2d 868, 872 (E.D. 78. David Meyer, Bureau of Economics "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. 245. Press accounts indicate that fee-for-service brokers have raised their prices or exited the market altogether in response to minimum-service laws. See, e.g., Thompson v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1579-80 (11th Cir. cooperating broker Definition | Law Insider See DEL. In December 2005, NAR filed a motion to dismiss the lawsuit. Hahn, Tr. at 68 (describing the option). Dawn Miller, Paralegal, Litigation III Section For an official signed copy, please contact the Antitrust Documents Group. at 55 ("[W]e found local markets to consistently have commission modes at either six or seven percent. See U.S. Department of Housing and Urban Development, U.S. Housing Market Conditions 73 (Nov. 2006) [hereinafter "HUD REPORT"], available at http://www.huduser.org/periodicals/ushmc/fall06/USHMC_Q306.pdf. 174. 29 During the 1990s, most states revised their laws to allow buyer representation, and at the same time NAR revised its policies, eliminating seller-subagency as a condition of participation in the MLS. Some parties submitted a cover letter with the public comment. The aim of antitrust law is to preserve competitive markets. '"60 Second, sellers benefit from wider exposure of their listings, while buyers benefit from reduced search costs.61 Finally, the court noted that "[t]he broker is particularly benefited by having immediate access to a large number of listings and at the same time by being furnished with a method for quickly and expansively exposing his own listings to a broader market. 1983 FTC STAFF REPORT, supra note 9, at 31. 217. ASS'N 519 (1992); Crockett, supra note 51, at 213. IDX datafeeds can also be less complete than the full MLS listings database because each MLS determines which datafields to include in the IDX datafeed. See Robert W. Hahn et al., Paying Less for Real Estate Brokerage: What Will Make It Happen? [I]t is apparent that the activity within this study is still ongoing within the industry. 30, 2000). 23. See id. Namely, a broker's success typically depends on securing significant cooperation from direct competitors. Pursuant to the state's administrative proceedings, the Tennessee Real Estate Commission scheduled a public hearing regarding the rebate ban's final repeal for May 2007. No. "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. The selling agent may be (1) the subagent or listing agent of the seller; (2) a buyer's agent; or (3) a dual agent. In addition to the MLS-only package, many fee-for-service brokers offer other services. . 37:1455 (West 2006). 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. 23, 27-28 (1995). See, e.g., Zillow.com, http://www.zillow.com (last visited April 20, 2007). American Bankers Association, Public Comment 10, at 3 (comment). 244. 2005). "176 An agent who has been in the business for less than a year stated: "Realtors are competing fiercely on the price at which they will take listings. 179. 952, 955 (D. Md. at 146. 279. Yun, Tr. 65, 75 (2003). See Letter from DOJ to Oklahoma Representatives and Senators (Apr. 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. Id. 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%). White, supra note 47, at 4. 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 Rebates currently are prohibited by law, however, in ten states: Alabama;230 Alaska;231 Kansas;232 Louisiana;233 Mississippi;234 Missouri;235 New Jersey;236 North Dakota;237 Oklahoma;238 and Oregon.239 In addition, Iowa240 prohibits rebates when the customer uses the services of two or more brokers during a real estate transaction. 276. Academic opportunities for certificates, associates, bachelors, and masters degrees. And by returning money to home buyers, rebates can also benefit home sellers, because buyers will have more to spend on the home as opposed to commission payments. Geoffrey K. Turnbull, Real Estate Brokers, Nonprice Competition and the Housing Market, 24 REAL ESTATE ECONOMICS 293, 295 (1996). Local broker marketplaces ensure equity and transparency. 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. 141. See, e.g., Hoover v. Ronwin, 466 U.S. 558, 568 (1984) ("Closer analysis is required when the activity at issue is not directly that of the legislature or supreme court, but is carried out by others pursuant to state authorizations. 277. Advancing best practices, bringing insight to trends, and providing timely decision-making tools. Whatley, Tr. Some national Internet websites aggregate some of the MLS data from across the country and allow potential home buyers to search the databases. 228. 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. Growth in home prices was relatively flat through most of the 1990s and real commission fees did not surpass their 1991 levels until 2002. Section A examines the structural features of the real estate brokerage industry. The seller then assumes responsibility for future tasks related to the sale of his or her home. at 27. "); Salinger, Tr. This person is not necessarily a licensed attorney. See also Perriello, Tr. "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. See William C. Goolsby & Barbara J. Childs, Brokerage Firm Competition in Real Estate Commission Rates, 3 JOURNAL OF REAL ESTATE RESEARCH 79 (1988). 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. Id. Competition among brokers on price primarily occurs through lower commission fees and rebates. at 223-24 (describing how the MLS puts small and large brokers "on equal footing"). 16. Subagency offers are typically communicated to cooperating brokers via the MLS. "); Large, Public Comment 241, at 1 ("our average commission per transaction side has dropped 13% this year compared to last year as a result of competition from discount brokerage business models operating in our market"). "285, The evidence, however, does not suggest that consumers who choose to use fee- for-service brokers are harmed by performing certain aspects of the real estate transaction themselves or misunderstand the nature of the contractual relationships into which they enter. In addition, there is no indication that the marketplace is incapable of addressing situations where cooperating brokers may face additional work to close a transaction.299 Cooperating brokers can make unilateral choices as to whether or not the compensation offered by the home seller through the MLS, as well as that offered directly by their buyer, is sufficient payment for the effort that may prove necessary to close a transaction. Other studies have examined REAL Trends data and have made the same observations about patterns in commission rates, housing prices, and brokerage fees. One panelist who represents a FSBO website discussed his company's experience with state laws that require firms that advertise FSBO homes to become licensed real estate agents. Commission/Cooperative Compensation Offers, Section 1: Information 270. 155. 3 (Mar. One commenter, the owner of a discount brokerage franchise, reported that he has "not experienced any discrimination by agents in the showing or selling of our properties"333. Sirmans & Geoffrey K. Turnbull, Brokerage Pricing under Competition, 41 JOURNAL OF URBAN ECONOMICS 102 (1997). 65. A lock (LockA locked padlock) or https:// means youve safely connected to the .gov website. at 86 ("The [I]nternet is an ideal platform for marketing real estate. Other analysts have expressed similar views. See Chang-Tai Hsieh & Enrico Moretti, Can Free Entry Be Inefficient? . Realty Multi-List, 629 F.2d 1351 (5th Cir. 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." The essential and appropriate requirement by a multiple listing service is that the information to be published shall clearly inform the participants as to the compensation they will receive in cooperative transactions unless advised otherwise by the listing broker in writing in advance of their submitting an offer to purchase. C-3449, 116 F.T.C. 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. 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. 72. The scenarios covered by the FAQs reference Standards of Practice 3-3 and 16-16. 129. This factor is discussed in detail in Chapter IV of this Report. 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." 209. Indeed, antitrust agencies have challenged private associations' restraints on truthful competitor advertising. Stay current on industry issues with daily news from NAR. Brokerage entry appears to be more difficult than agent entry. Approximately half of the public comments submitted to the Agencies in response to their request for public comments were some variation of a form letter that NAR composed, posted on its website, and encouraged its 1.2 million members to send. 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. It also identifies and describes certain types of nontraditional real estate business models, including: (1) full-service discount brokers; (2) fee-for-service brokers; (3) Virtual Office Website ("VOW") operators; (4) for-sale-by-owner ("FSBO") facilitators; and (5) broker referral networks. 2005): 58. See infra Chapter IV. 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). Mar. 243. When implemented by each of the respondents, this "Web Site Policy" prevented homes with exclusive agency or other non-traditional listing contracts from being displayed on a broad range of public real estate websites, including Realtor.com. In addition, in states that do not prohibit them, brokers may offer rebates (i.e. It is a standard question now. OHIO CODE 4735.75(B) ("A licensee who negotiates directly with a seller, purchaser, lessor, or tenant pursuant to a written authorization as described in division (A) of this section does not violate division (A)(19) of section 4735.18 of the Revised Code and negotiations conducted by a licensee pursuant to the authorization shall not create or imply an agency relationship between that licensee and the client of that exclusive broker."). A cooperating broker does not assume compensation from the listing firm. For example, Realogy through its franchises and wholly-owned brokerages claims to have "participated in approximately one of every four domestic homes sold through a brokerage in 2005. 91. See Hahn, Tr. 186. 28. 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 LA. And trust me, everyone asks."). AEI-Brookings Paper, supra note 3, at 5. NAR reported in its public comment that in 2004 the top ten brokerage firms in the United States had a combined 9.1 percent market share, the top twenty firms had a 10.9 percent share, the top 100 firms had a 17 percent share, and the top 500 firms had a 26.6 percent share.148 In addition, according to NAR, the two largest brokerage firms in the industry had only 4.1 percent and 1.7 percent market shares, respectively.149 The market shares reported by NAR appear to be based on the nationwide shares of individual brokerage firms, most of which do not have a nationwide presence. NAR 2005 SURVEY, supra note 38, at 65 (Internet cited by 84% of broker respondents, while yard sign cited by 79%). Member recognition and special funding, including the REALTORS Relief Foundation. Without rebates, if the buyer's broker were simply to reduce his or her commission, the savings would go to the seller's broker, not to the home buyer. at 3. 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. Listing brokers may verify the pre-qualification letter. This finding was significant at the one percent level for each of the equations tested. A subagent can be an unaffiliated cooperating broker. 63. Consumers may be unaware of these potential conflicts of interest. Civ. 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."). Access to the MLS is one of the most important services that real estate brokers traditionally have offered. Our review of fee-for-service broker websites reveals that consumers appear to have ready access to prices that fee-for-service brokers charge for additional services beyond the MLS-only option in advance of entering into a contractual relationship. Cooperating Broker Compensation Agreement - Pennsylvania Association of STAT. 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. 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 . 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. See Lewis, Tr. Empowers REALTORS to evaluate, enhance and showcase their highest levels of professionalism. "Thus, with the increase in housing prices, the brokerage fee (in dollars) for selling a median-priced home increased even as the commission rate fell. some collusion between brokers through the [MLS] . NAR 2006 SURVEY, supra note 4, at 44. 59, 858-312 (West 2006). REALOGY, REALOGY BUSINESS OVERVIEW 4 (Dec. 2006), available at http://library.corporate- ir.net/library/19/198/198414/items/223251/RealogyDecember06%20Final.pdf. If the seller accepts the offer, the home is "under contract," and, pursuant to contracts containing typical contingencies, several things must occur during a stated time period before the transaction closes, such as home inspections, appraisals, securing buyer financing, assuring the title to the home is clear, and conducting necessary repairs.34 Both listing and cooperating brokers typically work together to assure that all contingencies are satisfied, allowing the closing to occur as scheduled. "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. 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"). NAR's 1,600 local and state member boards control approximately 80 percent of the approximately 1,000 MLSs in the United States. Perriello, Tr. 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. cooperating broker spends many hours, even days, trying to locate the right property for the Buyer. 164. See Steve Sawyer et al., Redefining Access: Uses and Roles of Information and Communication Technologies in the US Residential Real Estate Industry from 1995 to 2005, 20 J. In addition, the Agencies received almost 400 submissions in response to their request for public comment in connection with the Workshop. 2782, available at http://billstatus.ls.state.ms.us/documents/2006/html/SB/2700-2799/SB2782IN.htm. Suggested Rules additionally Regulations for a Commercial/Industrial MLS Separately Incorporated but Completely Owned by a Board of REALTORS. Designated sales agent Technique in which in-house dual agency can be handled. 145. See, e.g., STEVE SAWYER, LOCAL REAL ESTATE MARKET COMPETITION: EVIDENCE AND INSIGHT FROM AN ANALYSIS OF 12 LOCAL MARKETS 3 (2005), available at http://www.realtor.org/publicaffairsweb.nsf/Pages/Sawyer05?OpenDocument (noting existence of "micro- markets" within metropolitan areas. (1) Accepting delivery of and presenting to the client or customer offers and counteroffers to buy, sell, or lease the client's or customer's property or the property the client or customer seeks to purchase or lease; (2) Assisting the client or customer in developing, communicating, negotiating, and presenting offers, counteroffers, and notices that relate to the offers and the counteroffers until a lease or purchase agreement is signed and all contingencies are satisfied or waived; and, (3) Answering the client's or customer's questions relating to the offers, counteroffers, notices, and contingencies.260, Currently, Alabama,261 Idaho,262 Illinois,263 Indiana,264 Iowa,265 Texas,266 and Utah267 have minimum-service laws that require licensees to perform tasks similar to those specified in Missouri's law.268 Further, Kentucky,269 Michigan,270 Mississippi,271 and New Mexico272 recently have considered but not adopted minimum-service requirements.273. See Michael Carney, Costs and Pricing of Home Brokerage Services, 10 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 331 (1982). The norm years ago was 7%, then 6% . See, e.g., GAO REPORT, GAO-03-749, Airline Ticketing: Impact of Changes in the Airline Ticket Distribution Industry (July 2003) (discussing how Internet distribution lowered transaction costs in the sale of airline tickets), available at http://www.gao.gov/new.items/d03749.pdf; GAO REPORT, GAO/GGD-00- 43, Online Trading: Better Investor Protection Information Needed on Broker's Web Sites (May 2000) (discussing how Internet brokerages charge far less commission per trade on securities), available at http://www.gao.gov/new.items/gg00043.pdf. 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. Further, by stating up-front the compensation being offered to a cooperating broker, the MLS can reduce the costs associated with listing brokers having to negotiate separately with each potential cooperating broker.55 As a result, the use of an MLS can substantially reduce transaction costs.56, The efficiencies associated with use of an MLS in the real estate industry are well documented in the real estate, legal, and economic literature57 and in court decisions.58 In the seminal case, United States v. Realty Multi-List, Inc., the Fifth Circuit described the various benefits offered by an MLS.59 First, the MLS reduces the "obstacles brokers must face in adjusting supply to demand: market imperfections are overcome in that information and communication barriers are reduced, along with the easing of the built-in geographical barrier confronting the buyer-seller relationship. Id. 16, 2007). Because broker fees are paid indirectly, buyers may be less likely to negotiate over them. at 199 ("[W]hen I was in a market that was very, very slow, it was not uncommon to actually have a disproportionate share going to the buyer . Some commentators have posited that alternative payment structures may better align consumer and broker interests.139. See Olazabal, supra note 19, at 91-100; see also Early, Tr. 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. Part 5: Suggested Rules & Regulations for a Commercial/Industrial MLS A listing broker who has already agreed to pay a commission to a cooperating brokerin the MLS, for exampleshould fill out the Ratification of Fee box. There were contrasting views among Workshop participants and commenters about the extent to which brokers compete on the price dimension. A NAR economist explained at the workshop that any average commission rate reported by a prominent entity such as NAR could be used by industry participants as a focal point for collusion on commission rates. If a home buyer finds a discounter's listing on his or her own that appears to be a good match, a broker likely will either have to show the home buyer the discounter's listing or explain why he or she will not.135, In addition, consumers also may be unaware that when they pay their broker a commission based solely on a percentage of the sales price at closing (as most do today),136 the broker's financial incentives are not necessarily aligned with the consumer's. . 142. 64. The subagent, because of this extension of the agent's authority, is also an agent of the principal. Thus, consumers who purchase the MLS-only package, but later feel they need more assistance with their transaction, typically can obtain it from their broker for an additional fee. NAR's policy permits traditional brokers to discriminate against other brokers based on their business models, denying them the full benefits of MLS participation. 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. 282. It is a standard question now. Avoiding fee-for-service listings without disclosure to buyers, however, may raise issues concerning the fulfillment of fiduciary duties. 100. Finally, this Chapter addresses gaps in consumer knowledge that may exist despite the extensive information now available on the Internet. 27. 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. 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. "163 Additionally, brokers expend varying degrees of effort involving a wide range of activity, including marketing their own services to potential buyers and sellers. For example, consumers can use the Internet to research brokers,109 mortgage and lending options, 110 and recent home sales and home valuations in their community.111 Consumers also can find information about schools, crime, and other variables related to home purchase decisions through a host of online sources, including websites hosted by their municipalities. In addition to listing information derived from MLSs, consumers also can view homes for sale on third-party advertising websites such as Craigslist.com, and on a variety of websites that promote homes that are for-sale-by-owner.108 Further, the Internet helps consumers to educate themselves about other areas of home buying and selling. See also Tradii, Public Comment 340, at 1; Wharton, Public Comment 179, at 1. 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. For example, it is not uncommon for MLSs to withhold the home address, a critical piece of information for brokerage clients, from the IDX datafeed. Specific legal requirements to offer subagency to cooperating brokers are: Written informed consent must be obtained from seller client to offer subagency, the consent must state the following: That the broker may cooperate with another broker who is then a subagent of the seller.