Competition in the Real Estate Brokerage Industry
A Report by the Federal Trade Commission
and the U.S. Department of Justice, April 2007

View the full FTC/USDOJ report here:
http://www.usdoj.gov/atr/public/reports/223094.pdf

Page 1: Introduction

	"Buying or selling a home is the largest financial transaction most Americans will ever undertake... New business models are emerging that allow consumers to save thousands of dollars when they buy or sell a home." Source: U.S. Dept. of Justice (website)

"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... And, because the amount home sellers pay their real estate broker is built into the home sales price, both home buyers and sellers bear this expense."

"The residential real estate industry has undergone a number of substantial changes in recent years... 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. In fact, the Internet has surpassed the yard sign as the most important marketing tool to reach consumers."

Pages 4-5: Overview of the Typical Real Estate Transaction

	See also: "Discount Brokers Can Make Selling a Home Less Costly" (website) "Consumers Can Save Thousands of Dollars in Commissions" (website) "Calculate how much you can save" (website)

At its most basic, real estate brokerage is about matching a home seller with a home buyer... Brokers reduce the transaction costs of matching buyers and sellers and also provide their clients with ancillary services related to the transaction. 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... The Internet also appears to be playing an increasingly important role in the real estate transaction."

"Brokers and agents (hereinafter, "brokers") usually are more informed about the local real estate market and the process of a real estate transaction than most home buyers and sellers. This informational advantage derives from two sources. First, only brokers have direct access to the MLS... 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."

Pages 9-10: The Multiple Listing Service

"Access to the MLS is one of the most important services that real estate brokers traditionally have offered... The MLS 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. The MLS combines its members' home listings information into a database, usually in electronic form. The MLS then makes these data available to all brokers who are members of the MLS. By listing information on a home in the MLS, a broker can market it to a large set of potential buyers... 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... 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. In addition to the database of currently available homes, an MLS maintains a database of homes sold through the MLS. 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."

Page 12: Why the MLS is Important to Sellers, Buyers, and Brokers

"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. Home sellers benefit from exposure of their listings to a wide audience of potential buyers, increasing the probability of selling their homes quickly and at an optimal price for those sellers. In addition, sellers, through their brokers, can use the MLS information on comparable homes to decide whether to sell their homes and, if so, at what price. According to NAR's 2006 survey of home buyers and sellers, 88 percent of sellers reported that their home was listed in the MLS. 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."

Page 14: Nontraditional Business Models

"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."

Page 15: Full-Service Discount Brokers

"Discount brokers offer buyers and sellers full-service real estate brokerage services at a price lower than the prevailing commission fees. For example, a discount broker may offer all of the services provided by a traditional broker for a 3 or 4 percent commission in an area where 6 to 7 percent is the prevailing rate. In addition, in states that do not prohibit them, brokers may offer rebates (i.e. cash payments)... to buyers and sellers... 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... Rebates, therefore, can be powerful tools for price competition between brokers. 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."

Pages 16-17: Fee-For-Service Brokers

"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."

"Fee-for-service brokers often offer an MLS-only package, which allows consumers, who are not permitted by MLS rules to list their homes in the MLS on their own, to list their homes in the MLS by contracting with a broker who is a member of the local MLS. For a flat fee (e.g., $500), the broker would list the home in the local MLS and make an offer of compensation in the MLS to other brokers who may cooperate in the sale of the home. The broker typically would retain the flat fee whether or not the home ultimately sells. If a cooperating broker ultimately secures a buyer for the home, he or she would receive the cooperating commission. A seller who finds a buyer without the help of a cooperative broker, however, would not pay this compensation."

"MLS-only packages offered by fee-for-service brokers typically include other services provided via the MLS. These include advertising the seller's listing on Internet websites that home buyers search directly (e.g., Realtor.com ) and on other MLS members' websites. Additionally, fee-for-service brokers typically provide the client additional selling aids, such as yard signs, online advertisements, and a lock-box to allow buyers' agents to show the home when the seller is not present."

"In addition to the MLS-only package, many fee-for-service brokers offer other services. The Agencies' review of fee-for-service broker websites indicates that most offer at least two tiers of service and the complete array of traditional services at a reduced commission. Thus, consumers who purchase the MLS-only package, but later feel they need more assistance with their transaction, typically can obtain it from their broker for an additional fee... Further, many fee-for-service brokers allow their clients to cancel their listing agreement at any time, leaving consumers free to pursue other brokerage or non-brokerage options if they become dissatisfied with the broker's service."

Page 19: Websites that Provide Advertising and Other Services to FSBO Sellers

"Some consumers choose to sell their homes without any assistance from a real estate broker. These sellers are referred to as "for-sale-by-owners" or "FSBOs," and they market their homes themselves by placing ads in local media, posting signs, and conducting their own open houses. MLSs do not allow FSBO homes to be listed in the local MLS because a listing broker member is not involved. FSBOs often offer payment to a broker representing a buyer."

" Several companies offer services to help FSBO sellers. For example, there are several websites devoted to advertising FSBO homes. One Workshop panelist representing a major FSBO website explained that his company allows home sellers to post color photos, virtual tours, and 3,000-word descriptions that are searchable by potential home buyers. According to this panelist, the industry average price for this service is a flat fee of approximately $300. These websites often will also provide potential home buyers with general information on neighborhoods, such as demographics, crime rates, and school quality. Further, many provide links to ancillary service providers, such as title insurance companies, escrow services, and home inspectors, and also provide sample forms related to real estate transactions, such as sample purchase or lease agreements."

Page 21: Consumers' Use of Nontraditional Models and FSBOs

"According to NAR's 2006 Profile of Home Buyers and Sellers, 83 percent of home sellers who retained a broker used one who provided the traditional "full" array of services; 8 percent hired a broker who listed the seller's home in the MLS and performed few, if any, additional services; and 9 percent hired a broker to provide a broader array of services, but short of full-service."

"NAR data show that the number of FSBOs – consumers who sell their homes without the assistance of a real estate professional – has been declining. NAR's 2006 Survey estimated that FSBOs account for about 12 percent of home sellers, with an additional 5 percent of sellers first trying the FSBO route, but then retaining a broker tocomplete the sale."

Page 22: Increased Consumer Access to Real Estate-Related Information

"By reducing the cost of transmitting and searching information, the Internet has enabled consumers more easily to educate themselves about all facets of home buying and selling. For example, before the introduction of the Internet, consumers had to learn about homes for sale through real estate brokers, or through various offline marketing vehicles, such as yard signs, newspaper advertisements, or real estate magazines. These techniques are still important and commonly used, but consumers now have access to listing information from a variety of online sources as well."

Pages 25-26: The Internet's Effect on the Real Estate Industry

By placing more information in the hands of consumers, the Internet has facilitated the growth of nontraditional business models – such as fee-for-service brokers, VOWs, and broker referral networks – that allow consumers opportunities to substitute their efforts for those of the broker, in many cases in return for lower fees... According to one commenter, "With individuals assuming more of the responsibility to gather and assess information, less time and effort is required by real estate agents in assessing market conditions (for sellers) and in identifying and showing houses [(for buyers)]. The cost of an agent's service, therefore, should go down reflecting this shift in burden."

"Consumers differ in their willingness, ability and opportunity to use the Internet to perform functions traditionally provided by brokers. While many consumers may be willing to perform search tasks themselves, they may be more likely to continue to rely on brokers for assistance related to the transaction process because it involves expertise derived from broker experience. For buyers, this may mean performing much of their early search by themselves online and contacting a broker only after they have become familiar with market offerings and are ready to start placing offers on homes. For sellers, this may mean setting their own sales price and relying on the wide online exposure of MLS listings rather than broker effort to market their home, and hiring an agent only to list their home in the MLS and for assistance in closing the transaction."

Pages 27-29: Gaps in Consumer Knowledge

Even with the significant amount of information currently available on the Internet, there may be gaps in knowledge by some consumers in several important areas that may result in real estate brokerage markets functioning less efficiently. First, it appears that many consumers are not fully apprised of their marketplace options. For example, the most recent NAR survey of home sellers and buyers found that the majority of home sellers contact only one listing agent before hiring one to assist with the sale of their home. Further, there is evidence that some consumers of brokerage services are not necessarily aware that commission rates are negotiable."

" Second, consumers may be unaware of the possibility that their brokers may have conflicting interests that lead them not to provide the consumer with the best possible advice. As discussed in more detail in Chapter IV, brokers have certain incentives to "steer" consumers toward those homes that offer the highest cooperating broker commission payment and away from homes listed by brokers known to charge home sellers discounted commission rates. In this manner, brokers can take advantage of their superior knowledge of market conditions by steering clients away from home listings that otherwise match the criteria identified by the consumers, but provide lower financial gains for the broker than other homes."

Home buyers' increasing use of the Internet may limit brokers' ability to steer buyers away from discounters' listings without their knowledge. As noted above, 80 percent of consumers use the Internet to search for homes in 2006. To the extent that consumers have greater knowledge of the stock of housing for sale than they used to, brokers will be less able to exclude a particular listing from home buyers' searches without their knowledge. If a home buyer finds a discounter's listing on his or her own that appears to be a good match, a broker likely will either have to show the home buyer the discounter's listing or explain why he or she will not."

"In addition, consumers also may be unaware that when they pay their broker a commission based solely on a percentage of the sales price at closing (as most do today), the broker's financial incentives are not necessarily aligned with the consumer's. On the sell side of the transaction, the consumer's interest is to sell the home at the highest possible price. Even though an agent's commission increases with the price of the home, he or she likely retains no more than 1 to 2 percent of the sales price (after paying the cooperating broker and the agent's brokerage firm). Therefore, the agent may be less willing than the consumer to take the risks associated with getting a higher sales price, such as waiting for what might be a better offer and perhaps having to do additional work."

"Likewise on the buy side of the transaction, the broker may be less interested than the consumer in negotiating the lowest possible sales price because a lower sales price translates into a lower commission for the broker, likely requires additional work, and may increase the risk that the transaction falls through with no commission paid to the broker. Consumers may be unaware of these potential conflicts of interest. Some commentators have posited that alternative payment structures may better align consumer and broker interests."

Page 71: Conclusion and Recommendations

"Consumers likely would benefit significantly from additional knowledge about the range of options available in brokerage services and fees."

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