(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. While many buyers may see this as a benefit that allows them greater control over their home-buying process, brokers may also benefit. 103. Chapter III explores the competitive structure of the real estate brokerage industry and publicly available evidence concerning brokerage commission rates and fees. See Complaint, United States v. Kentucky Real Estate Comm'n, Civil Act. 952, 955 (D. Md. 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"). The multiple listing service shall not have a rule requiring the listing broker to disclose the amount of total negotiated commission in his listing contract, and the multiple listing service shall not publish the total negotiated commission on a listing which has been submitted to the MLS by a participant. We have not found any increased incidence of undisclosed dual agency problems associated with limited-service brokerage. Assuming a commission rate of 5.8% in 1985, Sirmans and Turnbull's statistical results imply a commission rate that varies from 5.8% in 1985, upwards to a commission rate of 6.06% at the end of 1989, and downward to 5.95% by the end of 1992. 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. A Report by the Civ. Competition among brokers based on service to consumers includes a wide range of possibilities. single agent A single agent is an agent who represents only one person in the transaction, either the buyer or the seller. "62, Due to these significant efficiencies and procompetitive features, the Fifth Circuit held that the alleged MLS-related restrictions at issue should not be condemned as per se illegal.63 At the same time, the Court held that the efficiencies and benefits flowing from the MLS, combined with other factors, resulted in the MLS having market power in a relevant antitrust market, thereby simplifying the rule of reason inquiry concerning the legality of restrictions imposed by the MLS and its members.64, Although the data show that most consumers currently contract with a broker that supplies the full range of services traditionally offered by brokers, many consumers prefer to use brokers whose business models are alternatives to the traditional one. REAL ESTATE RESEARCH 30, 34-35 (2000). 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. See William C. Goolsby & Barbara J. Childs, Brokerage Firm Competition in Real Estate Commission Rates, 3 JOURNAL OF REAL ESTATE RESEARCH 79 (1988). 321. To compete on price, they can offer lower commissions to home sellers and, where permitted, rebates to home buyers. The studies have focused on, among other things, the distribution of commission rates within certain geographic areas and the relationship between commission rates and various property characteristics (such as the age of the home or the list price), market conditions, and the amount of time that the home spends on the market.192, In late 1979 and early 1980, the FTC staff conducted a national survey of recent home buyers and sellers. Where participants are 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, multiple listing services may, as a matter of local discretion, require listing participants to disclose to cooperating participants in writing the total reduction in the gross commission and the amount by which the compensation payable to the cooperating broker will be reduced within ______ hours of receipt of notification from the lender. As one panelist explained: the mechanics of the typical real estate transaction make it difficult for a buyer's broker to reduce the price of his or her services because the "custom of the industry" is for the listing broker to split his or her commission with the buyer's broker.70 Rebates, therefore, can be powerful tools for price competition between brokers. 129. (Amended 5/10), Note 3: Multiple listing services must give participants the ability to disclose to other participants any potential for a short sale. For example, a recent National Association of Realtors ("NAR") survey found that 84 percent of consumers employ a real estate broker to help them sell their home, and the vast majority of these home sellers appear to be contracting with real estate brokers to provide assistance on all aspects of the transaction.11 Another NAR survey found that nine out of ten buyers use a real estate professional during their home searches.12 The Internet also appears to be playing an increasingly important role in the real estate transaction. 236. Mar. at 3. 128. Including Legal, Agent & Broker, and Property Rights Issues. The authors use a sample of 669 single family home transactions covering the first nine months of 1986 obtained from the Lincoln, Nebraska MLS. For example, these advocates fear that a cooperating full-service broker may be forced to explain aspects of the transaction to the seller or perform some of the tasks related to removing contingencies and closing the transaction typically performed by the listing agent. 98. 28. . "); Hsieh, Tr. No. According to the U.S. Census, the median home sales price in Baton Rouge in 1992 was $73,600. 133. Olazabal notes that the subagency regime was not a creature of state law, but rather was a result of most MLSs permitting listing brokers to split commissions only with cooperating agents who agreed to be a subagent of the seller. Generally speaking, agents work directly with consumers and brokers supervise agents. However, Weicher notes that the magnitude of the sales price effect appears to be small. 41. . Such entities are likely to gain financially from increased entry into the brokerage industry. 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. To the extent that fee-for-service options cost more, full-service brokers will have less need to offer these incentives. Competition among brokers on price primarily occurs through lower commission fees and rebates. See ForSaleByOwner.com Corp. v. Zinnemann, 347 F. Supp. . Instead of working with customers directly, brokers often provide agents with branding, advertising, and other services that help the agents complete transactions. "182 These observations are similar to those of the GAO, which noted that competition from nontraditional brokers may be partially responsible for a recent decline in commission rates.183, C. Commission Rates and Fees: Empirical Evidence184. See Amended Complaint, United States v. Nat'l Ass'n of Realtors (Oct. 4, 2005), available at http://www.usdoj.gov/atr/cases/f211700/211751.htm. Seller Broker Definition, One who earns a commission from the seller of a property in exchange for finding a buyer and assisting in negotiation. & ECON. 151. 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. "Procuring cause" refers to the efforts of the primary broker, who brings a buyer to the listing and causes the transaction to be completed. (Amended 05/10), While offers of compensation made by listing brokers to cooperating brokers through MLS are unconditional (except where MLS rules create specific exceptions as specified elsewhere in this policy statement), a listing brokers obligation to compensate a cooperating broker who was the procuring cause of sale (or lease) may be excused if it is determined through arbitration that, through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission pursuant to the listing agreement. Matthew Magura, Economist, Economic Regulation Section Access to the MLS is one of the most important services that real estate brokers traditionally have offered. Denis A. Breen, Assistant Director, Bureau of Economics A decrease in commission rates does not necessarily imply a decrease in fees. Drawing on commission rate data from the 1983 FTC Report and examining census data on commissions from the period of 1980 to 1998, Hsieh (and his co-author) found evidence suggesting that regardless of home selling prices, commission rates appear fairly stable around 6 percent over the relevant time period and across markets.222 Hsieh studied 282 cities over eighteen years and found that in cities with higher housing prices (and thus higher commission fees and higher profit opportunities for agents): (1) there are more real estate agents relative to the city's workforce; (2) these agents are less productive (measured by sales per agent or sales per hour worked); and (3) wages for agents are not higher than they are in cities with low housing prices. Similarly, at a recent Congressional hearing on competition in the real estate brokerage industry, Representative Baker analogized minimum-service laws and regulations to requiring a consumer to have his or her entire house painted when he or she only wanted the porch painted. 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." Geoffrey K. Turnbull, Real Estate Brokers, Nonprice Competition and the Housing Market, 24 REAL ESTATE ECONOMICS 293, 295 (1996). Matthew J. Bester, Trial Attorney, Litigation III Section The agenda, transcript, and other information relating to the Workshop are available at the Agencies' websites at http://www.usdoj.gov/atr/public/workshops/reworkshop.htm and http://www.ftc.gov/bc/realestate/workshop/index.htm. 182. 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. 308. Yet, consumers are paying almost 25 percent more for brokerage services, after adjusting for inflation, than they did in 1998. c. Both a and b. d. Neither a nor b. b. their broker. 144. See Hsieh & Moretti, supra note 139, at 1089 ("as long as the commission rate is fixed, the amount of time that realtors devote to prospecting and farming relative to actually selling a house or finding an appropriate house for a buyer increases as the market becomes more and more competitive, that is, as more realtors are chasing after the same number of customers"). Hsieh, Tr. Section A examines the structural features of the real estate brokerage industry. See Maureen K. Ohlhausen, Minimum-Service Requirements in Real Estate Brokerage: A Reply to Darryl Anderson, ANTITRUST SOURCE, Mar. 154. 30, 2000). See C.F. at 1082. 116. See Whatley, Tr. Id. 1999). The commission "rate" is the percentage of the home sales price that the broker retains as a commission. 136. Since the consent decree was entered, consumers in Kentucky have benefited from new reduced price business models. 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. 27, 2007). It also addresses the role that the cooperative nature of real estate brokerage may play in shaping competition in the real estate brokerage industry. Given how important competition is to consumers in this industry, the Federal Trade Commission ("FTC") and the Department of Justice Antitrust Division ("DOJ") held a public workshop in October 2005 ("Workshop") to address issues affecting competition in the residential real estate brokerage industry.6 Panelists at the Workshop included traditional real estate brokers, brokers offering nontraditional business models, state regulators, and academics.7. 126. Barnett, Tr. From 1989 to 1992, despite a home sales price increase of about 15.5%, the average commission rate decreased about 2%. Advancing best practices, bringing insight to trends, and providing timely decision-making tools. should be able to choose their service models as well as the provider of those services, whether they be limited service or full-service"). In the majority of transactions, the commission fee is determined by multiplying the commission rate negotiated in the listing contract by the home's actual selling price. at 198-99. 44. at 152 (speaking for Cendant, and stating that "we believe that consumers . 327. 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. Illustrative of the continued changes is a court's description of a local MLS as it progressed from distribution of an index card for each property listing to computerized downloads of digitized photographs. Complete listing of state and local associations, MLSs, members, and more. Although neither commenters nor Workshop panelists presented evidence to explain the cause of relatively inflexible rates, this phenomenon has meant that the price that consumers paid for brokerage services rose considerably during the recent run-up in housing prices. The FTC and DOJ do not necessarily endorse, support, verify, or agree with the comments, opinions or statements of Workshop participants or of others who have published articles regarding the industry that are included in this Report. 50. "115, Industry-produced data appear to support this view. 191. CODE 452.133. Accordingly, there is no basis for believing that there is a need for a minimum-service law to "protect" cooperating brokers from doing additional work when facing a home seller represented by a fee-for-service broker. One panelist noted that, in her experience as a broker, lenders' increased use of technology has streamlined the mortgage process, causing the average time from contract to closing to fall from forty- five to sixty days, to thirty days.37 The HUD-1 form required by the Real Estate Settlement Protection Act ("RESPA") is a centerpiece of the closing and requires a detailed listing of the flow of funds from buyer to seller and the use of funds, including selling and buying expenses associated with the transaction and the amount of commission paid to each broker. 274. 76. at 83. 225. 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. 210. 2005). at 172; NAR, Public Comment 208, at 12 (comment). ANN. "A subagent is a cooperating agent who works for a listing broker-salesperson in the sale of a property. First, it appears that many consumers are not fully apprised of their marketplace options. They instinctively start with the [I]nternet before they search to buy anything. Lydia B. Parnes, Director, Bureau of Consumer Protection 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. Increased Consumer Access to Real Estate-Related Information. 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"). "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. Id. ON LEGIS. 69. Id. Ohio,302 Virginia,303 and Wisconsin304 recently have adopted this approach. James E. Larson & Won J. 192. of Registration in Optometry, 110 F.T.C. 70 Fed. FSBOs often offer payment to a broker representing a buyer. 260. 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. 1983 FTC STAFF REPORT, supra note 9, at 64. 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. White, The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like? 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. 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. Although the specific data fields on each listing are determined by the individual MLS, they typically include detailed descriptions of the homes for sale, the asking price, the offer of compensation that will be paid to a cooperating broker who finds a suitable buyer,43 and the name of the listing broker. Competition in the real estate brokerage industry would likely be enhanced if consumers had better access to such information. The data are usually proprietary and not readily available to the public or to academic analysts. Multiple listing services may, as a matter of local discretion, require participants to disclose short sales when participants know a transaction is a potential short sale. In 2005 real estate broker commissions exceeded $60 billion. See, e.g., Zillow.com, http://www.zillow.com (last visited April 20, 2007). There is some overlap between the categories because certain business models fit into more than one category. Cooperating brokers may also seek to negotiate higher compensation from the listing broker or from the home buyer. Kunz, Tr. See Hsieh, Tr. 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). 54.1-2131(E) (2007). at 178-79; Sambrotto, Tr. NAR, Public Comment 208, at 1 (comment). Further, once a seller consents to a cooperating broker acting as a subagent, all licensees affiliated with that broker are that seller's subagent for the listed property. In accordance with NAR rules, the MLSs create an "Internet Data Exchange ("IDX"), a datafeed that participating brokers may use for their individual advertising websites. * (Revised 11/04). city or state) under examination, as home prices increased, commission rates decreased.200 However, despite a lower commission rate, the results imply the dollar magnitude of the commission fee paid was considerably higher for higher priced homes.201 The study also found that commission rates associated with sales of existing homes were higher and less varied than rates associated with new homes.202 On average, the commission rate paid on sales of existing homes was approximately 1.2 percentage points higher than the rate paid on new home sales.203 Finally, the study found that commission rates in transactions involving cooperating brokers were on average approximately 0.4 percent higher than rates in non-cooperative transactions. Peggy Bayer Femenella, Bureau of Competition See Hearing, supra note 1, at 5 (testimony of David G. Wood), available at http://financialservices.house.gov/media/pdf/072506dgw.pdf. In the next Chapter, we turn to obstacles innovators may be encountering. [In w]hat other business can you find that kind of cooperation?"324. 122. If a listing broker fails to pay a cooperating broker, the cooperating broker can bring a "procuring cause" dispute against the listing broker through the MLS arbitration mechanism. 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. See supra notes 117-118 and accompanying text. 65. 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. U.S. Department of Justice, Jeffrey Schmidt, Director, Bureau of Competition Iowa 2004), rev'd on other grounds, 406 F.3d 969 (8th Cir. 1983 FTC STAFF REPORT, supra note 9, at 102. Rutherford et al., Conflicts Between Principals and Agents: Evidence From Residential Brokerage, 76 J. at 38-39; NAR 2006 SURVEY, supra note 4, at 48 (64 percent of buyers reported that they worked with an agent who represented their interests alone); see also Christopher Curran & Joel Schrag, Does it Matter Whom and Agent Serves? at 55 ("[I]t's not surprising to me that we observe non-price competition if, in fact, there isn't a lot of price competition." 1983 FTC STAFF REPORT, supra note 9, at 107-116. 24. The important role played by more listing information being made directly available to consumers underscores the benefits of the antitrust actions against collective action to reduce the availability of such information. 310. In response to these investigations, the South Dakota and West Virginia Real Estate Commissions rescinded their regulations prohibiting rebates, thereby enabling consumers in those states to receive more benefits of competition.250 The Tennessee Real Estate Commission voted to suspend its rules and is in the process of rescinding them entirely.251, No Workshop panelist who commented on rebate bans found any justification for them.

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