at 29-30; AEI-Brookings Paper, supra note 3, at 13 n.49; Nadel, supra note 25, at 4-5. 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). at 160-61 (noting that consumers now may research online not only homes for sale, but also the entire buying and selling process). 2006 (discussing various theoretical and empirical reasons why the hold-up theory does not appear to apply to fee-for-service brokerage). "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 . Any superceding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount. '"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. NAR's policy permits traditional brokers to discriminate against other brokers based on their business models, denying them the full benefits of MLS participation. See VA. CODE 54.1-2138.1. C-4167; Information and Real Estate Services, LLC, FTC File No. 317. at 101 (noting that several types of business models operate under the Century 21 franchise). "); Turnbull, supra note 162, at 296 ("[S]ince no direct pricing of service levels is allowed, the housing market and broker market lose an important channel normally responsible for ensuring that the services are provided to the point where the marginal value to clients equals the marginal cost to brokers."). Several panelists and commenters cited Real Trends estimates of commission rates. NAR 2006 SURVEY, supra note 4, at 37. 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. Typically, agents solicit listings, work with homeowners to sell their homes, and show buyers homes that are likely to match their preferences. 25. It is a standard question now. William H. Jones, II, Trial Attorney, Litigation III Section The MLS facilitates the offering of unilateral offers of compensation to cooperating brokers, according to NAR. at 111. 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. "157 Another panelist, a NAR economist, stated that in 2004 "253,000 [licensees] entered the market, became realtor members, and 127,000 dropped out, indicating that the market is fairly dynamic, that there's free entry, free exit. 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. 59 858-353, TENN. CODE tit. See Kunz, Tr. 155. 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. American Bankers Association, Public Comment 10, at 3 (comment). 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. In December 2005, NAR filed a motion to dismiss the lawsuit. 1983 FTC STAFF REPORT, supra note 9, at 45. 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. 8. at 113-14. . STATUTES. Some MLSs also withhold such datafields as the detailed description of the home or the property disclosures. See Hearing, supra note 1, at 30 (statement of Rep. Richard H. Baker, member House Comm. Weicher's calculations use average home sales prices, not median home sales prices. If you owe a fiduciary duty to someone, you must act in the. (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. Licensees who work for the listing broker or for the selling (cooperating) broker are the subagents of their respective brokers. 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"). Specifically, these panelists pointed to rules that keep exclusive agency listings from being uploaded to national real estate websites like Reator.com.310 Recent NAR data show that 77 percent of home buyers search the Internet for homes, and that 24 percent of home buyers first found online the home they ultimately purchased.311 Thus, online exposure appears to be crucial to marketing a home, and, to the extent that successful marketing tends to lead to a higher selling price and shorter time on the market, it is reasonable to assume that homes without such exposure are likely to take longer to sell or sell at lower prices. 156. 2006) ("In short, it is impossible to perform the tasks of a real estate agent or appraiser in the relevant geographic area without using [the defendant MLS]. 293. They found a counter-cyclical pattern for commission rates. According to REAL Trends data, the number of transaction sides per agent declined from 12.7 in 2000 to 10.2 in 2005. Generally speaking, agents work directly with consumers and brokers supervise agents. United States v. Colgate & Co., 250 U.S. 300 (1919). 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."). See, e.g., VA. CODE ANN. . Subagent Definition, . The Agencies have not encountered evidence supporting any of these arguments in favor of minimum-service restrictions. "105 The same panelist elaborated on the advantages of MLS data: As this panelist explained, access to full MLS, rather than limited IDX datafeeds, is "extremely valuable" because it allows agents to tell consumers "the minute that something is listed, 'Let me tell you, there was a new listing that just popped up, it's matched your criteria, I think we ought to go out and look at it.'"107. The MLS is a local or regional joint venture of real estate brokers, typically operated by a local group of brokers affiliated with NAR, who pool and disseminate information on homes available for sale in their particular geographic areas.41 The MLS combines its members' home listings information into a database, usually in electronic form. Although a detailed exploration of all industry characteristics was beyond the scope of the 'Workshop, participants focused on a variety of characteristics, including broker concentration and entry into the industry. See also Whatley, Tr. 279. they are confronted with the question how much can you reduce your commission? One agent claimed that, due to the prevalence of discount brokers, real estate agents "are confronted with the question how much can you reduce your commission? Code of Ethics, NAR's Constitution & Bylaws, and model bylaws for state & local associations. However, just because members of a MLS have a pre-existing agreement in place does not mean that all listing agents will play ball. See Weicher, supra note 167, at 121 ("Goolsby and Childs find that the commission rate declines about 0.06 to 0.11 percentage points for each $10,000 increase in home price, e.g., from 5.90 percent to 5.84 or 5.79 percent."). This bill, signed into law on March 22, 2007, becomes effective July 1, 2007. "142, Although nationwide market shares provide little information about local market concentration, national-level data do demonstrate that there are many brokerage firms and agents, and that most brokerage offices consist of a small number of agents. See also Blanche Evans, Remember the Alamo: Limited Service Dust-up Brings Out State's Rights Argument Against DOJ, FTC, REALTY TIMES, Apr. Kentucky S.B. Review your membership preferences and Code of Ethics training status. See, e.g., Lewis, Tr. "87 eRealty gave a 1 percent rebate to buyers and also took listings from home sellers.88, The panelist emphasized that this business model took the MLS "a step beyond" cooperation and compensation in a business-to-business exchange and used the "power of the information in [the MLS] to better serve consumers. The only exception to this is in the case of the appointment of designated agents, as outlined in paragraph 10. Agents also may have incentives to steer buyers toward their listings or homes listed by other agents who are affiliated with the same brokerage firm. at 154. eRealty was a licensed brokerage and employed licensed agents.84 It provided the ability to search MLS data online to bona fide buyers who had registered for a password, monitored the MLS, and reported to its clients when any listing came up that fit a profile that the client had pre-established.85 In this way, the VOW model allows consumers to substitute their search effort for that of a broker: eRealty also would "communicate instantly through email or any device [clients] needed to assist [them] with scheduling of appointments and the whole scheduling of the transaction all the way through to close. See id. See Whatley, Tr. 3:05CV188-H (filed Mar. 241. No. In this manner, brokers can take advantage of their superior knowledge of market conditions by steering clients away from home listings that otherwise match the criteria identified by the consumers, but provide lower financial gains for the broker than other homes.133, Home buyers' increasing use of the Internet may limit brokers' ability to steer buyers away from discounters' listings without their knowledge. Id. 54. A .gov website belongs to an official government organization in the United States. Some commentators have posited that alternative payment structures may better align consumer and broker interests.139. "179 Another commenter observed that "[t]he 6% commission of long ago has decreased to 4 or 5% on the majority of deals. NAR 2006 SURVEY, supra note 4, at 44. See AEI-Brookings Paper, supra note 3, at 19. Official websites use .gov 45:15-3.1 (West 2006). See NAR, CODE OF ETHICS AND STANDARDS OF PRACTICE OF THE NATIONAL ASSOCIATION OF REALTORS, STANDARD OF PRACTICE 17-4 (effective Jan. 1, 2006), available at http://www.realtor.org/mempolweb.nsf/pages/code. . (2007). 208. 192. single agent A single agent is an agent who represents only one person in the transaction, either the buyer or the seller. Therefore, a real estate broker must keep confidential any information that may weaken a principal's bargaining position. See also Perriello, Tr. See Olazabal, supra note 19, at 91-100; see also Early, Tr. . In contrast, in 1997 only 2 percent of recent home buyers had first located their home on the Internet. "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. at 14. One Workshop panelist, an economist, expressed concern about the effect of these compensation arrangements on competition and on consumers. Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. See the NAR website (http://www.realtor.org/law_and_policy/mls/ild/regulator_letters.html) for more details on the association's instructions and suggested content. 311. Yet, consumers are paying almost 25 percent more for brokerage services, after adjusting for inflation, than they did in 1998. See also Whatley, Tr. As a result, inflation-adjusted commission fees per transaction appear to follow closely movements in home sales prices. No. See, e.g., Reifert, 450 F.3d at 317; Metropolitan Multi-List, 934 F.2d at 1579-80; Realty Multi-List, 629 F.2d at 1356. at 1089 ("the cost of finding a customer increases with the number of realtors in the market, without necessarily generating additional benefits to the consumer"). "163 Additionally, brokers expend varying degrees of effort involving a wide range of activity, including marketing their own services to potential buyers and sellers. . See HUD REPORT, supra note 201. NAR 2006 SURVEY, supra note 4, at 74 (69% of sellers contacted only one agent; 74% of sellers found their agent through either a referral or a prior relationship with the agent). 35. The FTC defined alternative brokers as "those who charge and promote a commission rate or fee that is at least 2 percent lower than the fee prevailing in their geographic area, or who offer and promote services that differ significantly from those generally offered in their geographic area." See Lawrence J. In terms of branding, the broker may invest in and create a brand or affiliate with a national or regional franchisor that provides a brand with certain reputational value and an advertising campaign. What Is Subagency In Real Estate? (Solved) - Signature Group Realty Specifically, both studies find that homes owned by agents sell for more than other homes, even after controlling for housing characteristics that are likely to affect prices. These licensing statutes form the framework for state regulation and oversight of the profession by establishing requirements for licensure (such as minimum age, education, and experience) and various requirements and prohibitions regarding business practices and conduct. Workshop panelists reported how some MLS rules discriminate against brokers who enter into exclusive agency listing agreements, which provide that the broker is entitled to compensation only when the home is sold by an agent, and not in the event the home seller sells the home on his or her own.309 This is the type of agreement used in most fee-for-service transactions. some collusion between brokers through the [MLS] . Instead of working with customers directly, brokers often provide agents with branding, advertising, and other services that help the agents complete transactions. 275. INFORMATION TECH. While cooperation among brokers through a multiple listing service can provide consumers with important efficiencies, cooperation used to adopt rules that hinder rivals can be anticompetitive and, as recent Agency actions indicate, may violate the antitrust laws. D. One Explanation of the Seemingly Contradictory Descriptions of Broker Competition. The selling agent may be (1) the subagent or listing agent of the seller; (2) a buyer's agent; or (3) a dual agent. When exercised, the opt-out provision prevents Internet-based brokers from providing all MLS listings that respond to a customer's search, effectively inhibiting the new technology. 176. Suggested Rules additionally Regulations for a Commercial/Industrial MLS Separately Incorporated but Completely Owned by a Board of REALTORS. Increased Consumer Access to Real Estate-Related Information. The authors did not identify the source of the U.S. commission data. Id. They should also avoid enacting such laws, rules, and regulations in the future. Until the 1990s it was common for the cooperating broker to be a subagent of the listing broker, working on the seller's behalf. 051-0217. Some have argued that subagency was created by members of NAR in order to restrict access to the MLS. NAR 2006 SURVEY, supra note 4, at 34. See Hahn, Tr. 116. 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. Structural Features of the Real Estate Brokerage Industry. 319. 334. Hahn believes that the involvement of multiple parties and the "unique" compensation arrangements in real estate transactions make it difficult for home buyers and sellers to pay for services according to their needs, and he questioned whether alternative business models have had a fair chance to compete under the current structure. See GAO REPORT, supra note 3, at 13-14, 21. The staff found that 85 percent of the sellers surveyed were quoted a commission rate of either six or 7 percent by their broker. for a description of VOWs. Re/Max Int'l, Inc. v. Realty One, Inc., 173 F.3d 995, 1003 (6th Cir. First, it appears that many consumers are not fully apprised of their marketplace options. 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, e.g., Mortgage101.com, http://www.mortgage101.com (last visited April 20, 2007). CENT. See also Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. 295. According to the U.S. Census, the median home sales price in Baton Rouge in 1992 was $73,600. with housing prices. See United States v. Realty Multi-List, 629 F.2d 1351, 1370 (5th Cir. Real estate study .docx - The purpose of a liscense Article c. Both a and b. d. Neither a nor b. b. their broker. at 149. 33, no. [In w]hat other business can you find that kind of cooperation?"324. According to the author, "[t]he [HUD-1] data clearly reveal systematic variation in the actual home brokerage commission rates according to the three variables examined. Even if some of the proffered justifications for minimum-service laws were valid, there appear to be far less restrictive ways to address them ways that preserve the benefits of competition for consumers than implementing minimum-service requirements to address them. of Realtors, FTC Dkt. 221. Several companies offer services to help FSBO sellers. . In such a case, the subagent works with the buyer as a customer but owes fiduciary duties to the listing broker and the seller. 65. an agent) do not appear to be substantial. 132. Once all contingencies have been satisfied, the parties proceed to closing, where they exchange purchase money and title to the home. Sub-agents bring buyers to view homes but they don't represent them that is, they don't work on the buyers' behalf. See NAR 2006 SURVEY, supra note 4, at 78 (75 percent of home sellers surveyed reported that the listing agent was compensated with a percentage of the sales price of the home). "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. Since cooperating brokers do not directly participate in negotiating listing contracts, rebates offer a way for them to compete on price.164. As described infra, however, this is not necessarily the case with respect to the entry of new business models in the real estate brokerage industry. National, state & local leadership, staff directories, leadership opportunities, and more. See Table 1 in Chapter III of this Report. 2004) (defining procuring cause as "[t]he efforts of the agent or broker who effects the sale of realty and who is therefore entitled to a commission."). . Panelists representing traditional brokers acknowledged that the listings information provided via an IDX datafeed is limited. 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. Brokerage entry appears to be more difficult than agent entry. 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. at 89; American Bankers Association, Public Comment 10, at 3. 159. "156 Namely, an individual agent primarily needs to meet state licensing requirements and affiliate with a licensed broker. Antitrust laws generally do not prohibit unilateral decisions by firms not to deal with a particular listing broker.334 If consumers have enough information about the quality of the service they have received, then firms that choose to engage in steering will develop a poor reputation for having done so and will consequently lose future business. See also Hahn, Tr. PDF Connecticut Real Estate Commission Policy on Agency See also Hsieh & Moretti, supra note 139, at 1078; Hsieh, Tr. 131. 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. at 103. Using that information, as well as Agency expertise, the almost 400 submissions filed in response to the Agencies' request for public comment in connection with the Workshop, and other available information, this Report has undertaken a careful examination of the real estate brokerage industry. Agency RelationshipsUnit 5 109 Is the Cooperating Broker a Subagent? Indeed, antitrust agencies have challenged private associations' restraints on truthful competitor advertising. White, The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like? The public comments are available at http://www.ftc.gov/os/comments/realestatecompetition/index.htm and http://www.usdoj.gov/atr/public/workshops/reworkshop_rewcomments.htm. A cooperating broker does not assume compensation from the listing firm. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. NAR 2005 SURVEY, supra note 38, at 29.
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a cooperating broker would be a subagent