# COMPETITION IN THE REAL ESTATE > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Aftc%3A961f1bd73ce0e014 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text COMPETITION IN THE REAL ESTATE 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 Commissioner Commissioner 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 A. 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 1. Description of the MLS......................................................................................................................10 2. Why the MLS is Important to Sellers, Buyers, and Brokers ..............................................................12 C. NONTRADITIONAL BUSINESS MODELS ....................................................................................................14 1. Full-Service Discount Brokers ..........................................................................................................15 2. Fee-For-Service Brokers ...................................................................................................................16 3. Virtual Office Website Brokers..........................................................................................................17 4. Websites that Provide Advertising and Other Services to FSBO Sellers...........................................19 5. Broker Referral Networks..................................................................................................................20 6. Consumers’ Use of Nontraditional Models and FSBOs....................................................................20 1. 2. 3. 4. CHAPTER II: THE INTERNET’S ROLE IN REAL ESTATE BROKERAGE .........................................22 A. B. C. 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 A. STRUCTURAL FEATURES OF THE REAL ESTATE BROKERAGE INDUSTRY .................................................30 Broker Concentration........................................................................................................................30 Entry ..................................................................................................................................................32 B. THE NATURE OF COMPETITION AMONG BROKERS ..................................................................................34 1. Service Dimension.............................................................................................................................34 2. Price Dimension ................................................................................................................................34 C. COMMISSION RATES AND FEES: EMPIRICAL EVIDENCE..........................................................................38 D. ONE EXPLANATION OF THE SEEMINGLY CONTRADICTORY DESCRIPTIONS OF BROKER COMPETITION ...45 1. 2. CHAPTER IV: OBSTACLES TO MORE ROBUST COMPETITION ......................................................49 A. 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 1. Discrimination Against Brokers Entering into Exclusive Agency Listing Contracts ........................63 2. Discrimination Against VOWs ..........................................................................................................65 C. STEERING AS A POSSIBLE OBSTACLE TO GREATER PRICE COMPETITION ...............................................66 1. The Importance of Cooperation in Real Estate Brokerage ...............................................................67 2. Reports That Cooperation Has Been Withheld .................................................................................68 3. Limiting the Effects of Steering .........................................................................................................69 1. 2. 3. 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 1 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. 2 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. 3 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]. 4 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. 5 Id. at 34 (Internet cited by 80% of home buyer respondents, while yard sign cited by 63%). 1 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 6 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. 7 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. 8 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. 2 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. 3 I. 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. A. 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 1. 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 9 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. 10 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. 11 NAR 2006 SURVEY, supra note 4, at 67, 68. 12 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. 13 NAR 2006 SURVEY, supra note 4, at 34. 4 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. 14 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. 15 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. 16 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. 17 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. 5 2. 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 18 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). 19 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). 20 See Whatley, Tr. at 35. 21 Id. at 36. 22 Id. 6 3. 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 23 We use the terms “cooperating broker” and “buyer’s broker” interchangeably throughout this Report. 24 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. 25 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. 26 “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.”). 27 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.”). 28 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. 7 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 4. 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 29 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). 30 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). 31 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”). 32 Id. 33 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). 8 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. B. 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 34 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. 35 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. 36 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. 37 Id. at 161-62. 38 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). 39 1983 FTC STAFF REPORT, supra note 9, at 107-116. 9 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. 1. 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). 41 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). 42 See GAO REPORT, supra note 3, at 6 (explaining the structure and purpose of the MLS). 43 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. 10 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. 44 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). 45 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. 46 Whatley, Tr. at 30. 47 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.). 48 Hahn, Tr. at 32-36. 11 2. 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 49 See Whatley, Tr. at 31 (“The MLS is strategically one of the most valuable things to me”). 50 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). 51 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). 52 See NAR 2006 SURVEY, supra note 4, at 77. 53 1983 FTC STAFF REPORT, supra note 9, at 31. 54 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). 12 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 55 See Whatley, Tr. at 39-40. 56 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”). 57 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. 58 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. 59 Realty Multi-List, 629 F.2d 1351 (5th Cir. 1980). 60 Id. at 1356. 61 Id. 13 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 C. 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 62 Id. 63 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. 64 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. 65 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. 14 1. 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. 66 See GAO REPORT, supra note 3, at 19. 67 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. 68 See 1% Realty, Buying a New Home, http://www.onepercentusa.com/buy.htm (last visited Mar. 27, 2007). 69 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%). 70 Henderson, Tr. at 155. 15 2. 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 71 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. 72 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). 73 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”). 16 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 3. 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. 74 See Farmer, Tr. at 107-08. 75 See TexasDiscountRealty.com, Home Sellers, http://www.texasdiscountrealty.com/sellers1.htm (last visited April 20, 2007). 76 See Kunz, Tr. at 101 (noting that several types of business models operate under the Century 21 franchise). 77 See GAO REPORT, supra note 3, at 19-20. 78 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. 79 Id. 17 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 80 Id. 81 Id. at 1. 82 Id. 83 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. 84 DelBianco, Tr. at 182. 85 Id. at 182-83. 86 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). 18 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 4. 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 87 DelBianco, Tr. at 182. 88 Id. 89 Id. 90 Id. at 186. 91 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. 92 Sambrotto, Tr. at 86. 19 inspectors, and also provide sample forms related to real estate transactions, such as sample purchase or lease agreements.93 5. 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 6. 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 93 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). 94 Henderson, Tr. at 154. 95 Id. at 155. 96 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. 97 Henderson, Tr. at 156-57. 98 NAR 2006 SURVEY, supra note 4, at 77. 20 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 99 Id. at 80, 68. 100 NAR 2005 SURVEY, supra note 38, at 59. 21 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. A. 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. 22 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. 23 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.”). 24 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 B. 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%). 25 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). 26 C. 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 27 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. 28 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). 29 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. A. 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. 1. 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. 30 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. 31 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 2. 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. 32 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.”). 33 B. The Nature of Competition Among Brokers Brokers compete for clients on several dimensions by offering the most attractive service and price combination.162 1. 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. 2. 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. 34 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). 35 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). 36 “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 37 of the GAO, which noted that competition from nontraditional brokers may be partially responsible for a recent decline in commission rates.183 C. Commission Rates and Fees: Empirical Evidence184 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Aftc%3A961f1bd73ce0e014. Public record. Not legal advice.