a cooperating broker would be a subagent
See infra Chapter IV. Even though an agent's commission increases with the price of the home, he or she likely retains no more than 1 to 2 percent of the sales price (after paying the cooperating broker and the agent's brokerage firm).137 Therefore, the agent may be less willing than the consumer to take the risks associated with getting a higher sales price, such as waiting for what might be a better offer and perhaps having to do additional work.138 Likewise on the buy side of the transaction, the broker may be less interested than the consumer in negotiating the lowest possible sales price because a lower sales price translates into a lower commission for the broker, likely requires additional work, and may increase the risk that the transaction falls through with no commission paid to the broker. In some instances the cooperating and listing agents may work for the same brokerage firm. As the name suggests, these laws and regulations enumerate specific tasks that a broker must perform for a client. 308. Repairs may be ordered by the lender as a condition for financing or requested by the home buyer after the results of inspection. 325. Based on the foregoing, the FTC and DOJ recommend the following to help maintain competition and protect consumers in the real estate brokerage industry: 1. L. REV. National, state & local leadership, staff directories, leadership opportunities, and more. Throughout this Report citations to "Public Comments" refer to comments submitted in response to the Agencies' Federal Register Notice inviting comments on the topics addressed at the Workshop. 77. 195. 212. 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. Share sensitive information only on official, secure websites. 127. 216. Hahn's concerns are more fully developed in his AEI-Brookings Paper, where he describes how the cooperative relationship among brokers in an MLS has the potential to give rise to uniformity in services provided and brokerage fees charged. through the local or regional [MLS]."). 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. 182. The present law keeps it under control. A lock (LockA locked padlock) or https:// means youve safely connected to the .gov website. Id. 324. See Amended Final Judgment and Order, United States v. Kentucky Real Estate Comm'n, Civ. 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. 151. 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. Some states protect parties' interests in this situation through "designated agency," under which different agents within the brokerage firm are "designated" separately to represent the buyer's and seller's interests in the transaction. There were contrasting views among Workshop participants and commenters about the extent to which brokers compete on the price dimension. Perriello, Tr. 209. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s). This bill, signed into law on March 22, 2007, becomes effective July 1, 2007. 051-0065; Williamsburg Area Ass'n of Realtors, Inc., FTC File No. Further, many provide links to ancillary service providers, such as title insurance companies, escrow services, and home inspectors, and also provide sample forms related to real estate transactions, such as sample purchase or lease agreements.93. What is split Agency? A .gov website belongs to an official government organization in the United States. 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. A. The MLS then makes these data available to all brokers who are members of the MLS.42 By listing information on a home in the MLS, a broker can market it to a large set of potential buyers. 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. Going forward, the Internet offers consumers increased knowledge of homes available for sale and, consequently, may limit the ability of cooperating brokers to steer buyers away from desirable homes listed by discount and fee-for-service brokers. 174. 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. Now more than ever, it is critical for REALTORS across America to come together and speak with one voice. See Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. In other words, as the demand for housing and sales prices increased, commission rates declined. For example, one industry participant stated: "Becoming a real estate agent is far too easy and too fast for what the service contemplates: The sale of what for many people is both their most important asset, and the one thing that physically binds their family together: a home."160. The staff found that 85 percent of the sellers surveyed were quoted a commission rate of either six or 7 percent by their broker. Mar. No. 117. 1992). Real estate brokers compete to attract customers in different ways based on price and non-price dimensions. How the cost of such repairs is split is often the subject of additional negotiation. See, e.g., William C. Erxleben, In Search of Price and Service Competition in Residential Real Estate Brokerage: Breaking the Cartel, 56 WASH. L. REV. From its building located steps away from the U.S. Capitol, NAR advocates for you. One panelist represented RealEstate.com, a business that uses the Internet to build a network of local brokers and agents.94 Participating brokers and agents pay a cooperative brokerage fee to the company for referrals, and RealEstate.com cultivates buyers by using online tools and information and, where permitted, by offering the buyer a rebate.95 The buyers are then referred to the local broker for further assistance.96 As this panelist noted, the Internet and the new business models are "about unleashing brokers to have the ability to use new methods and tools to expand, to succeed and to succeed in this market that is competitive. One commenter concluded: "Today's sellers and buyers are more educated and more knowledgeable thanks almost entirely to the growth of the [I]nternet. In particular, in light of the evidence presented above regarding the relatively limited competition among traditional brokers on the price dimension, innovators should not be discouraged by industry policies or government regulations from offering more flexible commission rates. Id. 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. See also id. Lawrence Yun, Ph.D., Senior Economist, National Association of Realtors, Presentation at the Federal Trade Commission & Department of Justice Public Workshop: Competition Policy and the Real Estate Industry, Real Estate Brokerage Industry: Structure-Conduct-Performance, at 9 (Oct. 25, 2005) [hereinafter Yun Presentation], available at http://www.ftc.gov/opp/workshops/comprealestate/yun.pdf. 16. "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. 228. attorney in fact A person authorized to act for another under a power of attorney. By reducing the cost of transmitting and searching information, the Internet has enabled consumers more easily to educate themselves about all facets of home buying and selling. ON LEGIS. See Farmer, Tr. Founded as the National Association of Real Estate Exchanges in 1908. Competition among brokers on price primarily occurs through lower commission fees and rebates. 59. You can post virtual tours. Perriello, Tr. 65, 75 (2003). Since the consent decree was entered, consumers in Kentucky have benefited from new reduced price business models. NAR 2005 SURVEY, supra note 38, at 59. 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. The subagent owes fiduciary duties to the listing broker and to the seller. Mar. Namely, a broker's success typically depends on securing significant cooperation from direct competitors. A Workshop panelist, Chang-Tai Hsieh, an academic economist, offered one possible explanation of how, in the presence of relatively inflexible commission rates, the increased entry and non-price competition by brokers can reflect an inefficient constraint on price competition. 178. See also Hsieh & Moretti, supra note 139, at 1078; Hsieh, Tr. American Bankers Association, Public Comment 10, at 3 (comment). It is a standard question now. at 149. 317. 103. Cooperating Agent - A real estate agent who sells a property. For example, one Workshop panelist who owns a limited-service brokerage noted that in 2004 there were more than 3,500 complaints filed with the Texas Real Estate Commission against brokers and agents, but there has never been a complaint filed against a fee-for-service broker.286 This observation is consistent with what FTC and DOJ staff have learned in discussions with officials in other states.287 Evidence also suggests that home sellers are aware of the prices fee-for-service brokers charge for additional services before they enter into contracts with those brokers. See, e.g., Paul Anglin & Richard Arnott, Are Brokers' Commission Rates on Home Sales Too High? Press accounts indicate that fee-for-service brokers have raised their prices or exited the market altogether in response to minimum-service laws. A cooperating broker likewise can search the MLS to provide a home buyer with information about all the listed homes in the area that match the buyer's housing needs. Michael A. Salinger, Director, Bureau of Economics The Workshop afforded real estate brokers, state regulators, and academics an opportunity to express their various views on competition in the real estate brokerage industry. Transaction-level data on commission rates and fees are not publicly available, but broad national aggregate data suggest that commission rates and fees move in tandem with housing prices. The evidence presented above shows a dramatic increase in agent entry in recent years coupled with claims of intense competition among brokers. Matthew J. Bester, Trial Attorney, Litigation III Section . A discussion of the various private litigation involving alleged MLS-related restraints is beyond the scope of this Report. United States v. Realty Multi-List, 629 F.2d 1351, 1374 (5th Cir. See Ann Morales Olazabal, Redefining Realtor Relationships and Responsibilities: The Failure of State Regulatory Responses, 40 HARV. Proponents of minimum-service requirements typically argue that these requirements purportedly: (1) protect consumers; and (2) protect brokers. NAR 2005 SURVEY, supra note 38, at 65 (Internet cited by 84% of broker respondents, while yard sign cited by 79%). 52. C-3461, 116 F.T.C. 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. C-3449, 116 F.T.C. 38. ; NAR, Public Comment 208, at 3 (comment). In other cases, brokers may charge a flat commission fee for certain services or bundles of services. See also Bunnell, Public Comment 146, at 1 ("Low barriers to entry and recalcitrance to change have created a situation where the status quo makes sense for none of the transaction participants. 101. Promoting the election of pro-REALTOR candidates across the United States. Id. In addition, the Agencies received almost 400 submissions in response to their request for public comment in connection with the Workshop. Several states, including Delaware, Florida, Ohio, Oklahoma, Tennessee, and Wisconsin, have less restrictive laws that allow the client to decide whether he or she wants the listing broker to perform such services. Suggested Rules additionally Regulations for a Commercial/Industrial MLS Separately Incorporated but Completely Owned by a Board of REALTORS. For example, a broker in Alexandria, Virginia, competes with other brokers able to meet the needs of consumers who are buying and selling homes in the area; this is likely to include other brokerage firms located in and around Alexandria, but not those located in California. 47. State laws and state real estate commission regulations prohibiting rebates are referred to generally as "rebate prohibitions" or "rebate bans." Several Workshop panelists and commenters remarked on how the Internet has expanded the amount of information available to consumers, making them more knowledgeable as they enter into real estate transactions. at 26. some collusion between brokers through the [MLS] . 33. But when competition occurs primarily along such dimensions, brokers may expend more resources providing additional services than the value of those services to consumers.217, According to Hsieh, real estate agents may be competing intensely but do so primarily by expending resources to gain listings rather than competing by lowering their commission fees, a phenomenon Hsieh calls the "tragedy of the commission. "); 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. 1999). Mar. 1983 FTC STAFF REPORT, supra note 9, at 31. Hahn believes that rebating will have a positive impact on consumer welfare, and sees no compelling economic rationale for not allowing rebates since they are a form of price competition that should improve efficiency by putting pressure on brokerages to provide better services at lower prices. As in other TREC contracts, this simply authorizes the escrow agent to pay the cooperating broker from the listing broker's fee at closing. 93. . 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. of this Report. 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. 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. 172. Mid-America Real Estate Co. v. Iowa Realty Co., No. Access to such websites, however, is a key input in the brokerage of residential real estate sales in the respective MLS service areas. "); White, supra note 47, at 2 ("[A] more competitive outcome would surely mean that average fees would be lower than they are today and that 'the 6% (or 7%) commission' would be unlikely to remain as the modal fee. at 154. 124. NAR 2006 SURVEY, supra note 4, at 44. 125. "332 Such experiences, however, were not reported by all of the nontraditional brokers who testified. DOJ's lawsuit seeks to ensure that traditional brokers, through NAR's policy, cannot deprive consumers of the benefits that would flow from these new ways of competing. 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. Meet the continuing education (CE) requirement in state(s) where you hold a license. In addition, they claimed that the tens of thousands of brokerages, more than two million licensed real estate professionals, and various business models across the country provide consumers with a great deal of choice. 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. Id. at 103. . "); Salinger, Tr. where the REALTOR is an agent oder subagent, the obligations of a fiduciary. 260. 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. Mary Ethel Kabisch, Administrative Assistant, Litigation III Section, John R. Read, Chief, Litigation III Section 202-307-0468 or John.Read@usdoj.gov, CHAPTER II: THE INTERNET'S ROLE IN REAL ESTATE BROKERAGE, CHAPTER IV: OBSTACLES TO MORE ROBUST COMPETITION, Competition provides American consumers lower prices, better quality services, and greater choice. An exclusive brokerage agreement is defined as "a written brokerage agreement which provides that the broker has the sole right, through the broker or through one or more affiliated licensees, to act as the exclusive limited agent, representative, or transaction broker of the client or customer that meets the requirements of section 339.780." 213, 217 (2005) (contending that brokers provide value in three areas information intermediation, process knowledge, and social capital in supporting closing needs of buyers and sellers and that even though an online MLS gives buyers greater access to relevant information, most buyers will still need assistance in making sense of this information). For example, recent Realogy data indicate that between 2002 and 2006 Realogy's average commission rate declined about 7 percent while the average sales price for the homes they sold increased about 30 percent. Alternative brokers providing MLS access tended to be "full-service brokers, offering to consumers the same package of services as the traditional brokers." 3:05CV188-H, available at http://www.usdoj.gov/atr/cases/f210100/210142.htm. As a result of the extra time spent with each client, this broker raised the price of his MLS-only option by $100. 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. No. 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. Paulsen, Public Comment 364, at 1. 23. Subagency offers are typically communicated to cooperating brokers via the MLS. "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. 280. Generally speaking, agents work directly with consumers and brokers supervise agents. Think about it. Although the terms may vary by state, there are two principal categories of real estate brokerage professionals: "agents" and "brokers." View the guidelines for preparation and use for specific uses. . 2005): 58. A broker who brings the buyer to the listing agent is a subagent of the listing broker. See H.B. at 46 (49.6% of sample paid 6%, while 27.9% paid 7%). Note 1: The compensation specified on listings filed with the multiple listing service by the participants of the service shall be expressed as a percentage of the gross sales price or as a definite dollar amount. REV. 98. 30. One panelist observed that "[brokers] are cooperative with the competition in ways unheard of in any other industry that I know of. . We refer to all such rebates and inducements generally as "rebates" throughout this Report. 1983 FTC STAFF REPORT, supra note 9, at 107-116. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. MLS-only packages offered by fee-for-service brokers typically include other services provided via the MLS. In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees. 283. REAL ESTATE FIN. See, e.g., FSBOAdvertisingService.com, Houston Texas Realtor Flat Fee MLS, http://www.fsboadvertisingservice.com/flat-fee-mls-MLSTX3.asp (last visited April 20, 2007) (2-3 percent commission for broker that finds a buyer); ifoundahome.net, http://www.ifoundahome.net/Listingwork/SBasicListing.htm (last visited April 20, 2007) (allowing home sellers to offer "a 3% commission or more" to buyers' brokers); TexasDiscountRealty.com, Flat Fee Listing, http://www.texasdiscountrealty.com/flatfee.htm (last visited April 20, 2007) (3 percent commission for a broker that finds a buyer). 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 . See, e.g., Thomas J. Miceli, The Multiple Listing Service, Commission Splits, and Broker Effort, 19 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 548, 564 (1991) ("The MLS is therefore a mixed blessing for consumers of brokerage services. As such, these obstacles have received particular attention from the Agencies. REV. In the case of the Austin Board of Realtors, for example, the data showed that three months after the MLS implemented its exclusive agency listing policy, the percentage of all listings that were exclusive agency listings fell from 18 percent to 2.5 percent.314 The complaints also alleged that the exclusive agency listing policy did not give rise to any plausible or cognizable efficiencies, and was "not reasonably ancillary to the legitimate and beneficial objectives of the MLS. 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."). For a discussion of the positive network effects associated with MLSs, see 13 HERBERT HOVENKAMP, ANTITRUST LAW 2220b4, 2223b3 (2d ed. Some commentators have posited that alternative payment structures may better align consumer and broker interests.139. 43, available at http://www.lrc.ky.gov/record/06RS/SB43.htm. Offering research services and thousands of print and digital resources. Because consumers tend to know the prices of additional services before entering contracts with fee-for-service brokers, they are not likely to suffer from the "hold-up" that minimum- service advocates have asserted as a reason for such provisions.288, Further, the origins of these laws suggest that the asserted public interest justifications are not genuine. For example, if a cooperating broker secures a buyer for a transaction and can establish through arbitration that he or she was the "procuring cause" of the sale, then the listing broker is liable for the cooperative compensation.45, One panelist who is a real estate broker and past president of NAR described the MLS as "a broker-to-broker information exchange that provides an opportunity for cooperation and compensation. The Internet's Effect on the Real Estate Industry, By placing more information in the hands of consumers, the Internet has facilitated the growth of nontraditional business models such as fee-for-service brokers, VOWs, and broker referral networks that allow consumers opportunities to substitute their efforts for those of the broker, in many cases in return for lower fees. Therefore, IDX datafeeds may contain listings on fewer than all of the homes listed for sale in the MLS's area. Rebates are an important form of price competition under the traditional structure of real estate transactions because the seller and seller's broker, not the buyer's broker, determine the amount of the buyer's broker's commission via the listing agreement. at 114; Farmer, Tr. 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. The Nature of Competition Among Brokers, Brokers compete for clients on several dimensions by offering the most attractive service and price combination.162. 265, 269 (2000) ("In recent years it has become more common for buyers to employ a buyer's agent, rather than a traditional seller's agent"). ASS'N 519 (1992); Crockett, supra note 51, at 213. Ohio,302 Virginia,303 and Wisconsin304 recently have adopted this approach. 179, 184-185 (1981); Crockett, supra note 51, at 211. U.S. Department of Justice, Jeffrey Schmidt, Director, Bureau of Competition Research on a wide range of topics of interest to real estate practitioners. Unfortunately, as one author recently noted, "There is not much empirical evidence on commission rates. 262. "330 A Workshop panelist who owns a fee-for-service brokerage recounted his experiences: Brokers also filed public comments alleging that competing brokers have withheld cooperation with, or engaged in harassment of, discounters. A form of alternative dispute resolution whereby a neutral third party listens to each party's position and makes a final decision. 293. See Darryl W. Anderson, Minimum-Service Requirements in Real Estate Brokerage: A Response to Maureen K. Ohlhausen, ANTITRUST SOURCE, Jan. 2006, at 3-4 (arguing that minimum-service requirements are procompetitive because they foster price negotiations before entering a representation agreement over what a fee-for-service broker will charge for all the services required by law).
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