Is there any real competition among brokers?
I’m going to examine two sides of an argument over whether or not real estate brokers who are commission-based are competitive or have a monopoly that is bad for the consumer.
I’m going to start with an article that is pro-commission that disputes claims that commissioned brokers are bad for consumers.
From an article in realty times by M. Anthony Carr, "groups like the Consumer Federation of America (CFA) and American Homeowners Grassroots Alliance bemoaned the current commission-only business of real estate agents across the country.
To hear the CFA’s take on these independent contractors (who have no job security, biweekly pay check, benefits, vacation/sick leave or traditional company support), they are all totally overpaid and consumers are being fleeced by a "fixed" commission rate that’s being protected by the industry at large.
Well, let’s work in real numbers. Last year, the local MLS reported the D.C. area real estate market created roughly $44 billion in sales. The average commission, according to Real Trends, an industry watchdog group, stands at 5.1 percent (not the 6 to 7 percent touted in Mr. Brobeck’s testimony). At that rate, with a commission split of 50/50 between brokers and their 30,000 agents, the average commission income would be roughly $37,400 each.
A lot of money exchanges hands in this business, being divided between a lot of people. So while the dollar amounts sound expensive, they really only create an average income compared to any other industry in the region. But here’s the catch — agents only collect their pay if they are successful.
Unlike other professions where the attorney gets paid even if his client goes to jail, or the surgeon gets paid even if his patient dies — the real estate agent only gets paid the commission when the house sells. There’s no paycheck for failure in real estate.
That was paraphrased but you get the idea of the argument he makes here. He doesn’t believe there is any need to regulate the real estate business and doesn’t believe that commissioned brokers are anti-consumer or anti-competitive. At least thats what I understand by reading the article by him.
Now lets take a look at the other side of the argument.
Feds probe real estate agents Money magazine investigation shows Justice Dept. looking into anticompetitive practices. April 22, 2005: 5:27 PM EDT By Jon Birger, Money Magazine
NEW YORK (CNN/Money) – Did you pay your real estate broker too much? The U.S. Department of Justice may be set to turn Tulsa, Okla. into a test-case for ending the stranglehold 6 percent commissions have over the real estate brokerage business.
MONEY has learned that Justice’s Antitrust Division is gathering information on the bully tactics that full-commission brokers in Tulsa allegedly use against their discount rivals to discourage commission-cutting. The probe follows other recent efforts to spur competition in the real estate industry.
Economists who study real estate, such as the University of Cincinnati’s Norm Miller, believe anti-competitive behavior is the primary explanation for the persistence of the 6 percent commission.
J.D. Smith and Bob Meyer are two Tulsa discount real estate agents who say they were interviewed by federal investigators. They say the investigators wanted information on full-commission agents’ alleged refusal to show home-buying clients properties listed by discount brokers — a tactic known as boycotting.
Boycotting exploits the one major weakness of the multiple listing service.
The MLS’s upside is that it centralizes all homes for sale in a single electronic marketplace that can be accessed by all agents — and these days by Web-savvy consumers as well.
The downside is that brokers must depend on one another to help sell their homes, and that discourages them from undercutting each other’s commissions.
While boycotting the listings of discounters is generally considered an antitrust violation — if undisclosed, it’s also a breach of fiduciary duty to clients — industry insiders are well aware that boycotting goes on, even if they claim not to condone it.
The Tulsa investigation is part of an ongoing Antitrust Division foray into the sharp-elbowed realty world. In March, the Antitrust Division sued the Kentucky Real Estate Commission over a state law that prohibits real estate brokers from offering commission rebates to consumers.
More recently, Assistant Attorney General R. Hewitt Pate sent letters to lawmakers and regulators in Oklahoma and Texas, urging them to reject proposals that would effectively prohibit brokers from engaging in limited-service or fee-for-service realty — such as listing a home for sale on the multiple listing service for a flat fee of $500.
Bruce Hahn, chairman of the American Homeowners Grassroots Alliance, argues that state prohibitions on rebates and fee-for-service discourage competition and inflate commissions paid by consumers. "We’ve talked to Justice, and we think what they’re doing is tremendous," he said.
Now to understand, while it is nice to defend the individual agent for the job that they do, not receiving benefits as on a normal job, only being paid when they make a sale, etc. is commendable, it seems that overall it isn’t being paid a commission that is the problem.
Its only when those who want to offer consumers a choice that saves them money are boycotted or regulations do not permit them to do so. That is where it becomes anti-competitive.
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