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Competition In The Real Estate Brokerage Industry
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Department of Justice. James C. John R. Read usdoj. 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. 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. 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 "Workshop" to address issues affecting competition in the residential real estate brokerage industry.
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. 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. 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. At its most basic, real estate brokerage is about matching a home seller with a home buyer. 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. 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.
Although the terms may vary by state, there are two principal categories of real estate brokerage professionals: "agents" and "brokers. 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. 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. 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.
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. 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.
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.
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. The broker who works with the buyer is often referred to as the "cooperating broker" "or "buyer's broker.
Buyers typically do not pay their brokers directly. 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.
The legal relationship between the buyer and the cooperating broker varies from state to state and has changed over time. Until the s it was common for the cooperating broker to be a subagent of the listing broker, working on the seller's behalf. 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 buyer financing, assuring the title to the home is clear, and conducting necessary repairs. As one broker- panelist 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.
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 forty- five to sixty days, to thirty days. Although they typically do not play an active role at this stage, brokers often accompany their clients to the closing.
Access to the MLS is one of the most important services that real estate brokers traditionally have offered. The 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.
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. 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.
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 broker- 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. 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.
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. 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. 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. 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. Further, by stating up-front the compensation being offered to a cooperating broker, the MLS can reduce the costs associated with listing brokers having to negotiate separately with each potential cooperating broker.
The efficiencies associated with use of an MLS in the real estate industry are well documented in the real estate, legal, and economic literature 57 and in court decisions. Realty Multi-List, Inc. Moreover, a realistic price structure is engendered.
In effect, real estate becomes by virtue of the multiple listing service 'a more liquid commodity. 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. 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.
Discount brokers offer buyers and sellers full-service real estate brokerage services at a price lower than the prevailing commission fees. In addition, in states that do not prohibit them, brokers may offer rebates i. 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.
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.
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.
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.
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Real estate broker
A real estate broker works to negotiate and arrange real estate transactions. This licensed individual has daily duties that include writing contracts and overseeing transactions for sales and purchasing activities on homes, land and commercial properties. A broker has attained a higher-level license than a real estate agent and can hire real estate agents to work as a team under their supervision. In some states, every real estate professional is licensed as a broker, such as in Colorado and New Mexico. However, even if you are licensed as an independent broker, you must attain another higher-level license if you want to hire agents or other brokers to work under you.
Expand Your Network with The Broker List
A real estate broker , real estate agent or realtor is a person who represents sellers or buyers of real estate or real property. While a broker may work independently, an agent usually works under a licensed broker to represent clients. A real estate broker typically receives a real estate commission for successfully completing a sale. Across the U. Flat-fee brokers and Fee-for-Service brokers can charge significantly less depending on the type of services offered. In the United States, real estate brokers and salespersons are licensed by each state, not by the federal government. For example, some states only allow for lawyers to create documentation to transfer real property, while other states also allow the licensed real estate agent. There are state laws defining the types of relationships that can exist between clients and real estate licensees , and the lawful duties of real estate licensees to represent clients and members of the public. Rules vary substantially as defined by the law from state to state, for example, on subjects that include what legal language is necessary to transfer real property, agency relationships, inspections, disclosures, continuing education, and other subjects. In most jurisdictions in the United States , a person must have a license to perform licensed activities, and these activities are defined within the statutes of each state.
When you start a new business, you need to expand your network.
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