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Sunday, July 02, 2006

Law - More on real estate brokers vs. discount brokers and Indiana's new law

My bad. It wasn't until lunch today, as I was going through stacks of unopened newpapers (still in the little plastic delivery bags I use during dog walks) that I spotted a story in the June 17th issue of the Wall Street Journal titled "Real-Estate War Traps Consumers in the Middle: Full Service Brokers' Tactics to Rebuff Discount Rivals Sometimes Hurt the Consumer."

Fortunately, this story has been republished in a number of freely available online sources, including Yahoo Finance. Access it here. The story begins:

In the fight between traditional real-estate brokers and their discount rivals, some consumers are getting caught in the crossfire.

With house prices surging in recent years, a number of people are seeking ways to cut commission costs, which are based on a percentage of a home's selling price. More home buyers are turning to discount brokers that offer to rebate a portion of the commission if you are willing to do much of the work in finding a home. And sellers are hiring discounters who, for a flat fee of a few hundred dollars, will include your home in a multiple-listing service, a database on houses for sale used by agents.

About 11% of home sellers last year used "alternative" brokers (ones offering flat fees or other forms of discounting), up from less than 2% in 2002, according to surveys by Real Trends, a publishing and consulting firm.

The competition from discounters has prompted some traditional brokers to use a variety of tactics to fight back, and this can end up hurting consumers. The controversy will get a public airing Monday when the Consumer Federation of America, a nonprofit research and advocacy group, releases a report on "how the real estate brokerage industry functions as a price-setting cartel."

Well, "Monday" was June 19th, so the CFA report is available now. The Washington Post published an article about the CFA report on June 20th. Some quotes:
A national consumer advocacy group yesterday condemned real estate trade groups as a "cartel" that sets prices and blocks competition to maintain its traditional commission structure and to keep discount firms from gaining market share.

The commission system is "cockamamie," said Stephen Brobeck, executive director of the Consumer Federation of America. Even some inexperienced real estate agents are charging a 7 percent sales commission, he said -- an amount he likened to the cost of a new car. And he questioned why the brokerage fee on an $800,000 houses is four times higher than that for a $200,000 house, saying the work involved is basically equal.

The District-based federation applauded efforts by government antitrust regulators to put pressure on the trade groups to change the way they do business, but Brobeck said no one had yet found the "magic bullet" to reduce costs. He said consumers have been left on their own and urged home buyers and sellers to negotiate over the sales commissions they are charged and make sure it is clear who is representing whom, what each agent will be paid and for what services. * * *

The federation's report came as the Michigan legislature prepares to enact rules sought by the state real estate industry to define the responsibilities of agents in ways that critics say would favor traditional firms and make it more difficult for discount and Internet-based firms to compete. The Realtor association in Michigan says the rule change is needed because some of the new firms are offering consumers poor service, leaving traditional real estate agents scrambling to keep deals together.

In October, federal antitrust regulators at the Justice Department and the Federal Trade Commission wrote to Michigan legislators urging them to shelve the proposed rule. The agencies said it "would reduce consumer choice and cause Michigan consumers to pay more for real estate brokerage services," according to a Justice Department statement.

The ILB reported on the Michigan effort in this March 22nd entry. The last paragraph is a quote from a release from the FTC and Justice referencing a letter earlier sent to a Michigan Senate Committee. The release begins:
The Federal Trade Commission and U.S. Department of Justice (DOJ) issued a joint letter today urging the Michigan Senate Committee on Economic Development, Small Business, and Regulatory Reform to reject House Bill 4849 as currently drafted, as the legislation would reduce consumer choice and cause Michigan consumers to pay more for real estate brokerage services. According to the letter, the bill would change current law to restrict the ability of licensed real estate brokers to offer consumers the option to pick the specific brokerage services they want.
This certainly sounds a lot like our Indiana law.

The CFA's press release has a list of five factors under the heading "How Traditional Brokers Stifle Competition." Number two is:

The anti-rebate and minimum service laws, which traditional brokers have persuaded many state legislatures to pass, are designed to restrict service and pricing options. So are more subtle forms of discrimination by traditional brokers who do not show listings of discount or fee-only brokers or who make access to property listings difficult for exclusive buyer brokers or rebaters.
Here is the report itself.

Here, from last Sunday, is the ILB's most recent substantive entry on the issues raised by the new Indiana law, along with links to earlier entries.

Posted by Marcia Oddi on July 2, 2006 12:37 PM
Posted to General Law Related