyer, the MLS already protects the cooperating broker through its dispute resolution mechanism.300 As explained in Chapter I, a broker who secures a buyer for a transaction is entitled to cooperative compensation as offered via the MLS listing. Ohio,302 Virginia,303 and Wisconsin304 recently have adopted this approach. Agency RelationshipsUnit 5 109 Is the Cooperating Broker a Subagent? See C.F. The sample data (provided by a local MLS) consisted of 15,608 single-family home sales in the Baton Rouge, Louisiana metropolitan area from 1985 through 1992.210 Similar to the two studies described above, the authors found that the listing broker commission rate varied statistically significantly with a variety of home characteristics.211 For example, commission rates declined, albeit at a decreasing rate, with the list price of the home.212 However, despite a lower commission rate, the authors' estimates showed that the actual commission fee paid rose with housing prices. 166. See The Changing Real Estate Market: Hearing Before the House Financial Services Subcommittee on Housing and Community Opportunity, 109th Cong. "); see also, e.g., Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312, 317 (7th Cir. at 233 ("[T]he real puzzle in the real estate business is why does there seem to be this relatively fixed commission structure? . Royce de R. Barondes & V. Carlos Slawson, Jr., Examining Compliance With Fiduciary Duties: A Study of Real Estate Agents, 84 OR. Id. 260. 283. Resources to foster and harness the grassroots strength of the REALTOR Party. "A subagent is a cooperating agent who works for a listing broker-salesperson in the sale of a property. 290. 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. 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). Founded as the National Association of Real Estate Exchanges in 1908. See, e.g., Metropolitan Multi- List, 934 F.2d at 1579-80; Austin Bd. 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. Hahn believes that the involvement of multiple parties and the "unique" compensation arrangements in real estate transactions make it difficult for home buyers and sellers to pay for services according to their needs, and he questioned whether alternative business models have had a fair chance to compete under the current structure. 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. Reg. In its complaint, DOJ alleged that NAR's policy was the product of collective action by NAR's members and offers no procompetitive benefit. This arguably can give rise to legal liability for both the cooperating broker and the buyer.297 At the same time, however, the buyer may want his or her agent to help the unrepresented seller just so the transaction can properly close.298. These are the 'normal' modes for virtually all markets, regardless of how they might vary from one another, and nationwide a very high percentage of real estate brokerage transactions occurred at a commission rate of one or the other. In other cases, brokers may charge a flat commission fee for certain services or bundles of services. Hahn observed that such specialization and dividing of real estate services into smaller parts could result in "substantial gains for consumers." The primary evidence presented is the near-uniformity of commission rates in a given market. 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. C-3300 (1990). 244. 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). THE INTERNET'S ROLE IN REAL ESTATE BROKERAGE. The Cooperating Broker Compensation Agreement (Form CBC) provides the buyer agent, transaction licensee or the subagent for seller to be paid by the listing broker. 30. See Tenn. Admin. See, e.g., Lord, Public Comment 254, at 1 ("The competition is fierce the majority of time that an agent has a listing appointment . Barnett, Tr. 19. at 225-26. According to a Workshop panelist, there are approximately 98,000 brokerage firms operating over 200,000 local offices in the United States.143 These offices provide potential employment for approximately 2.5 million real estate licensees (of which more than 1.2 million are members of NAR).144 In 2004, 96 percent of brokerage offices in the United States employed ten or fewer agents.145 From 1983 to 1999, the portion of brokerage offices with five or fewer agents increased from 51 percent to 60 percent.146 In contrast, the portion of offices with a sales force of more than 50 agents never exceeded 5 percent during that time period.147, There is conflicting information regarding the percentage of home sales nationwide accounted for by the largest real estate firms. DOJ's lawsuit is pending in the federal court in Chicago, Illinois. See R.C. Cal. Hahn, Tr. VOW brokerages typically maintain physical offices in the markets in which they operate, staff those offices with licensed brokers who participate in their local MLSs, and represent both buyers and sellers.82. The MLS facilitates the offering of unilateral offers of compensation to cooperating brokers, according to NAR. at 46 (49.6% of sample paid 6%, while 27.9% paid 7%). See Letter from DOJ to Oklahoma Representatives and Senators (Apr. 303. 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. 327. See Weicher, supra note 167, at 121 ("Goolsby and Childs find that the commission rate declines about 0.06 to 0.11 percentage points for each $10,000 increase in home price, e.g., from 5.90 percent to 5.84 or 5.79 percent."). 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. Whatley analogized the real estate transaction to a play where each actor has a role and knows the script; the play would be disrupted if an actor were to enter at the wrong time or forget his or her lines. 114. Promoting the election of pro-REALTOR candidates across the United States. Fulfill your COE training requirement with free courses for new and existing members. Park, Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance," 17 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 422, 428-29 (1989). 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. N.D. 1980) (membership in the MLS becomes essential to a broker's ability to compete effectively on equal terms); GAO REPORT, supra note 3, at 12. See Table 1 in Chapter III of this Report. The real estate brokerage industry has been characterized by cooperation among brokers and agents for well over a century, going back to the first real estate boards and MLSs.321 Under the MLS system, listing brokers rely on cooperating brokers to procure a buyer in the majority of transactions.322 The emphasis on cooperation continues today, as reflected in statements made at the Workshop and in public comments filed with the FTC and DOJ. "); Salinger, Tr. A-00-CA-154 JN, 2000 WL 34239114, at *4 (W.D. The Only Thing Discount Brokers Might Disrupt. Tex. Both Rutherford et al. In the residential real estate industry, competition is vitally important because buying or selling a home is one of the most important financial transactions a consumer will ever undertake. REAL ESTATE FIN. Namely, there has been substantial agent entry in recent years225 and the average number of transactions per agent declined by 20 percent from 2000 through 2005.226 Even though the income available from each transaction increased over the time period, according to NAR, the "typical" income of its members fell from $52,000 in 2002 to $49,300 in 2004, while the income of sales associates (who comprise two-thirds of NAR's membership) decreased from $41,600 to $38,300 during the same time period.227 A NAR economist appearing on a Workshop panel explained: "That's not surprising. The average sales price of an existing home in 1980 was $72,800. at 29-30; AEI-Brookings Paper, supra note 3, at 13 n.49; Nadel, supra note 25, at 4-5. Patrick J. Roach, Deputy Assistant Director, Bureau of Competition Usually, the cooperating broker is the (selling) broker who found the buyer who offers to buy a piece of property listed with another (listing) broker. "113 Another commenter observed: One panelist opined that "a generation of Americans are now comfortably and constantly connected to the [I]nternet and to [eC]ommerce. I see agents advertising commissions as low as 2%. MO. Cf. See NAR 2006 SURVEY, supra note 4, at 78 (75 percent of home sellers surveyed reported that the listing agent was compensated with a percentage of the sales price of the home). The typical real estate transaction involves several steps. (2007). This Chapter also discusses the Internet as a means of providing real estate brokerage and related services to consumers. The obstacles discussed so far in this Chapter represent concerted efforts of real estate incumbents to insulate themselves from new and innovative types of competitors. This Chapter explores evidence concerning competition among brokers. See Hsieh & Moretti, supra note 139, at 1089 ("prospecting" and "farming" are not "entirely socially wasteful," rather "society's gain from free pumpkins for Halloween and from free notepads with the realtor's picture is far less than their cost to the realtor, in terms of the direct cost of these freebies, but particularly in terms of the opportunity cost of the time the realtor puts into such activities. See Robert W. Hahn et al., Paying Less for Real Estate Brokerage: What Will Make It Happen? FINANCIAL ECON. See also Tradii, Public Comment 340, at 1; Wharton, Public Comment 179, at 1. Although, as noted in Chapter I, cooperation among brokers can lower transaction costs, it may also foster a natural impediment to discount brokers.325 As one author has explained: As a result, brokers may be deterred from discounting if cooperating brokers threaten to "concentrate their efforts" or steer buyers toward transactions for which higher commissions are available. Alternative brokers providing MLS access tended to be "full-service brokers, offering to consumers the same package of services as the traditional brokers." Bringing you savings and unique offers on products and services just for REALTORS. It is well established that the antitrust laws prohibit an unreasonable agreement by a group of brokers that they will withhold cooperation from a particular broker. 27, 2007). 136. 25. As discussed in Chapter I of this Report, the commission "rate" is the percentage of the home sales price that the broker retains as a commission, and commission "fees" are the total dollar amount paid by consumers for real estate brokerage services. at 55 ("[W]e found local markets to consistently have commission modes at either six or seven percent. A 1983 FTC Staff Report on the real estate brokerage industry observed that "the nearly universal opinion is that there are no significant barriers to entry, if entry is construed as gaining a license in order to practice. Charles Schneider, Executive Director, James C. Cooper, Deputy Director, Office of Policy Planning 272. 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. Commenters using this form highlighted local competition between individual agents as an outstanding example of rigorous competition to which the rest of the economy should aspire. 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%."). Nina B. Hale, Assistant Chief, Litigation III Section White, supra note 47, at 4. 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. Further, if commission rates are relatively inflexible, such that agents do not seek to attract customers by offering lower rates, agents will compete along other dimensions to gain clients.214 For instance, agents may expend resources "prospecting" for listings by, for example, door-to-door canvassing, mailings, providing potential clients with free pumpkins at Halloween, and calling on FSBO sellers.215, Marketing is often beneficial to consumers and competition,216 and some consumers may benefit from the enhanced service competition in this market. 324. 1991); Austin Bd. This experience builds expertise in gauging market conditions and knowledge of the details involved in completing a real estate transaction. Access recent presentations from NAR economists and researchers. "152 In Mid-America Real Estate Co. v. Iowa Realty Co., the court found that one company accounted for over 50 percent of all residential real estate transactions in Des Moines, Iowa, (when FSBO sales are considered) or approximately 60 percent of all sales completed through the local MLS in Des Moines.153 In a study of the State College, Pennsylvania, area, researchers found that "the largest brokerage firm maintained 31% of the listings and 30% of the sales.