COMPETITION IN THE REAL ESTATE

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BROKERAGE INDUSTRY

A Report by the Federal Trade Commission and

U.S. Department of Justice

April 2007

Federal Trade Commission

DEBORAH PLATT MAJORAS

PAMELA JONES HARBOUR

JON LEIBOWITZ

WILLIAM E. KOVACIC

J. THOMAS ROSCH

Chairman

Commissioner

Jeffrey Schmidt, Director, Bureau of Competition

Lydia B. Parnes, Director, Bureau of Consumer Protection

Michael A. Salinger, Director, Bureau of Economics

Maureen K. Ohlhausen, Director, Office of Policy Planning

William Blumenthal, General Counsel

Charles Schneider, Executive Director

Report Contributors:

James C. Cooper, Deputy Director, Office of Policy Planning

Gregory P. Luib, Assistant Director, Office of Policy Planning

Denis A. Breen, Assistant Director, Bureau of Economics

Daniel S. Hosken, Deputy Assistant Director, Bureau of Economics

Christopher P. Adams, Bureau of Economics

David Meyer, Bureau of Economics

Sean P. Gates, Deputy Assistant Director, Bureau of Competition

Patrick J. Roach, Deputy Assistant Director, Bureau of Competition

Peggy Bayer Femenella, Bureau of Competition

Peter Taylor, Bureau of Competition

Inquiries concerning this Report should be directed to:

James C. Cooper, Deputy Director, Office of Policy Planning

202-326-3367 or jcooper1@ftc.gov

U.S. Department of Justice

Antitrust Division

THOMAS O. BARNETT

Assistant Attorney General

Dennis W. Carlton

Scott D. Hammond

Gerald F. Masoudi

Deputy Assistant Attorney General for Economic Analysis

Deputy Assistant Attorney General for Criminal Enforcement

Deputy Assistant Attorney General for International, Policy

and Appellate Matters

Deputy Assistant Attorney General for Civil Enforcement

Chief of Staff

Director of Operations

Economics Director of Enforcement

Director of Criminal Enforcement

Deputy Director of Operations

David L. Meyer

James J. O’Connell, Jr.

J. Robert Kramer, II

Kenneth Heyer

Marc Siegel

Patricia A. Brink

Report Contributors:

Anne Marie Cushmac, Counsel to the Assistant Attorney General

W. Robert Majure, Chief, Competition Policy Section

Matthew Magura, Economist, Economic Regulation Section

John R. Read, Chief, Litigation III Section

Nina B. Hale, Assistant Chief, Litigation III Section

Joyce L. Bartoo, Trial Attorney, Litigation III Section

Matthew J. Bester, Trial Attorney, Litigation III Section

William H. Jones, II, Trial Attorney, Litigation III Section

Christopher M. Ries, Trial Attorney, Litigation III Section

Amber Buycks, Paralegal, Litigation III Section

Lucy Malcolm, Paralegal, Litigation III Section

Dawn Miller, Paralegal, Litigation III Section

Mary Ethel Kabisch, Administrative Assistant, Litigation III Section

Inquiries concerning this Report should be directed to:

John R. Read, Chief, Litigation III Section

202-307-0468 or John.Read@usdoj.gov

TABLE OF CONTENTS

INTRODUCTION ................................................................................................................................................1

CHAPTER I: BACKGROUND .........................................................................................................................4

OVERVIEW OF THE TYPICAL REAL ESTATE TRANSACTION .......................................................................4

Description of Real Estate Brokers and Agents ..................................................................................4

The Seller’s Agreement with the Listing Broker..................................................................................6

The Buyer’s Relationship with the Cooperating Broker......................................................................7

The Buyer’s Offer, Contingencies, and Closing in a Typical Transaction ..........................................8

B. THE MULTIPLE LISTING SERVICE..............................................................................................................9

Description of the MLS......................................................................................................................10

Why the MLS is Important to Sellers, Buyers, and Brokers ..............................................................12

C. NONTRADITIONAL BUSINESS MODELS ....................................................................................................14

Full-Service Discount Brokers ..........................................................................................................15

Fee-For-Service Brokers ...................................................................................................................16

Virtual Office Website Brokers..........................................................................................................17

Websites that Provide Advertising and Other Services to FSBO Sellers...........................................19

Broker Referral Networks..................................................................................................................20

Consumers’ Use of Nontraditional Models and FSBOs....................................................................20

CHAPTER II: THE INTERNET’S ROLE IN REAL ESTATE BROKERAGE .........................................22

INCREASED CONSUMER ACCESS TO REAL ESTATE-RELATED INFORMATION ..........................................22

THE INTERNET’S EFFECT ON THE REAL ESTATE INDUSTRY ....................................................................25

GAPS IN CONSUMER KNOWLEDGE ..........................................................................................................27

CHAPTER III: COMPETITION AMONG BROKERS ................................................................................30

STRUCTURAL FEATURES OF THE REAL ESTATE BROKERAGE INDUSTRY .................................................30

Broker Concentration........................................................................................................................30

Entry ..................................................................................................................................................32

B. THE NATURE OF COMPETITION AMONG BROKERS ..................................................................................34

Service Dimension.............................................................................................................................34

Price Dimension ................................................................................................................................34

C. COMMISSION RATES AND FEES: EMPIRICAL EVIDENCE..........................................................................38

D. ONE EXPLANATION OF THE SEEMINGLY CONTRADICTORY DESCRIPTIONS OF BROKER COMPETITION ...45

CHAPTER IV: OBSTACLES TO MORE ROBUST COMPETITION ......................................................49

LEGISLATIVE AND REGULATORY RESTRICTIONS ON COMPETITION ........................................................49

Anti-Rebate Laws and Regulations....................................................................................................49

Minimum-Service Requirements........................................................................................................53

Licensing Requirements for Firms that Advertise FSBOs .................................................................62

B. USE OF MLS RULES TO DISADVANTAGE COMPETITORS .........................................................................63

Discrimination Against Brokers Entering into Exclusive Agency Listing Contracts ........................63

Discrimination Against VOWs ..........................................................................................................65

C. STEERING AS A POSSIBLE OBSTACLE TO GREATER PRICE COMPETITION ...............................................66

The Importance of Cooperation in Real Estate Brokerage ...............................................................67

Reports That Cooperation Has Been Withheld .................................................................................68

Limiting the Effects of Steering .........................................................................................................69

CONCLUSION AND RECOMMENDATIONS..............................................................................................71

INTRODUCTION

Competition provides American consumers lower prices, better quality services,

and greater choice. In the residential real estate industry, competition is vitally important

because buying or selling a home is one of the most important financial transactions a

consumer will ever undertake. Given the size of the real estate industry,1 any restraints

on competition in real estate brokerage will have significant adverse consequences for

consumers. Moreover, because real estate broker commissions are typically a percentage

of the home sales price, the dollar amount charged by real estate brokers has increased

significantly in recent years as home sales prices have escalated.2 And, because the

amount home sellers pay their real estate broker is built into the home sales price, both

home buyers and sellers bear this expense.3

The residential real estate industry has undergone a number of substantial changes

in recent years. Today, real estate agents and brokers are changing the way they operate

and are increasingly incorporating the Internet into their business models in a variety of

ways, such as offering potential buyers the option to view full, detailed multiple listing

services (“MLSs”) online, using websites to gather “lead” information on potential

customers, and using the Internet to match home buyers and sellers. The increased ease

with which home buyers and sellers can perform tasks that once were the exclusive

domain of real estate agents and brokers likely has been an important factor in the

increased demand for innovative, non-traditional real estate brokerage services.4 In fact,

the Internet has surpassed the yard sign as the most important marketing tool to reach

consumers.5

In 2005 real estate broker commissions exceeded $60 billion. See The Changing Real Estate Market:

Hearing Before the House Financial Services Subcommittee on Housing and Community Opportunity,

109th Cong. 1 (2006) [hereinafter Hearing] (testimony of David G. Wood, Director, Financial Markets and

Community Investment, Government Accounting Office), available at

http://financialservices.house.gov/media/pdf/072506dgw.pdf.

Between 1998 and 2005, the real median real estate broker commission per transaction grew by 25.5% to

$11,549. See Table 1 in Chapter III of this Report.

See Robert W. Hahn et al., Paying Less for Real Estate Brokerage: What Will Make It Happen? 5

(American Enterprise Institute-Brookings Joint Center for Regulatory Studies, Working Paper 05-11, 2005)

[hereinafter AEI-Brookings Paper]; GAO, REAL ESTATE BROKERAGE: FACTORS THAT MAY AFFECT PRICE

COMPETITION (GAO-05-947) 15 n.33 (2005) [hereinafter GAO REPORT].

According to one survey, 80 percent of home buyers used the Internet during their home search in 2006,

and 24 percent of recent home buyers first located the home they bought on the Internet. NAR, 2006

NATIONAL ASSOCIATION OF REALTORS PROFILE OF HOME BUYERS AND SELLERS 34, 38 (2006) [hereinafter

NAR 2006 SURVEY] (covering 12-month period ending June 2006). In contrast, in 1997 only 2 percent of

recent home buyers had first located their home on the Internet. Id. at 38.

Id. at 34 (Internet cited by 80% of home buyer respondents, while yard sign cited by 63%).

While there have been many positive developments in the residential real estate

industry, there are some indications that consumers are not enjoying all of the possible

benefits of competition in the real estate brokerage industry. A number of developments

have raised competitive concerns, particularly laws and regulations in some states that

limit consumer choice of real estate brokerage service offerings and that prohibit rebates

to consumers, anticompetitive agreements among brokers, and industry practices that

impede competition. These practices can lead to substantial consumer harm through

reduced choice of real estate brokerage services, higher fees, and limitations on the

ability to access information about real estate listings.

Given how important competition is to consumers in this industry, the Federal

Trade Commission (“FTC”) and the Department of Justice Antitrust Division (“DOJ”)

held a public workshop in October 2005 (“Workshop”) to address issues affecting

competition in the residential real estate brokerage industry.6 Panelists at the Workshop

included traditional real estate brokers, brokers offering nontraditional business models,

state regulators, and academics.7

This Report presents an overview of the information provided and opinions

expressed at the Workshop, as well as existing literature and studies, and examines some

of the competitive issues raised at the Workshop and in other proceedings.8 Chapter I

provides background information on the real estate brokerage industry, including the

roles that real estate agents and brokers play in a typical real estate transaction; considers

the importance of MLSs; and examines some of the alternative business models used by

The agenda, transcript, and other information relating to the Workshop are available at the Agencies’

websites at http://www.usdoj.gov/atr/public/workshops/reworkshop.htm and

http://www.ftc.gov/bc/realestate/workshop/index.htm.

The following people testified at the Workshop: Cathy Whatley, real estate broker and Past President of

NAR; Robert Hahn, economist and Executive Director, American Enterprise Institute-Brookings Joint

Center for Regulatory Studies; Aaron Farmer, Owner of Texas Discount Realty; Thomas Kunz, President

and Chief Executive Officer of Century 21 Real Estate LLC; Colby Sambrotto, Chief Operating Officer of

ForSaleByOwner.com; Wayne Thorburn, Administrator, Texas Real Estate Commission and Immediate

Past President of the Association of Real Estate License Law Officials; Steve DelBianco, Executive

Director, NetChoice Coalition; Thomas Early, President, National Association of Exclusive Buyers’

Brokers; Philip Henderson, Vice President, Lending Tree; Geoff Lewis, Senior Vice President and Chief

Legal Officer, RE/MAX International, Inc; Alexander Perriello, President and Chief Executive Officer,

Cendant Real Estate Franchise Group; Lawrence Yun, Managing Director of Quantitative Research, NAR;

Chang-Tai Hsieh, Associate Professor of Economics, University of California. In addition, the Agencies

received almost 400 submissions in response to their request for public comment in connection with the

Workshop.

This Report, however, does not draw on any non-public information gathered during investigations

conducted by the FTC or DOJ or obtained through litigation brought by the Agencies. The FTC and DOJ

do not necessarily endorse, support, verify, or agree with the comments, opinions or statements of

Workshop participants or of others who have published articles regarding the industry that are included in

this Report.

real estate brokerages. Chapter II discusses the impact of the Internet on the real estate

brokerage industry and information asymmetries. Chapter III explores the competitive

structure of the real estate brokerage industry and publicly available evidence concerning

brokerage commission rates and fees. Chapter IV addresses obstacles to a more

competitive market environment, including government-imposed impediments, MLS

rules that can cause anticompetitive effects, and the importance of broker

interdependence. The final part of the Report offers conclusions and recommendations.

BACKGROUND

This Chapter provides an overview of the traditional real estate transaction and

the participants involved in the process, discusses the important role of the MLS, and

examines how the Internet has affected residential real estate brokerage-related services.

It also identifies and describes certain types of nontraditional real estate business models,

including: (1) full-service discount brokers; (2) fee-for-service brokers; (3) Virtual

Office Website (“VOW”) operators; (4) for-sale-by-owner (“FSBO”) facilitators; and (5)

broker referral networks.

Overview of the Typical Real Estate Transaction

At its most basic, real estate brokerage is about matching a home seller with a

home buyer.9 As one panelist, who represents a major brokerage franchise, remarked, a

home seller wants to “negotiate the best possible price in the quickest possible time.”10

Brokers reduce the transaction costs of matching buyers and sellers and also provide their

clients with ancillary services related to the transaction. Although there is no legal

impediment to consumers buying and selling homes on their own, the large majority of

consumers choose to work with a real estate broker. For example, a recent National

Association of Realtors (“NAR”) survey found that 84 percent of consumers employ a

real estate broker to help them sell their home, and the vast majority of these home sellers

appear to be contracting with real estate brokers to provide assistance on all aspects of the

transaction.11 Another NAR survey found that nine out of ten buyers use a real estate

professional during their home searches.12 The Internet also appears to be playing an

increasingly important role in the real estate transaction. For example, NAR data show

that the Internet was second only to real estate agents as the most commonly used

information source for home buyers.13

Description of Real Estate Brokers and Agents

Although the terms may vary by state, there are two principal categories of real

estate brokerage professionals: “agents” and “brokers.” Generally speaking, agents work

See FEDERAL TRADE COMMISSION, THE RESIDENTIAL REAL ESTATE AND BROKERAGE INDUSTRY: LOS

ANGELES REGIONAL OFFICE STAFF REPORT VOLUMES I AND II AND THE BUTTERS REPORT 9 (1983)

[hereinafter 1983 FTC STAFF REPORT], available at http://www.ftc.gov/bc/realestate/workshop/index.htm.

Kunz, Tr. at 103. Throughout this Report citations to “Tr.” refer to the transcript of the Workshop.

Speakers are identified by last name. The full transcript is available at

http://www.ftc.gov/opp/workshops/comprealestate/051209transcript.pdf and

http://www.usdoj.gov/atr/public/workshops/rewagenda.htm.

NAR 2006 SURVEY, supra note 4, at 67, 68.

NAR, Home Buyer & Seller Survey Shows Rising Use of Internet, Reliance on Agents (Jan. 17, 2006),

http://www.realtor.org/press_room/news_releases/2006/hmbuyersellersurvey06.html.

NAR 2006 SURVEY, supra note 4, at 34.

directly with consumers and brokers supervise agents. Typically, agents solicit listings,

work with homeowners to sell their homes, and show buyers homes that are likely to

match their preferences. Instead of working with customers directly, brokers often

provide agents with branding, advertising, and other services that help the agents

complete transactions. 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. As for services, brokers may provide

agents with computers, website hosting, office space, training, and marketing.

States require real estate brokers and agents to be licensed. 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. State commissions, frequently composed of real estate brokers, oversee drafting

of and compliance with these laws and regulations.14

Brokers and agents (hereinafter, “brokers”)15 usually are more informed about the

local real estate market and the process of a real estate transaction than most home buyers

and sellers.16 This informational advantage derives from two sources. First, only brokers

have direct access to the MLS, which is a local or regional joint venture of real estate

brokers who pool and disseminate information on homes available for sale in their

particular geographic areas. 17 The MLS provides information both on the homes

currently for sale in a particular geographic area and past sales data, which typically are

used in determining a home’s listing price or a buyer’s offer price. Second, most brokers

have been involved in many more real estate transactions than their clients. This

experience builds expertise in gauging market conditions and knowledge of the details

involved in completing a real estate transaction.

See PATRICK WOODALL & STEPHEN BROBECK, CONSUMER FEDERATION OF AMERICA, STATE REAL

ESTATE REGULATION: INDUSTRY DOMINANCE AND ITS CONSUMER COSTS 3 (July 2006), available at

http://www.consumerfed.org/pdfs/CFA_Real_Estate_Commissioner_Report.pdf.

We refer to brokers and agents collectively as “brokers” throughout this Report, except when a

distinction between the two is necessary to the meaning or when quoting a panelist or author.

See R.C. Rutherford et al., Conflicts Between Principals and Agents: Evidence From Residential

Brokerage, 76 J. FINANCIAL ECON. 627 (2005); Steven D. Levitt & Chad Syverson, Market Distortions

When Agents are Better Informed: The Value of Information in Real Estate (NBER Working Paper 11053,

2005), available at http://www.nber.org/papers/w11053.

The importance of the MLS as the primary source of information about homes currently for sale and

prices at which comparable homes have sold is discussed in Chapter I.B. of this Report.

The Seller’s Agreement with the Listing Broker

The typical real estate transaction involves several steps. First, if the seller

chooses to hire a real estate broker rather than selling the home on his or her own, the

seller contracts with a “listing broker.” A home seller may consider any number of

brokers before choosing one with whom to list the home, but NAR’s 2006 industry

survey notes that the majority of sellers contact only one listing broker.18 Once the seller

has selected a listing broker, they enter into a contractual relationship called a “listing

agreement” by which the broker agrees to market and sell the home in exchange for a set

fee, typically in the form of a percentage commission. The commission “rate” is the

percentage of the home sales price that the broker retains as a commission. Commission

“fees” are the total dollar amount paid by consumers for real estate brokerage services.

This contract often specifies the commission the homeowner will pay the listing broker if

the home is sold within a specified period of time, how the home is to be listed in the

MLS, and, as discussed below, the share of the commission to be offered by the listing

broker to a so-called “cooperating broker,” who works with the buyer.19 The listing

broker typically markets the home, both within his or her brokerage firm and to other

brokers in the community, by uploading the listing data, including the offer of

compensation to cooperating brokers, into the MLS database so that the information can

be disseminated to cooperating brokers, who in turn can inform potential buyers of the

listing.

There are three principal types of listing agreements. In the most common of the

three, an “exclusive right to sell” contract, the listing broker receives a payment if the

home is sold during the listing period, regardless of who finds a buyer for the home.20 In

an “exclusive agency” agreement, the listing broker receives payment if any broker finds

the buyer, but does not receive payment if the seller finds the buyer.21 In an “open

listing,” a broker has a nonexclusive right to sell the home and receive payment, but other

brokers or the seller may also sell the home without any payment to the listing broker.22

See 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).

See Whatley, Tr. at 39; Perriello, Tr. at 198-99. In some instances the cooperating and listing agents may

work for the same brokerage firm. Some states protect parties’ interests in this situation through

“designated agency,” under which different agents within the brokerage firm are “designated” separately to

represent the buyer’s and seller’s interests in the transaction. See Ann Morales Olazabal, Redefining

Realtor Relationships and Responsibilities: The Failure of State Regulatory Responses, 40 HARV. J. ON

LEGIS. 65, 75 (2003).

See Whatley, Tr. at 35.

Id. at 36.

Id.

The Buyer’s Relationship with the Cooperating Broker

The broker who works with the buyer is often referred to as the “cooperating

broker” “or “buyer’s broker.”23 Cooperating brokers typically attempt to find housing

from the available stock that match buyers’ preferences, show prospective buyers homes

for sale, provide them information about comparable home sales that have occurred in the

area, assist prospective buyers in becoming pre-qualified for a certain level of

financing,24 advise them on making offers, and assist in closing the transaction. Buyers

typically do not pay their brokers directly.25 Rather, listing brokers compensate

cooperating brokers according to the terms stated in the MLS listing, which usually

specifies an unconditional offer of compensation to any broker that is the “procuring

cause” of the sale.26 For example, a listing broker who charges a 6 percent commission

may offer to compensate a cooperating broker with 3 percent, half of the listing broker’s

commission. As one panelist reported, it is common for a listing broker to offer 50

percent of his or her commission to a broker who provides a buyer who closes on the

home, although this percentage may vary according to market conditions; in slow

markets, a listing broker may offer higher compensation to attract scarce buyers, and this

may be reversed in a hot market.27 Differences in offers of compensation may also arise

based on local norms for historical reasons.28

We use the terms “cooperating broker” and “buyer’s broker” interchangeably throughout this Report.

Sellers often want potential buyers to be pre-qualified for the level of financing required to purchase their

homes. Often, at the recommendation of their brokers, prospective buyers receive a letter of prequalification from a lender or mortgage broker, which is presented at the time of offer. Listing brokers may

verify the pre-qualification letter.

Although buyers do not pay a direct fee to their brokers, some portion of brokerage fees likely is built

into the prices of homes for sale. See AEI-Brookings Paper, supra note 3, at 5. Because broker fees are

paid indirectly, buyers may be less likely to negotiate over them. In fact, commentators have expressed

concern that some buyers may believe that their brokers’ services are free. 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.

“Procuring cause” refers to the efforts of the primary broker, who brings a buyer to the listing and causes

the transaction to be completed. Cf. BLACK’S LAW DICTIONARY 234 (8th ed. 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.”).

See Perriello, Tr. at 199 (“[W]hen I was in a market that was very, very slow, it was not uncommon to

actually have a disproportionate share going to the buyer . . . . So, at that point, if it was say a 6 percent

commission, I might take 2 percent and offer 4 percent.”).

One Workshop panelist, an economist, expressed concern about the effect of these compensation

arrangements on competition and on consumers. Hahn, Tr. at 41. 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. AEI-Brookings Paper,

supra note 3, at 5.

The legal relationship between the buyer and the cooperating broker varies from

state to state and has changed over time. Until the 1990s it was common for the

cooperating broker to be a subagent of the listing broker, working on the seller’s behalf.29

During the 1990s, most states revised their laws to allow buyer representation, and at the

same time NAR revised its policies, eliminating seller-subagency as a condition of

participation in the MLS.30 Today, after a decade of agency law reform across the

country, it is more common for the cooperating broker to owe fiduciary duties solely to

the buyer.31 In some states, however, a cooperating broker may be a “transaction” broker

who has limited fiduciary duties to both the buyer and seller and whose role is to assure

that the transaction proceeds smoothly.32 In all states, brokers are required to disclose to

buyers the type of relationship that exists so buyers know whom the cooperating broker

represents, although the timing of this disclosure varies by state.33

The Buyer’s Offer, Contingencies, and Closing in a Typical Transaction

Once a buyer makes an offer on a home, the listing broker may help the seller

evaluate offers and formulate counteroffers and may negotiate directly with the buyer or

buyer’s broker. If the seller accepts the offer, the home is “under contract,” and, pursuant

to contracts containing typical contingencies, several things must occur during a stated

time period before the transaction closes, such as home inspections, appraisals, securing

Royce de R. Barondes & V. Carlos Slawson, Jr., Examining Compliance With Fiduciary Duties: A Study

of Real Estate Agents, 84 OR. L. REV. 681, 689 (2005).

See Olazabal, supra note 19, at 74-75. Olazabal notes that the subagency regime was not a creature of

state law, but rather was a result of most MLSs permitting listing brokers to split commissions only with

cooperating agents who agreed to be a subagent of the seller. Id. at 70. Some have argued that subagency

was created by members of NAR in order to restrict access to the MLS. As one study explains:

the designation of subagency in an MLS transaction allowed the NAR to argue that sellers and

listing brokers would only want to extend subagency to ethical cooperating brokers. Brokers not

bound by NAR's Code of Ethics therefore could not be trusted with the responsibility of

subagency. Bundling the requirement of subagency with the MLS therefore gave the NAR a

justification for limiting access to the MLS to NAR members . . . .

Thomas J. Miceli et al., Restructuring Agency Relationships in the Real Estate Brokerage Industry: An

Economic Analysis, 20 J. REAL ESTATE RESEARCH 30, 34-35 (2000).

Whatley, Tr. at 38-39; NAR 2006 SURVEY, supra note 4, at 48 (64 percent of buyers reported that they

worked with an agent who represented their interests alone); see also Christopher Curran & Joel Schrag,

Does it Matter Whom and Agent Serves? Evidence from Recent Changes in Real Estate Agency Law, 43 J.

L. & ECON. 265, 269 (2000) (“In recent years it has become more common for buyers to employ a buyer’s

agent, rather than a traditional seller’s agent”).

Id.

See Olazabal, supra note 19, at 91-100; see also Early, Tr. at 169 (discussing the timing of disclosure of

agency relationship in many states as having been changed from “first meaningful contact” to “as soon as

practical but no later than the writing of an offer,” and how this can give rise to procuring cause issues).

buyer financing, assuring the title to the home is clear, and conducting necessary

repairs.34 Both listing and cooperating brokers typically work together to assure that all

contingencies are satisfied, allowing the closing to occur as scheduled. As one brokerpanelist explained, in addition to real estate brokers, many other actors are necessary to

assure a successful closing, including the mortgage lender, the insurance agent, the home

inspector, the termite inspector, the surveyor, the appraiser, the closing attorney (in some

states), the title company, and the escrow agent.35 According to this panelist, the seller’s

broker and the buyer’s broker “will work together to make sure that all parts of the

transaction are facilitated appropriately,” including “working through the transaction

itself, meeting the home inspector, helping the seller and/or the buyer understand what

the results of the inspection were, overseeing repairs, making sure that things that are

necessarily time-sensitive get responded to in a time-sensitive manner.”36

Once all contingencies have been satisfied, the parties proceed to closing, where

they exchange purchase money and title to the home. One panelist noted that, in her

experience as a broker, lenders’ increased use of technology has streamlined the

mortgage process, causing the average time from contract to closing to fall from fortyfive to sixty days, to thirty days.37 The HUD-1 form required by the Real Estate

Settlement Protection Act (“RESPA”) is a centerpiece of the closing and requires a

detailed listing of the flow of funds from buyer to seller and the use of funds, including

selling and buying expenses associated with the transaction and the amount of

commission paid to each broker. Although they typically do not play an active role at

this stage, brokers often accompany their clients to the closing.38 The brokers are paid

their commission at closing.

The Multiple Listing Service

Access to the MLS is one of the most important services that real estate brokers

traditionally have offered. The 1983 FTC Report traces the evolution of the exchange of

home information by brokers, from the weekly in-person “exchanges” of the Nineteenth

Century to the formation of the modern MLS.39 The MLS has evolved still further since

Repairs may be ordered by the lender as a condition for financing or requested by the home buyer after

the results of inspection. How the cost of such repairs is split is often the subject of additional negotiation.

Whatley, Tr. at 26. Detailed discussion of the ancillary services often provided in connection with real

estate transactions was beyond the scope of the Workshop and, likewise, is beyond the scope of this Report.

Id. at 27-28. Whatley analogized the real estate transaction to a play where each actor has a role and

knows the script; the play would be disrupted if an actor were to enter at the wrong time or forget his or her

lines. See id. at 26-27.

Id. at 161-62.

See NAR, THE 2005 NATIONAL ASSOCIATION OF REALTORS PROFILE OF HOME BUYERS AND SELLERS 58

(2006) [hereinafter NAR 2005 SURVEY] (71% of sellers report that their agent attended the closing).

1983 FTC STAFF REPORT, supra note 9, at 107-116.

1983, reflecting the rapid pace of technological developments during this period.40 The

following two sections describe the present-day MLS and discuss its importance to home

sellers, buyers, and brokers.

Description of the MLS

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. The MLS then makes these data available to all brokers who are members of the

MLS.42 By listing information on a home in the MLS, a broker can market it to a large

set of potential buyers. A cooperating broker likewise can search the MLS to provide a

home buyer with information about all the listed homes in the area that match the buyer’s

housing needs.

MLSs are the primary source of home listings information because they contain

real time information on virtually every home listed for sale in a given area, except FSBO

homes. Most MLSs require that a member broker, upon acceptance of a listing, enter the

listing into the MLS database within a short period of time, e.g., twenty-four to seventytwo hours. Although the specific data fields on each listing are determined by the

individual MLS, they typically include detailed descriptions of the homes for sale, the

asking price, the offer of compensation that will be paid to a cooperating broker who

finds a suitable buyer,43 and the name of the listing broker. The MLS allows broker40

Illustrative of the continued changes is a court’s description of a local MLS as it progressed from

distribution of an index card for each property listing to computerized downloads of digitized photographs.

See Montgomery County Ass’n of Realtors, Inc. v. Realty Photo Master Corp., 783 F. Supp. 952, 955 (D.

Md. 1992).

NAR’s 1,600 local and state member boards control approximately 80 percent of the approximately

1,000 MLSs in the United States. See Amended Complaint at 5, United States v. Nat’l Ass’n of Realtors

(N.D. Ill. Oct. 4, 2005).

See GAO REPORT, supra note 3, at 6 (explaining the structure and purpose of the MLS).

The MLS facilitates the offering of unilateral offers of compensation to cooperating brokers, according to

NAR. NAR, HANDBOOK ON MULTIPLE LISTING POLICY 50 (2006). NAR’s President-Elect has stated:

An MLS is a cooperative venture between real estate brokers in which brokers share

information on their listings with other competing brokers along with an offer to

compensate them in the event they sell the listing. The MLS provides sellers with the

advantage of listing with one brokerage firm but having exposure to all buyers working

with other brokers in the community. It benefits buyers because they only need to work

with one broker but have access to the properties listed by all of the other brokers who

participate in the MLS. It is a business to business cooperative created by real estate

professionals to enable them to share information relating to properties they list for sale,

and to research and present property-related information to their clients seeking to buy

real estate properties.

members to search and filter homes based on detailed criteria, including property and

neighborhood information, offers made on the home, prior sales history, and days on the

market.44 In addition to the database of currently available homes, an MLS maintains a

database of homes sold through the MLS. Brokers can use this database to provide their

clients with information on sales of comparable homes so that the clients can more

accurately value their homes or determine the amount to bid on a home.

The MLS also operates an arbitration mechanism to resolve compensation

disputes between listing and cooperating brokers. For example, if a cooperating broker

secures a buyer for a transaction and can establish through arbitration that he or she was

the “procuring cause” of the sale, then the listing broker is liable for the cooperative

compensation.45

One panelist who is a real estate broker and past president of NAR described the

MLS as “a broker-to-broker information exchange that provides an opportunity for

cooperation and compensation.”46 Another panelist, however, described the MLS as a

“club” that can limit membership and access to MLS listings to firms that conduct

business in a particular manner, thereby limiting consumer choice.47 This panelist, an

economist, stressed that when competitors cooperate, as in an MLS, the rules governing

that cooperation and the conditions under which the cooperation occurs must be

examined closely.48

Hearing, supra note 1, at 18-19 (testimony of Pat Vredevoogd-Combs, President-Elect, NAR), available at

http://financialservices.house.gov/media/pdf/072506pvc.pdf.

See Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. 2006) (finding that the

features and information available through the MLS at issue are not available through any other service).

See supra note 26. To enforce his or her right to payment, the cooperating broker may bring a complaint

to the MLS’s arbitration system. 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.

Whatley, Tr. at 30.

Hahn, Tr. at 32. Hahn’s concerns are more fully developed in his AEI-Brookings Paper, where he

describes how the cooperative relationship among brokers in an MLS has the potential to give rise to

uniformity in services provided and brokerage fees charged. AEI-Brookings Paper, supra note 3 at 8-10.

Other analysts have expressed similar views. See Lawrence J. White, The Residential Real Estate

Brokerage Industry: What Would More Vigorous Competition Look Like? 6 (New York University School

of Law, New York University Law and Economics Working Papers 51, 2006); GAO REPORT, supra note 3,

at 3, 12-13 (MLS may encourage price conformity by, for example, by requiring that each listing state the

fee split that the cooperating broker will receive. Because, all else being equal, brokers have less incentive

to show properties that offer them a lower commission, brokers may refrain from offering less than the

prevailing commission.).

Hahn, Tr. at 32-36.

Why the MLS is Important to Sellers, Buyers, and Brokers

As the primary source of information about homes currently for sale and the

prices at which other, comparable homes have been sold, the MLS is an extraordinarily

important resource for sellers, buyers and brokers.49 Home sellers benefit from exposure

of their listings to a wide audience of potential buyers, increasing the probability of

selling their homes quickly and at an optimal price for those sellers.50 In addition, sellers,

through their brokers, can use the MLS information on comparable homes to decide

whether to sell their homes and, if so, at what price.51 According to NAR’s 2006 survey

of home buyers and sellers, 88 percent of sellers reported that their home was listed in the

MLS.52

Buyers also benefit from the MLS because they can go to a single source (that is,

a single broker) for information regarding the vast majority of homes for sale within a

given area, instead of visiting multiple brokerages to obtain such information. Access to

the largest number of potentially appropriate homes for sale allows buyers to maximize

their chances of finding a home that most closely matches their desired characteristics.53

MLSs are so important to the operation of real estate markets that, as a practical

matter, any broker who wishes to compete effectively in a market must participate in the

local MLS.54 As previously noted, brokers using the MLS reduce the costs of matching

buyers and sellers and can market their service to a large set of potential clients. Further,

by stating up-front the compensation being offered to a cooperating broker, the MLS can

See Whatley, Tr. at 31 (“The MLS is strategically one of the most valuable things to me”).

NAR, Public Comment 208, at 5 (comment). Throughout this Report citations to “Public Comments”

refer to comments submitted in response to the Agencies’ Federal Register Notice inviting comments on

the topics addressed at the Workshop. 70 Fed. Reg. 53,362 (Sept. 8, 2005). The public comment numbers

cited in this Report refer to those found on the FTC’s website. Some parties submitted a cover letter with

the public comment. Citations to submissions by these parties contain a parenthetical reference either to

the “comment” or the “cover letter.” 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. See also Whatley, Tr. at 16061 (although the Internet provides useful information to buyers and sellers of real estate, by the time

properties are advertised on the Internet, they may be gone already; thus, the MLS is crucial).

John H. Crockett, Competition and Efficiency in Transacting: The Case of Residential Real Estate

Brokerage, 10 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 209, 211

(1982).

See NAR 2006 SURVEY, supra note 4, at 77.

1983 FTC STAFF REPORT, supra note 9, at 31.

See United States v. Realty Multi-List, 629 F.2d 1351, 1370 (5th Cir. 1980) (membership in the MLS

becomes essential to a broker’s ability to compete effectively on equal terms); GAO REPORT, supra note 3,

at 12. See also Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. 2006); Thompson v.

Metropolitan Multi-List, Inc., 934 F.2d 1566 (11th Cir. 1991).

reduce the costs associated with listing brokers having to negotiate separately with each

potential cooperating broker.55 As a result, the use of an MLS can substantially reduce

transaction costs.56

The efficiencies associated with use of an MLS in the real estate industry are well

documented in the real estate, legal, and economic literature57 and in court decisions.58 In

the seminal case, United States v. Realty Multi-List, Inc., the Fifth Circuit described the

various benefits offered by an MLS.59 First, the MLS reduces the “obstacles brokers

must face in adjusting supply to demand: market imperfections are overcome in that

information and communication barriers are reduced, along with the easing of the built-in

geographical barrier confronting the buyer-seller relationship. Moreover, a realistic price

structure is engendered. In effect, real estate becomes by virtue of the multiple listing

service ‘a more liquid commodity.’”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

See Whatley, Tr. at 39-40.

White, supra note 47, at 4. According to NAR, the MLS has been especially beneficial to smaller

brokers, because it “levels the playing field” on which brokers compete. See NAR, Public Comment 208,

at 5 (comment) (“Brokerages of different sizes and business models are able to compete on a level playing

field because most real estate professionals and firms share their detailed property listing information . . .

through the local or regional [MLS].”). See also Yun, Tr. at 223-24 (describing how the MLS puts small

and large brokers “on equal footing”).

See, e.g., William C. Erxleben, In Search of Price and Service Competition in Residential Real Estate

Brokerage: Breaking the Cartel, 56 WASH. L. REV. 179, 184-185 (1981); Crockett, supra note 51, at 211.

For a discussion of the positive network effects associated with MLSs, see 13 HERBERT HOVENKAMP,

ANTITRUST LAW ¶¶ 2220b4, 2223b3 (2d ed. 2005):

A real estate multiple listing service may also be subject to network externalities. As

each real estate broker is added to the system the consequences are (1) that the new

broker is entitled to sell the houses listed on the system by other members, thus

increasing the chances of sale; and (2) existing members are entitled to sell the houses

listed by the new broker, thus giving each broker a larger inventory of houses to show. A

larger multiple listing service would generally have an advantage over a smaller service,

for the person listing a house for sale presumably wishes to be placed in contact with as

many potential buyers as possible. As a result, most municipalities have a single multiple

listing service, and virtually all real estate brokers except perhaps a few highly

specialized ones are members.

Id. ¶ 2220b4, at 343.

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.

Realty Multi-List, 629 F.2d 1351 (5th Cir. 1980).

Id. at 1356.

Id.

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.”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

Nontraditional Business Models

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. Some

consumers may also choose to work with non-brokers who offer services that will

facilitate the marketing and sale of their homes. The growing popularity of some of these

new business models is likely linked to consumers’ increasing use of, and comfort with,

the Internet. In this Section we discuss the following non-traditional business models:

(1) full-service discount brokers; (2) fee-for service brokers; (3) VOW brokers; (4)

websites that provide advertising and other assistance to sellers who choose not to use a

broker; and (5) referral networks.65

Id.

Id. at 1369. Subsequent decisions largely have followed this approach. See, e.g., Metropolitan MultiList, 934 F.2d at 1579-80; Austin Bd. of Realtors v. E-Realty, Inc., No. Civ. A-00-CA-154 JN, 2000 WL

34239114, at *4 (W.D. Tex. Mar. 30, 2000). A discussion of the various private litigation involving

alleged MLS-related restraints is beyond the scope of this Report.

Realty Multi-List, 629 F.2d at 1373-74 (citing A. Austin, Real Estate Boards and Multiple Listing

Systems as Restraints of Trade, 70 COLUMBIA L. REV. 1325, 1346 (1970)); accord Metropolitan Multi-List,

934 F.2d at 1580 (“Market power turns on the number of brokers who use the service, the total dollar

amount of annual listings, and a comparison of the rate of sales using the multilisting service to the market

as a whole.”); see also, e.g., Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312, 317 (7th Cir.

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]. Thus, it possesses sufficient market power to restrain

competition.”); Austin Bd. of Realtors, 2000 WL 34239114, at *4 n.4 (“It is undisputed that ABOR has

significant market power in the relevant product market for residential real estate brokerage services in the

Austin metropolitan area and exclusive access to the MLS Data which is essential to effective competition

in this market.”); 1983 FTC STAFF REPORT, supra note 9, at 37 (“At the MLS level, there is, in fact, no

effective competition at the present time, and almost all brokers are, therefore, members of one system in

each local community.”) In the twenty-five years since the Realty Multi-List case, the Agencies have

brought a number of antitrust cases involving anticompetitive effects associated with an MLS.

There is some overlap between the categories because certain business models fit into more than one

category. For example, a VOW operator may or may not also be a discount broker.

Full-Service Discount Brokers

Discount brokers offer buyers and sellers full-service real estate brokerage

services at a price lower than the prevailing commission fees.66 For example, a discount

broker may offer all of the services provided by a traditional broker for a 3 or 4 percent

commission in an area where 6 to 7 percent is the prevailing rate. In addition, in states

that do not prohibit them, brokers may offer rebates (i.e. cash payments) and

inducements, such as gift certificates, coupons, vouchers, and discounted or free services

relating to buying and selling a home, to buyers and sellers.67 These are incentives that

typically are offered by cooperating brokers to home buyers to encourage them to use the

brokers’ services. For example, 1% Realty offers buyers a rebate of approximately 1

percent of the purchase price in states that have not prohibited rebates.68 Brokers

sometimes also pay rebates to home sellers. For example, home sellers who are referred

by one broker to another broker sometimes receive rebates. Additionally, some listing

brokers pay their clients secret rebates rather than offering a lower listing commission in

order to disguise discounting.69

Rebates are an important form of price competition under the traditional structure

of real estate transactions because the seller and seller’s broker, not the buyer’s broker,

determine the amount of the buyer’s broker’s commission via the listing agreement.

Without rebates, if the buyer’s broker were simply to reduce his or her commission, the

savings would go to the seller’s broker, not to the home buyer. As one panelist

explained: the mechanics of the typical real estate transaction make it difficult for a

buyer’s broker to reduce the price of his or her services because the “custom of the

industry” is for the listing broker to split his or her commission with the buyer’s broker.70

Rebates, therefore, can be powerful tools for price competition between brokers. And by

returning money to home buyers, rebates can also benefit home sellers, because buyers

will have more to spend on the home as opposed to commission payments.

See GAO REPORT, supra note 3, at 19.

We refer to all such rebates and inducements generally as “rebates” throughout this Report. State laws

and state real estate commission regulations prohibiting rebates are referred to generally as “rebate

prohibitions” or “rebate bans.” State anti-rebate laws and regulations and their effect on price competition

and consumer choice are discussed in Chapter IV.A.1 of this Report.

See 1% Realty, Buying a New Home, http://www.onepercentusa.com/buy.htm (last visited Mar. 27,

2007).

See, e.g., Glenn Roberts, Jr., “Secret Agents” Quietly Offer Real Estate Rebates, INMAN NEWS, Mar. 7,

2006 (describing secret real estate agent referral service operating in Maryland, Virginia, and the District of

Columbia that offers – outside of the settlement and thus off the books – sellers a 1.5% rebate and buyers

all of the commission received by the agent above 1.5%).

Henderson, Tr. at 155.

Fee-For-Service Brokers

Fee-for-service brokers – sometimes also referred to as “flat-fee” brokers or

“limited-service” brokers – represent a departure from traditional full-service brokers

who typically charge a commission based on the sales price in return for a bundle of

services. Fee-for-service brokers offer home sellers the option to purchase less than the

full bundle of services traditional brokers provide. Different fee-for-service brokers may

offer different arrays of services, and home sellers can pick and choose the services they

wish to procure from the provider or providers of their choice. Most fee-for-service

brokers offer sellers two or more service packages, and many offer an additional itemized

list of optional services. This business model is likely to benefit consumers who do not

want to forgo broker assistance completely but who feel comfortable handling many

aspects of the transaction without such assistance.

Fee-for-service brokers often offer an MLS-only package, which allows

consumers, who are not permitted by MLS rules to list their homes in the MLS on their

own, to list their homes in the MLS by contracting with a broker who is a member of the

local MLS.71 For a flat fee (e.g., $500), the broker would list the home in the local MLS

and make an offer of compensation in the MLS to other brokers who may cooperate in

the sale of the home. The broker typically would retain the flat fee whether or not the

home ultimately sells. If a cooperating broker ultimately secures a buyer for the home,

he or she would receive the cooperating commission.72 A seller who finds a buyer

without the help of a cooperative broker, however, would not pay this compensation.

MLS-only packages offered by fee-for-service brokers typically include other

services provided via the MLS. These include advertising the seller’s listing on Internet

websites that home buyers search directly (e.g., Realtor.com73) and on other MLS

members’ websites. Additionally, fee-for-service brokers typically provide the client

additional selling aids, such as yard signs, online advertisements, and a lock-box to allow

buyers’ agents to show the home when the seller is not present.

In addition to the MLS-only package, many fee-for-service brokers offer other

services. The Agencies’ review of fee-for-service broker websites indicates that most

See, e.g., Rules and Regulations of North Texas Real Estate Information Systems, Inc. §§ 5.01-5.02

(amended Sept. 21, 2005), available at http://www.ntreis.net/documents/Documents_262006124924.

See, e.g., FSBOAdvertisingService.com, Houston Texas Realtor Flat Fee MLS,

http://www.fsboadvertisingservice.com/flat-fee-mls-MLSTX3.asp (last visited April 20, 2007) (2-3 percent

commission for broker that finds a buyer); ifoundahome.net,

http://www.ifoundahome.net/Listingwork/SBasicListing.htm (last visited April 20, 2007) (allowing home

sellers to offer “a 3% commission or more” to buyers’ brokers); TexasDiscountRealty.com, Flat Fee

Listing, http://www.texasdiscountrealty.com/flatfee.htm (last visited April 20, 2007) (3 percent commission

for a broker that finds a buyer).

REALTOR.com, http://www.realtor.com (last visited April 20, 2007) (according to its website,

REALTOR.com is the “Official Site of the National Association of REALTORS”).

offer at least two tiers of service and the complete array of traditional services at a

reduced commission. Thus, consumers who purchase the MLS-only package, but later

feel they need more assistance with their transaction, typically can obtain it from their

broker for an additional fee. For example, one Workshop participant who operates a flatfee brokerage stated that about 30 percent of his clients who sign up for a flat-fee listing

eventually purchase additional brokerage services.74 This panelist’s website offers the

flat-fee listing at $595, but also offers two other packages: “flat-fee plus,” which costs an

additional $1,500 and includes negotiation and post-contractual assistance, and fullservice brokerage for a discounted percentage fee.75 Further, many fee-for-service

brokers allow their clients to cancel their listing agreement at any time, leaving

consumers free to pursue other brokerage or non-brokerage options if they become

dissatisfied with the broker’s service.

Although many brokers who specialize in the fee-for-service option are not

affiliated with major national brokerage chains, some brokers who are affiliated with

such chains offer fee-for-service or flat fee brokerage options.76 Although brokers using

these models have existed since the 1970s, industry participants told GAO that the

Internet has allowed such brokerages to grow in numbers and size in recent years, in part

because they can market their services to a larger population of buyers and sellers.77

Virtual Office Website Brokers

VOWs are Internet websites through which brokers offer brokerage services

online to their registered clients.78 The unique feature of VOW operators is that these

brokers offer their clients the ability to search online the same MLS information that

other brokers provide to their clients through other delivery methods, such as hand

delivery, mail, fax, or email.79 Under NAR rules, VOWs may provide clients with more

MLS information than can be provided by publicly accessible broker websites that are

governed by NAR’s Internet Data Exchange (“IDX”) policy, discussed in Chapter II.

See Farmer, Tr. at 107-08.

See TexasDiscountRealty.com, Home Sellers, http://www.texasdiscountrealty.com/sellers1.htm (last

visited April 20, 2007).

See Kunz, Tr. at 101 (noting that several types of business models operate under the Century 21

franchise).

See GAO REPORT, supra note 3, at 19-20.

See Testimony Summary of Russell Capper, President and Chief Executive Officer, eRealty, Inc. before

Federal Trade Commission Office of Policy and Planning Public Workshop on E-Commerce 2 (2002),

available at http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/capper.pdf.

Id.

Access to the VOW and its listings search features is limited to prospective

buyers or sellers who have entered into an agreement with the VOW operator that

includes a terms-of-use agreement.80 The VOW permits clients to search the database at

their leisure until they are ready to contact their broker for assistance in viewing the

home, making an offer, etc. While many buyers may see this as a benefit that allows them

greater control over their home-buying process, brokers may also benefit. For example,

brokers may reduce the time they spend servicing each customer face-to-face because

customers conduct a portion of the time-consuming listings searches on their own.81

Although brokers offering VOWs differ from other brokerages in their innovative uses of

the Internet, in other respects they operate like other brokers. VOW brokerages typically

maintain physical offices in the markets in which they operate, staff those offices with

licensed brokers who participate in their local MLSs, and represent both buyers and

sellers.82

One panelist who worked with eRealty, an early discount broker that operated a

VOW,83 described aspects of its business model. 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:

The e-Realty model . . . allows the client to initially bypass the Realtor by

becoming a client of e-Realty and conducting his own search. . . .

Therefore e-Realty can often charge a lower commission than traditional

Realtors since there has been no time expended searching through the

MLS.86

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

Id.

Id. at 1.

Id.

Prudential Real Estate purchased eRealty. See Blanche Evans, Prudential Neutralizes eRealty, Buys

Technologies, REALTY TIMES, Jan. 29, 2004, available at

http://realtytimes.com/rtapages/20040129_erealty.htm.

DelBianco, Tr. at 182.

Id. at 182-83.

Austin Bd. of Realtors v. E-Realty, Inc., No. Civ. A-00-CA-154JN, 2000 WL 34239114, at *2 (W.D. Tex.

Mar. 30, 2000).

transaction all the way through to close.”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.”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 . . . to help them see the home.”90

Websites that Provide Advertising and Other Services to FSBO Sellers

Some consumers choose to sell their homes without any assistance from a real

estate broker. These sellers are referred to as “for-sale-by-owners” or “FSBOs,” and they

market their homes themselves by placing ads in local media, posting signs, and

conducting their own open houses. MLSs do not allow FSBO homes to be listed in the

local MLS because a listing broker member is not involved. FSBOs often offer payment

to a broker representing a buyer.

Several companies offer services to help FSBO sellers. For example, there are

several websites devoted to advertising FSBO homes.91 One Workshop panelist

representing a major FSBO website explained that his company allows home sellers to

post color photos, virtual tours, and 3,000-word descriptions that are searchable by

potential home buyers.92 According to this panelist, the industry average price for this

service is a flat fee of approximately $300. These websites often will also provide

potential home buyers with general information on neighborhoods, such as

demographics, crime rates, and school quality. Further, many provide links to ancillary

service providers, such as title insurance companies, escrow services, and home

DelBianco, Tr. at 182.

Id.

Id. at 186.

Examples of FSBO websites include: ForSaleByOwner.com, http://www.forsalebyowner.com (last

visited April 20, 2007); FSBO.com, http://www.fsbo.com (last visited April 20, 2007); craigslist.org,

http://sfbay.craigslist.org/hhh (last visited April 20, 2007); and HomesByOwner.com,

http://www.homesbyowner.com (last visited April 20, 2007). See Thorburn, Tr. at 97-98 (noting the

variety of tools available to FSBOs). See also GAO REPORT, supra note 3, at 20.

Sambrotto, Tr. at 86.

inspectors, and also provide sample forms related to real estate transactions, such as

sample purchase or lease agreements.93

Broker Referral Networks

Some national Internet websites aggregate some of the MLS data from across the

country and allow potential home buyers to search the databases. After the potential

buyer has searched the information online and is ready to visit homes in a particular area,

the website refers him or her to a local broker. This broker pays a referral fee – typically

a portion of the commission – to the referral website that aggregated the MLS data. The

referral website may then rebate a portion of its referral fee to the consumer, if state law

or regulations do not prohibit rebates.

Other referral websites do not display aggregated listings, but use Internet

marketing to advertise their referral services and rebates to consumers. One panelist

represented RealEstate.com, a business that uses the Internet to build a network of local

brokers and agents.94 Participating brokers and agents pay a cooperative brokerage fee to

the company for referrals, and RealEstate.com cultivates buyers by using online tools and

information and, where permitted, by offering the buyer a rebate.95 The buyers are then

referred to the local broker for further assistance.96 As this panelist noted, the Internet

and the new business models are “about unleashing brokers to have the ability to use new

methods and tools to expand, to succeed and to succeed in this market that is

competitive.”97

Consumers’ Use of Nontraditional Models and FSBOs

According to NAR’s 2006 Profile of Home Buyers and Sellers, 83 percent of

home sellers who retained a broker used one who provided the traditional “full” array of

services; 8 percent hired a broker who listed the seller’s home in the MLS and performed

few, if any, additional services; and 9 percent hired a broker to provide a broader array of

services, but short of full-service.98

See ForSaleByOwner.com Corp. v. Zinnemann, 347 F. Supp. 2d 868, 870-71 (E.D. Cal. 2004) (providing

a general description of the ForSaleByOwner.com business model).

Henderson, Tr. at 154.

Id. at 155.

This assistance can include: locating and arranging for inspection of properties by prospective buyers;

providing prospective buyers with information such as relative property values and most recent selling

prices; helping in the negotiation process; and helping to schedule and prepare for closing of the

transaction.

Henderson, Tr. at 156-57.

NAR 2006 SURVEY, supra note 4, at 77.

NAR data show that the number of FSBOs – consumers who sell their homes

without the assistance of a real estate professional – has been declining. NAR’s 2006

Survey estimated that FSBOs account for about 12 percent of home sellers, with an

additional 5 percent of sellers first trying the FSBO route, but then retaining a broker to

complete the sale.99 NAR’s 2005 data estimated FSBOs at approximately 13 to 14

percent, and noted that this number has been steady since 2001, and is lower than it was

for the 1990s: 19 percent in 1991; 17 percent in 1993; 15 percent in 1995; 18 percent in

1997; and 16 percent in 1999.100

Id. at 80, 68.

100

NAR 2005 SURVEY, supra note 38, at 59.

II.

THE INTERNET’S ROLE IN REAL ESTATE BROKERAGE

The Internet has had a significant impact on the real estate industry, leading to a

diversification of business models to serve consumers. Some have suggested, however,

that the industry has not yet experienced the sort of sweeping benefits to consumers in the

form of cost savings and service enhancements that have been seen in other industries

from the use of the Internet and other technology.101 This Chapter examines how the

Internet has increased consumer access to information about real estate and how this

increased access has in turn affected consumer behavior. This Chapter also discusses the

Internet as a means of providing real estate brokerage and related services to consumers.

Finally, this Chapter addresses gaps in consumer knowledge that may exist despite the

extensive information now available on the Internet.

Increased Consumer Access to Real Estate-Related Information

By reducing the cost of transmitting and searching information, the Internet has

enabled consumers more easily to educate themselves about all facets of home buying

and selling. For example, before the introduction of the Internet, consumers had to learn

about homes for sale through real estate brokers, or through various offline marketing

vehicles, such as yard signs, newspaper advertisements, or real estate magazines. These

techniques are still important and commonly used, but consumers now have access to

listing information from a variety of online sources as well. Many brokers market

listings online through their own websites and give their MLSs permission to place their

listings on Realtor.com.102 Consumers can view these listings before contacting or

forming a relationship with a particular broker.

The source of listings for many of these advertising websites is the MLS. In

accordance with NAR rules, the MLSs create an “Internet Data Exchange (“IDX”), a

datafeed that participating brokers may use for their individual advertising websites.

Broker IDX websites enable home sellers to get greater exposure for their listings, and

enable home buyers to search listings, both on national IDX websites (e.g., Remax.com),

and on broker websites focused in a local area. According to a NAR survey of home

buyers and sellers, broker IDX websites were among the top three most popular websites

searched by buyers, with 40% of buyers conducting their home searches on these

websites.103 In addition, many MLSs contribute the IDX datafeed to some of the most

popular publicly accessible websites like Realtor.com, a national website that NAR owns.

Although these IDX websites, as explained more fully below, provide critically

important avenues for brokers to advertise their listings to potential buyers and their

101

See Hahn, Tr. at 29-30; AEI-Brookings Paper, supra note 3, at 13 n.49; Nadel, supra note 25, at 4-5.

102

See Perriello, Tr. at 149; Lewis, Tr. at 174 (noting that all traditional companies “have a significant

online presence”).

103

NAR 2006 SURVEY, supra note 4, at 44.

agents, these websites are not a substitute for the MLS. In contrast to VOWs and to

brokers’ “brick and mortar” offices, websites that rely on an IDX datafeed contain less

information than the actual MLS database, and that information may be out of date.104 If

a broker opts to not participate in the IDX, which NAR’s rules allow, none of the

broker’s listings are included on the IDX datafeed, and he or she cannot operate a website

based on an IDX datafeed. Therefore, IDX datafeeds may contain listings on fewer than

all of the homes listed for sale in the MLS’s area. IDX datafeeds can also be less

complete than the full MLS listings database because each MLS determines which

datafields to include in the IDX datafeed. For example, it is not uncommon for MLSs to

withhold the home address, a critical piece of information for brokerage clients, from the

IDX datafeed. Some MLSs also withhold such datafields as the detailed description of

the home or the property disclosures. Finally, IDX-based websites often will be missing

some homes that recently have been listed for sale and include some that are no longer

for sale because there often is a delay between an update of MLS data and when those

changes are reflected in the IDX datafeed.

Panelists representing traditional brokers acknowledged that the listings

information provided via an IDX datafeed is limited. For example, one panelist

explained that “what you see in the MLS is more detailed information [than is displayed

on IDX websites], but again, [brokers] have access to that [information in the MLS], and

[brokers] can provide that to the consumer.”105 The same panelist elaborated on the

advantages of MLS data:

Anyone who is a member of the realtor organization, whether they are a

discount broker, a limited service broker or a full-service broker, have

their listings in the Multiple Listing Service, and in that broker-to-broker

cooperative environment, that is real time information for me to be able to

deliver to my customer or client, the buyer, and real time is important,

especially if you happen to be in a seller’s market, because the advertising

vehicles [i.e. IDX websites] that are out there on the internet are not real

time, and by the time even that a consumer might be able to see something

online, it could be gone.106

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

104

See Whatley, Tr. at 160-61.

105

Id. at 210-11.

106

Id. at 161.

107

Id.

In addition to listing information derived from MLSs, consumers also can view

homes for sale on third-party advertising websites such as Craigslist.com, and on a

variety of websites that promote homes that are for-sale-by-owner.108 Further, the

Internet helps consumers to educate themselves about other areas of home buying and

selling. For example, consumers can use the Internet to research brokers,109 mortgage

and lending options,110 and recent home sales and home valuations in their community.111

Consumers also can find information about schools, crime, and other variables related to

home purchase decisions through a host of online sources, including websites hosted by

their municipalities.

Several Workshop panelists and commenters remarked on how the Internet has

expanded the amount of information available to consumers, making them more

knowledgeable as they enter into real estate transactions. One commenter concluded:

“Today’s sellers and buyers are more educated and more knowledgeable thanks almost

entirely to the growth of the [I]nternet.”112 A panelist described the Internet as “a very

highly effective marketing tool as well as a tremendous information resource and

communication tool.”113 Another commenter observed:

More individuals are researching available properties for sale. Buyers can

themselves gather key bits of information about property location, flood

history, contract status, room dimensions, etc. Sellers are better able to

determine comparable prices for similar houses, helping them to gauge the

appropriateness of a listing price suggested by an agent.114

108

E.g., ForSaleByOwner.com, http://www.forsalebyowner.com (last visited April 20, 2007); FSBO.com,

http://www.fsbo.com (last visited April 20, 2007); and HomesByOwner.com,

http://www.homesbyowner.com (last visited April 20, 2007).

109

See, e.g., JustRealEstate.org, http://www.justrealestate.org (last visited April 20, 2007).

110

See, e.g., Mortgage101.com, http://www.mortgage101.com (last visited April 20, 2007).

111

See, e.g., Zillow.com, http://www.zillow.com (last visited April 20, 2007).

112

Shortt, Public Comment 311, at 1.

113

Perriello, Tr. at 149. See also Whatley, Tr. at 160-61 (noting that consumers now may research online

not only homes for sale, but also the entire buying and selling process).

114

American Bankers Association, Public Comment 10, at 3 (comment). See also Perriello, Tr. at 149

(listing several features of real estate websites, including property photos, virtual tours, rich text, mapping

functionality, and neighborhood information); Sambrotto, Tr. at 86 (“The [I]nternet is an ideal platform for

marketing real estate. You can post color photos. You can post virtual tours. . . . And you can have that

information easily searched and frequently searched by buyers from their own homes on the [I]nternet.”).

One panelist opined that “a generation of Americans are now comfortably and constantly

connected to the [I]nternet and to [eC]ommerce. They instinctively start with the

[I]nternet before they search to buy anything. They do extensive research online.”115

Industry-produced data appear to support this view. A recent NAR survey of

home sellers and buyers concluded that “[t]he most significant trend in the home search

process is the increasing importance of the Internet as a source of information about

homes and the characteristics of different communities.”116 Among the evidence

supporting this conclusion is the finding that in 2006, 80 percent of home buyers used the

Internet during their home searches (up from 71 percent in 2003).117 In addition, in 2005

and 2006, 24 percent of recent home buyers first found the home that they purchased on

the Internet – up from only 2 percent in 1997.118 Conversely, the number of buyers

reporting real estate agents as the first source of such information has decreased from 50

percent in 1997 to 36 percent in 2005 and 2006.119 Among the most popular websites

used by home buyers in their searches were Realtor.com (52 percent of respondents),

MLS websites (53 percent), and real estate company websites (41 percent).120 Features

ranked as most useful among home buyers searching for a home on the Internet were

photos (identified as very useful by 83 percent of home buyers), detailed property

information (81 percent), and virtual tours (60 percent).121 Brokers surveyed by NAR

cite the Internet more frequently than any other method, including yard signs, as a way to

market homes.122

The Internet’s Effect on the Real Estate Industry

By placing more information in the hands of consumers, the Internet has

facilitated the growth of nontraditional business models – such as fee-for-service brokers,

VOWs, and broker referral networks – that allow consumers opportunities to substitute

their efforts for those of the broker, in many cases in return for lower fees. These lower

fees reflect the lower cost of serving consumers who are “easier to serve” because they

115

DelBianco, Tr. at 185.

116

NAR 2005 SURVEY, supra note 38, at 29.

117

NAR 2006 SURVEY, supra note 4, at 37.

118

Id. at 38, 29.

119

Id.

120

Id. at 44.

121

Id.

122

NAR 2005 SURVEY, supra note 38, at 65 (Internet cited by 84% of broker respondents, while yard sign

cited by 79%).

perform substantial online research themselves.123 According to one commenter, “With

individuals assuming more of the responsibility to gather and assess information, less

time and effort is required by real estate agents in assessing market conditions (for

sellers) and in identifying and showing houses [(for buyers)]. The cost of an agent’s

service, therefore, should go down reflecting this shift in burden.”124

Consumers differ in their willingness, ability and opportunity to use the Internet

to perform functions traditionally provided by brokers. While many consumers may be

willing to perform search tasks themselves, they may be more likely to continue to rely

on brokers for assistance related to the transaction process because it involves expertise

derived from broker experience.125 For buyers, this may mean performing much of their

early search by themselves online and contacting a broker only after they have become

familiar with market offerings and are ready to start placing offers on homes. For sellers,

this may mean setting their own sales price and relying on the wide online exposure of

MLS listings rather than broker effort to market their home, and hiring an agent only to

list their home in the MLS and for assistance in closing the transaction.

While the Internet clearly has had a significant impact on the real estate industry,

one Workshop panelist, an economist, opined that the real estate brokerage industry has

not experienced the types of technology gains benefiting consumers that have been seen

in other service industries, such as making airline and other travel reservations and

buying and selling stocks.126 Several factors may be limiting wider use of the Internet.

The resistance of some traditional brokers to dealing with firms that more fully or

innovatively use the Internet is one factor that could limit realization of the Internet’s full

potential.127 Restrictions on the availability of real estate listing information can also

limit the economic benefits that Internet use provides.128

123

DelBianco, Tr. at 185.

124

American Bankers Association, Public Comment 10, at 3 (comment).

125

See Steve Sawyer et al., Redefining Access: Uses and Roles of Information and Communication

Technologies in the US Residential Real Estate Industry from 1995 to 2005, 20 J. INFORMATION TECH. 213,

217 (2005) (contending that brokers provide value in three areas – information intermediation, process

knowledge, and social capital in supporting closing needs of buyers and sellers – and that even though an

online MLS gives buyers greater access to relevant information, most buyers will still need assistance in

making sense of this information).

126

See Hahn, Tr. at 29-30; AEI-Brookings Paper, supra note 3, at 13 n.49; Nadel, supra note 25, at 4-5.

127

See GAO REPORT, supra note 3, at 13-14, 21. This factor is discussed in detail in Chapter IV of this

Report.

128

GAO found that a “key factor” in the expansion of the Internet is the extent to which information about

properties listed in an MLS is widely available. GAO REPORT, supra note 3, at 17, 20-21. See also AEIBrookings Paper, supra note 3, at 12 (access to the MLS is a “potential bottleneck” in the large positive

impact that the Internet could have for home buyers and sellers).

Gaps in Consumer Knowledge

Even with the significant amount of information currently available on the

Internet, there may be gaps in knowledge by some consumers in several important areas

that may result in real estate brokerage markets functioning less efficiently. First, it

appears that many consumers are not fully apprised of their marketplace options. For

example, the most recent NAR survey of home sellers and buyers found that the majority

of home sellers contact only one listing agent before hiring one to assist with the sale of

their home.129 Further, there is evidence that some consumers of brokerage services are

not necessarily aware that commission rates are negotiable.130 This may be especially

true of buyers who pay for their brokers’ services indirectly via the purchase price of the

home.131 Although some Workshop comments suggest that consumers’ awareness of

their ability to negotiate over the price and terms of brokerage services is increasing,132

perhaps due to the increasing numbers of discount brokers that have entered the industry

over the past few years, some consumers do not negotiate over commission rates.

Second, consumers may be unaware of the possibility that their brokers may have

conflicting interests that lead them not to provide the consumer with the best possible

advice. As discussed in more detail in Chapter IV, brokers have certain incentives to

“steer” consumers toward those homes that offer the highest cooperating broker

commission payment and away from homes listed by brokers known to charge home

sellers discounted commission rates. 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

129

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).

130

See, e.g., Paul Anglin & Richard Arnott, Are Brokers’ Commission Rates on Home Sales Too High? A

Conceptual Analysis, 27 REAL ESTATE ECONOMICS 719, 721 (1999) (“Another factor in sustaining a

collusive commission rate is that many sellers do not realize that the commission rate is negotiable.”); 1983

FTC STAFF REPORT, supra note 9, at 66, 68-69 (reporting that as many as three-fifths of recent sellers and

three-fifths of recent buyers may have been unaware of the negotiability of commission rates).

131

Some commentators have argued that buyers may have the misimpression that their brokers’ services

are free. See Nadel, supra note 25 at 23.

132

See, e.g., Lord, Public Comment 254, at 1 (“The competition is fierce the majority of time that an agent

has a listing appointment . . . they are confronted with the question how much can you reduce your

commission? It is a standard question now.”); Paulsen, Public Comment 364, at 1 (“If the public felt there

was a set fee I would not be asked what my rate is to sell a house. And trust me, everyone asks.”).

133

See Barry, Public Comment 19, at 57 (reporting that, because the public sources of property listings

never show the commission offered by the listing brokers, buyers are unaware that their agents have

screened out listings with lower commission offerings); WOODALL & BROBECK, supra note 14, at 5 (“home

buyers will not have access to this information about the splits, so they cannot check to see whether their

broker is steering them away from houses carrying lower splits”); White, supra note 47, at 5 n.13 (“in a

milieu where there is a great deal of uncertainty as to which house will best fit the demands of a buyer and

which buyers are true prospects for a seller, it may be difficult for the client to determine that her agent is

Home buyers’ increasing use of the Internet may limit brokers’ ability to steer

buyers away from discounters’ listings without their knowledge. As noted above, 80

percent of consumers use the Internet to search for homes in 2006.134 To the extent that

consumers have greater knowledge of the stock of housing for sale than they used to,

brokers will be less able to exclude a particular listing from home buyers’ searches

without their knowledge. If a home buyer finds a discounter’s listing on his or her own

that appears to be a good match, a broker likely will either have to show the home buyer

the discounter’s listing or explain why he or she will not.135

In addition, consumers also may be unaware that when they pay their broker a

commission based solely on a percentage of the sales price at closing (as most do

today),136 the broker’s financial incentives are not necessarily aligned with the

consumer’s. On the sell side of the transaction, the consumer’s interest is to sell the

home at the highest possible price. Even though an agent’s commission increases with

the price of the home, he or she likely retains no more than 1 to 2 percent of the sales

price (after paying the cooperating broker and the agent’s brokerage firm).137 Therefore,

the agent may be less willing than the consumer to take the risks associated with getting a

higher sales price, such as waiting for what might be a better offer and perhaps having to

do additional work.138 Likewise on the buy side of the transaction, the broker may be less

steering in a disadvantageous way”); 1983 FTC STAFF REPORT, supra note 9, at 75 (“Because many buyers

think they are seeing all the properties a broker or salesperson knows to be on the market, the practice of

steering coupled to the general practice of denying consumers direct access to information from a MLS

may mislead buyers.”).

134

See supra notes 117-118 and accompanying text.

135

Another gap in consumers’ knowledge – albeit one that does not necessarily affect competition in the

real estate brokerage industry – may be that consumers are not fully informed as to what, if any, duties they

are owed by their broker. This can occur if the broker fails to disclose such information to the client as

legally required. States typically require agents to disclose to their clients the duties that they owe to their

clients under state law. See, e.g., VA. CODE ANN. § 54.1-2131(E) (2007). Without full and timely

disclosure a customer may reveal sensitive information, such as the buyer’s maximum offer or the seller’s

minimum price, to a broker who is actually representing the party on the other side of the transaction.

136

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).

137

See Rutherford et al., supra note 16, at 629 (“Given that the agent receives a small portion of the

transaction price as commission, the agent’s goal of maximizing the expected commission may diverge

from the seller’s goal of maximizing the selling price. Furthermore, given that the targeted selling price

will impact the time the asset stays on the market, the agent’s desired time on the market may diverge from

that of the seller.”).

138

See Levitt & Syverson, supra note 16, at 6 (noting that if an agent receives 1.5 percent of the sales price

and incurred weekly costs of $200 to keep a home on the market, “the agent would be indifferent between

selling the house today or waiting one more week and receiving an offer $13,333 higher with certainty.”).

Both Rutherford et al. and Levitt & Syverson find empirical evidence consistent with a principal-agent

conflict between sellers and agents. 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.

interested than the consumer in negotiating the lowest possible sales price because a

lower sales price translates into a lower commission for the broker, likely requires

additional work, and may increase the risk that the transaction falls through with no

commission paid to the broker. Consumers may be unaware of these potential conflicts

of interest. Some commentators have posited that alternative payment structures may

better align consumer and broker interests.139

139

See Chang-Tai Hsieh & Enrico Moretti, Can Free Entry Be Inefficient? 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).

III.

COMPETITION AMONG BROKERS

Real estate brokers compete to attract customers in different ways based on price

and non-price dimensions. To compete on price, they can offer lower commissions to

home sellers and, where permitted, rebates to home buyers. On the service dimension,

they can offer more assistance or convenience to customers. Brokers also compete for

customers by marketing their services to potential buyers and sellers in various ways.

Although consumers benefit to some extent from all of these forms of

competition, the available data suggest that brokers may compete less on price than

would be expected in a competitive market. Even though national average commission

rates have fallen steadily since 1991 and commission rates appear to vary inversely with

housing prices, it appears that rates are sufficiently inflexible to cause commission fees to

move in tandem with housing prices. The recent run-up in housing prices illustrates this

phenomenon: from 1998 to 2005, housing prices rose 37 percent in real terms and,

although national average commission rates appear to have fallen from 5.5 percent to 5

percent, average brokerage fees per transaction rose 26 percent in real terms during the

same period.140 At the same time, the efficiencies generated by the Internet and other

technological advances suggest that broker costs should be falling. The evidence also

suggests that rising per-sale profits for brokers induce entry by new brokers so that the

average number of sales per broker declines.

This Chapter explores evidence concerning competition among brokers. Section

A examines the structural features of the real estate brokerage industry. Section B

describes the nature of competition among brokers and views about the current state of

competition presented by Workshop panelists and commenters. Section C presents the

available data on actual commission rates and fees. Section D reports one panelist’s

attempt to make sense of the evidence presented in Sections A through C.

Structural Features of the Real Estate Brokerage Industry

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.

Broker Concentration141

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. For

example, a broker in Alexandria, Virginia, competes with other brokers able to meet the

140

See infra Chapter III.C.

141

Although this section reports a variety of statistics that purport to measure “market share,” this Report

makes no attempt to define a relevant antitrust market for this, or any other, analysis.

needs of consumers who are buying and selling homes in the area; this is likely to include

other brokerage firms located in and around Alexandria, but not those located in

California. Recent research supported by NAR states that “the U.S. real estate industry is

a collection of many local real estate markets.”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. According

to a Workshop panelist, there are approximately 98,000 brokerage firms operating over

200,000 local offices in the United States.143 These offices provide potential employment

for approximately 2.5 million real estate licensees (of which more than 1.2 million are

members of NAR).144 In 2004, 96 percent of brokerage offices in the United States

employed ten or fewer agents.145 From 1983 to 1999, the portion of brokerage offices

with five or fewer agents increased from 51 percent to 60 percent.146 In contrast, the

portion of offices with a sales force of more than 50 agents never exceeded 5 percent

during that time period.147

There is conflicting information regarding the percentage of home sales

nationwide accounted for by the largest real estate firms. NAR reported in its public

comment that in 2004 the top ten brokerage firms in the United States had a combined

9.1 percent market share, the top twenty firms had a 10.9 percent share, the top 100 firms

had a 17 percent share, and the top 500 firms had a 26.6 percent share.148 In addition,

according to NAR, the two largest brokerage firms in the industry had only 4.1 percent

and 1.7 percent market shares, respectively.149 The market shares reported by NAR

142

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 “micromarkets” within metropolitan areas. For example, within the Washington, DC metropolitan area, there is

little or no competition among buyers, sellers, and real estate agents across the micro-markets of

Montgomery County, MD, Fairfax County, VA, and southwest Washington, DC).

143

Yun, Tr. at 220.

144

Id.; NAR, Public Comment 208, at 3 (comment).

145

Lawrence Yun, Ph.D., Senior Economist, National Association of Realtors, Presentation at the Federal

Trade Commission & Department of Justice Public Workshop: Competition Policy and the Real Estate

Industry, Real Estate Brokerage Industry: Structure-Conduct-Performance, at 9 (Oct. 25,

2005)[hereinafter Yun Presentation], available at

http://www.ftc.gov/opp/workshops/comprealestate/yun.pdf.

146

Id.

147

Id.

148

NAR, Public Comment 208, at 7 (comment).

149

Id.

appear to be based on the nationwide shares of individual brokerage firms, most of which

do not have a nationwide presence. However, in many cases, individual brokerage firms

exist under common ownership or as part of a franchise system. For example, Realogy –

through its franchises and wholly-owned brokerages – claims to have “participated in

approximately one of every four domestic homes sold through a brokerage in 2005.”150

In any case, competition among brokerages tends to be local, and brokerage

shares calculated at the local level can be far higher than those suggested by national

data.151 For example, in Re/Max International, Inc. v. Realty One, Inc., the plaintiff’s

expert presented “essentially unchallenged” testimony explaining that “[i]n a majority of

the 161 cities and towns in northeast Ohio, the [two] defendants’ combined market share

exceeds 50%.”152 In Mid-America Real Estate Co. v. Iowa Realty Co., the court found

that one company accounted for over 50 percent of all residential real estate transactions

in Des Moines, Iowa, (when FSBO sales are considered) or approximately 60 percent of

all sales completed through the local MLS in Des Moines.153 In a study of the State

College, Pennsylvania, area, researchers found that “the largest brokerage firm

maintained 31% of the listings and 30% of the sales. The second largest brokerage firm

accounted for 22% of the listings and 20% of the sales. Each of the next four largest

firms enjoyed less than 10% of the listings and sales.”154 A study of real estate

transactions obtained from the Lincoln, Nebraska, MLS reported that although homes in

the sample were listed by fifteen brokerage firms, “[t]wo of these firms listed 75% of the

properties in the sample, with the remaining listings fairly evenly distributed between the

other thirteen firms.”155

Entry

The requirements for becoming a real estate licensee (i.e. an agent) do not appear

to be substantial. A 1983 FTC Staff Report on the real estate brokerage industry

150

REALOGY, REALOGY BUSINESS OVERVIEW 4 (Dec. 2006), available at http://library.corporateir.net/library/19/198/198414/items/223251/RealogyDecember06%20Final.pdf.

151

NAR, Public Comment 208, at 6 (“In a few markets, some firms may have a larger than usual market

share, but market shares are known to change measurably from one year to the next.”).

152

Re/Max Int’l, Inc. v. Realty One, Inc., 173 F.3d 995, 1003 (6th Cir. 1999).

153

Mid-America Real Estate Co. v. Iowa Realty Co., No. 4:04-CV-10175, 2004 WL 1280895, at *8-*9 &

n.5 (S.D. Iowa 2004), rev’d on other grounds, 406 F.3d 969 (8th Cir. 2005).

154

Shiawee X. Yang & Abdullah Yavas, Bigger is Not Better: Brokerage and Time on the Market, 10 J.

REAL ESTATE RES. 23, 27-28 (1995). The authors used a sample of 388 home sales in calendar year 1991

from the multiple listing service. Id. at 27.

155

James E. Larson & Won J. Park, Non-Uniform Percentage Brokerage Commissions and Real Estate

Market Performance,” 17 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS

ASSOCIATION 422, 428-29 (1989). The authors use a sample of 669 single family home transactions

covering the first nine months of 1986 obtained from the Lincoln, Nebraska MLS. See id. at 427-28.

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.”156 Namely, an

individual agent primarily needs to meet state licensing requirements and affiliate with a

licensed broker. Several Workshop panelists expressed a similar view. According to one

panelist, “there are no significant barriers to entry or expansion in the residential real

estate industry. As a result, there has been a dramatic number of new agents and new

entrants into the industry in recent years.”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.”158 He noted that between 1998 and 2005, while the number of home sales

increased about 50 percent, the number of NAR members increased about 67 percent.159

Some commenters stressed the ease with which one can become an agent. For

example, one industry participant stated: “Becoming a real estate agent is far too easy

and too fast for what the service contemplates: The sale of what for many people is both

their most important asset, and the one thing that physically binds their family together: a

home.”160

Brokerage entry appears to be more difficult than agent entry. At a minimum, an

entrant that wants to establish a brokerage must hire or become a licensed broker.161

Additionally, an entering broker may require an agent workforce, office space, office

staff, and advertising of their listings to establish name recognition. Establishing such

name recognition could be aided by affiliating with a national franchise (e.g., Prudential

or Re/Max). The examples of relatively high local market shares for brokerages

described above suggest that agent entry is more common than brokerage entry.

156

1983 FTC STAFF REPORT, supra note 9, at 102. 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. See infra

Chapter IV.

157

Perriello, Tr. at 146. See also Lewis, Tr. at 172 (“There are no barriers to entry in our industry . . . .”);

Hsieh, Tr. at 235 (“there’s relatively free entry into the profession and into the real estate brokerage

business . . . .”). The ability of novice entrants to attract clients relative to more experienced agents was not

discussed at the Workshop and, likewise, is not addressed in this Report.

158

Yun, Tr. at 220.

159

Yun Presentation, supra note 145, at 5, 7.

160

Daniels, Public Comment 92, at 1.

161

NAR, Public Comment 208, at 5 (“An agent can obtain a broker’s license, usually after having been in

business for several years, and passing a broker’s license exam. The exact requirements vary by state.”).

The Nature of Competition Among Brokers

Brokers compete for clients on several dimensions by offering the most attractive

service and price combination.162

Service Dimension

Competition among brokers based on service to consumers includes a wide range

of possibilities. Brokers can provide varying degrees of assistance to buyers, such as

performing MLS searches for homes for the buyer or allowing a buyer on-line access to

MLS data to perform such searches on his or her own. They can provide varying levels

of service to sellers in marketing their homes, such as holding open houses more or less

frequently. To facilitate a particular transaction, “[b]rokers can help sellers (and buyers)

to varying degrees throughout the entire transaction process: helping the seller set the

asking price, guiding buyers when they formulate their offers, providing guidance

through the maze of paperwork faced by buyers and sellers and recommending reliable

inspectors, lawyers, mortgage brokers, etc.”163 Additionally, brokers expend varying

degrees of effort involving a wide range of activity, including marketing their own

services to potential buyers and sellers. Broker marketing can include paid

advertisements in television, radio, print, or online media; informal networking to meet

potential buyers and sellers; and giving away pumpkins at Halloween.

Price Dimension

Competition among brokers on price primarily occurs through lower commission

fees and rebates. In the majority of transactions, the commission fee is determined by

multiplying the commission rate negotiated in the listing contract by the home’s actual

selling price. In other cases, brokers may charge a flat commission fee for certain

services or bundles of services. Alternatively, brokers may adopt a combination of flat

fees and a commission rate. Since cooperating brokers do not directly participate in

negotiating listing contracts, rebates offer a way for them to compete on price.164

There were contrasting views among Workshop participants and commenters

about the extent to which brokers compete on the price dimension. The FTC’s last report

on real estate brokerage, twenty-three years ago, stated:

162

One author has described the service that brokers provide as not merely a completed match of buyer and

seller, but rather “a completed transaction at some level of service provided to the parties involved.”

Geoffrey K. Turnbull, Real Estate Brokers, Nonprice Competition and the Housing Market, 24 REAL

ESTATE ECONOMICS 293, 295 (1996).

163

Id. The extent to which brokers supply these services “provides the margin for nonprice competition

among brokers.” Id.

164

As discussed in Chapter I of this Report, rebates are a meaningful component of price competition

between brokers in states that do not prohibit rebates. Anti-rebate laws are discussed in more detail in

Chapter IV of this Report.

The evidence indicates that brokerage commission rates are quite uniform

within local markets. In most markets, the prevailing rate is either 6 or 7

percent. Furthermore, the dollar value of commission fees per transaction

has increased very substantially in recent years when compared to the

general rate of inflation or the incomes of other white collar workers. At

the same time, there is at least some evidence that brokerage industry

productivity apparently has declined in recent years. . . . Available

statistics, therefore, strongly suggest that forces other than free

competition are affecting the level at which commission rates are set.165

Some claim that things have not changed.166 Some commenters observe that the

relative inflexibility of commission rates coupled with rising home prices has caused

consumers to pay more in commissions, and that if brokers competed more on

commission rates, commission fees would be lower.167 Moreover, citing consumers’

increasing use of the Internet in real estate transactions and the substantial savings that

the Internet has brought to consumers across numerous service industries,168 some

165

1983 FTC STAFF REPORT, supra note 9, at 64. See also id. at 55 (“[W]e found local markets to

consistently have commission modes at either six or seven percent. These are the ‘normal’ modes for

virtually all markets, regardless of how they might vary from one another, and nationwide a very high

percentage of real estate brokerage transactions occurred at a commission rate of one or the other. . . . The

degree of rate uniformity we found clearly is inconsistent with a market characterized by the particular kind

of vigorous competition common in many other markets.”).

166

See, e.g., Hsieh, Tr. at 261 (“[I]f you go back to the FTC report from more than 20 years ago, things

really have not changed that much.”); Bourgoin, Public Comment 30 at 1 (“[T]he FTC did a study which

was completed and published in 1983. [I]t is apparent that the activity within this study is still ongoing

within the industry.”); Abdullah Yavas, Impossibility of a Competitive Equilibrium in the Real Estate

Brokerage Industry, 21 J. REAL ESTATE RES. 187, 187 (2001) (“A number of studies have argued that the

uniformity of the commission rate across different properties and regions is an indication of collusive

behavior.”); Richard J. Buttimer, Jr., A Contingent Claims Analysis of Real Estate Listing Agreements, 16 J.

REAL ESTATE FIN. & ECON. 257, 257 (1998) (“Much of the literature argues that there is . . . some collusion

between brokers through the [MLS] . . . The primary evidence presented is the near-uniformity of

commission rates in a given market. A common argument is that the effort required to sell a house is not a

linear function of the sales price and that if there is not collusion among brokers, there should be, at the

very least, variation in commission rates across house price ranges within a given market.”).

167

See, e.g., American Bankers Association, Public Comment 10, at 1 (cover letter) (“[b]y any standard, the

real estate brokerage market is considerably less competitive than it should be and commissions are

artificially high.”); White, supra note 47, at 2 (“[A] more competitive outcome would surely mean that

average fees would be lower than they are today and that ‘the 6% (or 7%) commission’ would be unlikely

to remain as the modal fee.”); John C. Weicher, The Price of Residential Real Estate Brokerage Services: A

Review of the Evidence, Such At It Is 1 (presented at AAI Conference on Competition in the Residential

Real Estate Brokerage Industry Nov. 8, 2005) (noting “a fairly widespread view that brokerage is not a

competitive industry…” based several perceptions, including: (1) excessive commission rates that are

“sticky downward” even as technology reduces brokers’ costs; (2) commission rates are higher in the

United States than in many other developed countries; (3) lobbying efforts by NAR and state Realtor

associations in favor of state laws restricting competition; (4) NAR’s successful lobbying of Congress to

prohibit banks from entering the real estate brokerage business; and (5) NAR-imposed restrictions on

discount and Internet brokers’ access to the MLS).

commenters maintain that the Internet should also be reducing the costs of providing real

estate brokerage services.169

In its comment, the American Bankers Association (“Association”) observed that

“[one] would expect to see variations in brokerage commissions across geographical

regions as the supply and demand varies dramatically across the United States, but little if

any variation exists.”170 If the market were competitive, according to the Association,

commissions could fall as much as by half.171 The Association calculated that, assuming

the standard of living is the same today as it was in 1990, when the average commission

was 6.1 percent, the commission rate necessary to generate the same real return today

would be only 4.34 percent.172

In contrast to the views of the Association, NAR173 reported in its public comment

that the residential real estate brokerage industry is “fiercely competitive” and that

commission rates “are set by market forces in order to attract clients.”174 NAR rests its

conclusion in large part on particular attributes of the industry, which, according to NAR,

168

See, e.g., GAO REPORT, GAO-03-749, Airline Ticketing: Impact of Changes in the Airline Ticket

Distribution Industry (July 2003) (discussing how Internet distribution lowered transaction costs in the sale

of airline tickets), available at http://www.gao.gov/new.items/d03749.pdf; GAO REPORT, GAO/GGD-0043, Online Trading: Better Investor Protection Information Needed on Broker’s Web Sites (May 2000)

(discussing how Internet brokerages charge far less commission per trade on securities), available at

http://www.gao.gov/new.items/gg00043.pdf.

169

See Hahn, Tr. at 89; American Bankers Association, Public Comment 10, at 3.

170

American Bankers Association, Public Comment 10, at 3 (comment).

171

Id. at 1.

172

Id. at 4. A 2002 study analyzing commission rates in the United States and several other countries

concluded that U.S. commission rates “should equal something closer to 3.0% versus the common 6% or

7% fee.” Natalya Delcoure & Norm G. Miller, International Residential Real Estate Brokerage Fees and

Implications for the US Brokerage Industry, 5 INTERNATIONAL REAL ESTATE REVIEW 12, 29 (2002). NAR

has cautioned against comparing U.S. and foreign commission rates, claiming that there are too many

country-specific factors involved to permit simple comparisons across countries, and the authors of the

2002 study concede that “[d]ata on such differences is not readily available and beyond the scope of this

study.” Id. at 14. The authors did not identify the source of the U.S. commission data. See NAR, Public

Comment 208, at 15-16; Delcoure & Miller, supra, at 15.

173

Approximately half of the public comments submitted to the Agencies in response to their request for

public comments were some variation of a form letter that NAR composed, posted on its website, and

encouraged its 1.2 million members to send. This letter praised the competitive nature of the real estate

industry. Commenters using this form highlighted local competition between individual agents as an

outstanding example of rigorous competition to which the rest of the economy should aspire. In addition,

they claimed that the tens of thousands of brokerages, more than two million licensed real estate

professionals, and various business models across the country provide consumers with a great deal of

choice. 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.

174

NAR, Public Comment 208, at 1 (comment).

“resemble[] a perfectly competitive industry structure with production at the lowest

possible cost and consumers benefiting from competitively determined prices.”175

Several other commenters claimed that there is vigorous price competition. One

broker described the competition that he faces as follows: “In about 95 percent of the

leads I get, I have competition from at least one other Real Estate Agent, and on listing

appointments, I am often competing against [two] to [three] other Agents, and I lose quite

a few [to] those who list with lower commission rates.”176 An agent who has been in the

business for less than a year stated: “Realtors are competing fiercely on the price at

which they will take listings. In my own experience, I have already lost listings to

brokers who have offered to take the listing at a lower brokerage fee.”177

Several commenters also provided anecdotal evidence regarding falling

commission rates in various areas of the country.178 One commenter, for example, stated:

“Real estate is very competitive in Arizona. I see agents advertising commissions as low

as 2%. The norm years ago was 7%, then 6% . . . now there is not a norm. It varies

greatly.”179 Another commenter observed that “[t]he 6% commission of long ago has

decreased to 4 or 5% on the majority of deals.”180

Some commenters identified discount and fee-for-service brokers as key drivers

of price competition. 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? It is a standard question now.”181 Another agent at a full-service firm

reported that “since we go up against limited service firms all the time, we are having to

reduce our commission rate to keep the client.”182 These observations are similar to those

175

Id. at 2.

176

Blann, Public Comment 250, at 1. But see 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).

177

Reppert, Public Comment 294, at 1. See also Tradii, Public Comment 340, at 1; Wharton, Public

Comment 179, at 1.

178

See, e.g., Earman, Public Comment 73, at 1-2 (average commission is “well under 6%”); Giorgianni,

Public Comment 200, at 1 (“My average commission has dropped over the last ten years from 3% to about

2.25%.”).

179

Paulsen, Public Comment 364, at 1. Several panelists and commenters cited Real Trends estimates of

commission rates. See, e.g., Kunz, Tr. at 81-82; Lewis, Tr. at 172; NAR, Public Comment 208, at 12

(comment).

180

Lord, Public Comment 254, at 1.

181

Id. at 1.

182

Dwyer, Public Comment 55, at 1. See also Blomquist, Public Comment 194, at 1; Forgues, Public

Comment 118, at 1 (“Here in Tucson, Arizona, competition amongst real estate agents is fierce. There are

of the GAO, which noted that competition from nontraditional brokers may be partially

responsible for a recent decline in commission rates.183

Commission Rates and Fees: Empirical Evidence184

In light of the contrasting views presented above, it is reasonable to ask what

empirical evidence reveals about commission rates and fees in recent years.

Unfortunately, as one author recently noted, “There is not much empirical evidence on

commission rates. The data are usually proprietary and not readily available to the public

or to academic analysts.”185 Consistent with this observation, none of the Workshop

participants or commenters provided data on commission rates or fees.186 To our

knowledge, REAL Trends is the only source that publishes commission rate data. REAL

Trends publishes nationwide average commission rates. Its data are derived from a

survey of the top 500 brokerage firms in the country and a group of rising firms just

below the top 500.

Table 1 lists REAL Trends national average commission rates and fees from 1991

through 2005. Fees, measured in constant 2006 dollars, are based on median home prices

so as to represent what a typical consumer would pay in real estate commissions to sell

his or her home. As illustrated in Figure 1, commission rates have fallen gradually over

this time period, from 6.1 percent to just over 5 percent.

a variety of options available to buyers and sellers from full service agents to very limited service agents

with a wide variety of fee structures.”); Large, Public Comment 241, at 1 (“our average commission per

transaction side has dropped 13% this year compared to last year as a result of competition from discount

brokerage business models operating in our market”).

183

GAO REPORT, supra note 3, at 12.

184

As discussed in Chapter I of this Report, the commission “rate” is the percentage of the home sales price

that the broker retains as a commission, and commission “fees” are the total dollar amount paid by

consumers for real estate brokerage services. A decrease in commission rates does not necessarily imply a

decrease in fees.

185

Weicher, supra note 167, at 121.

186

NAR – a logical source of commission data, given its size and access to MLS data through its local

associations – does not study or report commission rates. A NAR economist explained at the workshop

that any average commission rate reported by a prominent entity such as NAR could be used by industry

participants as a focal point for collusion on commission rates. See Yun, Tr. at 225-26. See also NAR,

Public Comment 208, at 12 (comment) (“[NAR] does not conduct research on commission rates out of

concerns that the research results have the effect of setting a ‘focal point’ for practitioners to set their

commissions.”).

Table 1

Commission Rates and Real Commission Fees: 1991-2005

Median Home Prices

Year

Commission Rate

2006 Dollars

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

6.10%

6.04%

5.94%

5.88%

5.83%

5.75%

5.64%

5.48%

5.44%

5.42%

5.12%

5.14%

5.12%

5.08%

5.02%

$153,925

$153,235

$153,632

$155,145

$155,365

$158,029

$162,168

$167,881

$171,031

$172,427

$177,939

$188,634

$198,557

$212,655

$230,059

Commission Fees

% Change

2006 Dollars

% Change

-0.45%

0.26%

0.98%

0.14%

1.71%

2.62%

3.52%

1.88%

0.82%

3.20%

6.01%

5.26%

7.10%

8.18%

$9,389

$9,255

$9,126

$9,123

$9,058

$9,087

$9,146

$9,200

$9,304

$9,346

$9,110

$9,696

$10,166

$10,803

$11,549

-1.43%

-1.40%

-0.04%

-0.71%

0.32%

0.66%

0.59%

1.13%

0.45%

-2.52%

6.42%

4.85%

6.26%

6.91%

Department of Housing and Urban Development, U.S. Housing Market Conditions, 4th Quarter 2006,

Tables 6-9 (Feb. 2007), and are a weighted average of new and existing home prices, based on annual

sales; median home prices are converted into 2006 dollar with consumer price index for all goods for all

urban consumers (CPI-U) from Bureau of Labor Statistics

(http://data.bls.gov/PDQ/servlet/SurveyOutputServlet); commission fees are calculated by multiplying

commission rates by real median home prices.

Figure 1

Average Commission Rates: 1991-2005

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 2, however, shows that despite the downward trend in rates, the dollar amount of

commission fees appears to have increased closely in line with rising housing prices.

Growth in home prices was relatively flat through most of the 1990s and real commission

fees did not surpass their 1991 levels until 2002. At the same time, as housing price

growth accelerated from 2001 through 2005, real commission fees rose about 25 percent.

Figure 2

Average Commission Fees and Median Home Prices: 1991-2005

(in 2006 dollars)

Median Commission Fee

Median Home Price

$240,000

$12,000

$220,000

$11,500

$11,000

$200,000

$10,500

$180,000

$160,000

$10,000

Home Prices

$9,500

$140,000

Commission Fees

$120,000

$9,000

$8,500

$8,000

$100,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 3 illustrates annual percent changes in real housing prices and commission fees

from 1992 through 2005, and provides additional illustration of how fees tend to move in

Figure 3

Annual Percentage Change in Median Home Prices

and Commission Fees: 1992-2005

(in 2006 Dollars)

10%

Home Prices

Commission Fees

-2%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-4%

tandem with housing prices. For most years, the annual percent change in real

commission fees is very similar to the annual percent change in real housing prices.

Other studies have examined REAL Trends data and have made the same

observations about patterns in commission rates, housing prices, and brokerage fees. 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 inflationadjusted 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. “Thus, with the increase in housing prices,

the brokerage fee (in dollars) for selling a median-priced home increased even as the

commission rate fell.”190

Data reported to the Securities Exchange Commission by Realogy, the largest

brokerage firm in the United States, are consistent with these findings. For example,

recent Realogy data indicate that between 2002 and 2006 Realogy’s average commission

rate declined about 7 percent while the average sales price for the homes they sold

increased about 30 percent. As a result, Realogy’s inflation-adjusted average

commission fee increased from about $11,600 in 2002 to about $14,000 in 2006, an

inflation-adjusted increase of about 22 percent.191

Rather than using REAL Trends aggregated data, some researchers have analyzed

commission rates on a transaction-by-transaction basis to determine the extent to which

commission rates vary in relation to a variety of market factors. The studies have focused

on, among other things, the distribution of commission rates within certain geographic

areas and the relationship between commission rates and various property characteristics

187

Weicher, supra note 167, at 124. Weicher’s calculations use average home sales prices, not median

home sales prices.

188

Id.

189

See Hearing, supra note 1, at 5 (testimony of David G. Wood), available at

http://financialservices.house.gov/media/pdf/072506dgw.pdf..

190

Id. at 6.

191

See Realogy Corporation 10-K for fiscal year ending Dec. 31, 2006, available at

http://www.sec.gov/Archives/edgar/data/1355001/000095012307003335/e31090e10vk.htm#tocpage.

(such as the age of the home or the list price), market conditions, and the amount of time

that the home spends on the market.192

In late 1979 and early 1980, the FTC staff conducted a national survey of recent

home buyers and sellers. Each survey participant who had sold through a broker was

asked the commission rate that had been quoted by the broker. The staff found that 85

percent of the sellers surveyed were quoted a commission rate of either six or 7 percent

by their broker.193 More specifically, approximately 53 percent were quoted a rate of 6

percent, while approximately 32 percent were quoted a rate of 7 percent.194 Factoring in

after-the-fact reductions in prices (including rebates and gifts provided by the brokers),

78 percent of those surveyed were actually charged commissions at those rates.195 These

results are comparable to those revealed in a sample of HUD-1 forms from the latter half

of the 1970s collected by HUD for its own purposes, which showed that 77 percent of

sellers were charged a commission rate of 6 or 7 percent.196 Although the average

commission rates based on the HUD-1 forms varied across metropolitan areas, in eleven

of the sixteen cities surveyed 80 percent or more of the commission rates actually paid

were equal to either 6 or 7 percent.197

A 1982 study analyzed the relationship between commission rates and several

variables, including the price of the home, whether the home was a new or existing home,

and whether the sale involved cooperation from another broker.198 The sample data

included 1,107 transactions drawn from seven cities in 1975, 485 transactions drawn

from eight cities in 1978, 1,769 transactions drawn from eight cities in 1979 and 3,895

transactions drawn from all 50 states in 1979.199 For each transaction, data on actual

commission rates paid were obtained from HUD-1 forms. The study found that in 23

percent of the market areas (i.e. city or state) under examination, as home prices

192

A comprehensive review of the empirical research conducted in the real estate brokerage industry is

beyond the scope of this Report. For a review of the literature on such research, see Jonathan Dombrow &

Geoffrey K. Turnbull, Trends in Real Estate Research, 1988-2001: What’s Hot and What’s Not, 29

JOURNAL OF REAL ESTATE FINANCE AND ECONOMICS 47 (2004); John D. Benjamin, G. Donald Jud & G.

Stacy Sirmans, What Do We Know About Real Estate Brokerage?, 20 JOURNAL OF REAL ESTATE

RESEARCH 5 (2000).

193

1983 FTC STAFF REPORT, supra note 9, at 45.

194

Id.

195

Id. at 46 (49.6% of sample paid 6%, while 27.9% paid 7%).

196

Id. at 48.

197

Id. at 52.

198

See Michael Carney, Costs and Pricing of Home Brokerage Services, 10 JOURNAL OF THE AMERICAN

REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 331 (1982).

199

Id. at 335.

increased, commission rates decreased.200 However, despite a lower commission rate, the

results imply the dollar magnitude of the commission fee paid was considerably higher

for higher priced homes.201 The study also found that commission rates associated with

sales of existing homes were higher and less varied than rates associated with new

homes.202 On average, the commission rate paid on sales of existing homes was

approximately 1.2 percentage points higher than the rate paid on new home sales.203

Finally, the study found that commission rates in transactions involving cooperating

brokers were on average approximately 0.4 percent higher than rates in non-cooperative

transactions. 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.”204

A 1988 study analyzed the relationship between the commission rate offered to

cooperating brokers and the selling price of the home.205 The sample data were

comprised of 532 home sales drawn from 1983 and 1987 sales data in the Knoxville,

Tennessee, Board of Realtors’ MLS.206 The study found that the cooperative commission

rate was negatively related to the sales price of the home and positively related to the

percent of the list price achieved by the seller.207 The authors concluded, “[t]hese results

200

Id. at 336.

201

Id. at 348 (“[O]n average, a $100,000 rise in the price of the home reduces the commission rate by about

0.5 percentage points”). The average sales price of an existing home in 1980 was $72,800. See U.S.

Department of Housing and Urban Development, U.S. Housing Market Conditions 73 (Nov. 2006)

[hereinafter “HUD REPORT”], available at

http://www.huduser.org/periodicals/ushmc/fall06/USHMC_Q306.pdf. At that price, the study’s statistical

results predict a corresponding commission rate of 6.25%, leading to a commission fee of $4,550. A home

selling for $100,000 more, or $172,000, would pay a commission rate of 5.73%, for a commission fee of

$9,901.

202

Carney, supra note 198, at 339 (excluding five areas with insufficient observations for new homes, in 59

percent of the remaining market areas the mean commission rate paid was statistically significantly higher

for existing homes than for new homes).

203

Id.

204

Id. at 248.

205

See William C. Goolsby & Barbara J. Childs, Brokerage Firm Competition in Real Estate Commission

Rates, 3 JOURNAL OF REAL ESTATE RESEARCH 79 (1988).

206

Id. at 84.

207

This finding was significant at the one percent level for each of the equations tested. See id. at 83.

However, Weicher notes that the magnitude of the sales price effect appears to be small. 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.”).

provide strong evidence that the presumption by previous researchers that real estate

brokerage firms are unwilling to negotiate differential rates is inaccurate.”208

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. The sample data (provided by a

local MLS) consisted of 15,608 single-family home sales in the Baton Rouge, Louisiana

metropolitan area from 1985 through 1992.210 Similar to the two studies described

above, the authors found that the listing broker commission rate varied statistically

significantly with a variety of home characteristics.211 For example, commission rates

declined, albeit at a decreasing rate, with the list price of the home.212 However, despite a

lower commission rate, the authors’ estimates showed that the actual commission fee

paid rose with housing prices. These authors also considered whether commission rates

within the Baton Rouge market responded to market-wide changes akin to housing

booms and busts. They found a counter-cyclical pattern for commission rates. In other

words, as the demand for housing and sales prices increased, commission rates declined.

However, the authors’ statistical results suggest commission rates are relatively

inflexible.213 This result is consistent with the findings based on Real Trends data

208

Goolsby & Childs, supra note 205, at 85. Since the authors only observed the cooperative commission

rate, they note that their conclusion rests on the assumption that the cooperative split is a fixed share of the

total listing commission. The authors report that interviews with industry members suggest that the

cooperative split was almost uniformly 60/40, in favor of the listing broker. See id. at 81 n.1.

209

See C.F. Sirmans & Geoffrey K. Turnbull, Brokerage Pricing under Competition, 41 JOURNAL OF

URBAN ECONOMICS 102 (1997). This study apparently incorporates the data and relevant findings of an

earlier study conducted by the authors. See C.F. Sirmans, Geoffrey K. Turnbull & John D. Benjamin, The

Markets for Housing and Real Estate Broker Services, 1 JOURNAL OF HOUSING ECONOMICS 207 (1991).

210

Sirmans & Turnbull, supra note 209, at 111.

211

Id. at 113-115.

212

Id. at 113-14. The authors performed regressions analyzing how the contract commission rate was

affected by various market conditions and housing variables. As the authors explain, the commission rate

captured in the sample is “the contract rate and therefore does not reflect any adjustment or changes that

might be renegotiated between the house seller and the agent at the time of sale.” Id. at 111.

213

While it is not possible to quantify the relative inflexibility based on information reported by the

authors, supplemental information can be used to compute a rough approximation. Weicher, supra note

166, at 121, reports that Sirmans and Turnbull calculated an average contract commission rate of 5.8% in

Baton Rouge over the period 1985-1987. Assuming a commission rate of 5.8% in 1985, Sirmans and

Turnbull’s statistical results imply a commission rate that varies from 5.8% in 1985, upwards to a

commission rate of 6.06% at the end of 1989, and downward to 5.95% by the end of 1992. According to

the U.S. Census, the median home sales price in Baton Rouge in 1992 was $73,600. See U.S. Census

Bureau, Median Sales Price of Existing One-Family Homes by Selected Metropolitan Areas, available at

http://www.allcountries.org/uscensus/1202_median_sales_price_of_existing_one.html. Based on the 1992

median price, home sales price indices from the Office of Federal Housing Enterprise Oversight (see

http://www.ofheo.gov/HPI.asp) imply median home sales prices of $71,920 in 1985, $63,620 in 1989, and

$73,600 in 1992. From 1985 to 1989, despite a home sales price drop of about 11.5%, the average

described above: as home sales prices have increased since 1991, commission rates have

declined, but not in proportion to increases in home sales prices.

Overall, the evidence suggests that while commission rates may vary modestly

with housing prices and overall market conditions, they do not tend to vary in proportion

to changing home prices. As a result, inflation-adjusted commission fees per transaction

appear to follow closely movements in home sales prices. In other words, commission

rates are relatively inflexible. Although neither commenters nor Workshop panelists

presented evidence to explain the cause of relatively inflexible rates, this phenomenon

has meant that the price that consumers paid for brokerage services rose considerably

during the recent run-up in housing prices.

One Explanation of the Seemingly Contradictory Descriptions of Broker

Competition

The evidence presented above shows a dramatic increase in agent entry in recent

years coupled with claims of intense competition among brokers. Yet, consumers are

paying almost 25 percent more for brokerage services, after adjusting for inflation, than

they did in 1998. A Workshop panelist, Chang-Tai Hsieh, an academic economist,

offered one possible explanation of how, in the presence of relatively inflexible

commission rates, the increased entry and non-price competition by brokers can reflect an

inefficient constraint on price competition.

According to Hsieh, in a booming real estate market, relatively stable commission

rates imply higher commission fees per transaction and an increased profit opportunity

for agents. Because becoming an agent is easy, an increasing number of people enter the

industry in search of these higher profits. But with more and more agents competing to

close transactions, the average number of transactions per agent will decline. Further, if

commission rates are relatively inflexible, such that agents do not seek to attract

customers by offering lower rates, agents will compete along other dimensions to gain

clients.214 For instance, agents may expend resources “prospecting” for listings by, for

commission rate increased about 4.5%. From 1989 to 1992, despite a home sales price increase of about

15.5%, the average commission rate decreased about 2%. In short, changes in home sales prices have

relatively small effects on commission rates.

214

Other commentators have observed that if commission rate competition is limited, brokers will likely

compete by engaging in marketing activities or offering to provide higher quality services. See Turnbull,

supra note 162, at 293. Thomas J. Miceli, The Welfare Effects of Non-Price Competition Among Real

Estate Brokers, 20 J. AM. REAL ESTATE & URBAN ECON. ASS’N 519 (1992); Crockett, supra note 51, at

213. See also Hahn, Tr. at 55 (“[I]t’s not surprising to me that we observe non-price competition if, in fact,

there isn’t a lot of price competition.” “[C]ompeting over variables other than price[,] . . . that’s exactly

what we observed in the airline industry before Fred Kahn, Steve Breyer, Ted Kennedy deregulated

airlines, got rid of the Civil Aeronautics Board. For those of you old enough to remember, we had things

like the sandwich wars on some airplanes to get people to come on.).”

example, door-to-door canvassing, mailings, providing potential clients with free

pumpkins at Halloween, and calling on FSBO sellers.215

Marketing is often beneficial to consumers and competition,216 and some

consumers may benefit from the enhanced service competition in this market. But when

competition occurs primarily along such dimensions, brokers may expend more resources

providing additional services than the value of those services to consumers.217

According to Hsieh, real estate agents may be competing intensely but do so

primarily by expending resources to gain listings rather than competing by lowering their

commission fees, a phenomenon Hsieh calls the “tragedy of the commission.”218 The

“tragedy” of relatively inflexible commission rates, according to Hsieh, is not just that

consumers receive more services and fewer commission fee reductions than many

consumers might prefer, but that the agents themselves are no better off.219 Because the

ratio of agents to buyers and sellers has increased, agents have to work harder to find

clients and consequently spend less time actually closing transactions.220 In this manner,

215

Hsieh & Moretti, supra note 139, at 1088-89 (2003) (cataloging the importance of prospecting in “selfhelp” books for real estate agents).

216

See, e.g., J. HOWARD BEALES & TIMOTHY J. MURIS, STATE AND FEDERAL REGULATION OF NATIONAL

ADVERTISING 7-19 (1993). Indeed, antitrust agencies have challenged private associations’ restraints on

truthful competitor advertising. See, e.g., Massachusetts Bd. of Registration in Optometry, 110 F.T.C. 549

(1988).

217

See Hsieh & Moretti, supra note 139, at 1089 (“prospecting” and “farming” are not “entirely socially

wasteful,” rather “society’s gain from free pumpkins for Halloween and from free notepads with the

realtor’s picture is far less than their cost to the realtor, in terms of the direct cost of these freebies, but

particularly in terms of the opportunity cost of the time the realtor puts into such activities.”); 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.”).

218

Chang-Tai Hsieh Presentation, Associate Professor of Economics, University of California, Presentation

at the Federal Trade Commission and Department of Justice Public Workshop: Competition Policy and the

Real Estate Industry, The Tragedy of the Commission (Oct. 24, 2005), available at

http://www.ftc.gov/opp/workshops/comprealestate/hsieh.pdf. See also Hsieh & Moretti, supra note 139, at

1078; Hsieh, Tr. at 233-46.

219

Hsieh, Tr. at 237. See also Bunnell, Public Comment 146, at 1 (“Low barriers to entry and recalcitrance

to change have created a situation where the status quo makes sense for none of the transaction

participants. It’s a tragic story where nobody wins, especially the consumer.”). Higher profits may accrue

to participants in the industry not subject to intense entry and profit dissipation. For example, for each

additional agent entering the industry a licensing fee is paid. In most states, there exists a single licensing

board. Further, NAR membership is required for all agents and brokers that belong to the vast majority of

MLSs in the United States. Such entities are likely to gain financially from increased entry into the

brokerage industry.

220

See Hsieh & Moretti, supra note 139, at 1089 (“as long as the commission rate is fixed, the amount of

time that realtors devote to prospecting and farming relative to actually selling a house or finding an

a larger number of agents dissipates the increased profit opportunities by incurring

additional expenses to close transactions. Further, this theory suggests that because

agents compete profits away by incurring additional expenses to provide these services,

rather than lowering their commission rates, they operate at inefficiently high cost

levels.221

Hsieh provided empirical evidence at the Workshop consistent with competition

in the brokerage industry occurring primarily in non-price dimensions. Drawing on

commission rate data from the 1983 FTC Report and examining census data on

commissions from the period of 1980 to 1998, Hsieh (and his co-author) found evidence

suggesting that regardless of home selling prices, commission rates appear fairly stable

around 6 percent over the relevant time period and across markets.222 Hsieh studied 282

cities over eighteen years and found that in cities with higher housing prices (and thus

higher commission fees and higher profit opportunities for agents): (1) there are more

real estate agents relative to the city’s workforce; (2) these agents are less productive

(measured by sales per agent or sales per hour worked); and (3) wages for agents are not

higher than they are in cities with low housing prices. He concluded that these empirical

findings are consistent with his hypothesis that “higher commission fees in more

expensive cities are dissipated by excessive entry of brokers.”223 Hsieh estimated the

social waste resulting from such excess entry for the year 1990 – the latest year of their

analysis – at between $1.1 and $8.2 billion.224

Hsieh’s observations using earlier data are consistent with other reported market

conditions. Namely, there has been substantial agent entry in recent years225 and the

average number of transactions per agent declined by 20 percent from 2000 through

appropriate house for a buyer increases as the market becomes more and more competitive, that is, as more

realtors are chasing after the same number of customers”).

221

Id. 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”).

222

These data come from the “total home selling expense” field in the Bureau of Labor Statistics’ annual

Consumer Expenditure Survey from 1980-1990. This field also includes selling expenses other than

commissions, like closing costs and attorneys fees, so it is likely to overstate the actual commission rate.

However, because sellers typically do not pay for title searches, abstracts, and many of the other fees

associated with closing a residential real estate transaction, the data in this field are likely to closely

represent commissions paid by the seller. Id. at 1082.

223

Id. at 1118.

224

Id. at 1116-17.

225

See Hsieh & Moretti, supra note 139, at 213 and accompanying text. Yun showed evidence of entry as

a result of the recent housing market boom, as well as evidence that NAR membership has varied directly

with housing prices for at least the past 20 years. See Yun Presentation, supra note 145, at 3.

2005.226 Even though the income available from each transaction increased over the time

period, according to NAR, the “typical” income of its members fell from $52,000 in 2002

to $49,300 in 2004, while the income of sales associates (who comprise two-thirds of

NAR’s membership) decreased from $41,600 to $38,300 during the same time period.227

A NAR economist appearing on a Workshop panel explained: “That’s not surprising.

The number of new agents entering the market in the past couple of years has outpaced

the home sales growth and even the home price growth. So, given the fact that the

Realtor membership has increased far more than actual home sales, it’s not surprising that

the median income has fallen.”228

A remaining question, not resolved by Workshop participants or commenters, is

why commission rates are relatively inflexible.229 Regardless of the answer, it is

desirable that brokers have the freedom to offer a variety of price and service

combinations to attract consumers. In particular, in light of the evidence presented above

regarding the relatively limited competition among traditional brokers on the price

dimension, innovators should not be discouraged by industry policies or government

regulations from offering more flexible commission rates. In the next Chapter, we turn to

obstacles innovators may be encountering.

226

According to REAL Trends data, the number of transaction sides per agent declined from 12.7 in 2000

to 10.2 in 2005. See http://www.remax-cahi.com/esource/marketingmaterials/2005realtrends500.pdf; and

http://www.realtrends.com/past_newsletters.asp?article=newsletters/2005_04_6.htm.

227

NAR, Public Comment 208, at 12.

228

Yun, Tr. at 225. See discussion in Hsieh & Moretti, supra note 139, at 1116 (estimating $1.1 billion to

$8.2 billion social waste resulting from excess entry in 1990).

229

See Hsieh, Tr. at 233 (“[T]he real puzzle in the real estate business is why does there seem to be this

relatively fixed commission structure?”); Salinger, Tr. at 248 (“[A]s Dr. Hsieh and I’m sure many people

today have pointed out, the puzzle is why the percentage commission has been so stubbornly persistent.”);

Hsieh & Moretti, supra note 139, at 1086 (“The apparent uniformity of commission rates presents an

enormous puzzle, especially if one believes that the cost and effort necessary to sell a house do not increase

one to one with the price of housing. Why do commission rates appear to be so insensitive to market

forces? We do not have an answer to this puzzle.”).

IV.

OBSTACLES TO MORE ROBUST COMPETITION

In recent years, the Agencies have become aware of actions taken by state

legislatures, industry regulators and private actors that have the effect of restricting

competition in the real estate brokerage industry. This Chapter discusses these actions

and the Agencies’ responses. It also addresses the role that the cooperative nature of real

estate brokerage may play in shaping competition in the real estate brokerage industry.

Legislative and Regulatory Restrictions on Competition

This Section examines three types of restraints imposed by state laws and

regulations that are likely to reduce competition and consumer choice in the real estate

brokerage industry: anti-rebate laws and regulations; minimum-service requirements;

and overly broad licensing requirements.

Anti-Rebate Laws and Regulations

As discussed in Chapter I, rebates can be powerful tools for price competition

among brokers. Rebates are permitted in most states, and brokers in these states may

freely advertise their willingness to offer rebates that save consumers hundreds and often

thousands of dollars per transaction. Rebates currently are prohibited by law, however, in

ten states: Alabama;230 Alaska;231 Kansas;232 Louisiana;233 Mississippi;234 Missouri;235

New Jersey;236 North Dakota;237 Oklahoma;238 and Oregon. 239 In addition, Iowa240

prohibits rebates when the customer uses the services of two or more brokers during a

real estate transaction.

230

ALA. CODE § 34-27-36 (1975).

231

ALASKA STAT. § 08.88.401 (Michie 2005).

232

KAN. STAT. ANN. § 58-3062 (2006).

233

LA. REV. STAT. ANN. § 37:1455 (West 2006).

234

MISS. CODE ANN. § 73-35-21 (2006).

235

MO. REV. STAT. § 339.150 (2006).

236

N.J. STAT. ANN. § 45:15-3.1 (West 2006).

237

N.D. CENT. CODE § 43-23-11.1 (2006).

238

OKLA. STAT. ANN. tit. 59, § 858-312 (West 2006).

239

OR. REV. STAT. § 696.290 (2005).

240

IOWA CODE § 543B.60A (2005).

Rebate bans inhibit price discounting and thereby harm consumers. For example,

in states allowing rebates, some brokers operate business models pursuant to which they

rebate up to one-third or one-half of their commission to their buyers. Because

cooperating brokers typically receive 50 percent of the overall commission, a broker who

returns half of his or her commission to the client provides a 25 percent discount on the

overall commission payment; rebating one-third provides approximately a 16 percent

discount. For example, if a cooperating broker were to earn half of a 5.1 percent

commission and offer a 50 or 33.3 percent rebate, a consumer would save $3,459 or

$2,306 in commission payments, respectively, on the sale of a $271,263 home.241

Consumers in states with rebate bans could enjoy a similar level of savings only if such

bans were eliminated.

While action by a state through legislation is generally immune from federal

antitrust enforcement, not every act of a state governmental entity is protected by state

action immunity.242 When actors other than the state itself (e.g., the legislature or state

supreme court) unreasonably restrict competition under the guise of state authority, those

actions may be subject to antitrust scrutiny.243 For example, where rebate bans have been

imposed by state real estate commissions, DOJ has investigated, and where appropriate

challenged, these restrictions in order to bring the benefits of price competition to

consumers.

In March 2005, DOJ filed a civil antitrust lawsuit against the Kentucky Real

Estate Commission, alleging that its regulations prohibiting Kentucky real estate brokers

from offering rebates restricted competition and caused consumers to pay higher prices

for real estate brokerage services.244 The lawsuit was settled on July 13, 2005. Under the

terms of the settlement, which was approved by a federal judge, the Kentucky Real Estate

241

Based on weighted average sales price of new and existing homes in 2005 ($271,263), the buyer’s

broker’s share of a $13,834 commission would be $6,917. A buyer who is rebated half of this would

receive $3,459. See HUD REPORT, supra note 201.

242

See, e.g., California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980)

(entity claiming state action immunity from federal antitrust laws must demonstrate that its actions are (1)

pursuant to a clearly articulated state policy intentionally displacing competition with an alternative

regulatory scheme and (2) actively supervised by the state or a qualified government agency or official).

See also FTC OFFICE OF POLICY PLANNING, REPORT OF THE STATE ACTION TASK FORCE (Sept. 2003),

available at http://www.ftc.gov/os/2003/09/stateactionreport.pdf (analyzing state action immunity

doctrine).

243

See, e.g., Hoover v. Ronwin, 466 U.S. 558, 568 (1984) (“Closer analysis is required when the activity at

issue is not directly that of the legislature or supreme court, but is carried out by others pursuant to state

authorizations.”); Southern Motor Carriers Rate Conference v. United States, 471 U.S. 48, 62-63 (1985)

(public utility commission not the state itself); Goldfarb v. Virginia State Bar, 421 U.S. 773, 791-92 (1975)

(attorney fee schedule established by county bar association was not immune from antitrust liability).

244

See Complaint, United States v. Kentucky Real Estate Comm’n, Civil Act. No. 3:05CV188-H (filed Mar.

31, 2005) (hereinafter “Kentucky Complaint”), at http://www.usdoj.gov/atr/cases/f208300/208393.htm.

Commission agreed to cease enforcement of its rebate prohibitions,245 allowing Kentucky

consumers to avail themselves of the benefits of increased competition through brokeroffered rebates, discounts, and other inducements.246

During the course of the investigation, DOJ found evidence that brokers wanted

to restrict rebates because they understood that rebates are a form of price competition.

As noted in the Complaint, in response to a survey asking brokers whether the Kentucky

Real Estate Commission should retain the rebate ban, one broker predicted “[I]f we give

rebates and inducements, it would get out of control and all clients would be wanting

something. The present law keeps it under control.”247 Another broker predicted: “This

[lifting the rebate ban] would turn into a bidding war, lessen our profits and cheapen our

‘so-called’ profession.”248 Another broker observed: “If inducements were allowed, they

could lead to competitive behavior, which would make us look unprofessional in the eyes

of the public.”249

DOJ also investigated rebate bans by the South Dakota Real Estate Commission,

the West Virginia Real Estate Commission, and the Tennessee Real Estate Commission.

In response to these investigations, the South Dakota and West Virginia Real Estate

Commissions rescinded their regulations prohibiting rebates, thereby enabling consumers

in those states to receive more benefits of competition.250 The Tennessee Real Estate

245

See Amended Final Judgment and Order, United States v. Kentucky Real Estate Comm’n, Civ. Action

No. 3:05CV188-H, available at http://www.usdoj.gov/atr/cases/f210100/210142.htm.

246

Since the consent decree was entered, consumers in Kentucky have benefited from new reduced price

business models. For example, one realty company offers a 1% cash back rebate program for home buyers;

another offers rebates worth up to $2,250 in the form of HomeDepot or American Express gift cards; and

another offers to pay moving costs of up to $1,500 to consumers who buy particular properties. Two other

companies together operate a program that rebates up to $3,000 for the sale or purchase of a home, which

can yield a combined maximum rebate of $6,000 when a customer buys one property and sells another

through the program when he or she moves. For more on types of rebates offered in Kentucky and

nationwide, see, e.g., Mariwyn Evans, Law: Consumer Rebates, REALTOR MAGAZINE ONLINE (Jan. 1,

2006), available at http://www.realtor.org/rmoprint.nsf/pages/lawjan06; Jessica Swesey, Internet stock

brokerage pioneers enter online real estate, INMAN NEWS (Apr. 6, 2006), available at

http://www.inman.com/inmannews.aspx?ID=50907.

247

Kentucky Complaint at 3.

248

Id. at 3.

249

Id. A few brokers surveyed supported eliminating the rebate ban, recognizing some of the

procompetitive benefits that repeal of the ban would foster. One broker observed: “Rebates will increase

competition and give consumers more choices in service.” Id. at 3.

250

DOJ, South Dakota Real Estate Commission Permits Real Estate Brokers To Offer Rebates And

Inducements (Aug. 17, 2005), available at

http://www.usdoj.gov/atr/public/press_releases/2005/210637.htm; DOJ, West Virginia Real Estate

Commission Permits Real Estate Brokers To Offer Rebates And Other Discounts (May 4, 2006), available

at http://www.usdoj.gov/atr/public/press_releases/2006/215961.htm.

Commission voted to suspend its rules and is in the process of rescinding them

entirely.251

No Workshop panelist who commented on rebate bans found any justification for

them. A panelist representing several major national brokerage franchises noted that

state rebate prohibitions deprive consumers of potential benefits available to consumers

in states without prohibitions; rebate prohibitions also limit the competitiveness of real

estate brokerages in those states where such prohibitions exist.252 This panelist’s

company has been working with state real estate commissions to repeal prohibitions on

rebates, which the panelist characterized as “not necessary” and “antiquated.”253

Similarly, another panelist representing a major national brokerage franchise stated that

“brokers and agents should be allowed the ability to freely negotiate transaction service

pricing with their clients in any way they see appropriate.”254 A panelist representing an

online referral network that offers rebates to buyers characterized state rebate

prohibitions as “barriers to competition” because rebates facilitate “price competition and

deliver value back to the consumer.”255 Another panelist who was an officer in an early

VOW operator noted that his company gave a 1 percent rebate to buyers, but explained

that rebate prohibitions “immediately slammed the door [in] certain states for [his

company].”256

One panelist noted that, given the clear benefits of rebates to consumers, it is

“hard to find a good articulated defense” of rebate prohibitions.257 Proponents of such

provisions claim that they protect consumers from false and misleading offers of rebates

and help ensure that consumers choose brokers on the basis of the quality of the service,

rather than price. While states properly are concerned with issues of consumer fraud,

there is no evidence that rebates have harmed consumers or that rebate bans improve

251

In response to DOJ’s investigation, the Tennessee Real

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