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entitled 'Real Estate Brokerage: Factors That May Affect Price
Competition' which was released on September 28, 2005.
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Report to the Committee on Financial Services, House of
Representatives:
August 2005:
Real Estate Brokerage:
Factors That May Affect Price Competition:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-947]
GAO Highlights:
Highlights of GAO-05-947, a report to the Committee on Financial
Services, House of Representatives:
Why GAO Did This Study:
Consumers paid an estimated $61 billion in residential real estate
brokerage fees in 2004. Because commission rates have remained
relatively uniform—regardless of market conditions, home prices, or the
effort required to sell a home—some economists have questioned the
extent of price competition in the residential real estate brokerage
industry. Further, while the Internet offers time and cost savings to
the process of searching for homes, Internet-oriented brokerage firms
account for only a small share of the brokerage market. Finally, there
has been ongoing debate about the potential competitive effects of bank
involvement in real estate brokerage.
GAO was asked to discuss (1) factors affecting price competition in the
residential real estate brokerage industry, (2) the status of the use
of the Internet in residential real estate brokerage and potential
barriers to its increased use, and (3) the effect on competition and
consumers of residential real estate brokerage by state-chartered banks
in states that permit this practice.
What GAO Found:
The residential real estate brokerage industry has competitive
attributes, but its competition appears to be based more on nonprice
variables—such as quality, reputation, or level of service—than on
brokerage fees, according to a review of the academic literature and
interviews with industry analysts and participants. One potential cause
of the industry’s apparent lack of price variation is the use of
multiple listing services (MLS), which facilitates cooperation among
brokers in a way that can benefit consumers but may also discourage
participating brokers from deviating from conventional commission
rates. For instance, an MLS listing gives brokers information on the
commission that will be paid to the broker who brings the buyer to that
property. This practice potentially creates a disincentive for home
sellers or their brokers to offer less than the prevailing rate, since
buyers’ brokers may show high-commission properties first. Some state
laws and regulations may also affect price competition, such as those
prohibiting brokers from giving clients rebates on commissions.
Although such laws and regulations can protect consumers, the
Department of Justice and the Federal Trade Commission have argued that
they may also unnecessarily limit competition and reduce consumers’
choices.
The Internet has changed the way consumers look for real estate and has
facilitated the creation and expansion of alternatives to traditional
brokers. A variety of Web sites allows consumers to access property
information that once was available only by contacting brokers
directly. The Internet also has fostered the growth of nontraditional
residential real estate brokerage models, including discount brokers
and broker referral services. However, industry participants and
analysts cited several obstacles to more widespread use of the Internet
in real estate transactions, including restrictions on listing
information on Web sites, some traditional brokers’ resistance to
cooperating with nontraditional firms, and certain state laws and
regulations.
Although about 30 states potentially authorize state-chartered banks or
their operating subsidiaries to engage in some form of residential real
estate brokerage, few banks in these states appear to have done so.
GAO’s contacts with seven banks engaged in brokerage in two states
found that they were located in small communities with few other
brokerage options, and that their brokerage services did not differ
significantly from those of other local real estate brokers. In
general, because residential real estate brokerage by state-chartered
banks appears to be so limited, its effect on competition and consumers
has likely been minimal.
www.gao.gov/cgi-bin/getrpt?GAO-05-947.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-8678 or woodd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Various Factors Can Influence the Extent of Price Competition in Real
Estate Brokerage:
The Internet Has Increased Consumers' Options, but Several Factors
Could Limit Its Wider Use:
Few State-Chartered Banks Appear to Engage in Real Estate Brokerage:
Appendix:
Appendix I: GAO Contact and Staff Acknowledgments:
Bibliography:
Abbreviations:
DOJ: Department of Justice:
FTC: Federal Trade Commission:
MLS: multiple listing service:
NAR: National Association of Realtors®:
VOW: Virtual Office Web site:
Letter August 31, 2005:
The Honorable Michael G. Oxley:
Chairman:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
The fees paid for residential real estate brokerage--the bringing
together of buyers and sellers of homes and the provision of related
services by licensed brokers and agents--have increased as home prices
have risen in recent years, well beyond the rate of general price
inflation. While comprehensive data do not exist, REAL Trends, an
industry source, estimates that in 2004 consumers paid about $61
billion in real estate brokerage fees related to home sales, up from
approximately $43 billion in 2000.[Footnote 1] Payments to brokers are
typically percentage commissions, or a percentage of the sales price of
the home. An observed tendency toward uniform commission rates
regardless of local market conditions has led many economists and other
observers to question the level of price competition--rivalry among
firms to attract clients on the basis of price--in the residential real
estate brokerage industry.
The emergence of the Internet offers the potential to reduce costs by
generating efficiencies and new ways of doing business. While many
consumers now use the Internet to search for homes and related
services, such as mortgages, Internet-oriented brokerage firms still
represent a small share of the market.[Footnote 2] This has raised
questions concerning potential institutional, legal, and other barriers
to greater "e-commerce" in real estate. Additionally, there has been an
ongoing debate on the potential competitive effects of allowing
federally chartered banks and financial holding companies to engage in
real estate brokerage. Because some states already permit brokerage by
state-chartered banks, the experience of those states may help inform
this debate.
You requested that we review issues related to price competition and
the use of information technology in the residential real estate
brokerage industry. This report discusses (1) factors affecting price
competition in the residential real estate brokerage industry, (2) the
status of use of the Internet in residential real estate brokerage and
potential barriers to its increased use, and (3) the effect on
competition and consumers of residential real estate brokerage by state-
chartered banks in states that permit this practice.
In addressing these topics, we reviewed academic literature on the
structure and competitiveness of the residential real estate brokerage
industry. (A bibliography of selected literature reviewed appears at
the end of this report.) We did not collect original data on
residential real estate brokerage fees or attempt to analyze the extent
of price competition within any specific market. We interviewed and
obtained relevant documents from industry analysts and officials of
real estate brokerage and banking trade associations, including the
National Association of Realtors® (NAR); national associations of state
real estate and banking regulators; and the Department of Housing and
Urban Development, the Department of Justice (DOJ), and the Federal
Trade Commission (FTC). We also interviewed officials of 10 residential
real estate brokerage firms and franchisors, including 2 companies with
major national franchise operations, 1 full-service brokerage firm, 2
Internet-oriented full-service discount brokerage firms, 2 companies
that franchise limited-service discount brokerage offices, and 3
Internet-oriented information and referral companies. The brokerages
and franchisors we spoke with included both small and large firms, and
these firms relied on the Internet to varying degrees. Because we spoke
to a limited number of brokerage firms and franchisors, their views
cannot be interpreted as being representative of all such firms. We
also reviewed the activities of two states, Iowa and Wisconsin, where
some banks are active in residential real estate brokerage. We spoke
with these states' banking regulatory agencies and real estate trade
associations, as well as with seven banks in these states that engage
in residential real estate brokerage. The information on these seven
banks is intended to be illustrative and cannot be generalized to state-
chartered banks nationwide. We also reviewed relevant selected state
laws and regulations and state and federal court decisions. The scope
of our work was limited to residential real estate brokerage and did
not address other aspects of real estate transactions, such as mortgage
financing, title search and insurance, or the settlement
process.[Footnote 3] We performed our work primarily in Boston,
Massachusetts; Chicago, Illinois; and Washington, D.C., between January
and July 2005. We performed our work in accordance with generally
accepted government auditing standards, except that we did not seek
agency comments on this report because we did not review agencies'
programs. However, we provided selected portions of a draft of this
report to DOJ and FTC for their technical comments, which we
incorporated where appropriate.
Results in Brief:
A number of factors can influence the degree of price competition in
the real estate brokerage industry. Some economists have observed that
while the industry has attributes associated with active competition--a
large number of relatively small firms and ease of entry--it has
displayed more evidence of competition on the basis of nonprice
factors, such as reputation or level of service, than on price.
Although there are no comprehensive data on brokerage fees, past
analyses and anecdotal information suggest that commission rates have
persisted in the same range--roughly 5 percent to 7 percent of a
property's selling price--over long periods, regardless of local market
conditions, housing prices, or the cost or effort required to sell
different properties. Our review of the academic literature and
interviews with industry analysts and participants suggest several
potential causes of this relative lack of price variation. First,
multiple listing services (MLS)--the local organizations through which
brokers share information about properties--may encourage price
conformity by, for example, showing the commission that buyers' brokers
will receive for cooperating in the sale of a property. Because, all
else being equal, buyers' brokers have less incentive to show
properties that offer them a lower commission, this system may
discourage brokers from offering less than the prevailing commission
rate. In addition, sellers' brokers may offer a lower share of the
sales commission to buyers' brokers who advertise discounted prices
than to other brokers. Further, some states prohibit brokers from
giving clients rebates on commissions, and some states require or are
considering proposals to require brokers to provide consumers with a
minimum level of service. Although such laws may offer some consumer
protections, DOJ and FTC have argued that they can potentially prevent
price competition or reduce consumers' choice of brokerage services.
The Internet has increased consumers' access to information about
properties for sale and facilitated new approaches to real estate
transactions. Many brokers post on Web sites information--in varying
degrees of detail--about properties they have contracted to sell
("listings"), enabling consumers to obtain such information without
consulting a real estate broker. The Internet also has fostered the
creation or expansion of a number of Internet-oriented real estate
brokerage and related firms, including some discount brokers and
services that refer clients to brokers. However, several potential
obstacles to further expansion of the Internet's role in real estate
brokerage exist, including the extent to which listing information is
made available for brokers to post online. For example, NAR has
considered allowing listing brokers to decide which other brokers may
display their MLS listings online. Some brokers' refusal to allow their
listings to be posted on certain brokers' Web sites could constrain
potential buyers' Internet searches for properties for sale,
potentially limiting the business of Internet-oriented brokers.
Internet-oriented discount brokers may also face resistance from
traditional brokers and may be affected by the state laws that prohibit
or restrict commission rebates to consumers. Finally, other factors,
such as the lack of a uniform sales contract for residential real
estate and of a uniform technology to facilitate related processes--
such as inspection, appraisal, financing, title search, and settlement-
-may inhibit the use of the Internet for accomplishing the full range
of activities needed for real estate transactions.
Approximately 30 states have laws or regulations that potentially
authorize state-chartered banks or their operating subsidiaries to
engage in real estate brokerage under some circumstances. However, only
a limited number of banks in these states appear to have used this
authority, so the effect on competition and consumers has likely been
minimal. On the basis of our review of state statutes and regulations
identified by two national associations, at least 5 states and the
District of Columbia provide relatively clear authority for banks or
their subsidiaries to engage in real estate brokerage. Laws in certain
other states may also provide such authority, but these laws are
ambiguous or subject to regulatory interpretation. The exact number of
state-chartered banks engaged in real estate brokerage is unknown but
appears to be limited, according to trade and regulator associations in
the banking and real estate industries. The seven banks we spoke with
told us that they offered brokerage services in small communities and
provided an additional option for local customers. These banks said
that real estate brokerage was a small portion of their business, and
that their brokerage services and pricing did not differ significantly
from those of other local brokerage companies.
Background:
Traditionally, real estate brokers have offered a full, "bundled"
package of services to sellers and buyers, including marketing the
seller's home or assisting the buyer's search, holding open houses for
sellers and showing homes to buyers, preparing offers and assisting in
negotiations, and coordinating the steps to close the transaction.
Because real estate transactions are complex and infrequent for most
people, many consumers benefit from a broker's specialized knowledge of
the process and of local market conditions. Still, some consumers
choose to complete real estate transactions without a broker's
assistance, including those who sell their properties on their own, or
"for-sale-by-owner."
For many years, the industry has used a commission-based pricing model,
with sellers paying a percentage of the sales price as a brokerage fee.
Brokers acting for sellers typically invite other brokers to cooperate
in the sale of the property and offer a portion of the total commission
to whoever produces the buyer. Agents involved in the transaction may
be required to split their shares of the commission with their
brokers.[Footnote 4] Under this approach, brokers and agents receive
compensation only when sales are completed. Common law has generally
considered both brokers cooperating in the sale of a home to have a
fiduciary responsibility to represent the seller's interests, unless
the buyer's broker has specifically agreed to represent the buyer's
interests.[Footnote 5]
In recent years, alternatives to this traditional full-service
brokerage model have become more common, although industry analysts and
participants told us that they still represent a small share of the
overall market. Discount full-service brokerages charge a lower
commission than the prevailing local rate, but offer a full package of
services. Discount limited-service brokerages offer a limited package
of services or allow clients to choose from a menu of "unbundled"
services and charge reduced fees on a commission or fee-for-service
basis.
Most local real estate markets have an MLS that pools information about
homes that area brokers have agreed to sell. Participating brokers use
an MLS to "list" the homes they have for sale, providing other brokers
with detailed information on the properties, including how much of the
commission will be shared with the buyer's agent. An MLS serves as a
single, convenient source of information that provides maximum exposure
for sellers and facilitates the home search for buyers. Each MLS is a
private entity with its own membership requirements and operating
policies and procedures. According to NAR, approximately 900 MLSs
nationwide are affiliated with the trade association, whose more than 1
million members represent approximately 60 percent of all active
licensed real estate brokers and agents. NAR has affiliations with 54
state and territorial associations and more than 1,600 local
associations. When one of these local associations owns and operates an
MLS, this NAR-affiliated MLS is expected to follow NAR's model
guidelines for various operational and governance issues, such as
membership requirements and rules for members' access to and use of
listing information. If a local association or its MLS fails to comply
with these guidelines, it can lose important insurance coverage
provided through NAR or have its charter membership in NAR revoked. An
MLS that is not affiliated with NAR is not bound by these guidelines.
Individual states regulate real estate brokerage, establishing
licensing and other requirements for brokers and agents. Of the two
categories of state-licensed real estate practitioners, brokers
generally manage their own offices, and agents, or salespeople, must
work for licensed brokers. States generally require brokers to meet
more educational requirements than agents, have more experience, or
both. For the purposes of this report, we generally refer to all
licensed real estate practitioners as brokers. Generally, a state
commission, led by appointees who may have a professional background in
real estate, oversees implementation of and compliance with state
requirements and may respond to complaints about brokers or agents or
take disciplinary action. Federal agencies do not play a day-to-day
regulatory role in real estate brokerage, although DOJ and FTC enforce
compliance with federal antitrust laws in this market, as they do for
many other markets.
Banks may obtain charters at the federal or state level, and their
activities are subject to oversight by federal or state regulators. The
Office of the Comptroller of the Currency, which is a bureau within the
Department of the Treasury (Treasury), charters and regulates national
banks. State-chartered banks are overseen by state regulators and, if
they have federal deposit insurance, a federal regulator.[Footnote 6]
Many companies that own or control banks are regulated by the Board of
Governors of the Federal Reserve System (Federal Reserve) as bank
holding companies. Under the 1999 Gramm-Leach-Bliley Act (Pub. L. No.
106-102), bank holding companies may qualify as financial holding
companies and thereby engage in a range of financial activities broader
than those traditionally permitted for bank holding companies, such as
securities and insurance underwriting.
Some states permit state-chartered banks to engage in real estate
brokerage, but national banks and financial holding companies may not
engage in such activity. The Gramm-Leach-Bliley Act permits financial
holding companies and financial subsidiaries of national banks to
engage in activities that the Federal Reserve and the Treasury deem,
through order or regulation, to be financial in nature, incidental to
such financial activity, or both complementary to a financial activity
and not posing substantial risk to the safety and soundness of
depository institutions or the financial system generally. In late
2000, the Federal Reserve and the Treasury released a proposed
regulation to allow banking companies to enter real estate brokerage
under some circumstances.[Footnote 7] However, from fiscal years 2003
to 2005, amendments to appropriations laws precluded the Federal
Reserve and the Treasury from issuing such regulations. Legislation was
introduced in the 109TH Congress to prohibit financial holding
companies and national banks from engaging in real estate brokerage
activities. Legislation was also introduced to permit such activity.
Various Factors Can Influence the Extent of Price Competition in Real
Estate Brokerage:
A number of factors can influence the degree of price competition in
the real estate brokerage industry. Some economists have observed that
brokers typically compete more on nonprice factors, such as service
quality, than on price. Evidence from academic literature and industry
participants with whom we spoke highlighted several potential causes of
this apparent lack of price competition. These potential causes include
broker cooperation, largely through MLSs, which can discourage brokers
from competing with one another on price; resistance from traditional
full-service brokers to brokers who offer discounted prices or limited
services; limited pressure from consumers for lower prices; and state
antirebate and minimum service laws and regulations, which some argue
may limit pricing and service options for consumers.
Real Estate Brokerage Is Characterized More by Nonprice Competition
Than Price Competition:
The real estate brokerage industry has a number of attributes that
economists normally associate with active price competition. Most
notably, the industry has a large number of brokerage firms and
individual licensed brokers and agents--approximately 98,000 active
firms and 1.9 million active brokers and agents in 2004, according to
the Association of Real Estate License Law Officials.[Footnote 8]
Although some local markets are dominated by 1 or a few large firms,
market share in most localities is divided among many small firms,
according to industry analysts. In addition, the industry has no
significant barriers to entry, since obtaining a license to engage in
real estate brokerage is relatively easy and the capital requirements
are relatively small.
While real estate brokerage has competitive attributes, with a large
number of players competing for a limited number of home listings, much
of the academic literature and some industry participants we
interviewed described this competition as being based more on nonprice
variables, such as quality, reputation, or level of service, than on
price.[Footnote 9],[Footnote 10] One reason for this characterization
is the apparent uniformity of commission rates. Although comprehensive
data on brokerage fees are lacking, past analyses and anecdotal
information from industry analysts and participants indicate that,
historically, commission rates have remained relatively uniform across
markets and over time. Various studies using data from the late 1970s
through the mid-1980s found evidence that the majority of listings in
many communities clustered around the same rate, exactly 6 percent or 7
percent.[Footnote 11] Although these studies and observations do not
indicate that there has been complete uniformity in commission rates,
they do suggest that variability has been limited.[Footnote 12] Many of
the industry analysts and participants we interviewed said that
commissions still cluster around a common rate within most markets, and
they generally cited rates of 5 percent to 6 percent as typical now.
Some economists have cited certain advantages to the commission-based
model that is common in real estate brokerage, most notably that it
provides sellers' brokers with an incentive to get the seller the
highest possible price.[Footnote 13] Moreover, uniformity in commission
rates within a market at a given time does not necessarily indicate a
lack of price competition. But some economists have noted that in a
competitive marketplace, real estate commission rates could reasonably
be expected to vary across markets or over time--that is, to be more
sensitive to housing market conditions than has been traditionally
observed.[Footnote 14] For example, commission rates within a market at
a given time do not appear to vary significantly on the basis of the
price of the home. Thus, the brokerage fee, in dollar terms, for
selling a $300,000 home is typically about three times the fee for
selling a $100,000 home, although the time or effort required to sell
the two homes may not differ substantially.[Footnote 15] Similarly,
commission rates do not appear to have changed as much as might be
expected in response to rapidly rising home prices in recent years.
Between 1998 and 2003, the national median sales price of existing
homes, as reported by NAR, increased 35 percent, while inflation over
the same period was 10 percent, leaving an increase of some 25 percent
in the inflation-adjusted price of housing. According to REAL Trends,
average commission rates fell from an estimated 5.5 percent in 1998 to
an estimated 5.1 percent in 2003, a decrease of about 7
percent.[Footnote 16] Thus, with the increase in housing prices, the
brokerage fee for selling a median-priced home increased even as the
commission rate fell.[Footnote 17]
Some economists have suggested that uniformity in commission rates can
lead brokers to compete on factors other than price in order to gain
market share. For example, brokers might hire more agents in an effort
to win more sellers' listings.[Footnote 18] Brokers may also compete by
spending more on advertising or offering higher levels of service to
attract clients.[Footnote 19] Although some of these activities can
benefit consumers, some economic literature suggest that such actions
lead to inefficiency because brokerage services could be provided by
fewer agents or at a lower cost.[Footnote 20] For example, although
advertising can be effective in providing buyers and sellers with
information about broker services, the consumer benefit from brokers'
expenditures on advertising or promotions aimed at acquiring listings
may be less than their cost to the broker.
To the extent that commission rates may have declined slightly in
recent years, the change may be the result in part of rapidly rising
home prices, which have generated higher brokerage industry revenues
even with lower commission rates. However, competition from increasing
numbers of discount, fee-for-service, and other nontraditional
brokerage models may have also contributed to the decline. These
nontraditional models typically offer lower fees, and although they
currently represent only about 2 percent of the market, they may be
putting some downward pressure on the fees charged by traditional
brokerages.[Footnote 21]
Certain Factors May Inhibit Price Competition within the Real Estate
Brokerage Industry:
Factors related to the cooperation among brokers facilitated by MLSs,
some brokers' resistance to discounters, and consumer attitudes may
inhibit price competition within the real estate brokerage
industry.[Footnote 22]
Cooperation Facilitated by Multiple Listing Services:
While MLSs provide important benefits to consumers by aggregating data
on homes for sale and facilitating brokers' efforts to bring buyers and
sellers together, the cooperative nature of the MLS system can also in
effect discourage brokers from competing with one another on price.
Because participating in an MLS in the areas where they exist is widely
considered essential to doing business, brokerage firms may have an
incentive to adopt practices that comply with MLS policies and customs.
As previously noted, MLSs facilitate cooperation in part by enabling
brokers to share information on the portion of the commission that
sellers' brokers are offering to buyers' brokers. In the past, some
MLSs required participating brokers to charge standard commission
rates, but this practice ended after the Supreme Court ruled, in 1950,
that an agreement to fix minimum prices was illegal under federal
antitrust laws.[Footnote 23] Subsequently, some MLSs adopted suggested
fee schedules, but this too ended after DOJ brought a series of
antitrust actions in the 1970s alleging that this practice constituted
price fixing.[Footnote 24] Today, MLSs no longer establish standard
commission rates or recommend how commissions should be divided among
brokers. MLS listings do show how much sellers' brokers will pay other
brokers for cooperating in a sale, according to industry participants.
When choosing among comparable homes for sale, brokers have a greater
incentive--all else being equal--to first show prospective buyers homes
that offer other brokers the prevailing commission rate than homes that
offer a lower rate. Therefore, even without formal policies to maintain
uniform rates, individual brokers' reliance on the cooperation of other
brokers to bring buyers to listed properties may help maintain a
standard commission rate within a local area, at least for buyers'
brokers.[Footnote 25]
Traditional Brokers' Resistance to Nontraditional Brokerage Models:
Traditional brokers may discourage price competition by resisting
cooperation with brokers and firms whose business models depart from
charging conventional commission rates, according to several industry
analysts and participants we spoke with. A discount broker may
advertise a lower commission rate to attract listings, but the broker's
success in selling those homes, and in attracting additional listings
in the future, depends in part on other brokers' willingness to
cooperate (by showing the homes to prospective buyers) in the sale of
those listings. Some discount full-service and discount limited-service
brokerage firms we interviewed said that other brokers had refused to
show homes listed by discounters.[Footnote 26] In addition, traditional
brokers may in effect discourage discount brokers from cooperating in
the sale of their listings by offering discounters a lower buyer's
broker commission than the prevailing rate offered to other
brokers.[Footnote 27] This practice can make it more difficult for
discount brokers to recruit new agents because they may earn more
working for a broker who receives the prevailing commission from other
brokers.[Footnote 28] Some traditional full-service brokers have argued
that discount brokers often do less of the work required to complete
the transaction and, thus, deserve a smaller portion of the seller's
commission. Representatives of discount brokerages told us they
believed that reduced commission offers are in effect "punishment" for
offering discounts to sellers and are intended as signals to other
brokers to conform to the typical pricing in their markets.
Limited Consumer Pressure:
Pressure from consumers for lower brokerage fees appears to be limited,
although it may be increasing, according to our review of economics
literature and to several industry analysts and participants. Consumers
may accept a commission rate of about 6 percent as an expected cost of
selling a home, in part because that has been the accepted pricing
model for so long, and some consumers may not know that rates can be
negotiated. Buyers may also have little concern about commission rates
because sellers directly pay the commissions. Sellers may be reluctant
to reduce the portion of the commission offered to buyers' brokers
because doing so can reduce the likelihood that their home will be
shown.[Footnote 29] In addition, home sellers who have earned large
profits as housing prices have climbed in recent years may have been
less sensitive to the price of brokerage fees. However, some brokers
and industry analysts noted that the growth of firms offering lower
commissions or flat fees has made an increasing number of consumers
aware that there are alternatives to traditional pricing structures and
that commission rates are negotiable.
Some State Laws and Regulations Can Affect Price Competition:
Although state laws and regulations related to real estate licensing
can protect consumers, DOJ and FTC have expressed concerns that some of
these laws and regulations may also unnecessarily hinder competition
among brokers and limit consumer choice.
Antirebate Provisions:
At least 14 states appear to prohibit, by law or regulation, real
estate brokers from giving consumers rebates on commissions or to place
restrictions on this practice.[Footnote 30] Proponents say such laws
and regulations help ensure that consumers choose brokers on the basis
of the quality of service as well as price, rather than just on the
rebate being offered.[Footnote 31] Opponents of antirebate provisions
argue that such restrictions serve only to limit choices for consumers
and to discourage price competition by preventing brokers from offering
discounts.[Footnote 32] Proponents also note that offering a rebate is
one of the few ways to reduce the effective price of buyer brokerage
services since commissions are typically paid wholly by the
seller.[Footnote 33] In March 2005, DOJ's Antitrust Division filed suit
against the Kentucky Real Estate Commission, arguing that the
commission's administrative regulation banning rebates violated federal
antitrust laws. In its complaint, DOJ argued that the regulation
unreasonably restrained competition to the detriment of consumers,
making it more difficult for them to obtain lower prices for brokerage
services.[Footnote 34] In July 2005, DOJ and the commission proposed a
settlement agreement which, if approved by the court, would require the
commission to cease enforcing its regulation prohibiting rebates and
other inducements.[Footnote 35]
Minimum Service Standards:
Ten states are considering or have passed legislation that requires
brokers to provide a minimum level of service when they represent
consumers.[Footnote 36] Such provisions generally require that when a
broker agrees to act as a consumer's exclusive representative in a real
estate transaction, the broker must provide such services as assistance
in delivering and assessing offers and counteroffers, negotiating
contracts, and answering questions related to the purchase and sale
process. Advocates of minimum service standards argue that they protect
consumers by ensuring that brokers provide a basic level of assistance.
Further, full-service brokers argue that such standards prevent them
from having to unfairly shoulder additional work when the other party
uses a limited-service broker. Opponents of these standards argue that
they restrict consumer choice and raise costs by impeding brokerage
models that offer limited services for a lower price.[Footnote 37] In
April and May 2005, DOJ wrote to state officials in Oklahoma, and DOJ
and FTC jointly wrote to officials in Alabama, Missouri, and Texas,
discouraging adoption of these states' proposed minimum service laws
and regulations. The letters argued that the proposed standards in
these states would likely harm consumers by preventing brokers from
offering certain limited-service options and therefore requiring some
sellers to buy brokerage services they would otherwise choose to
perform themselves. They also cited a lack of evidence that consumers
have been harmed by limited-service brokerage. Despite the concerns
raised by DOJ and FTC, the governors in all 4 states subsequently
signed minimum service standards into law.
Similarly, while state licensing rules for real estate brokers and
agents may ensure standards of quality that protect consumers, these
rules may also restrict consumers' ability to choose among services and
prices, ultimately reducing competition. For example, in 2004, a
federal district court found unconstitutional a California real estate
licensing law that required the operator of a for-sale-by-owner Web
site to obtain a brokerage license in order to advertise property
listings without providing any additional brokerage services. The court
found that the law impermissibly differentiated between publications
displaying the same basic content on their Web sites, noting that
newspapers were not required under the law to obtain a brokerage
license simply to display property listings on their Web
sites.[Footnote 38]
The Internet Has Increased Consumers' Options, but Several Factors
Could Limit Its Wider Use:
The Internet has increased consumers' access to information about
properties for sale and has facilitated new approaches to real estate
transactions. Many brokers post information on their Web sites--in
varying degrees of detail--on properties they have contracted to sell,
enabling consumers to obtain such information without consulting a
broker. The Internet also has fostered the creation or expansion of a
number of Internet-oriented firms that provide real estate brokerage or
related services, including discount brokers and broker referral
services. Whether the Internet will be more widely used in real estate
brokerage depends in part on the extent to which listing information is
widely available. Like discount brokerages, Internet-oriented brokerage
firms, especially those offering discounts, may also face resistance
from traditional brokers and may especially be affected by state laws
that prohibit them from offering rebates to consumers. In addition,
certain factors--such as the lack of a uniform sales contract--may
inhibit the use of the Internet for accomplishing the full range of
activities needed for real estate transactions.
The Internet Allows Consumers More Direct Access to Information:
The Internet allows consumers direct access to listing information that
has traditionally been available only from brokers. Before the Internet
was widely used to advertise and display property listings, MLS data
(which comprise a vast majority of all listings) were compiled in an
"MLS book" that contained information on the properties listed for sale
with MLS-member brokers in a given area. In order to view the listings,
buyers generally had to use a broker, who provided copies of listings
that met the buyer's requirements via hard copy or fax. Today,
information on properties for sale--either listed on an MLS or
independently, such as for-sale-by-owner properties--is routinely
posted on Web sites, often with multiple photographs or virtual tours.
For example, NAR's Realtor.com Web site features more than 2 million
properties listed with MLSs around the country, and most brokers also
maintain their own Web sites with information on properties for sale in
their area. Buyers may also search for non-MLS listed properties on the
Web sites of companies that help owners market their properties
themselves. Thus, the Internet has allowed buyers to perform much of
the search and evaluation process independently, before contacting a
broker.[Footnote 39]
Sellers of properties can also benefit from the Internet because it can
give their listings more exposure to buyers. For example, according to
NAR, Realtor.com--which provides information on approximately 95
percent of all homes listed with MLSs around the country--had 6.2
million unique visitors in February 2005. Sellers who choose to sell
their homes without the assistance of a broker can advertise their
properties on a multitude of "for-sale-by-owner" Web sites. Sellers may
also use the Internet to research suitable asking prices for their
homes by comparing the attributes of their houses with others listed in
their area.
Despite more active participation of some buyers and sellers in the
transaction process, some industry analysts and participants noted that
because of the complexity of real estate transactions, some buyers and
sellers will always desire the assistance of a broker to help them
navigate the process.[Footnote 40] Unlike transactions that can now be
completed entirely on the Internet--such as purchasing airline tickets
or trading securities--real estate transactions are likely to continue
to involve at least some in-person services for the foreseeable future.
The Internet Facilitates Alternative Service and Pricing Options:
Although Internet-oriented brokerages and related firms represent only
a small portion of the real estate brokerage market at present, the
Internet has made different service and pricing options more widely
available to consumers. Among these options are full-service and
limited-service discount brokerages, information and referral
companies, and alternative listing Web sites.
* Full-service discount brokerages offer buyers and sellers full-
service real estate brokerage services--including listing properties in
the MLS, conducting open houses, negotiating contracts, and assisting
with closings--but advertise lower than traditional commissions, for
example between 3 percent and 4.5 percent. These types of brokerages
existed before widespread use of the Internet, but many have gained
exposure and become more viable as a result of the Internet. In
addition, by posting listings online, displaying photographs and
virtual tours of homes for sale, and communicating with buyers and
sellers by e-mail, some of these companies say that they have been able
to cut brokerage costs, allowing them to offer rebates to buyers or
discounted commissions to sellers.
* Limited-service discount brokerages provide fewer services than full-
service brokerages but also offer lower commission rates or offer their
services for flat fees. For example, some firms market a full array of
brokerage services for a reduced commission but do not list homes in
the MLS. Other firms charge a flat fee for marketing and advertising
homes and, for additional fees, will list a property in the MLS and
show the home to prospective buyers. Although these types of discount
brokers have existed since at least the 1970s, industry participants
told us that the Internet has allowed them to grow in number and size
in recent years, in part because they can market their services to a
larger population of buyers and sellers.
* Information and referral companies, including some that are licensed
real estate brokers, provide resources for buyers and sellers--such as
home valuation tools and access to property listings--and make
referrals of those consumers to local brokers.[Footnote 41] Some of
these companies charge referral fees to brokers and then rebate a
portion of that fee back to buyers and sellers. It is through the
Internet that these companies are able to efficiently reach potential
consumers and offer those customers services and access to brokers.
* Alternative listing Web sites offer alternatives to the MLS, allowing
sellers who want to sell their homes themselves to advertise their
properties to buyers and giving buyers another source of information on
homes for sale. These alternative listing sites include the Web sites
of local newspapers, Craig's List, and "for-sale-by-owner" Web
sites.[Footnote 42] These services, which generally do not provide
buyers and sellers with the assistance of a licensed broker, are
limited to providing consumers with a venue for advertising homes and
viewing properties for sale.
Wider Use of the Internet in Real Estate Brokerage Will Depend on the
Availability of Listing Information and Other Factors:
Several factors could limit the extent to which the Internet is used in
real estate transactions. A key factor is the extent to which
information about properties listed in an MLS is widely available.
Currently, buyers may view MLS-listed properties on many Web sites,
including broker and MLS Web sites and on Realtor.com. NAR has
considered a policy on Virtual Office Web sites (VOW) that would allow
brokers to selectively exclude their MLS listings from being displayed
on certain other brokers' Web sites and would prohibit certain types of
companies, such as information and referral companies, from operating
VOWs.[Footnote 43] Proponents of this policy argue that listings are
the work product, and thus the property, of the selling broker, who
should have control over how the listings are used. Proponents maintain
that brokers should be able to prevent certain companies--such as
information and referral companies--from using their listings simply to
earn referral fees. NAR and others have also argued that freely posting
MLS data--such as addresses, descriptions of properties, and property
tax information--on the Internet may compromise the security and
privacy of their clients.
Opponents of the VOW policy argue that it is anticompetitive because it
would unfairly limit Internet-oriented brokers' ability to provide
their clients with access to MLS listings through their Web sites. They
argue that NAR already has policies on the appropriate distribution of
MLS information, and that their rules should treat information
disseminated via the Internet no differently than information
distributed via traditional bricks-and-mortar brokerages. They also
note that measures can be taken to address security and privacy
concerns related to MLS listings on the Internet, such as restricting
the number of listings that result from an online search. Some
opponents also expressed concern that some Internet-oriented brokers
would not be able to compete if--in a market dominated by a single
player--they were selectively excluded from displaying that player's
listings.
Even with few restrictions on the availability of information about
properties for sale, Internet-oriented brokerage firms may face other
challenges. First, Internet-oriented brokers we spoke with described
resistance, similar to that previously described, involving some
traditional brokerages that refused to show the Internet-oriented
brokerages' listed properties or offered them buyers' brokers
commissions that were less than those offered to other brokers.
However, the online availability of listing information may discourage
such behavior by enabling buyers to more easily detect whether a broker
is avoiding other brokers' listings that are of interest. Second, some
Internet-oriented companies said that state antirebate laws and
regulations could affect them disproportionately, since their model
often was built around such rebates.
Finally, certain factors may inhibit the use of the Internet for
accomplishing the full range of activities needed for real estate
transactions. For example, some companies told us that they would like
to make greater use of the Internet to facilitate the execution of the
contract used in the purchase and sale of a property. However, they
said that there is no single, uniform sales contract for residential
real estate, and state laws vary with respect to which disclosures must
accompany a sales contract. They also said that state laws vary in
their requirements for physical copies of signed contracts, attorneys'
involvement in signing a contract, and the circumstances under which a
contract may be rescinded. As a result, it would be difficult to
develop an online platform that could be used nationwide for
residential real estate contracts. Further, industry participants told
us that no uniform technology currently exists to facilitate the
assistance that brokers often provide in other aspects of the real
estate transaction, such as coordinating inspections, appraisals,
financing, title searches, and settlements.
Few State-Chartered Banks Appear to Engage in Real Estate Brokerage:
Our review of certain state statutes and regulations showed that
approximately 30 states may potentially authorize state-chartered banks
or their operating subsidiaries to engage in some real estate brokerage
activities. However, we also found that because only a small number of
banks in these states appeared to have taken advantage of this
authority, the effect on competition and consumers was likely minimal.
We reviewed the state statutes and regulations that NAR and the
Conference of State Bank Supervisors, using the broadest
interpretations, identified as potentially authorizing banks' brokerage
activity. While many of these laws are ambiguous and subject to
interpretation by state regulators, it appears that at least 5 states
and the District of Columbia provide relatively clear authority for
banks or their subsidiaries to engage in real estate brokerage. An
additional 8 states permit involvement in other real-estate-related
activities or in unspecified activities that might be approved by the
state. At least 7 states could potentially permit banks to conduct real
estate activities as an incidental power, an activity closely related
to banking, or an activity that is financial in nature. Many of the
remaining states could potentially allow state-chartered banks to
conduct real estate activities to the extent that national banks or
other federal depository institutions are allowed to do so.
The exact number of state-chartered banks that engage in real estate
brokerage is unknown because not all state regulators track such
activity. However, available data and interviews with real estate,
banking, and state regulatory officials suggest that such activity is
very limited among the approximately 5,700 state-chartered banks
nationwide. In separate surveys in 2001, NAR and the Conference of
State Bank Supervisors identified only eight states where state-
chartered banks had engaged in at least some real estate brokerage
activity. More recent data were not available, but regulators and
industry officials told us that they doubted that this activity had
expanded significantly since 2001. They noted that real estate
brokerage is not typically part of a bank's business model, and that
banks in small communities may be reluctant to compete with local real
estate brokers that may be clients of the banks.
We spoke with officials from banks engaged in real estate brokerage,
bank regulators, and real estate industry representatives in Iowa and
Wisconsin--two states identified as having the most banks involved in
real estate brokerage in 2001.[Footnote 44] The seven such banks we
identified in these states were all in small communities that had few
or no other real estate brokers, and some of these banks noted that
their presence provided an additional option for local residents. None
of the banks we spoke with offered brokerage services that were
different than those offered by traditional brokerages, and none
offered discount brokerage services. Most of the bank officials said
that real estate brokerage was not a large portion of their business.
They said their primary goal was not to link brokerage customers to the
bank's mortgage financing and added that most of their brokerage
customers in fact obtained their mortgages outside of the bank.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the report date. At that time, we will send copies to the
Secretary of Housing and Urban Development, the Attorney General, and
the Chairman of the Federal Trade Commission. We will make copies
available to others upon request. This report will also be available at
no charge on GAO's Web site at [Hyperlink, http://www.gao.gov].
Please contact me at (202) 512-8678 or [Hyperlink, woodd@gao.gov] if
you or your staffs have any questions about this report. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Key contributors to this report
are listed in appendix I.
Signed by:
David G. Wood:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: GAO Contact and Staff Acknowledgments:
GAO Contact:
David Wood, (202) 512-8678, [Hyperlink, woodd@gao.gov]:
Staff Acknowledgments:
In addition to the contact named above, Jason Bromberg, Assistant
Director; Tania Calhoun; Emily Chalmers; Evan Gilman; Christine Houle;
Austin Kelly; Cory Roman; and Julianne Stephens made key contributions
to this report.
[End of section]
Bibliography:
This bibliography includes articles cited in our report and selected
other sources from our review of literature on the structure and
competitiveness of the residential real estate brokerage industry.
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Arnold, M.A. "The Principal-Agent Relationship in Real Estate Brokerage
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Bartlett, R. "Property Rights and the Pricing of Real Estate
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Hsieh, C. and E. Moretti. "Can Free Entry Be Inefficient? Fixed
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Jud, G.D. and J. Frew. "Real Estate Brokers, Housing Prices, and the
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-----"The Welfare Effects of Non-Price Competition Among Real Estate
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Relationships in the Real Estate Brokerage Industry: An Economic
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47.
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1 (2001): 5-21.
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Schroeter, J.R. "Competition and Value-of-Service Pricing in the
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Sirmans, C.F. and G.K. Turnbull. "Brokerage Pricing under Competition."
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Turnbull, G.K. "Real Estate Brokers, Nonprice Competition and the
Housing Market." Real Estate Economics, vol. 24, no. 3 (1996): 293-316.
Yavas, A. "Matching of Buyers and Sellers by Brokers: A Comparison of
Alternative Commission Structures." Real Estate Economics, vol. 24, no.
1 (1996): 97-112.
Yinger, J. "A Search Model of Real Estate Broker Behavior." The
American Economic Review, vol. 71, no. 4 (1981): 591-605.
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(250233):
FOOTNOTES
[1] REAL Trends is a company providing news, research, and information-
based services to the residential real estate industry. The company was
cited in industry press and among industry participants we interviewed
as providing the best available data on residential real estate
brokerage fees. We considered REAL Trends' estimates to be sufficiently
reliable based on the competency of the source producing the estimates
and the reasonableness of the estimates.
[2] For the purposes of this report, the term "Internet-oriented
brokerages" refers to brokerage firms whose business model depends
largely on the Internet. Other brokerage firms may also use the
Internet to varying degrees.
[3] Hereafter, for purposes of this report, the term "real estate
brokerage" refers to residential real estate brokerage.
[4] Brokers who operate as part of a franchise may also be required to
share a portion of their commission revenue with the franchise, in
payment for using the brand name and other services.
[5] T.J. Miceli, K.A. Pancak, and C.F. Sirmans, "Restructuring Agency
Relationships in the Real Estate Brokerage Industry: An Economic
Analysis," Journal of Real Estate Research, vol. 20, no. 1/2 (2000).
Some states require consumer consent if the buyer's broker is to
represent the seller's interests; other states prohibit this form of
agency representation.
[6] The Board of Governors of the Federal Reserve System oversees state-
chartered commercial banks that are members of that system. Other state-
chartered banks with federal deposit insurance receive oversight from
the Federal Deposit Insurance Corporation.
[7] Board of Governors of the Federal Reserve System and the Department
of the Treasury, "Bank Holding Companies and Change in Bank Control,"
66 Fed. Reg. 307 (Jan. 3, 2001).
[8] The Association of Real Estate Law License Officials is a
membership organization comprised of governmental agencies that
regulate real estate activities and license brokers and agents.
According to association officials, its members include regulators from
48 states as well as U.S. territories and other countries. The
association compiles data on the number of real estate brokers, agents,
and firms from state licensing agencies.
[9] For discussions of nonprice competition among brokers, see J.H.
Crockett, "Competition and Efficiency in Transacting: The Case of
Residential Real Estate Brokerage," AREUEA Journal, vol. 10, no. 2
(1982);
D.R. Epley and W.E. Banks, "The Pricing of Real Estate Brokerage for
Services Actually Offered," Real Estate Issues, vol. 10, no. 1 (1985);
T.J. Miceli, "The Welfare Effects of Non-Price Competition Among Real
Estate Brokers," Journal of the American Real Estate and Urban
Economics Association, vol. 20, no. 4 (1992); and G.K. Turnbull, "Real
Estate Brokers, Nonprice Competition and the Housing Market," Real
Estate Economics, vol. 24, no. 3 (1996).
[10] Our review cites a number of academic studies that date back many
years because, in large part, there is not a large body of more recent
research on the real estate brokerage industry. However, we found that
older research findings in this area have been consistent with more
recent studies, as well as with testimonial evidence we obtained in
interviews with industry analysts and market participants. For the most
part, the economic literature and available data related to real estate
commissions cover existing home sales and not new construction.
[11] For example, FTC found that more than one-half of home sales had a
commission rate of 6 percent, and that from one-quarter to one-third
had a commission rate of 7 percent. FTC based its findings on an
analysis of closing documents from 7,622 sales made nationwide in 1977
and a national survey of 934 consumers who had sold homes in 1978 and
1979. FTC found similar clustering at 6 percent and 7 percent in
closing documents from sales in 15 of 16 cities examined (Federal Trade
Commission, The Residential Real Estate Brokerage Industry, vol. 1
(Washington, D.C. 1983)). J.E. Larsen and W.J. Park, "Non-Uniform
Percentage Brokerage Commissions and Real Estate Market Performance,"
AREUEA Journal, vol. 17, no. 4 (1989), found that about 90 percent of
listings had a commission rate of 7 percent in their analysis of 669
listings in the Lincoln, Nebraska, area in 1986.
[12] Some researchers have attempted to identify and explain variations
in commission rates. For example, using samples of commission rate data
within specific geographic areas, some studies found that rates could
vary with, among other things, a property's price or age, its expected
"difficulty of sale" (e.g., whether the home was vacant or renter-
occupied), or the size of the brokerage firm. See M. Carney, "Costs of
Pricing of Home Brokerage Services," AREUEA Journal, vol. 10, no. 3
(1982); W.C. Goolsby and B.J. Childs, "Brokerage Firm Competition in
Real Estate Commission Rates," The Journal of Real Estate Research,
vol. 3, no. 2 (1988); and C.F. Sirmans and G.K. Turnbull, "Brokerage
Pricing under Competition," Journal of Urban Economics, vol. 41, no. 1
(1997).
[13] For example, see M.A. Arnold, "The Principal-Agent Relationship in
Real Estate Brokerage Services," Journal of the American Real Estate
and Urban Economics Association, vol. 20, no. 1 (1992); and G.D. Jud
and J. Frew, "Real Estate Brokers, Housing Prices, and the Demand for
Housing," Urban Studies, vol. 23, no. 1 (1986).
[14] For example, see P. Anglin and R. Arnott, "Are Brokers' Commission
Rates on Home Sales Too High? A Conceptual Analysis," Real Estate
Economics, vol. 27, no. 4 (1999); R. Bartlett, "Property Rights and the
Pricing of Real Estate Brokerage," The Journal of Industrial Economics,
vol. 30, no. 1 (1981); and C. Hsieh and E. Moretti, "Can Free Entry Be
Inefficient? Fixed Commissions and Social Waste in the Real Estate
Industry," The Journal of Political Economy, vol. 111, no. 5 (2003).
[15] Some industry participants we met with suggested that it costs
more to market expensive homes, in part because the number of
prospective buyers is smaller. However, we did not identify any data on
brokers' actual costs of marketing homes.
[16] REAL Trends' data do not address the range of or variation among
actual commission rates. REAL Trends' estimates average commission
rates by dividing the total gross commission revenue reported by the
largest brokerage firms by their total sales volume. The estimate for
1998 was based on data from 532 firms, and the estimate for 2003 was
based on data from 541 firms. We considered REAL Trends' estimates to
be sufficiently reliable on the basis of the competency of the source
producing the estimates and the reasonableness of the estimates.
[17] Similarly, a decrease in commission rates from the prevalent 6
percent and 7 percent rates reported by FTC in the period around 1980
to the levels reported by REAL Trends in recent years would have been
more than offset by appreciation in housing prices during that period.
[18] For example, see Crockett, "Competition and Efficiency in
Transacting." Because agents generally are hired as independent
contractors whose incomes are based on commissions for complete sales,
brokers can hire agents to compete for more listings without incurring
significant up-front costs for their labor.
[19] For example, see Miceli, "The Welfare Effects of Non-Price
Competition," and Turnbull, "Real Estate Brokers, Nonprice Competition
and the Housing Market."
[20] For example, see Hsieh and Moretti, "Can Free Entry Be
Inefficient?"; Miceli, "The Welfare Effects of Nonprice Competition";
and Crockett, "Competition and Efficiency in Transacting."
[21] Consultants to NAR estimated that discount, full-service
brokerages, Internet-oriented full-service brokerages, broker referral
services, and other nontraditional brokerage models collectively
represented buyers and sellers in less than 2 percent of all real
estate brokerage transactions in 2003.
[22] We make no judgment on the legality of any actions that may
inhibit price competition; such matters are beyond the scope of our
work.
[23] United States v. National Association of Real Estate Boards, 339
U.S. 485, 488-89 (1950).
[24] For example, see United States v. Greater Pittsburgh Bd. of
Realtors, 1973-1 Trade Cas. ¶ 74,454 (W.D. Pa. 1973) and United States
v. Los Angeles Realty Bd., 1973-1 Trade Cas. ¶ 74,366 (C.D. Cal. 1973).
In 1971, NAR adopted a policy prohibiting its affiliated MLSs from
fixing or recommending to their members commission rates or fees to be
charged or the percentage division of commissions or fees.
[25] For examples of this long-standing observation, see Bartlett,
"Property Rights and the Pricing of Real Estate Brokerage"; Crockett,
"Competition and Efficiency in Transacting";
T.J. Miceli, "The Multiple Listing Service, Commission Splits, and
Broker Effort," AREUEA Journal, vol. 19, no. 4 (1991); and N.G. Miller
and P.J. Shedd, "Do Antitrust Laws Apply to the Real Estate Brokerage
Industry?," American Business Law Journal, vol. 17, no. 3 (1979). FTC
(Residential Real Estate Brokerage) concluded that the cooperative
nature of the industry and the interdependence among brokers were the
most important factors explaining the general uniformity in commission
rates that it had observed in many markets in the late 1970s.
[26] We did not investigate specific instances of brokers' alleged
refusal to show homes listed with discounters, nor do we have
information to assess how common such a practice might be.
[27] We did not investigate alleged incidents of differences in the
commissions offered to buyers' brokers. We note that the practice of
offering certain firms a smaller share of the commission than that
posted in the MLS is not necessarily limited to firms that advertise
discounted prices. In a private antitrust suit settled in 2000, Re/Max
International, Inc., and some of its franchises alleged that two large
brokerage firms in northeast Ohio had conspired to prevent Re/Max from
establishing a presence in that area by offering Re/Max agents less in
commission than other agents. Re/Max International, Inc., v. Realty
One, Inc., 173 F.3d 995 (6th Cir. 1999). Re/Max does not advertise
itself as a brand that offers discounted fees, but its business model
departs from the traditional brokerage model in which brokers retain a
significant portion of agents' commissions. Re/Max agents retain 95
percent to 100 percent of their commission revenues and pay a fixed
monthly fee to their brokers, an approach that arguably gives agents
greater flexibility to reduce their fees than the traditional brokerage
model.
[28] Conversely, officials from one firm suggested that a broker that
offers lower commissions to other brokers may have difficulty
recruiting or retaining agents because the affected brokers will have
less incentive to cooperate with those agents.
[29] Anglin and Arnott, "Are Brokers' Commission Rates on Home Sales
Too High?," and Goolsby and Childs, "Brokerage Firm Competition in Real
Estate Commission Rates."
[30] Based on our review of selected statutes and regulations in states
identified by the Association of Real Estate Law Licensing Officials
and two brokerage firms that provide rebates to consumers, states that
appear to prohibit or place restrictions on real estate brokers giving
consumers rebates on commissions include Alabama, Alaska, Iowa, Kansas,
Kentucky, Louisiana, Mississippi, Missouri, New Hampshire, New Jersey,
Oklahoma, Oregon, Tennessee, and West Virginia. We did not review all
states' laws and regulations or evaluate how the states interpret and
apply provisions, so other states may also prohibit or restrict
commission rebates to consumers. The original intent of some state
antirebate laws and regulations was to avoid conflicts of interest
between agents and customers by preventing brokers from giving a share
of their commission to lawyers, title companies, or others involved in
the real estate transaction.
[31] Coldwell Banker Residential Real Estate Servs. v. Clayton, 475
N.E.2d 536, 543 (Ill. 1985).
[32] During negotiations for the sale of a home, brokers sometimes
agree to reduce their commissions to pay for repairs or to bridge a gap
between the offer and the asking price. However, these reductions do
not represent price competition because they are offered after the
buyer and seller have selected their brokers.
[33] According to economic theory, sellers pass a portion of their
brokerage costs to buyers in the price of the home. By offering a
rebate to the buyer, a broker is in effect offering to offset this
cost.
[34] Complaint, United States v. Kentucky Real Estate Commission, U.S.
Dist. Ct., W.D. Ky., Case No. 3:05CV-188H, at 1, 2 (Mar. 30, 2005).
[35] Department of Justice, Antitrust Division, "United States v.
Kentucky Real Estate Commission; Proposed Amendment Final Judgment and
Competitive Impact Statement," 70 Fed. Reg. 45,424 (Aug. 5, 2005).
[36] As of August 16, 2005, Alabama, Florida, Illinois, Iowa, Missouri,
Oklahoma, Texas, and Utah had enacted minimum service standards.
Delaware and Kansas were considering adopting such standards.
[37] Minimum service standards would not necessarily prohibit a broker
from providing limited advice or service to a client if the broker had
not agreed to act as the consumer's exclusive representative. However,
an MLS may require brokers to have such an agreement in order to enter
a property listing in the MLS.
[38] ForSaleByOwner.com Corp. v. Zinneman, 347 F. Supp. 2d 868, 877
(E.D. Cal. 2004).
[39] Before the Internet, a buyer could still learn about properties
without a broker--for example, through newspaper advertisements or by
driving past a property to view it. However, the Internet can provide
consumers with far more extensive information, including, in some
cases, complete details on the property from the MLS as well as
photographs or a virtual tour.
[40] Consistent with Internet usage patterns in the United States,
younger consumers may be more likely than older consumers to search
listings online, a factor that could influence the growth of Internet
use in real estate transactions over time.
[41] These information and referral companies typically have a network
of participating real estate brokers in various markets to which they
refer customers. Although many information and referral companies are
themselves licensed real estate brokers, they generally do not directly
provide services typical of a real estate broker, such as showing homes
or negotiating a sales price.
[42] Craig's List is a noncommercial Internet bulletin board that
operates in 170 communities in 34 countries. Among other things, users
of Craig's List can post or review information on properties for sale.
[43] NAR issued its VOW policy in 2003; however, NAR has postponed
requiring implementation of the VOW policy by its affiliated MLSs
pending the outcome of its negotiations with DOJ, whose Antitrust
Division has been investigating the policy. According to NAR, some MLSs
have implemented their own VOW policies.
[44] The information we obtained from these banks is meant to be
illustrative and is not representative of all banks' brokerage activity
nationwide.
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