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AHGA Home
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Comments of the
American Homeowners Grassroots Alliance
Submitted to the
U.S. Federal Trade Commission
and the
U.S. Department of Justice
For the Public Workshop on
Competition Policy and the Real Estate Industry
Tuesday, October 25, 2005
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Background
Executive Summary
Overview of the Real
Estate Transaction
Issues Affecting Competition among Sellers Brokers
Issues Affecting Competition Among Buyers Brokers
Empirical Evidence on Competition in the Real Estate Industry
Recommendations
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Background
The American Homeowners Grassroots Alliance (AHGA) is a national consumer
advocacy organization serving the nation’s 75 million homeowners. AHGA
engages in policy issues that significantly impact homeowners and home
ownership. Among those issues is competition within the real estate services
industry.
AHGA has long had an interest in competition policy within the real estate
services industry. Real estate commissions appear to be about 1.5% higher in
the U.S. than in other developed countries, suggesting our system needs
scrutiny. In more expensive markets such as Washington DC, where the median
sales price recently passed $500,000, the predominant real estate sales
commissions remain in the 5 - 6% range (i.e. $25,000 - $30,000 on a $500,000
home), in a “seller’s market” that until recently saw few homes go unsold in
their first month of listing.
Executive Summary
Brokerage industries in the U.S. have changed dramatically in recent
decades. Prior to that time the securities, travel, and real estate
brokerage industries competed mainly on the basis of service, most offering
homeowners and other consumers a full range of services within a narrow
range of fees.
New business models in each of these brokerage industries have resulted in
an unbundling of services. Today consumers can trade in stocks and bonds on
the Internet for a fraction of the cost of full service brokers. However,
those low-cost companies do not always offer the full range of services of a
traditional stock broker, allowing the consumer to choose the service right
for him or her. Large Internet travel brokers have helped reduce the costs
of airline travel, hotels, and car rentals dramatically. Again, the Internet
companies do not offer the range of services of a traditional travel agency,
allowing the consumer to choose among low cost providers if price is their
priority or among full service providers if service is their priority.
In real estate brokerage, new Internet-based business models have provided
home sellers and buyers many new choices. In the most dramatic case, a
consumer might use a broker to only list their home in their local Multiple
Listing Service (MLS) for as little as $300. As in other brokerage sectors,
these low cost companies do not provide the full range of services of other
brokers. The consumer should have choice.
Many other new business models have evolved in the real estate service
sector. Some are based in part on benefiting from potential economies of the
Internet. Others, such as the evolution of exclusive buyer agency, where the
real estate broker’s business model and fiduciary duty is exclusively to the
buyer, have resulted from the migration of an existing business model into
residential real estate brokerage.
In the securities and travel industries these new business models have
evolved naturally. Most have gained substantial market share, and consumers
have their choice of working with full service travel agents or stockbrokers
who compete mainly on the basis of the quality of their services, or
selecting companies that perform only a limited core service and who compete
mainly on price.
The real estate service sector is an exception. Traditional full service
real estate companies have created industry rules and have promoted federal,
state, and local laws and regulations that have created barriers or
undermined new real estate services business models. Unlike the travel and
securities brokerage sectors, barriers to new business models in the real
estate services sector have limited the market penetration and thus consumer
access to new business models. The result is that some home buyers and
sellers are forced to pay for full services that they might not want or
need. In addition, other consumers would be surprised to learn their broker
is withholding information from free and easy distribution on the Internet,
while others find themselves deprived of services that they had expected.
All consumers are done a disservice by the development of “dual agency”,
which, under recent state laws allow the same broker to represent both the
home buyer and seller in the same transaction. Dual agency is
anticompetitive and an abrogation of the brokers fiduciary duty, as is the
process of shifting that responsibility to the broker’s agent.
These barriers to new business models in the real estate sector appear to be
growing and efforts to slow them have had limited success. Powerful state
real estate lobbying groups have engineered regulations and legislation in
20 states that prohibit competitors with new business models from offering
specialized services and consumer rebates. Their counterparts in other
states appear poised for similar efforts in 2006. Absent intervention by the
federal government, it is entirely possible that the right of consumers to
purchase unbundled services from real estate brokerage companies and the
right to receive a discount through a consumer rebate in real estate
transactions will no longer exist in this country.
At the federal level, the insistence of the National Association of Realtors
(NAR) to implement anticompetitive rules that enable real estate brokers to
restrict the dissemination of homeowners listings against their fiduciary’s
best interest, threaten to further erode broker’s fiduciary duty to American
homeowners. NAR continues to battle for the ability of brokers to protect
their own interests at the expense of the consumer – the exact opposite of
what a consumer hires an agent to do. Even as the DOJ highlights the obvious
antitrust problems with the brokers’ conspiracy, NAR battles on.
These barriers and changes cannot be explained by consumer interests.
Consumers have not supported the regulation of new business models in any
these brokerage industries. AHGA has not received complaints from its
members about problems associated with new business models in the real
estate brokerage sector. Even states that have passed new regulations are
widely reported to have done so in the face of practically zero consumer
complaints. Although disputes between consumers and real estate service
providers are quite common, we have not been able to substantiate any real
level of consumer discontent over new business models in real estate
services.
Organizations representing traditional full service real estate brokers
assert consumer protection in support of these laws and regulations.
However, it is surprising that consumers would bring their complaints to
full service brokers at the exclusion of consumer advocacy organizations and
government consumer protection organizations that are traditionally the
first resort for consumer complaints. Furthermore, the solution to a problem
of where consumers might make an unwise choice is disclosure: fully inform
the consumer of the nature of the services offered. These facts raise
profound doubts about the underlying motives of traditional real estate
service brokerage companies and organizations that are the authors of and
driving forces behind these restrictive rules, laws and regulations.
On behalf of the nation’s 75 million homeowners AHGA commends President Bush
and the leaders of the Federal Trade Commission and the Department of
Justice for hosting this workshop and for their ongoing efforts to prevent
antirust violations and anticompetitive behavior that is limiting consumer
choice and artificially propping up real estate transaction costs. AHGA also
urges federal and state legislators to review the record of this workshop
with a view towards determining what legislative measures are needed to
remove existing barriers to new competitors in the real estate services
sector.
Overview of the Real Estate Transaction
Unlike many traditional brokerage industries, where brokers are merely
intermediaries or facilitators, real estate brokers and agents owe a
fiduciary duty to their clients. This is a responsibility to put the best
interests of the client, be it a home buyer or home seller, above their own
interests. Appropriately, real estate industry professional and trade
associations have developed extensive training programs and certifications
to assure that industry professionals understand their responsibilities and
help consumers differentiate the educational qualifications of industry
professionals.
The fiduciary responsibility and these educational programs and
certifications are very important. Consumers who choose a full service real
estate brokerage to represent them as a seller or buyer have a right to
expect those brokerages and their agents to put the buyers or sellers best
interest ahead of their own both in all cases in individual transactions and
in their conduct in determining internal and external policy for their trade
and professional organizations.
Some real estate transactions, such as inheritances, family subdivisions,
and gifts or sales between families or friends do not require real estate
marketing services. For the overwhelming majority of the balance the local
Multiple Listing Service (MLS) is an essential facility for the real estate
transaction. The MLS is an electronic database of information about the
homes of the fiduciaries of participating brokers. Most are owned and
governed by those brokers. Traditionally MLS’s disseminated data and other
intellectual property owned or created by the homeowner, along with public
information, and in many cases additional contributions by the real estate
agent, to other MLS members. With the growth of the Internet most MLS’s now
also feed partial MLS listing information to the consumer-facing websites of
participating brokers. With the Internet now used in the home search by 70%
of buyers, maximum and unrestricted dissemination of listing information
over the Internet is of critical importance and benefit to both home buyers
and sellers.
The Internet has also facilitated consumer education on the real estate
transaction. Home buyers and sellers can access a wide array of helpful
information on marketing techniques, applicable laws and regulations, and
other unbiased information from the websites of government agencies or
consumer educational organizations. This has enabled more consumers, those
who wish to take the effort of assuming some of the responsibilities
themselves, to do so or to purchase real estate services in an unbundled
fashion from multiple sources.
New business models offering unbundled real estate services have been
created to fill this demand. In areas where barriers to this business model
have not been created consumers who are experienced in real estate
transactions, such as former real estate agents and experienced investors,
as well as other consumers who take the time to understand the process, have
saved substantial amounts on real estate sales transactions. AHGA believes
that the existence of these new lower cost business models is very likely
contributing to increased home sales, because they enable home sellers who
require specific net proceeds to sell in cases where they could not achieve
the net proceeds they require after a traditional 5-6% commission.
Many home sellers prefer to use traditional full service real estate
brokers. For example, a dual income couple with small children may not have
the time to conduct all of the requisite real estate marketing activities,
which can vary tremendously depending on market conditions. For this reason
they rely on the broker to exercise the same fiduciary duty and care that
the broker and agent would use in selling their own home.
The rules affecting real estate transactions are developed by the trade
associations representing the profession, promulgated by federal, state or
local regulators, or enacted by federal or state legislators. Homeowners
have traditionally been under-represented in policy deliberations affecting
the real estate transactions.
While there are some exceptions, most state real estate commissions, which
are charged with representing consumers, are dominated by traditional real
estate service providers. State real estate trade associations also dominate
state and federal lobbying on real estate issues. A review of state lobbying
reports in almost any state will list state and local real estate
associations among the major spenders on lobbying, and consumer advocacy
organizations, who have much broader issue agendas, among the smallest. The
practice of appointing independent consumer advisory committees, common in
some industries, has not taken hold in the real estate services sector.
Those factors help explain why state laws affecting such issues as dual
agency have reduced the fiduciary responsibilities and potential liabilities
of real estate service providers in recent years, and why those changes have
not been reflected in reduced commission rates.
The real estate transaction remains overly complex. Simplification will help
reduce the complexity. Disclosure, in plain English terms that consumers
will understand, will also help. Allowing consumers to obtain the level of
service they desire from a multiple array of service providers to fit each
consumer’s unique requirements will also help.
Issues Affecting Competition among Sellers Brokers
Numerous issues affect competition between sellers’ brokers. One is the cost
of services provided. A full service real estate broker, like his
counterparts in the securities and travel agency fields, must make a
significant investment in a variety of areas in order to be able to provide
a full range of services. There are numerous full service competitors in all
three markets, and competition in the full services segment of each imposes
some upper limits on the transaction pricing on their segment of the market.
This explains why transaction pricing for full service in all areas is
essentially the same today as it was before new business models were
introduced in all three industries.
In the real estate sector net real estate commissions, adjusted for
inflation, are probably slightly higher that they were in past decades. The
unusually rapid appreciation of U.S. homes in recent years (far faster than
inflation and more than 50% in many areas), have enabled the average
national real estate commission rate to drop from just below 6% to just
above 5% while yielding more actual dollars for traditional broker
transactions. For example, a 6% commission on a $200,000 home several years
ago would have yielded $12,000, while a more recent 5% commission on the
same home now worth $300,000 is $15,000. That $3,000 difference represents a
25% increase in actual dollars, and is probably a net increase for a
traditional broker and agent even after inflation. AHGA believes that were
there no barriers to new business models their penetration would be much
greater and the average commission today would be much lower.
AHGA believes the ability of traditional real estate brokers to maintain, if
not increase, commission proceeds is explained by the numerous current
barriers to competition in the U.S. real estate services industry. The
barriers include overt efforts by organizations at the federal and state
level to promulgate industry rules as well as enact state legislation and
regulations that are anticompetitive. These barriers have had the effect of
both limiting the participation of non-traditional real estate service
providers, and undermining the fiduciary responsibility of real estate
brokers to home buyers and sellers. It is difficult to understand how
organizations that represent businesses which owe a fiduciary duty to
homeowners can advocate policies that undermine that duty.
Also limiting competition are flawed notions of intellectual property
ownership that have not been sufficiently challenged. These include the
assertion, widely voiced by organizations representing traditional real
estate brokers, that the information contained in a home seller’s real
estate listing is the property of the real estate broker rather than the
homeowner. In fact some of the data is always either provided by the
homeowner and/or is a matter of public record. In many cases sophisticated
homeowners provide most or all the listing information and data, including
descriptions, photos, room measurements and other data. In such cases all
the intellectual property contained in the listing obviously belongs to the
homeowner. The MLS itself is an information conveyance, much like railroads
that carry the farmers’ grain to market. While the MLS owns the information
railroads and the tracks, antitrust laws dating back to the 19th century
must be applied to these information railroads.
Since real estate brokers and agents owe a fiduciary duty to home sellers
who also own or share the ownership the intellectual property contained in a
home listing, real estate brokers have no right to make decisions that would
limit the dissemination of that data without the home sellers permission.
AHGA believes that duty extends to their collective actions in setting the
policies of the multiple listing services, which are generally controlled by
those same real estate brokers. Sadly, all too often real estate brokers
appear to be setting MLS practices that limit competition and work against
the best interests of their clients. It was only recently, and then after
intense pressure from the U.S. Dept. of Justice, that the National
Association of Realtors withdrew an earlier version of their proposed “opt
out” rules that would allow a broker to limit the dissemination of a
homeowners listing without first getting the homeowners permission.
At the state level legislative and regulatory efforts supported by real
estate industry associations have reduced real estate broker fiduciary
responsibilities in some cases, and limited their unbundling in others. The
common thread in both cases is that traditional companies are benefited and
home sellers, home buyers, and companies offering alternative business
models to them are hurt. In the former regard state laws passed over the
last several decades allowing for dual agency (the inherently conflict of
interest practice of one real estate service provider representing both the
buyer and seller in the same transaction) undermine independent advocacy
services that are a key fiduciary responsibility to the client.
Prior to the passage of those laws it would have been a breach of fiduciary
duty for a real estate broker representing a seller to subsequently agree to
represent a buyer in that same transaction. While state laws may have made
dual agency legal, they still remain unethical. They lessen competition
because the broker has neither the undivided best interest of the buyer or
the seller in mind during competitive aspects of the transactions, such as
the negotiation of prices and terms. The broker’s agents representing the
opposing parties share telephones, computers, copiers and other equipment,
and may have neighboring desks as well as personal relationships and company
goals that all undermine both confidentiality and their client’s best
interest.
Today local real estate associations typically bury provisions in the fine
print of listing agreements language that allows the listing broker or agent
the option of soliciting visitors to their client’s open house to represent
them as buyers agents, thereby undermining the services expected in the
listing agreement. Those dual agency provisions do not provide for a
commensurate reduction in commission rates to offset the reduced level of
service. Dual agency laws hurt buyers and sellers alike and have hindered
the growth exclusive buyer agency, a recent development in representation
that provides a full and equal level of fiduciary representation to a home
buyer. State real estate agencies are also hindering the clear disclosure to
consumers of the services they forgo in a dual agency relationship.
Economies coming out of dual agency and some real estate brokerages’
entrance into mortgage lending have apparently as yet not been reflected in
lower transaction costs for home buyers and sellers despite their potential
for doing so.
Currently, state real estate associations are campaigning to limit the
unbundling of real estate services and prohibit rebates. Unbundled real
estate services enable home sellers, for example, to pay a real estate
broker as little $300 to list their home in the multiple listing service,
hold the open house themselves, and hire a real estate attorney to help with
the legal requirements. Growing numbers of homeowners in the metropolitan
Washington DC area, where the median sale price is $500,000, are opting to
list their home only for $300 and buy other needed services a la carte in
lieu of paying a $25,000 - 30,000 commission to sell their $500,000 home.
However, real estate professional associations in some 20 states outside the
metropolitan Washington DC area have passed legislation requiring every
broker to provide “minimum level of services” and/or prohibiting rebates.
The former would require all real estate services companies to provide a
full range of real estate services, which would undermine the business
models of Internet based companies that offer list only services.
Issues Affecting Competition Among Buyers Brokers
Many of the same issues that affect sellers also affect buyers. State dual
agency laws have enabled traditional real estate companies to fool
unsophisticated buyers into believing that they are getting the same
exclusive representation the buyer might receive from an exclusive buyers
agent. When a buyer who is not represented attends an open house it creates
a powerful incentive for the sellers agent to abrogate his or her fiduciary
responsibility to the seller and sign the prospective buyer to a buyers
representation agreement. At that instant the broker has created a conflict
of interest.
Anti-rebate laws also limit the ability of brokers to, in effect, offer a
discount to home buyers.
Empirical Evidence on Competition in the Real Estate Industry
U.S. real estate sales commissions average 1.5% higher in the U.S. than in
other countries. Thanks to home appreciation net proceeds continue to
increase. To put that in perspective, in the Washington DC market, median
home sales recently passed $500,000, yielding a $25,000 - $30,000 commission
to a traditional real estate broker charging a 5-6% commission. What is to
explain this discrepancy between sales commissions in the U.S. and other
countries, and the fact that a transaction whose major efforts are still
concluded in less than a month, in sellers markets costs $25,000 - $30,000?
According to a recent study by Dr. Steven D. Levitt, professor of economics
at the University of Chicago, real estate agents yield more on the sale of
their own homes than they do on the sale of their fiduciary’s homes. In his
new book, Freakonomics, Dr. Levitt determined from a sample of 100,000 home
sales that real estate agents yielded 3-4% more on average from the sale of
their own home as compared to the proceeds of their clients home. This is
evidence that the current real estate model is somewhat dysfunctional. Most
real estate agents and brokers are compensated completely by commission. The
risk of not getting any commission at all (when a sale is not made) has a
much greater economic impact for agents representing either buyers than does
getting a little more money for the seller or saving a little more money for
the buyer. A commission compensation arrangement inherently makes those
compensated by the commission more in favor of a deal that they themselves
might not take, as evidenced by the aforementioned study.
This is also consistent with the efforts of real estate brokers and agents
who are collectively abrogating their fiduciary duty in their advocacy of
laws and regulations that are, on their face, contrary to the best interests
of home buyers and sellers.
Recommendations
We commend the U.S. Department of Justice and the Federal Trade Commission
for their ongoing and persistent efforts to increase competition in real
estate services. The challenges are many, and the resources of those opposed
to more competition in real estate services are deep. We hope Members of
Congress will appreciate the vital work these two agencies are doing in this
area, and will increase the agency’s budget to better enable them to address
the immense task at hand.
Many of the challenges will need to be addressed at the legislative level.
AHGA has already communicated recommendations for increasing competition in
real estate services. On September 30, 2004 AHGA submitted comments to the
U.S. Antitrust Modernization Commission. Many of our recommendations were
focused in this area. The Commission, whose work is still in progress, is
charged with making recommendations to Congress on specific needed changes
in U.S. antitrust laws.
AHGA recommended that the antitrust commission review the impact of dual
agency laws on competition. Tie-in arrangements between real estate trade
associations and multiple listing service (MLS) organizations would also
appear to undermine real estate agency. Those arrangements require
membership in the local real estate trade association as a precondition for
the use of the MLS, which is generally recognized as the most powerful real
estate marketing tool. There are pending lawsuits and contradictory prior
court decisions on this issue, and a bright line prohibition of
anti-competitive tie-in practices would be timely.
There are several potential antitrust issues related to real estate
financing. There appears to be insufficient competition in the title
insurance reissue market. Consumers in many cases are charged the full
retail price or near the full retail price for reissued title insurances on
homes that are refinanced fairly soon after their purchase. It would seem
unnecessary to repeat the entire research process for the history of the
property in such cases, and relatively simple and inexpensive to determine
if any new threats to the marketability of the title had occurred in very
recent years.
As multiple factors, including consumer demand, are driving increased
overlap between real estate lending and real estate marketing, antitrust
laws should be adjusted to both protect consumer interests and encourage
greater competition. For example, real estate agents or brokers who arrange
home financing should be subject to all Truth-In-Lending-Act (TILA)
requirements.
The most pressing need may be to address the rapid growth in state laws and
regulations that limit consumer choices and force home buyers and sellers to
pay for services they neither want nor need. This issue is particularly
pressing because these laws are growing rapidly. Twenty states now have them
on the books and traditional real estate brokers are expected to press for
more during the next state legislative session.
Congress should consider federal legislation that would preempt law or
regulation that forces consumers to pay for real estate services that they
might not want or need. This includes laws that prohibit consumer rebates
and laws that restrict the ability of real estate brokers to offer minimum
services with full disclosure.
It is clear the real estate services sector needs to be pulled into the
twenty-first century. To do that, anachronistic practices and barriers to
competition need to be broken down, and violations of current antirust laws
need to be enforced. Laws that have no justification except to protect the
traditional real estate brokerage from new competition must be stopped or
preempted by federal law to protect the interests of American homeowners.
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