The Restraints on Robust Real Estate Competition

By Benny L. Kass
Saturday, May 19, 2007

Many obstacles remain to achieving more "robust competition" in the real estate market, the Federal Trade Commission and the Justice Department have concluded.

"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," the agencies wrote in a report issued last month.

The two government agencies have for some time been closely watching the industry to determine if its practices violate antitrust laws. They have filed lawsuits against real estate commissions, multiple-listing services and the National Association of Realtors. That last suit, filed in late 2005, is pending. The Justice Department argues that rules for listings on the Internet break antitrust laws; the Realtors association argues that competition is not restrained.

The government report says several factors have hindered competition among real estate brokers. Despite the Internet, which has changed so many other businesses, brokers continue to be involved in most real estate sales. A 2006 survey by the National Association of Realtors found that 84 percent of home sellers employ a real estate broker.

The report analyzes a typical real estate transaction, from the time a homeowner decides to put his or her house on the market until settlement. It's an interesting and informative read that explains in easy-to-understand terms the process -- and the pitfalls -- that home buyers and sellers will encounter.

The report examines the roles of two types of real estate professionals: agents and brokers. Agents work directly with consumers; brokers supervise agents. The seller signs a listing agreement with the broker, which spells out the terms and conditions of their relationship, including the commission charged should the house sell.

The report also discusses the three principal types of listing agreements. "Exclusive right to sell" is the most common, under which the listing broker will receive a commission if the house is sold during the listing period, no matter who finds a buyer for the house. Another type is "exclusive agency." Under that arrangement, the listing broker will receive a commission if any broker is successful in finding a buyer. However, no payment is owed if the seller personally finds a buyer. The third is an "open listing," in which the broker has the right to sell the house but the right is not exclusive. If another broker -- or the homeowner -- finds a buyer, the listing broker does not receive a commission.

The report also examines what it calls "nontraditional" business models, especially their effect on competition and consumers. The Internet now plays an important role in the buying and selling of real estate, allowing potential buyers to search for a home without having to spend all Sunday roaming from house to house.

Such nontraditional models include full-service discount brokers that offer buyers and sellers complete services at prices lower than the prevailing commission fees; Web site brokers, which offer services online to registered clients; and Web sites that cater to homeowners who prefer to try selling their homes on their own, also known as for-sale-by-owner or FSBOs. A number of companies offer services to help FSBO sellers. Some Web sites charge a flat fee (about $300) that allows a seller to post photos, virtual tours and descriptions that are searchable by potential home buyers.

Some nontraditional brokers -- where not prohibited by law -- will offer rebates such as cash, gift certificates, coupons and vouchers to their customers. "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," the report said.

Several states prohibit brokers from providing rebates to consumers, drawing scrutiny from the federal government. In March 2005, the Justice Department filed an antitrust suit against the Kentucky Real Estate Commission, claiming that regulations prohibiting Kentucky brokers from providing rebates restricted competition in that state. According to the report, the case was settled several months later and now rebates are permitted. The Justice Department has investigated similar bans in other states, with apparent success even without filing lawsuits.

The report concluded that many obstacles to competition remain. They include:

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