real estate “broker” updates

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Here are two new items that relate to last night’s post realtors fight unbundling, and to the theme that real estate brokers are trying to keep home buyers and sellers “broker” than should happen in a truly competitive marketplace:
1]  The Federal Trade Commission announced a real estate broker enforcement sweep today, explaining that it would litigate against two real estate groups and accept consent agreements from five others: According to the press release (dated Oct. 12, 2006):  

 

The Federal Trade Commission today charged two real estate groups operating multiple listing services in the Detroit, Michigan, area with illegally restraining competition by limiting consumers’ ability to obtain low-cost real estate brokerage services. The Commission also announced consent agreements with five other groups operating multiple listing services in parts of Colorado, New Hampshire, New Jersey, Virginia, and Wisconsin, that have discontinued the challenged conduct.    

According to the FTC, all seven groups adopted rules that withheld valuable benefits of the Multiple Listing Services (MLSs) they control from consumers who chose to enter into non-traditional listing contracts with real estate brokers. Six of the seven blocked non-traditional, less-than-full-service listings from being transmitted by the MLS to popular Internet Web sites. The seventh went further, adopting policies that include blocking such non-traditional brokerage contracts from the MLS entirely.

 

RealtorSign  The FTC has an updated website – Competition in the Real Estate Industry, and an 18-page online Glossary of Real Estate terminology, that should be helpful to do-it-yourselfers and other home buyers and sellers.    update: (Oct. 13, 2006)  The Washington Post has an article on the FTC actions, with comments from some of the respondents and the National Association of Realtors; via Antitrust Review weblog.

2]  Attorney and public policy analyst Mark S. Nadel has released a for-comment report at the AEI-Brookings Joint Center website, entitled “A Critical Assessment of the Standard, Traditional, Residential Real Estate Broker Commission Rate Structure,” October 2006,  Click for the Abstract or the full, 77-page PDF report. Nadel’s Executive Summary starts: “While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually.”  After this criticism [of the traditional fee structure], the article “suggests that consumers would benefit most from a fee-for-service approach – combining flat fees, hourly fees, and bonuses, including percentages of extra value created – and it identifies currently available examples of some of these options.  After reviewing eight reasons why incumbents are able to protect the current structure, the article “suggests six new disclosures that might undermine the industry’s protectionist practices.” 

 

 BillCollector  The Report has a good discussion of why unbundling can benefit consumers and of the harms from requiring bundled services.  Traditional brokers, who contend “that the public expects an ‘agent’ to provide some minimum set of services, such as delivering offers, have successfully helped to pass laws in at least 17 states that require brokers to provide some minimum set of services.” [footnote 139 lists the statutes and regulations requiring the bundled minimum services]  The seventeen states with such laws are: Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Missouri, Ohio, Oklahoma, Pennylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin.   Debunking the need for such bundling, Nadel notes:

“If policy makers were truly concerned that consumers might be denied a service they expected, an effective disclosure and/or a waiver option would be the appropriate response to this, as noted by the DOJ, the FTC, and the Wall Street Journal, among others, but only about five of the 17 states now permit sellers to waive state minimum service requirements. If the laws were really intended to ensure that consumers received all the services that they expected, they would explicitly require listing brokers to support the widest dissemination of the seller’s listing, and brokers engaged to show buyers homes to disclose all the homes meeting the buyer’s search criteria. These are services that consumers are now often being denied, without their knowledge, and to their detriment!”

There is much more in this study, but I will leave you with Nadel’s explanation for the continuation of anti-consumer laws.  In a section captioned, State Real Estate Commissions Protect Traditional Business Models, Nadel states: 

“Most regulation of real estate brokerage is a result of state law and state real estate commissions created by state legislatures. Although the laws and commissions are presumed to be intended to protect consumers, a 2006 Consumer Federation of America (CFA) survey of real estate regulatory agencies in 47 of the 50 states found that more than 70 percent of commissioners were real estate brokers or salespeople. Given the presence of real estate agents in every state legislative district and the availability of state affiliates of the NAR to manage industry lobbying and campaign contributions, it is not surprising that states have generally protected traditional brokers from entrants with new business models.”

The Nadel Study has quickly received quite a bit of attention: E.g., from Jonathan Miller at the Matrix real estate weblog (Oct. 10, 2006);  RealtyTimes (Oct. 10, 2006) and The RealDeal (Oct. 11, 2006). Stephen Dubner of Freakonomics approves.   Similar to the defense given by lawyers to the standard contingency fee, realtors note that most agents are not making very much money and that they only get paid if they sell the home.   Of course, the opportunity of making a large commission for relatively little work (like making a large legal fee in a personal injury case) is what attracts far more agents to real estate sales than is efficient or economically rational.  Far from proving that commission rates must be reasonable, the assertion that so many agents are struggling points to the human desire, and willingness to take an irrational risk, for a big score.  Having a lot of hungry colleagues does not justify bloated fees for the successful brokers and agents (or p/i lawyers), and does not disprove that the commission structure is a racket that overcharges the consumer.

2 Comments

  1. shlep: the Self-Help Law ExPress » Blog Archive » realtors fight unbundling (and pols help them)

    October 12, 2006 @ 10:28 pm

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    […] update (Oct. 12, 2006): According to Mark Nadel’s AEI-Brookings Article on real estate broker commissions, discussed at length in our update post, there are seventeen states with minimum services laws that restrict unbundling: Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Missouri, Ohio, Oklahoma, Pennylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin.   [thanks to David Fischer at Antitrust Review weblog for pointing to this post] […]

  2. raubin

    June 14, 2007 @ 7:54 am

    2

    Interesting read, your laws for real estate are completely different to how we work here. The law on real estate agency practice in the states should be brought in over here, which would change the face of the property market for one and make it fairer to the customer as well.

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