Discrimination against non-traditional real estate brokers, status quo commission structures, unregulated multiple listing services, lack of consumer knowledge, and the large share of real estate professionals who serve on state real estate regulatory commissions stifle competition in the real estate industry, according to a report released today by the Consumer Federation of America.
In the eight-page report, “How the Real Estate Cartel Harms Consumers and How Consumers Can Protect Themselves,” the consumer group encourages “fuller and more timely consumer information; ending of discrimination against nontraditional brokers; and effective, independent regulation” to improve the real estate industry. The non-profit advocacy group’s membership includes about 300 organizations that together represent about 50 million people. Stephen Brobeck, executive director for the consumer group, and Patrick Woodall, a senior researcher, prepared the report.
The National Association of Realtors took issue with the findings of the real estate report. “America’s real estate industry is one of the most competitive business environments in the world, characterized by low barriers to entry, intense personal client service and results-based compensation structure. Real estate consumers can choose from nearly 80,000 real estate brokerages and more than 2 million real estate licensees, more than 1.3 million of whom are Realtors. Competition is fierce,” the trade group said in a statement today.
While some industry reports suggest that the average total commission paid on the sale of a home has sunk to about 5 percent of the sale price — compared with a historic rate of about 6 percent — “traditional brokers still work hard to maintain uniform 6 percent or 7 percent commissions,” the report states.
Typically, sellers agree to pay an agent a total commission ranging from about 5 percent to 7 percent to assist with the home sale, and the listing agent offers a portion of this commission — usually about half — to an agent representing a buyer in the transaction.
But if prospective buyers negotiated a commission directly with their agent, commission rates would quickly erode, the report contends. This is because there is now fear that listed properties offering a low commission split to agents representing buyers will not be shown, according to the report.
The brokerage industry has exerted influence on regulators and legislators “to weaken the legal concept of broker representation to the point where they now can frequently serve as ‘dual agents’ collecting an entire commission but representing the financial interests of neither buyer nor seller,” the report charges. State laws or regulations in some cases allow such instances of “dual agency” or “double-dipping” in a real estate transaction with language such as “transactional broker,” “facilitator” or “designated agent” to describe the salespeople who represent both buyer and seller in the same transaction. This, the report alleges, “is a nonsensical concept since there is no way a broker can represent the financial interests of both seller and buyer.”
Some agents attempt to promote their home-seller clients’ properties to their home-buyer clients, while agents may also encourage buyer clients to purchase a home from another agent within their office. “In the first instance, they retain the entire commission; in the second, they realize varying benefits, which range from financial considerations to preferential treatment by the firm,” the report states.
Traditional brokers have supported state laws and measures that ban rebates to real estate consumers, the report states, and 11 states maintain such statutes “despite criticism and intervention by the U.S. Department of Justice.” The report contends that such laws prevent discount brokers who work with buyers “from competing on the basis of price.”
Also, some states have passed so-called “minimum service laws” and regulations that in some cases require a range of real estate brokerage services in every real estate transaction and can serve to limit competition from limited-service real estate companies.
Discrimination against alternative business models can also be “informal,” the report states, and can take the form of “traditional brokers discouraging clients from working with non-traditional brokers, their not showing listings of these brokers or their making access to properties difficult for rebaters or fee-only brokers.” Such activity “rarely benefits clients,” the report states, though it can serve to maintain industry commission rates. MLS rules, meanwhile, can serve to restrict the dissemination of information about certain types of properties, such as those by alternative brokers, the report states.
The Realtor association said in a statement that “discount brokerages and many innovative business models are doing very well today,” and called attention to Real Trends studies that showed a drop in real estate commission rates from 5.5 percent in 1998 to 5.1 percent in 2003.
“No other industry in the world has virtually its entire inventory online at one site, but you can find more than 2.2 million homes for sale at Realtor.com,” an association-affiliated site operated by Move Inc., the Realtor group noted.
The consumer group’s report charges that change is already upon the real estate industry. “Some feel that the traditional real estate brokerage industry is so entrenched and influential that it is impossible to reform. We believe, though, that pro-consumer changes are already occurring and that the adoption of significant reforms is not a question of if but when. There are too many competitive opportunities afforded by the Internet, too many abuses against consumers, and too many growing criticisms from policymakers, the press, consumer advocates and consumers themselves for the industry to resist these reforms.”
Consumers can take some steps to improve the industry, the report states. Buyers and sellers should insist, for example, that brokers make a statement indicating that they “will represent the financial interests of the other party, or simply serve as a facilitator or transaction broker,” indicate “the level and method of their compensation,” and disclose “any potential conflicts of interest that may arise.” And “consumers should never hesitate to negotiate lower fees,” the report suggests.
The consumer group recommends that real estate industry regulators should be independent: “For a start, practicing brokers should not be allowed to serve as regulators,” the report states. Corey Scholtka, a discount real estate broker in Wisconsin, said he agrees with the report’s findings. “Right now there is no real estate police. If the Realtor community doesn’t start to act quickly there will be federal intervention.”
But real estate is inherently a local business and should remain under the jurisdiction of states, the Realtor association said. “Adding another level of regulation at the federal level could add cost and stifle innovation. Consumers are better served by effective state regulation closer to local real estate markets than they would by Washington regulators.”
The federal government has definitely had its eye on the real estate industry. The U.S. Department of Justice filed an antitrust lawsuit against the Realtor group last year, charging that the group’s policies for the display and sharing of online property listings information were too restrictive. That agency and the Federal Trade Commission have also opposed minimum-service real estate measures and anti-rebate policies in several states.
