05/15/07: Is There Competition Among Real Estate Companies?
By Benny L. Kass
“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.”
Nevertheless, competition in the Real Estate Brokerage industry has been hindered as a result of a number of factors, despite the recent phenomenon of the Internet and other technological advances. Such factors include actions taken by some real estate brokers, state legislatures and even real estate commissions.
That is one of the many conclusions of a recently published report entitled “Competition in the Real Estate Brokerage Industry”, issued in April, 2007, by the Federal Trade Commission and the United States Department of Justice.
The report is lengthy and provides a comprehensive analysis of how a typical real estate transaction proceeds – from the time a homeowner decides to put his/her house on the market until the closing/settlement takes place.
There are two categories of real estate brokerage professionals: brokers and agent. According to the joint report, “...agents work directly with consumers and brokers supervise agents”. According to a 2006 survey performed by the National Association of Realtors, 84 percent of consumers employ a real estate broker to help them sell their house.
The seller signs a “listing agreement”, which is a contract between the broker and the seller. This spells out the terms and conditions – including the commission to be charged should the house sell.
According to the FTC/DOJ study, there are three principal types of listing agreements.
- “exclusive right to sell”, which is the most common. Here, the listing broker will receive a commission if the house is sold during the listing period, regardless of who finds a buyer for the house;
- “exclusive agency”. Under this arrangement, the listing broker will receive a commission if any broker is successful in finding a buyer. However, no payment is owed if the seller finds a buyer.
- an “open listing”. The broker has the right to sell the house, but it is not exclusive. If other brokers – or the home seller itself – finds a buyer, the listing broker does not receive a commission.
The report goes on to discuss a number of what it refers to as “nontraditional” business models. They include:
– full service discount brokers.who offer buyers and sellers complete real estate brokerage services at prices lower than the prevailing commission fees. As an example, the report explains that “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 in the prevailing rate.”
Some brokers – where not prohibited by law – will offer rebates such as cash, gift certificates or coupons and vouchers to their customers as an inducement to having them sign up as a client.
The report goes into a detailed analysis of the value of rebates. “...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.”
But several states prohibit brokers from providing rebates to consumers. The study determined that “rebate bans inhibit price discounting and thereby harm consumers.” In fact, in March of 2005, the Department of Justice filed a civil antitrust suit against the Kentucky Real Estate Commission, claiming that its regulations which prohibited Kentucky brokers from providing rebates restricted competition in that state. According to the report, the case was settled several months later, and now rebates are permitted. Additional, the Justice Department investigated similar bans in other states, with apparent success even before it had to file a lawsuit.
– virtual office website (VOW) brokers. According to the study, “VOWs are Internet websites through which brokers offer brokerage services online to their registered clients. The unique feature of VOW operators is that these brokers offer their clients the ability to search online the same (Multiple Listing Service) information that other brokers provide to their client through other deliver methods, such as hand delivery, mail, fax or email”
– Websites. In the real estate trade, a self-seller is known as a FSBO – “for sale by owner”. Although as discussed earlier, a large percentage of home sellers will use a real estate professional, there are many sellers who prefer to try it on their own. The study reports that there are a number of companies which offer services to help FSBO sellers. Some websites charge a flat fee (in the range of $300) which allows a home seller to “post color photos, virtual tours and 3,000 word descriptions that are searchable by potential home buyers.”
The Internet now plays an important role in the buying and selling of real estate. Organizations such as Craigs List, Just Real Estate or Zillow provide useful and informative assistance, thereby allowing potential buyers to search the web from home or office, without having to spend all day on Sunday roaming from house to house.
But despite these innovations, the joint report concluded that there remain many obstacles to achieving more “robust competition” in the real estate marketplace. By way of summary, these include:
- legislative and regulatory restrictions on competition, such as anti-rebate laws which still exist in a handful of jurisdictions, or licensing requirements for companies that advertise and work exclusively for FSBOs.
- use of multiple listing services. In preparing for this study, the FTC and the DOJ held a workshop, giving interested parties the opportunity to explain their concerns. According to the study, “workshop panelists reported how some MLS rules discriminate against brokers who enter into exclusive agency listings...The rules or policies ... state that information about homes is not allowed to be made available on popular real estate websites unless the listing contracts are exclusive right to sell...”
- “steering”. This involves situations were a broker or agent refuses to cooperate with another real estate professional, by not showing their clients certain houses where the agent would not receive a commission – or not receive as large a commission they would get from other houses. One real estate broker, who owns a non-traditional brokerage, explained:
I’ve personally had brokers, agent tell potential sellers that no one would show my listing... I have had my signs stolen... I even had one agent who was ridiculed in public for being a discount broker at a public realtor event...
Five conclusions are made by the joint report.
- Government should monitor the cooperative conduct of private associations of real estate brokers, “and bring enforcement actions in appropriate circumstances.”
- The FTC and the Justice Department should “continue to provide state legislators and industry regulators with information concerning the competitive consequences of state legislation and regulation that threaten to or already to restrict competition or consumer choice”
- 3. State legislators and industry regulators “should consider repealing existing laws, rules and regulations ... that limit choice and reduce the ability of new brokerage models .. to compete...’
- Government and industry regulators “should promote consumer understanding of marketplace options”.
- The FTC/DOJ and industry regulators should “assess the feasibility of an empirical study of the real estate brokerage industry.
The report is an interesting and informative read. It can be especially helpful to home sellers and homebuyers, since it explains in easy to understand terms the process – and the pitfalls – which they will encounter during the process. Whether this is yet another report which will gather dust on the regulator’s shelves is yet to be determined.
(The full report can be found at http://www.ftc.gov/reports/realestate/V050015.pdf)