Home purchase costs might be reduced if real estate brokers become legally responsible to buyers as well as sellers -- and more competitive in their commission prices, a Federal Trade Commission staff report finds.
The report, the details of which have not been made public, is part of a comprehensive two-year investigation of brokers' practices.
Staff members who prepared the report say the research shows that present industry relationships hinder broker productivity and encourage fixed-rate commissions, set at 6 or 7 percent in most jurisdictions. Because the fees may exceed the actual cost of doing business, changing the industry's structure to make brokers more competitive in commission pricing would reduce costs to sellers and bring home prices down, the report concludes.
The major structural problems must be solved, the FTC staff says, if local brokerages are to survive the growth of national firms, such as the real estate arms of Coldwell Banker and Merril Lynch.
The study of brokers' practices in Los Angeles, Seattle, Boston, Minneapolis/St. Paul and Jacksonville, Fla., is an academic probe, not an "adversarial" investigation of the industry, officials say, designed to open problems for review by industry, consumer and government groups. The report concludes that standard commissions are a symptom of problems with industry structure, not a result of conscious rate-fixing by brokers, as some consumer groups have charged.
Between 1950 and 1979, commissions earnings jumped more than 600 percent, compared with a 215 percent overall increase in the consumer price index, the study finds. Most of the hike reflects the rapid acceleration of the real estate prices on which commissions are based, not on increases in the cost of providing sales services, FTC officials say.
The potential for high income has brought legions of sales agents into the industry, encouraged by brokers who believe that a large sales force will give them a competitive edge.
However, few agents report exorbitant incomes, the FTC study finds. As the sales force grows larger, office productivity declines, so the brokerage shows little overall gain. To generate enough compensation for all the agents in the office, the report says, commissions must be maintained at 6 or 7 percent.
Compounding the problem is broker interdependence and the now widespread use of real estate multiple listing services, which encourage competition for referrals, not for listings.
Intended to increase the pool of available buyers and properties, the listing service also cites the ratio by which listing and selling agents will split the sales commission. The study finds that many sales agents will not show real-estate where a lower-than-standard commission split is offered, discouraging competitive pricing by listing agents.
If sales agents were to receive part of their incomes from buyers, through formal contractual arrangements, they would be bound to show all available homes, including those with low commission fees, the FTC staff concluded. Eventually, market forces would encourage some agents to seek additional listings by offering lower rates, and commissions would be set by competition, not by common practice as they are now, the report predicts.
Any change in broker relationships with the public should be forged through long-term cooperation between government, industry and consumer groups, and will be "evolutionary rather than revolutionary," officials say.
Immediate attention should be given to educating the buying public of its present legal status, possibly by requiring agents to disclose their exact relationships to both buyers and sellers, officials add. They note that most buyers are not aware that an agent's only legal responsibility is to the property's seller in the majority of cases.
To make a more specific obligation to the buyers, state licensing and real estate laws might be revamped to require agents to write a contract with home buyers. Most states already allow agents to have a contract with buyers and still have a share of the sales commission, so brokers would not have to forfeit any income, officials say.
While industry-based solutions, such as a rewrite of trade groups' code of ethics, might foster new relationships in the long run, officials doubt the groups will be able to agree on the need for industry restructuring, let alone what the changes might be.
Indeed, the real estate industry takes issue with many of the premises on which the FTC study is based.
"We've been over this many, many times," says National Association of Realtors senior vice-president William North, "I don't know of any industry that's more competitive" than the real estate trade. With over 150,000 member brokerages, price-fixing just isn't possible, he says. Commission rates remain at 6 or 7 percent because borkers "can't get anything higher" nor can they charge less and still stay in business, he adds.
The Realtors group has spent more than $4 million over the last five years reviewing the practices of its members and "has made constant adjustments" to eliminate any practices which might be anticompetitive, North says.
Brokers say there's no proof sales agents will work harder to sell homes with a larger commission split or shy away from homes on which they will make less money. More importantly, they say, is that they find homes that meet their buyers' needs, because no commission is won if there is no sale.
Many commissions are renegotiated before a sale is finally closed, brokers say, belying the belief that commissions are nearly always 6 to 7 percent.
The FTC will decide in two to three months whether to release the results of the staff report and recommendations for federal or state agency action. The findings of the study should draw interest from every corner of the real estate industry, but many officials and trade representatives doubt there will be focused government action any time soon.
They say it's hard to image major industry restructing from the Reagan administration, which has made a crusade of dismantling existing rules it considers antibusiness.