The Realtor Racket
Wall Street Journal
August 12, 2005 The Realtor Racket Why are Governors and state legislatures enacting regulations to make buying and selling homes as expensive as possible? We ask this question because in recent weeks three normally level-headed Republican Governors -- Matt Blunt of Missouri, Rick Perry of Texas and Bob Riley of Alabama -- have signed into law legislation that protects Realtors from discount competitors. About a dozen other states have also buckled to the National Association of Realtors lobby. They've effectively become partners in what looks suspiciously like a price-fixing scheme, whereby discounters are prevented by law from charging fees below the industry norm of 5% to 6% of the home sales price. The financial victims of this cartel are middle-income home buyers and sellers who are required to pay brokerage fees that can easily be several thousand dollars above a competitive market price. Real estate brokers are under increasing price pressure from Web-based home-buying services and other discount brokers. With state lawmakers so often bellyaching about the decline in "affordable housing," one would expect politicians to salute these low-fee entrants to the market. Instead, state legislatures and real estate commissions -- which happen to be populated by Realtors -- are enacting laws that make price competition illegal and thus treat Realtors as if they are members of a closed shop union. The Realtors argue with a straight face that their political efforts are somehow in the interests of the home-buying public. Maybe we're missing something here, but in almost every other consumer industry -- booksellers, retailers, home appliances, insurance, banking, stock brokers -- the introduction of Internet and discount sellers has been a phenomenal financial benefit to customers. Discount airlines have cut airfares by 60% or more, to the economic benefit of everyone with the exception of the incumbent competitors. * * * Economists call this process of squeezing out transaction costs "disintermediation." If any industry is ripe for this, it is the $70 billion-a-year real estate brokerage market. Yes, fees have fallen modestly to about 5.1% on average in recent years. But a new study by the Brookings Institution and American Enterprise Institute concludes that in an unimpeded free market, fees should be dropping much faster -- particularly amid a real estate boom that has doubled home values over the past decade. Many, if not most, of the services that Realtors provide don't vary with the sales price, so the percentage fee should fall as home price rises. The problem is that state lawmakers are squashing such competition through two types of laws. First, they make it illegal for brokers to provide rebates on their commissions, which is an overt impediment to price competition. So, for example, LendingTree.com is prevented under these laws in about 10 states from continuing its popular practice of providing several thousand dollars of rebates and coupons at Home Depot to homeowners who use its real estate services. Discount real estate agents would also be prohibited under many of these laws from advertising their lower prices in newspapers. The second legal device used to restrain trade are "minimum service requirements," which prevent real estate brokers from providing limited services to home sellers for a negotiated fee. These rules outlaw the increasingly popular choice of home sellers who contract with an agent to list their homes for a flat fee of typically around $500, but then handle all the other aspects of the home sale themselves in order to save $5,000 to $10,000 in additional fees. More than a dozen states (see nearby list) have enacted these requirements, which are analogous to telling McDonald's that it can sell french fries only if the customer also buys a hamburger and Coke. We'll also note the supreme irony that states and the federal government sued Microsoft for illegally "bundling" its software, whereas in the real estate market the states are requiring bundling. In either software or real estate, the choice should be up to the individual sellers. In some states, real estate agents collude to boycott homes that are being sold by agents who provide commission discounts. This practice is a clear breach of the fiduciary duty of the agent to find the best home at the lowest price for clients. Instead, the brokers are in effect finding homes for their clients that will afford them the highest fee structure. To our knowledge, neither the National Association of Realtors nor the state real estate commissions have ever sanctioned a real estate agent for this breach of ethics. How large is the restraint of trade rents in this industry? One back-of-the-envelope way to quantify the costs to consumers is to compare the 5.1% standard fee in the U.S. to the industry average in other countries, which is estimated at about 3.6%. This means Americans are paying about $20 billion a year more for real estate services -- or about $3,000 on an average priced home -- than are home buyers in other nations. In its own internal documents, the Realtors association acknowledges that the purpose of its state lobbying is to keep competition out and fees high. In an April 22 memo to its state affiliates, the national office urged members to keep agitating for "state laws that are designed to replace competition with regulation." The memo added that "Realtors have the right to lobby for legislative and regulatory action -- even if the effect of such action would be anti-competitive." In response to a recent U.S. Justice Department complaint against a Kentucky Real Estate Commission policy that prohibited brokerage rebates and "other inducements to attract customers," the Realtors also acknowledged that these laws are intended to keep prices as high as possible. The brokers admitted that the policy "inhibits free trade" but defended the regulation by arguing that it was necessary to "avoid a bidding war" and to protect against a "lessening of profits." And this was their defense. The Kentucky Real Estate Commission reversed itself, though the brokers no doubt will now scurry off to the state legislature to get a new law enacted. * * * The Realtors have the First Amendment right to lobby for such anti-consumer legislation. But let's please dispense with their pretense that these laws are intended to "assure that the market for the sale of real estate functions efficiently and in the interests of buyers and sellers." We have nothing against real estate agents or their trade. In fact, we think the Justice Department is wrong in its recent antitrust complaint demanding that the National Association of Realtors allow online sellers access to its Multiple Listing Service. The listing service is a privately owned data base, not a public utility, and the Realtors should have the right to share it with whomever they wish. However, with their lobbying for state-imposed restraints of trade, the Realtors are the ones doing financial damage to millions of home buyers and sellers. We don't know who is more at fault he the Realtors who maintain that such protectionism benefits consumers, or the pliant state lawmakers who actually believe them. |
They've got the best politicians money can buy.-Jitney
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I've thought it remarkable that the realtors have gotten away with this
for as long as they have. It looks exactly like pricing fixing and trying to lock out competitors, which if any other industry did it, they would have the FTC and DOJ all over them. As for state restraint of free trade, here in NJ I saw one a few years ago that was remarkable. A local radio station had a promo going where a gas station was selling gas at a deep discount. The state officials show up and close them down, because there is a law in NJ that you can't sell gas for less than cost. Now what's more remarkable is that somebody in NJ govt was there in a few hours to enforce a law that almost no one even knew existed. |
Where I live, in Missouri, Real Estate Brokers are free to negotiate
any terms and conditions that they choose into a listing agreement. They can charge as much or as little commission as they please. The problem with undercutting what is considered the "standard" commission rate of six percent is that buyers' agents aren't going to bother showing homes to potential buyers if they commission amount isn't going to make it worth their time. Therefore, these discount brokerages are cutting their own throat because their listings won't be sold as often as listings with a higher commission rate. As for six percent being high. People who claim that have no idea what a real estate agent does to earn his three percent (three percent because most agents have to split their commission with their broker). Sometimes you have to put in hundreds of hours of work, hundreds of miles of "showing properties", hundreds of telephone calls just to sell one piece of property, and maybe make a couple of thousand dollars on it. I would say that for the "average" REALTOR (not the high-profile super-realtors), they make about 15 dollars an hour in a good year. Hardly unreasonable in this day and age. chula |
"chula" writes:
.... As for six percent being high. People who claim that have no idea what a real estate agent does to earn his three percent (three percent because most agents have to split their commission with their broker). Sometimes you have to put in hundreds of hours of work, hundreds of miles of "showing properties", hundreds of telephone calls just to sell one piece of property, and maybe make a couple of thousand dollars on it. Three percent of 200,000 is 6000 and 200,000 is less than lots sell for. And, with computers and databases you can search, some claim that there is less work involved today than there were when all this was big thick books of photocopied information, if you were lucky. I would say that for the "average" REALTOR (not the high-profile super-realtors), they make about 15 dollars an hour in a good year. Hardly unreasonable in this day and age. Decades ago I was given sanitized records for a small town multiple listing organization. All I had was that a sale had been signed and a number for the agent, but no way for me to track that back to any actual person or sale. I found that the vast majority of members in this town had sold zero or one house in the last year, and that was when you were very lucky if you made a hundred dollars on a sale, not thousands or tens of thousands. Less than ten percent of the realtors had handled something like three quarters of all sales in the year. (And a single person had sold triple what the next highest person had, when I totalled these up, did a histogram and showed it to the person who had given me the data they immediately said they knew who the highest total person was, even without any info, that person was an "enforcer" who would do anything up to maybe breaking your kneecaps to get you to sign, but you would then crawl down to the courthouse the next day and get out of it) So, to the point, at that time if you had no job but didn't want to admit that you could "be a realtor", a respected profession, for a few dollars a year. Some of these folks became a realtor just to sell their own house. Others just needed somewhere to go "to work." And thus, the population of people in this game may still be wildly skewed and averages may give you very very distorted ideas of what is going on. (If you get a chance, go watch the free American Investors Network marketing promo that they are running around the country. They give you some idea what their plan is and they let me out of the thing at the end without beating me up until I would sign up. They claim property values are going up more than 40% a year in a few areas of the country and they are going to get you in on that. I'm not suggesting you pay the $3000 fee to join but it is an informative couple of hours) |
my father got a real estate license years ago in college. He's never sold
property but was involved heavily with it as an attorney. When i moved to Georgia, he checked & found he could become licensed here for something like $150 since he was already licensed in other states. He got it solely to save me several thousand on my house -- i listed him as my broker & he got the 3% commission applied to reduce the final price. So, to the point, at that time if you had no job but didn't want to admit that you could "be a realtor", a respected profession, for a few dollars a year. Some of these folks became a realtor just to sell their own house. Others just needed somewhere to go "to work." And thus, the population of people in this game may still be wildly skewed and averages may give you very very distorted ideas of what is going on. |
On Sun, 14 Aug 2005 10:19:38 -0400, "anon"
graced this newsgroup with: my father got a real estate license years ago in college. He's never sold property but was involved heavily with it as an attorney. When i moved to Georgia, he checked & found he could become licensed here for something like $150 since he was already licensed in other states. He got it solely to save me several thousand on my house -- i listed him as my broker & he got the 3% commission applied to reduce the final price. So, to the point, at that time if you had no job but didn't want to admit that you could "be a realtor", a respected profession, for a few dollars a year. Some of these folks became a realtor just to sell their own house. Others just needed somewhere to go "to work." And thus, the population of people in this game may still be wildly skewed and averages may give you very very distorted ideas of what is going on. huh? How did he get a brokers license??? A realtors license and a brokers license are different. |
i didn't know there was a difference, i just know he has the necessary
licenses. huh? How did he get a brokers license??? A realtors license and a brokers license are different. |
Percival P. Cassidy wrote:
Perhaps things vary from state to state, but when I was telling our realtor here in Michigan about my brief experience as a real-estate salesman many years ago in another country and mentioned the sliding scale of commission (5% on the first bit and decreasing from there on up) used by the real estate agents' organization there, he said, "That sounds like price-fixing, which is illegal." The sliding scale is common in California, as is non-percentage based, flat fee commission. Only a very naive seller pays 6% on a house more than $200K or so. |
x-no-archive: yes
reading some of these posts, it appears the buyer also gets charged commission on the sale price? so, who's zooming who?? In the UK, just selling agent gets (??)% - property often gets marketed through several agencies, who share the cut- they may also get commisssion on surveys, mortgage & insurance if arranged through them - not neccessarily at the best rates for the buyer though.. is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? buyer beware! |
In the US, normally the seller pays a commission, with full commission
being 6%. When the house gets sold, the selling real estate agency splits that with the buying real estate agency. |
On Mon, 15 Aug 2005 07:42:43 +0100, "crofter" wrote:
is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? Yes. Typically the contract a person signs when listing his home with the sellers agaen prohibits this. If it does occur, the listing agent can sue for hsi portion. |
When we were looking for a house recently, we signed an exclusive
buyer's agency with a realtor (who happened to be an old friend of my wife's family, otherwise we might well not have signed such an agreement). One of the provisions in the standard contract form was that if we bought a house (even if it was one we found ourselves) within some specified time period (three months, I think), he was still to get his cut. No doubt there would be corresponding provisions in a seller's agency contract. Perce On 08/15/05 02:42 am crofter tossed the following ingredients into the ever-growing pot of cybersoup: reading some of these posts, it appears the buyer also gets charged commission on the sale price? so, who's zooming who?? In the UK, just selling agent gets (??)% - property often gets marketed through several agencies, who share the cut- they may also get commisssion on surveys, mortgage & insurance if arranged through them - not neccessarily at the best rates for the buyer though.. is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? buyer beware! |
On Mon, 15 Aug 2005 07:42:43 +0100, "crofter" wrote:
x-no-archive: yes reading some of these posts, it appears the buyer also gets charged commission on the sale price? so, who's zooming who?? In the UK, just selling agent gets (??)% - property often gets marketed through several agencies, who share the cut- they may also get commisssion on surveys, mortgage & insurance if arranged through them - not neccessarily at the best rates for the buyer though.. is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? Yes, it's called "a contract". buyer beware! |
On 15 Aug 2005 04:45:48 -0700, in misc.consumers.frugal-living
wrote: In the US, normally the seller pays a commission, with full commission being 6%. When the house gets sold, the selling real estate agency splits that with the buying real estate agency. Yep and then the friggin escrow company takes it's pound of flesh and the frigging title company takes it's pound of flesh.. but at least our realty agents actully show the properties and actually do some work. |
"Yep and then the friggin escrow company takes it's pound of flesh and
the frigging title company takes it's pound of flesh.. but at least our realty agents actully show the properties and actually do some work. " And a title insurance company doesn't? They are providing title insurance, which certainly is of economic value. Without it, where would you be if someone shows up someday from the past, with a claim against the property? |
On 15 Aug 2005 15:01:30 -0700, in misc.consumers.frugal-living
wrote: "Yep and then the friggin escrow company takes it's pound of flesh and the frigging title company takes it's pound of flesh.. but at least our realty agents actully show the properties and actually do some work. " And a title insurance company doesn't? They are providing title insurance, which certainly is of economic value. Without it, where would you be if someone shows up someday from the past, with a claim against the property? I'm comparing realty agents in the UK to realty agent in the USA. |
Mike wrote:
On Mon, 15 Aug 2005 07:42:43 +0100, "crofter" wrote: is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? Yes. Typically the contract a person signs when listing his home with the sellers agaen prohibits this. If it does occur, the listing agent can sue for hsi portion. I think family are exempt from this. but otherwise yes the contract would prevent that direct sale. In fact they often have clauses that if the house gets sold within 30 days of them being terminated as your agent they still get comission. Though I think I would fight that one, but its in there... -- Respectfully, CL Gilbert |
crofter wrote:
x-no-archive: yes reading some of these posts, it appears the buyer also gets charged commission on the sale price? in my case, i made a full price offer, and the seller paid all closing costs. they paid the 3% to their agent, the 3% to my agent, etc. and since i went through costco to find my agent, i got a $500 costco cash card when the escrow closed. supposedly it comes out of my agents cut, so i basically got a half percent rebate. they still got 2.5% for doing basically nothing. so, who's zooming who?? In the UK, just selling agent gets (??)% - property often gets marketed through several agencies, who share the cut- they may also get commisssion on surveys, mortgage & insurance if arranged through them - not neccessarily at the best rates for the buyer though.. is there anything to stop someone seeing a house, then going direct to the seller, and arranging a private (comm. free, on both sides) sale? buyer beware! |
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"Percival P. Cassidy" wrote: When we were looking for a house recently, we signed an exclusive buyer's agency with a realtor (who happened to be an old friend of my wife's family, otherwise we might well not have signed such an agreement). One of the provisions in the standard contract form was that if we bought a house (even if it was one we found ourselves) within some specified time period (three months, I think), he was still to get his cut. That is a pretty silly thing to do - why would you do that? A senior moment? David No doubt there would be corresponding provisions in a seller's agency This is basically unavoidable, and for good reasons |
On 08/16/05 04:13 am quietguy tossed the following ingredients into the
ever-growing pot of cybersoup: When we were looking for a house recently, we signed an exclusive buyer's agency with a realtor (who happened to be an old friend of my wife's family, otherwise we might well not have signed such an agreement). One of the provisions in the standard contract form was that if we bought a house (even if it was one we found ourselves) within some specified time period (three months, I think), he was still to get his cut. That is a pretty silly thing to do - why would you do that? A senior moment? Perhaps it wasn't as long as three months; but, whatever it was, it was the wording on the standard pre-printed form. And appointing a *buyer's* agent meant that he was working for *us* rather than on behalf of the listing agent and the seller. So there were houses we saw in which he was able to point out faults or tell us that they were overpriced. Unless we appointed him as *our* agent, he wouldn't have been able to do that. Perce |
Percival P. Cassidy wrote:
On 08/16/05 04:13 am quietguy tossed the following ingredients into the ever-growing pot of cybersoup: When we were looking for a house recently, we signed an exclusive buyer's agency with a realtor That is a pretty silly thing to do - why would you do that? A senior moment? Perhaps it wasn't as long as three months; but, whatever it was, it was the wording on the standard pre-printed form. Just a note. There is no standard pre-printed form. In real estate deals just about everything is negotiable. The form is only standard in the sense that it's the form that particular agency uses and contains stuff that they want on the form. Anthony |
my dad had a $100K judgment against someone with a lien on the guy's house.
His daughter forged a release from my father, forged notarization by her employer (who was a notary) and all that. my dad got wind of it & was legally 1st in line on that house. The guy who bought it had title insurance, which paid my father. Otherwise, he would've lost his house. it probably is rare, but it does happen. And a title insurance company doesn't? They are providing title insurance, which certainly is of economic value. Without it, where would you be if someone shows up someday from the past, with a claim against the property? how often does that happen, in real life? |
On Tue, 16 Aug 2005 05:26:44 -0700, Anthony Matonak
wrote: Percival P. Cassidy wrote: On 08/16/05 04:13 am quietguy tossed the following ingredients into the ever-growing pot of cybersoup: When we were looking for a house recently, we signed an exclusive buyer's agency with a realtor That is a pretty silly thing to do - why would you do that? A senior moment? Perhaps it wasn't as long as three months; but, whatever it was, it was the wording on the standard pre-printed form. Just a note. There is no standard pre-printed form. In real estate deals just about everything is negotiable. The form is only standard in the sense that it's the form that particular agency uses and contains stuff that they want on the form. Anthony I don't think this is the case in Caliornia - they seem to be pretty particular about using the state-approved forms, even when changes are made to the standard terms. |
On Tue, 16 Aug 2005 06:22:34 -0400, "Percival P. Cassidy"
wrote: On 08/16/05 04:13 am quietguy tossed the following ingredients into the ever-growing pot of cybersoup: When we were looking for a house recently, we signed an exclusive buyer's agency with a realtor (who happened to be an old friend of my wife's family, otherwise we might well not have signed such an agreement). One of the provisions in the standard contract form was that if we bought a house (even if it was one we found ourselves) within some specified time period (three months, I think), he was still to get his cut. IMO, signing that would generally be a bad idea. The agent could have been terrible, and he would still get paid. Not a good situation. Plus this seems like a recipe for the agent to get lazy since he knows you are stuck with him That is a pretty silly thing to do - why would you do that? A senior moment? Perhaps it wasn't as long as three months; but, whatever it was, it was the wording on the standard pre-printed form. And appointing a *buyer's* agent meant that he was working for *us* rather than on behalf of the listing agent and the seller. So there were houses we saw in which he was able to point out faults or tell us that they were overpriced. Unless we appointed him as *our* agent, he wouldn't have been able to do that. Perce Why wouldn't he be able to do that? I have utilized the services of a buyers agent with the last 2 homes I have bought. I used the same agent both times, and was never asked to sign anything ahead of time. She was able to tell me everything she knew about the property. Also, in the state where I live, if there are known faults with the property, the seller is required by law to disclose those to any potential buyer. If the agent says he is representing you only, then there should be no need for a contract ahead of time. When he shows you the right place and you decide to make an offer, then get out the pen. |
This is exactly why I started offering fee for service, hourly and
commission splitting real estate services. Not only are my clients excited to be savings upwards of 5% (just did a deal where I was dual agent and total commission on both sides was less than 1%) but I am also making a reasonable amount of money for my efforts. Soon most real estate transactions will be handled in this manner, but until then check out my website for more information. a href="www.hourlyagents.com" www.hourlyagents.com /a |
too bad there's such a shortage of sneaky lawyers in the USA. Probably
no one could dream up a workaround against price-fixed brokerage. Too bad there's only one way to ever skin a cat! In the end, all the money the Realtors poured down the toilet won't help them. And those State Legislators probably know it quite well. But perhaps not. State Legislators aren't sneaky lawyers, right? |
"In the end, all the money the Realtors poured down the toilet won't
help them." Maybe so, but when is the end coming? Here in NJ the realtors are very much in control. So, it looks like money very well spent to me. |
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