a cooperating broker would be a subagent

A remaining question, not resolved by Workshop participants or commenters, is why commission rates are relatively inflexible.229 Regardless of the answer, it is desirable that brokers have the freedom to offer a variety of price and service combinations to attract consumers. 317. Id. 137. See Hahn, Tr. 30, 2000). 310. OVERVIEW OF THE TYPICAL REAL ESTATE TRANSACTION, Description of Real Estate Brokers and Agents, The Seller's Agreement with the Listing Broker, The Buyer's Relationship with the Cooperating Broker, The Buyer's Offer, Contingencies, and Closing in a Typical Transaction, Why the MLS is Important to Sellers, Buyers, and Brokers, Websites that Provide Advertising and Other Services to FSBO Sellers, Consumers' Use of Nontraditional Models and FSBOs, INCREASED CONSUMER ACCESS TO REAL ESTATE-RELATED INFORMATION, THE INTERNET'S EFFECT ON THE REAL ESTATE INDUSTRY, STRUCTURAL FEATURES OF THE REAL ESTATE BROKERAGE INDUSTRY, COMMISSION RATES AND FEES: EMPIRICAL EVIDENCE, ONE EXPLANATION OF THE SEEMINGLY CONTRADICTORY DESCRIPTIONS OF BROKER COMPETITION, LEGISLATIVE AND REGULATORY RESTRICTIONS ON COMPETITION, Licensing Requirements for Firms that Advertise FSBOs, USE OF MLS RULES TO DISADVANTAGE COMPETITORS, Discrimination Against Brokers Entering into Exclusive Agency Listing Contracts, STEERING AS A POSSIBLE OBSTACLE TO GREATER PRICE COMPETITION, The Importance of Cooperation in Real Estate Brokerage, Reports That Cooperation Has Been Withheld. Examples of FSBO websites include: ForSaleByOwner.com, http://www.forsalebyowner.com (last visited April 20, 2007); FSBO.com, http://www.fsbo.com (last visited April 20, 2007); craigslist.org, http://sfbay.craigslist.org/hhh (last visited April 20, 2007); and HomesByOwner.com, http://www.homesbyowner.com (last visited April 20, 2007). Review your membership preferences and Code of Ethics training status. 154. Additionally, fee-for-service brokers typically provide the client additional selling aids, such as yard signs, online advertisements, and a lock-box to allow buyers' agents to show the home when the seller is not present. Further, this theory suggests that because agents compete profits away by incurring additional expenses to provide these services, rather than lowering their commission rates, they operate at inefficiently high cost levels.221, Hsieh provided empirical evidence at the Workshop consistent with competition in the brokerage industry occurring primarily in non-price dimensions. A Report by the Figure 2, however, shows that despite the downward trend in rates, the dollar amount of commission fees appears to have increased closely in line with rising housing prices. 1983 FTC STAFF REPORT, supra note 9, at 107-116. Each of the next four largest firms enjoyed less than 10% of the listings and sales. 316. 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. Although many brokers who specialize in the fee-for-service option are not affiliated with major national brokerage chains, some brokers who are affiliated with such chains offer fee-for-service or flat fee brokerage options.76 Although brokers using these models have existed since the 1970s, industry participants told GAO that the Internet has allowed such brokerages to grow in numbers and size in recent years, in part because they can market their services to a larger population of buyers and sellers.77. 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. A cooperating brokeris a selling agent who assists another broker by finding a buyer. 47. B. So, given the fact that the Realtor membership has increased far more than actual home sales, it's not surprising that the median income has fallen."228. Official websites use .gov See Table 1 in Chapter III of this Report. 33. 061-0087, at 6 (2006) (analysis to aid public comment), available at http://www.ftc.gov/os/caselist/0610268/0610268consentanalysis.pdf. Dawn Miller, Paralegal, Litigation III Section At the same time, as housing price growth accelerated from 2001 through 2005, real commission fees rose about 25 percent. Thus, if fee-for-service brokers are forced to raise their prices in response to minimum-service requirements, consumers who choose full-service brokers are also likely to pay higher prices for real estate brokerage due to a reduction in the competitive constraint provided by fee-for-service brokers. 152. Panelists representing traditional brokers acknowledged that the listings information provided via an IDX datafeed is limited. White, supra note 47, at 4. at 172 ("There are no barriers to entry in our industry . . Since the consent decree was entered, consumers in Kentucky have benefited from new reduced price business models. As noted above, 80 percent of consumers use the Internet to search for homes in 2006.134 To the extent that consumers have greater knowledge of the stock of housing for sale than they used to, brokers will be less able to exclude a particular listing from home buyers' searches without their knowledge. "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. Mid-America Real Estate Co. v. Iowa Realty Co., No. 330. Yet, consumers are paying almost 25 percent more for brokerage services, after adjusting for inflation, than they did in 1998. 279. At a minimum, an entrant that wants to establish a brokerage must hire or become a licensed broker.161 Additionally, an entering broker may require an agent workforce, office space, office staff, and advertising of their listings to establish name recognition. (Apr. Peggy Bayer Femenella, Bureau of Competition 75. Whatley, Tr. 70 Fed. Network with other professionals, attend a seminar, and keep up with industry trends through events hosted by NAR. Commentary from NAR experts on technology, staging, placemaking, and real estate trends. 198. Cooperating brokers may also seek to negotiate higher compensation from the listing broker or from the home buyer. Competition in the real estate brokerage industry would likely be enhanced if consumers had better access to such information. Analysis of commercial market sectors and commercial-focused issues and trends. Acknowledging experience and expertise in various real estate specialties, awarded by NAR and its affiliates. Consumers differ in their willingness, ability and opportunity to use the Internet to perform functions traditionally provided by brokers. 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. See also FTC OFFICE OF POLICY PLANNING, REPORT OF THE STATE ACTION TASK FORCE (Sept. 2003), available at http://www.ftc.gov/os/2003/09/stateactionreport.pdf (analyzing state action immunity doctrine). 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. See Blanche Evans, Prudential Neutralizes eRealty, Buys Technologies, REALTY TIMES, Jan. 29, 2004, available at http://realtytimes.com/rtapages/20040129_erealty.htm. . See HUD REPORT, supra note 201. 176. 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). C-3449, 116 F.T.C. The only exception to this is in the case of the appointment of designated agents, as outlined in paragraph 10. Cooperating Agent - A real estate agent who sells a property. NAR's policy permits traditional brokers to discriminate against other brokers based on their business models, denying them the full benefits of MLS participation. Section D reports one panelist's attempt to make sense of the evidence presented in Sections A through C. A. For example, if a cooperating broker were to earn half of a 5.1 percent commission and offer a 50 or 33.3 percent rebate, a consumer would save $3,459 or $2,306 in commission payments, respectively, on the sale of a $271,263 home.241 Consumers in states with rebate bans could enjoy a similar level of savings only if such bans were eliminated. 222. (Amended 5/10), Note 3: Multiple listing services must give participants the ability to disclose to other participants any potential for a short sale. "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. 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 . and Levitt & Syverson find empirical evidence consistent with a principal-agent conflict between sellers and agents. 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. If you owe a fiduciary duty to someone, you must act in the. It varies greatly. 27. 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). 7. 54. 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. "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. 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."). See GAO REPORT, supra note 3, at 13-14, 21. 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. 288. In March 2005, DOJ filed a civil antitrust lawsuit against the Kentucky Real Estate Commission, alleging that its regulations prohibiting Kentucky real estate brokers from offering rebates restricted competition and caused consumers to pay higher prices for real estate brokerage services.244 The lawsuit was settled on July 13, 2005. 1980). No. In other cases, brokers may charge a flat commission fee for certain services or bundles of services. As the authors explain, the commission rate captured in the sample is "the contract rate and therefore does not reflect any adjustment or changes that might be renegotiated between the house seller and the agent at the time of sale." "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. However, that dynamic may not operate as well in industries, like real estate brokerage, where many consumers have significant limits on their knowledge, thus making it easier for competitors to steer business away from new or maverick brokers, or to otherwise withhold necessary cooperation, without the knowledge of their customers. See Olazabal, supra note 19, at 91-100; see also Early, Tr. INFORMATION TECH. 59. tit. Since cooperating brokers do not directly participate in negotiating listing contracts, rebates offer a way for them to compete on price.164. See United States v. Realty Multi-List, 629 F.2d 1351, 1370 (5th Cir. MLSs do not allow FSBO homes to be listed in the local MLS because a listing broker member is not involved. He explained that his company had received letters from states demanding that it stop doing business until it became licensed as an agent because "the services that you offer rise to the level of an agent."305. at 81-82; Lewis, Tr. See NAR, Public Comment 208, at 15-16; Delcoure & Miller, supra, at 15. The resistance of some traditional brokers to dealing with firms that more fully or innovatively use the Internet is one factor that could limit realization of the Internet's full potential.127 Restrictions on the availability of real estate listing information can also limit the economic benefits that Internet use provides.128. A few brokers surveyed supported eliminating the rebate ban, recognizing some of the procompetitive benefits that repeal of the ban would foster. Id. 134. The MLS facilitates the offering of unilateral offers of compensation to cooperating brokers, according to NAR. Re/Max Int'l, Inc. v. Realty One, Inc., 173 F.3d 995, 1003 (6th Cir. The present law keeps it under control. NAR 2005 SURVEY, supra note 38, at 59. 93. The examples of relatively high local market shares for brokerages described above suggest that agent entry is more common than brokerage entry. The listing broker retains the right to determine the amount of compensation offered to subagents, buyer agents, or to brokers acting in other agency or nonagency capacities, which may be the same or different. 345, 350 (1997) (noting that agency relationships can be created by actions). Comments provided at the Workshop suggest that the impetus for these laws comes not from aggrieved consumers, but from state Realtor associations.289. "204, A 1988 study analyzed the relationship between the commission rate offered to cooperating brokers and the selling price of the home.205 The sample data were comprised of 532 home sales drawn from 1983 and 1987 sales data in the Knoxville, Tennessee, Board of Realtors' MLS.206 The study found that the cooperative commission rate was negatively related to the sales price of the home and positively related to the percent of the list price achieved by the seller.207 The authors concluded, "[t]hese results provide strong evidence that the presumption by previous researchers that real estate brokerage firms are unwilling to negotiate differential rates is inaccurate."208. . See infra Chapter IV. 86. 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. Steering refers to any action taken by a broker or agent to avoid cooperating with a particular competitor. some collusion between brokers through the [MLS] . NAR's 1,600 local and state member boards control approximately 80 percent of the approximately 1,000 MLSs in the United States. See, e.g., Kunz, Tr. 277. "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 . "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. It is clearly beneficial in providing them access to a large amount of information at a minimal cost, but at the same time it permits brokers to coordinate their efforts, possibly at the expense of sellers' interests. 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. 260. In such instances, the fact that the gross commission is subject to court approval and either the potential reduction in compensation payable to cooperating brokers or the method by which the potential reduction in compensation will be calculated must be clearly communicated to potential cooperating brokers prior to the time they submit an offer that ultimately results in a successful transaction. We do not have an answer to this puzzle."). 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. Although they typically do not play an active role at this stage, brokers often accompany their clients to the closing.38 The brokers are paid their commission at closing. 2007), Notice of Rulemaking, available at http://www.tn.gov/sos/rules_hearingnotices/2007/1260/1260.20070228.02-37-07.notice.pdf (last updated Feb. 28, 2007). 40. In recent years, the Agencies have become aware of actions taken by state legislatures, industry regulators and private actors that have the effect of restricting competition in the real estate brokerage industry. Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. 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. Designated sales agent Technique in which in-house dual agency can be handled. One panelist, a past president of NAR, stated that an inexperienced seller handling the transaction on his or her own poses several risks to the buyer and the transaction, which cooperating brokers must act to avoid if they want the transaction to close successfully. Citations to submissions by these parties contain a parenthetical reference either to the "comment" or the "cover letter." 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 case resulted in a consent decree, under which MiRealSource is prohibited from adopting or enforcing any rules or polices that deny or limit the ability of MLS members to enter into exclusive agency listings, or any other lawful listing agreements, with home sellers.316. See NAR, THE 2005 NATIONAL ASSOCIATION OF REALTORS PROFILE OF HOME BUYERS AND SELLERS 58 (2006) [hereinafter NAR 2005 SURVEY] (71% of sellers report that their agent attended the closing). Today, real estate agents and brokers are changing the way they operate and are increasingly incorporating the Internet into their business models in a variety of ways, such as offering potential buyers the option to view full, detailed multiple listing services ("MLSs") online, using websites to gather "lead" information on potential customers, and using the Internet to match home buyers and sellers. Some have suggested, however, that the industry has not yet experienced the sort of sweeping benefits to consumers in the form of cost savings and service enhancements that have been seen in other industries from the use of the Internet and other technology.101 This Chapter examines how the Internet has increased consumer access to information about real estate and how this increased access has in turn affected consumer behavior. 2782, available at http://billstatus.ls.state.ms.us/documents/2006/html/SB/2700-2799/SB2782IN.htm. The study found that in 23 percent of the market areas (i.e. at 3. Without full and timely disclosure a customer may reveal sensitive information, such as the buyer's maximum offer or the seller's minimum price, to a broker who is actually representing the party on the other side of the transaction. ALASKA STAT. Section C presents the available data on actual commission rates and fees. The Nature of Competition Among Brokers, Brokers compete for clients on several dimensions by offering the most attractive service and price combination.162. On the morning the lawsuit was filed, NAR announced a revised policy that contained a blanket opt-out under which the listings of brokers who withheld their listings from a VOW could appear on no brokers' website, except for NAR's website, Realtor.com. For example, Weicher calculates that although the average commission rate as reported by REAL Trends fell by 16 percent (6.1 percent to 5.1 percent), because the average price of existing housing increased during this period ($128,400 to $236,000), the average inflation-adjusted commission per transaction increased by 11 percent in dollar terms between 1991 and 2004.187 More specifically, Weicher's analysis indicates that inflation- adjusted commission fees per home sale declined by approximately 7 percent between 1991 and 1998, but increased 19 percent between 1998 and 2004.188 The GAO, also using REAL Trends' commission rate data, reached the similar conclusion that commission rates do not appear to have changed enough to offset rapidly rising home prices in recent years.189 Specifically, the GAO observed that a decrease in commission rates from the prevalent 5.5 percent in 1998 to an estimated 5 percent in 2005, a 9 percent decrease in commission rates, was more than offset by a 58 percent increase in the median inflation-adjusted home sales price. Overall, the evidence suggests that while commission rates may vary modestly with housing prices and overall market conditions, they do not tend to vary in proportion to changing home prices. The Nevada legislature is considering a bill to allow consumers to waive the minimum- service requirements established by the Nevada Real Estate Commission, all of which is part of a package recommended by a minimum-service task force the Commission established. To enforce his or her right to payment, the cooperating broker may bring a complaint to the MLS's arbitration system. 297. Michigan H.B. at 348 ("[O]n average, a $100,000 rise in the price of the home reduces the commission rate by about 0.5 percentage points"). NAR, HANDBOOK ON MULTIPLE LISTING POLICY 50 (2006). "A subagent is a cooperating agent who works for a listing broker-salesperson in the sale of a property. b. their broker. Id. A. On the sell side of the transaction, the consumer's interest is to sell the home at the highest possible price. REAL ESTATE RES. [I]t is apparent that the activity within this study is still ongoing within the industry. The seller then assumes responsibility for future tasks related to the sale of his or her home. 29. 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. 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.

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