Mid-America Real Estate Co. v. Iowa Realty Co., No. 2. 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. For example, a broker in Alexandria, Virginia, competes with other brokers able to meet the 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. The norm years ago was 7%, then 6% . See, e.g., Metropolitan Multi- List, 934 F.2d at 1579-80; Austin Bd. First, it appears that many consumers are not fully apprised of their marketplace options. See Michael Carney, Costs and Pricing of Home Brokerage Services, 10 JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION 331 (1982). "); Abdullah Yavas, Impossibility of a Competitive Equilibrium in the Real Estate Brokerage Industry, 21 J. See C.F. Re/Max Int'l, Inc. v. Realty One, Inc., 173 F.3d 995, 1003 (6th Cir. See Commission Minutes at 4 (July 12-13, 2006) (suspending enforcement); Commission Minutes at 3 (Aug. 9-10, 2006) (repealing rule). Just as the 1983 FTC study provided valuable information about how real estate brokers competed in the late 1970s and early 1980s, a new study examining how transaction-level commission rates and fees vary based on such factors as market conditions, housing prices, and regulation would provide a better understanding of the current state of competition in the real estate brokerage industry. 20, 2005), available at http://www.usdoj.gov/atr/public/comments/209229.htm; Letter from DOJ to the New Mexico Real Estate Commission (Nov. 2, 2005), available at http://www.usdoj.gov/atr/public/comments/212656.htm. 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. 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. 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. "[C]ompeting over variables other than price[,] . Because brokers usually set the rules for each others' participation in the MLS by agreement, it is possible for one dominant group of brokers to establish MLS rules that favor them and disfavor other brokers who compete in a manner that they dislike. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. 47. The Real Estate Board of New York has guidelines on broker ethics especially as it relates to the commission fee. 704 (1993); Puget Sound Multiple Listing Ass'n, FTC Dkt. See TexasDiscountRealty.com, Home Sellers, http://www.texasdiscountrealty.com/sellers1.htm (last visited April 20, 2007). See GAO Report, supra note 3, at 19-20. NAR, Public Comment 208, at 1 (comment). See ForSaleByOwner.com Corp. v. Zinnemann, 347 F. Supp. Review your membership preferences and Code of Ethics training status. From 1989 to 1992, despite a home sales price increase of about 15.5%, the average commission rate decreased about 2%. Lucy Malcolm, Paralegal, Litigation III Section Panelists representing traditional brokers acknowledged that the listings information provided via an IDX datafeed is limited. Sirmans & Turnbull, supra note 209, at 111. "248 Another broker observed: "If inducements were allowed, they could lead to competitive behavior, which would make us look unprofessional in the eyes of the public. 191. 297. See Hearing, supra note 1, at 30 (statement of Rep. Richard H. Baker, member House Comm. See Olazabal, supra note 19, at 74-75. at 1369. These authors also considered whether commission rates within the Baton Rouge market responded to market-wide changes akin to housing booms and busts. 40. Practice all cards. See also AEI- Brookings 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). See, e.g., Your Igloo Real Estate, http://www.yourigloo.com/ (last visited Apr. 170. BLACK'S LAW DICTIONARY 234 (8th ed. 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]. As a result, there has been a dramatic number of new agents and new entrants into the industry in recent years. 251. "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%. . 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. 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. The Agencies and industry regulators should promote consumer understanding of marketplace options. The only exception to this is in the case of the appointment of designated agents, as outlined in paragraph 10. Id. 73. 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 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."). 319. In such a case, the subagent works with the buyer as a customer but owes fiduciary duties to the listing broker and the seller. 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. So, at that point, if it was say a 6 percent commission, I might take 2 percent and offer 4 percent."). But when competition occurs primarily along such dimensions, brokers may expend more resources providing additional services than the value of those services to consumers.217, According to Hsieh, real estate agents may be competing intensely but do so primarily by expending resources to gain listings rather than competing by lowering their commission fees, a phenomenon Hsieh calls the "tragedy of the commission. "); Salinger, Tr. Reg. 6, 2006), available at http://www.inman.com/inmannews.aspx?ID=50907. at 174 (noting that all traditional companies "have a significant online presence"). Id. It is well established that the antitrust laws prohibit an unreasonable agreement by a group of brokers that they will withhold cooperation from a particular broker. 318. NAR, Public Comment 208, at 7 (comment). Id. Paulsen, Public Comment 364, at 1. 710(16). A Workshop panelist, Chang-Tai Hsieh, an academic economist, offered one possible explanation of how, in the presence of relatively inflexible commission rates, the increased entry and non-price competition by brokers can reflect an inefficient constraint on price competition. See, e.g., California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980) (entity claiming state action immunity from federal antitrust laws must demonstrate that its actions are (1) pursuant to a clearly articulated state policy intentionally displacing competition with an alternative regulatory scheme and (2) actively supervised by the state or a qualified government agency or official). "175, Several other commenters claimed that there is vigorous price competition. See, e.g., Paul Anglin & Richard Arnott, Are Brokers' Commission Rates on Home Sales Too High? MO. See U.S. Department of Housing and Urban Development, U.S. Housing Market Conditions 73 (Nov. 2006) [hereinafter "HUD REPORT"], available at http://www.huduser.org/periodicals/ushmc/fall06/USHMC_Q306.pdf. at 149 (listing several features of real estate websites, including property photos, virtual tours, rich text, mapping functionality, and neighborhood information); Sambrotto, Tr. Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. at 225-26. 131. Id. 65. 205. See Nadel, supra note 25 at 23. 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. In most states, there exists a single licensing board. 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. REAL ESTATE RES. Both the MiRealSource and Realcomp complaints allege that the conduct was collusive and exclusionary, because in agreeing to keep non-traditional listings off the MLS or significant public websites, the brokers enacting the rules were, in effect, agreeing among themselves to limit the manner in which they compete with one another, and withholding valuable benefits of the MLS from real estate brokers who did not go along. Competition in the real estate brokerage industry would likely be enhanced if consumers had better access to such information. Cooperating brokers may also seek to negotiate higher compensation from the listing broker or from the home buyer. Performing such ministerial acts that are not inconsistent with subsection A shall not be construed to violate the licensee's brokerage relationship with the seller unless expressly prohibited by the terms of the brokerage relationship, nor shall performing such ministerial acts be construed to form a brokerage relationship with such buyer or potential buyer."). View the guidelines for preparation and use for specific uses. 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. State commissions, frequently composed of real estate brokers, oversee drafting of and compliance with these laws and regulations.14. Member Support is available Mon-Fri, 8am-5pm Central. is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. 220. 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). A home selling for $100,000 more, or $172,000, would pay a commission rate of 5.73%, for a commission fee of $9,901. 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. 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. Figure 3 illustrates annual percent changes in real housing prices and commission fees from 1992 through 2005, and provides additional illustration of how fees tend to move in tandem. Report Anticompetitive Conduct After a Natural Disaster, 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, Competitive Effects of Minimum-Service Requirements. 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 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. Several states, including Delaware, Florida, Ohio, Oklahoma, Tennessee, and Wisconsin, have less restrictive laws that allow the client to decide whether he or she wants the listing broker to perform such services. See id. In fact, many listing agents will be purposefully slow to respond to inquiries from discount brokers. 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. at 198-99. The extent to which brokers supply these services "provides the margin for nonprice competition among brokers." Because cooperating brokers typically receive 50 percent of the overall commission, a broker who returns half of his or her commission to the client provides a 25 percent discount on the overall commission payment; rebating one-third provides approximately a 16 percent discount. From 1985 to 1989, despite a home sales price drop of about 11.5%, the average commission rate increased about 4.5%. Thus, if fee-for-service brokers are forced to raise their prices in response to minimum-service requirements, consumers who choose full-service brokers are also likely to pay higher prices for real estate brokerage due to a reduction in the competitive constraint provided by fee-for-service brokers. 277. For example, in states allowing rebates, some brokers operate business models pursuant to which they rebate up to one-third or one-half of their commission to their buyers. The authors use a sample of 669 single family home transactions covering the first nine months of 1986 obtained from the Lincoln, Nebraska MLS. Figure 2, however, shows that despite the downward trend in rates, the dollar amount of commission fees appears to have increased closely in line with rising housing prices. See, e.g., Lord, Public Comment 254, at 1 ("The competition is fierce the majority of time that an agent has a listing appointment . In an address at the beginning of the Workshop, (then Acting) Assistant Attorney General Thomas Barnett observed that minimum-service laws and regulations can be viewed as no different from states passing a regulation that says: "When I walk into McDonald's and order a hamburger, I'm told that I also have to buy some french fries, because the state has decided that it might be deceptive or misleading or bad if I only got the hamburger, paid for it and didn't realize I wasn't going to get the french fries." Multiple listing services may, as a matter of local discretion, require participants to disclose short sales when participants know a transaction is a potential short sale. According to the author, "[t]he [HUD-1] data clearly reveal systematic variation in the actual home brokerage commission rates according to the three variables examined. Some commentators have posited that alternative payment structures may better align consumer and broker interests.139. 116. 127. In the case of the Austin Board of Realtors, for example, the data showed that three months after the MLS implemented its exclusive agency listing policy, the percentage of all listings that were exclusive agency listings fell from 18 percent to 2.5 percent.314 The complaints also alleged that the exclusive agency listing policy did not give rise to any plausible or cognizable efficiencies, and was "not reasonably ancillary to the legitimate and beneficial objectives of the MLS. 86. According to the U.S. Census, the median home sales price in Baton Rouge in 1992 was $73,600. 275. As for services, brokers may provide agents with computers, website hosting, office space, training, and marketing. A cooperating broker may represent either the seller or the buyer. attorney in fact A person authorized to act for another under a power of attorney. An official website of the United States government. that buyer, and owe fiduciary duties to that buyer. 31, 2005) (hereinafter "Kentucky Complaint"), at http://www.usdoj.gov/atr/cases/f208300/208393.htm. 1991). 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. 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. 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. Mar. In contrast, in 1997 only 2 percent of recent home buyers had first located their home on the Internet. Weicher, supra note 167, at 124. 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. 283. Even if some of the proffered justifications for minimum-service laws were valid, there appear to be far less restrictive ways to address them ways that preserve the benefits of competition for consumers than implementing minimum-service requirements to address them. 113. So in effect, any agent that showed the listed property automatically became a subagent of the listing broker and the seller. A .gov website belongs to an official government organization in the United States. National, state & local leadership, staff directories, leadership opportunities, and more. NAR a logical source of commission data, given its size and access to MLS data through its local associations does not study or report commission rates. 2007), Notice of Rulemaking, available at http://www.tn.gov/sos/rules_hearingnotices/2007/1260/1260.20070228.02-37-07.notice.pdf (last updated Feb. 28, 2007). See also Whatley, Tr. 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. Id. See, e.g., JustRealEstate.org, http://www.justrealestate.org (last visited April 20, 2007). 13. "Procuring cause" refers to the efforts of the primary broker, who brings a buyer to the listing and causes the transaction to be completed. One panelist who worked with eRealty, an early discount broker that operated a VOW,83 described aspects of its business model. 1999). For example, recent Realogy data indicate that between 2002 and 2006 Realogy's average commission rate declined about 7 percent while the average sales price for the homes they sold increased about 30 percent. Namely, there has been substantial agent entry in recent years225 and the average number of transactions per agent declined by 20 percent from 2000 through 2005.226 Even though the income available from each transaction increased over the time period, according to NAR, the "typical" income of its members fell from $52,000 in 2002 to $49,300 in 2004, while the income of sales associates (who comprise two-thirds of NAR's membership) decreased from $41,600 to $38,300 during the same time period.227 A NAR economist appearing on a Workshop panel explained: "That's not surprising. a cooperating agent from a brokerage firm not affiliated with the listing or buyer broker but who is assisting that broker by finding a buyer or a property for that broker's client; has fiduciary obligations to the client but does not operate as a subagent of the client In the next Chapter, we turn to obstacles innovators may be encountering. One commenter, the owner of a discount brokerage franchise, reported that he has "not experienced any discrimination by agents in the showing or selling of our properties"333. Peter Taylor, Bureau of Competition. Secure .gov websites use HTTPS . 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 any instance where a participant discloses a potential short sale, they must also be permitted to communicate to other participants how any reduction in the gross commission established in the listing contract required by the lender as a condition of approving the sale will be apportioned between the listing and cooperating participants. Fialkowski, Public Comment 113, at 1. at 146. As discussed below, evidence presented both at the Workshop and outside the Workshop contradicts these justifications. 54. Given the size of the real estate industry,1 any restraints on competition in real estate brokerage will have significant adverse consequences for consumers. Using that information, as well as Agency expertise, the almost 400 submissions filed in response to the Agencies' request for public comment in connection with the Workshop, and other available information, this Report has undertaken a careful examination of the real estate brokerage industry. The exact requirements vary by state."). . As a member, you are the voice for NAR it is your association and it exists to help you succeed. 30 Today, after . The second largest brokerage firm accounted for 22% of the listings and 20% of the sales. In addition, consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees. See Tenn. Admin. 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"). ."). 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 growing popularity of some of these new business models is likely linked to consumers' increasing use of, and comfort with, the Internet.
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