a cooperating broker would be a subagent

57. Overall, Form CBC is used to deal with compensation between brokers. For example, these advocates fear that a cooperating full-service broker may be forced to explain aspects of the transaction to the seller or perform some of the tasks related to removing contingencies and closing the transaction typically performed by the listing agent. . "10 Brokers reduce the transaction costs of matching buyers and sellers and also provide their clients with ancillary services related to the transaction. Commenters and participants in the real estate brokerage industry report steering behavior. 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. NAR, Public Comment 208, at 7 (comment). Some commentators have argued that buyers may have the misimpression that their brokers' services are free. From 1985 to 1989, despite a home sales price drop of about 11.5%, the average commission rate increased about 4.5%. 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 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. Real estate brokers compete to attract customers in different ways based on price and non-price dimensions. 30, 2000). 145. 301. 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. In particular, in light of the evidence presented above regarding the relatively limited competition among traditional brokers on the price dimension, innovators should not be discouraged by industry policies or government regulations from offering more flexible commission rates. See id. 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. "[C]ompeting over variables other than price[,] . Weicher's calculations use average home sales prices, not median home sales prices. 150. 23. In those investigations, however, the Agencies have not found evidence sufficient to establish an agreement jointly to steer clients away from or boycott a particular rival and have declined to bring an antitrust case. The study found that in 23 percent of the market areas (i.e. Goolsby & Childs, supra note 205, at 85. tit. 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. 273. White, supra note 47, at 4. Often, at the recommendation of their brokers, prospective buyers receive a letter of pre- qualification from a lender or mortgage broker, which is presented at the time of offer. 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). However, Weicher notes that the magnitude of the sales price effect appears to be small. See also Hahn, Tr. Network with other professionals, attend a seminar, and keep up with industry trends through events hosted by NAR. Further, this theory suggests that because agents compete profits away by incurring additional expenses to provide these services, rather than lowering their commission rates, they operate at inefficiently high cost levels.221, Hsieh provided empirical evidence at the Workshop consistent with competition in the brokerage industry occurring primarily in non-price dimensions. *Relates to Point No. Subagency refers to a specific client representation relationship between a property listing broker or real estate agent and another real estate broker or agent who brings in a buyer to purchase the property. Competition among brokers based on service to consumers includes a wide range of possibilities. In September 2005, DOJ's Antitrust Division sued NAR, alleging that its nationwide rules violated Section 1 of the Sherman Act. The MLS also operates an arbitration mechanism to resolve compensation disputes between listing and cooperating brokers. Secure .gov websites use HTTPS D. One Explanation of the Seemingly Contradictory Descriptions of Broker Competition. Drawing on commission rate data from the 1983 FTC Report and examining census data on commissions from the period of 1980 to 1998, Hsieh (and his co-author) found evidence suggesting that regardless of home selling prices, commission rates appear fairly stable around 6 percent over the relevant time period and across markets.222 Hsieh studied 282 cities over eighteen years and found that in cities with higher housing prices (and thus higher commission fees and higher profit opportunities for agents): (1) there are more real estate agents relative to the city's workforce; (2) these agents are less productive (measured by sales per agent or sales per hour worked); and (3) wages for agents are not higher than they are in cities with low housing prices. If a listing broker fails to pay a cooperating broker, the cooperating broker can bring a "procuring cause" dispute against the listing broker through the MLS arbitration mechanism. NAR and its affiliated Institutes, Societies, and Councils offer a wide selection of real estate training options. GAO REPORT, supra note 3, at 17, 20-21. 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. 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). Id. National, state & local leadership, staff directories, leadership opportunities, and more. 116. See Robert W. Hahn et al., Paying Less for Real Estate Brokerage: What Will Make It Happen? 6, 2006), available at http://www.inman.com/inmannews.aspx?ID=50907. These include advertising the seller's listing on Internet websites that home buyers search directly (e.g., Realtor.com)73 and on other MLS members' websites. 1983 FTC STAFF REPORT, supra note 9, at 1. at 174 (noting that all traditional companies "have a significant online presence"). Barnett, Tr. 187. 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. at 160-61 (noting that consumers now may research online not only homes for sale, but also the entire buying and selling process). 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"). 238. See Farmer, Tr. at 89; American Bankers Association, Public Comment 10, at 3. Sirmans, Geoffrey K. Turnbull & John D. Benjamin, The Markets for Housing and Real Estate Broker Services, 1 JOURNAL OF HOUSING ECONOMICS 207 (1991). 154. at 55 ("[I]t's not surprising to me that we observe non-price competition if, in fact, there isn't a lot of price competition." Action No. The extent to which brokers supply these services "provides the margin for nonprice competition among brokers." Second, minimum-service requirements can reduce the competitive constraint that fee-for-service brokers pose to full-service brokers. 128. "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. 320. See R.C. Listing brokers may verify the pre-qualification letter. From 1989 to 1992, despite a home sales price increase of about 15.5%, the average commission rate decreased about 2%. Hahn, for example, suggested that there may be a transition towards "a new era" in the industry in which real estate firms will develop and use a variety of different business models. 1999). 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. DOJ alleged that the rules, embodied in a so-called VOW Policy, limited competition from real estate brokers using innovative business models and the Internet to offer better services to their clients. at 172; NAR, Public Comment 208, at 12 (comment). Commission "fees" are the total dollar amount paid by consumers for real estate brokerage services. 108. See Glenn Roberts, Jr., New Mexico Rescinds Controversial Real Estate Rules, INMAN NEWS (July 17, 2006), available at http://www.inman.com/InmanNews.aspx?ID=54526. 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. NAR 2005 SURVEY, supra note 38, at 29. A discussion of the various private litigation involving alleged MLS-related restraints is beyond the scope of this Report. See Lewis, Tr. States require real estate brokers and agents to be licensed. American Bankers Association, Public Comment 10, at 3 (comment). However, that dynamic may not operate as well in industries, like real estate brokerage, where many consumers have significant limits on their knowledge, thus making it easier for competitors to steer business away from new or maverick brokers, or to otherwise withhold necessary cooperation, without the knowledge of their customers. . 3. 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. See Hearing, supra note 1, at 30 (statement of Rep. Richard H. Baker, member House Comm. Brokers also compete for customers by marketing their services to potential buyers and sellers in various ways. James E. Larson & Won J. Accordingly, there is no basis for believing that there is a need for a minimum-service law to "protect" cooperating brokers from doing additional work when facing a home seller represented by a fee-for-service broker. This broker pays a referral fee typically a portion of the commission to the referral website that aggregated the MLS data. . 0. State anti-rebate laws and regulations and their effect on price competition and consumer choice are discussed in Chapter IV.A.1 of this Report. See also Reifert v. South Central Wisconsin MLS Corp., 450 F.3d 312 (7th Cir. Commissions, Compensation and the Code of Ethics: Are You Complying? - WRA Repairs may be ordered by the lender as a condition for financing or requested by the home buyer after the results of inspection. See, e.g., Metropolitan Multi- List, 934 F.2d at 1579-80; Austin Bd. See Farmer, Tr. 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. 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. National, regional, and metro-market level housing statistics where data is available. The authors used a sample of 388 home sales in calendar year 1991 from the multiple listing service. Hsieh, Tr. Based on the foregoing, the FTC and DOJ recommend the following to help maintain competition and protect consumers in the real estate brokerage industry: 1. Cooperating brokers may also seek to negotiate higher compensation from the listing broker or from the home buyer. Instead of working with customers directly, brokers often provide agents with branding, advertising, and other services that help the agents complete transactions. they are confronted with the question how much can you reduce your commission? Finally, some have argued that the cooperating full-service broker risks not being compensated because the home seller might complete a deal directly with the buyer. Matthew J. Bester, Trial Attorney, Litigation III Section 3:05CV188-H, available at http://www.usdoj.gov/atr/cases/f210100/210142.htm. As discussed below, evidence presented both at the Workshop and outside the Workshop contradicts these justifications. 317. 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. However, the authors' statistical results suggest commission rates are relatively inflexible.213 This result is consistent with the findings based on Real Trends data described above: as home sales prices have increased since 1991, commission rates have declined, but not in proportion to increases in home sales prices. 16. One panelist observed that "[brokers] are cooperative with the competition in ways unheard of in any other industry that I know of. 134. 133. See Tenn. Admin. Rebate bans inhibit price discounting and thereby harm consumers. 299. A second effect of minimum-service requirements is that they reduce the competitive constraint fee-for-service brokers place on full-service brokers.281 A full- service broker who wants the business of a consumer considering fee-for-service brokerage will need to offer a lower commission rate and/or increased quality to induce the consumer to choose to purchase the additional services the broker offers. cooperating broker spends many hours, even days, trying to locate the right property for the Buyer. In a 1997 study, the authors tested a theoretical model relating commission rates to changes in a local housing market.209 This study addressed both how the distribution of commission rates varied across home prices within a geographic area and with changes in economic conditions across an entire area over time. 274. Other referral websites do not display aggregated listings, but use Internet marketing to advertise their referral services and rebates to consumers. As discussed in Chapter I of this Report, the commission "rate" is the percentage of the home sales price that the broker retains as a commission, and commission "fees" are the total dollar amount paid by consumers for real estate brokerage services. They can provide varying levels of service to sellers in marketing their homes, such as holding open houses more or less frequently. 207. "218 The "tragedy" of relatively inflexible commission rates, according to Hsieh, is not just that consumers receive more services and fewer commission fee reductions than many consumers might prefer, but that the agents themselves are no better off.219 Because the ratio of agents to buyers and sellers has increased, agents have to work harder to find clients and consequently spend less time actually closing transactions.220 In this manner, a larger number of agents dissipates the increased profit opportunities by incurring additional expenses to close transactions. See The Changing Real Estate Market: Hearing Before the House Financial Services Subcommittee on Housing and Community Opportunity, 109th Cong. 26. Chapter III explores the competitive structure of the real estate brokerage industry and publicly available evidence concerning brokerage commission rates and fees. 327. Kunz, Tr. See, e.g., VA. CODE ANN. 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. Cf. Missouri's law is representative of these requirements, mandating that all brokers who enter into an exclusive brokerage agreement259. 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? See infra Chapter IV. 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. A-00-CA-154JN, 2000 WL 34239114, at *2 (W.D. This line of argument typically focuses on three types of risks to the cooperating broker. Access to the MLS is one of the most important services that real estate brokers traditionally have offered. Antitrust laws generally do not prohibit unilateral decisions by firms not to deal with a particular listing broker.334 If consumers have enough information about the quality of the service they have received, then firms that choose to engage in steering will develop a poor reputation for having done so and will consequently lose future business. Further, if limited-service transactions do impose additional costs on cooperating brokers, sellers represented by fee-for-service brokers might find that they must offer cooperating brokers a higher commission to induce them to show their homes, and we are aware of no impediments to them doing so. This finding undermines a necessary condition for the hold-up theory to be plausible that consumers only learn the prices for additional services after they have entered into an exclusive listing agreement. MO. 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. 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, II. Counsel, Texas Real Estate Comm'n. Yun, Tr. Note 1: The compensation specified on listings filed with the multiple listing service by the participants of the service shall be expressed as a percentage of the gross sales price or as a definite dollar amount. at 27-28. Our review suggests that although the real estate industry has undergone a number of substantial changes in recent years in particular as a result of technological advances such as the Internet competition in the industry has been hindered as a result of actions taken by some real estate brokers, acting through MLSs and NAR, state legislatures, and real estate commissions. 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.

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