Real estate competition and antitrust actions | Inman News

Real estate competition and antitrust actions

Discounters down, but not out: Part 2

By Matt Carter, Friday, April 29, 2011.

Inman News™

Editor’s note: This is the second part in a multipart series highlighting the history and current state of low-fee real estate brokerage models.

If discount and limited-service real estate brokerages have yet to take off as spectacularly as their most enthusiastic boosters had anticipated, one reason could be that in some markets, the rules have been stacked against them, regulators say.

One obstacle nontraditional brokers have had to overcome is full and equal access to multiple listing services.

Sellers expect any broker they do business with will have the ability to place listings in the multiple listing service — and that those listings will be seen not only by other brokers, but by consumers.

Buyers are attracted to websites that offer them access to a comprehensive and rich set of listings data in their market — a fact that technology-based brokerages like ZipRealty and Redfin have built their businesses around.

   

Read Part 1
   

If traditional brokers are able to deny nontraditional brokers the ability to publicize their clients’ listings in public-facing MLS sites — or to display the listings represented by all brokers in a given market to prospective buyers — they can limit competition, regulators maintain.

At the state level, Realtor associations have prodded some lawmakers and real estate commissions to institute so-called minimum service requirements stipulating that real estate licensees must be able to perform some basic services, such as show properties, receive and present offers to clients, and advise them on negotiations and closings.

Regulators say such requirements can make it difficult for limited-service brokers to employ a business model in which they charge homeowners a flat fee for menu-based services, including "MLS entry only" listings.

In 2005, the U.S. Department of Justice and Federal Trade Commission voiced opposition to Realtor-backed legislation enacting minimum-service requirements in Alabama, Missouri, Oklahoma and Texas. Lawmakers in all four states passed the bills anyway (federal antitrust law gives states some leeway to adopt regulations that ostensibly protect consumers, even if they have anti-competitive effects).

Although several states have since repealed minimum-service requirements, the Justice Department’s "Competition and Real Estate" website lists 11 states that still have laws on the books that restrict the ability of consumers to choose only the services they want: Oregon, Washington, Idaho, Utah, Texas, Kansas, Iowa, Missouri, Indiana, Illinois, and West Virginia.

When Illinois’ minimum service law took effect in 2004, supporters said new requirements were intended to aid consumers and agents alike.

Brokers entering into "exclusive agency" listing agreements often employed by limited-service and flat-fee brokers were required to present offers from buyers to their clients — precluding a true "MLS entry only" listing where the broker provides no other service than listing a property in the MLS.

A spokeswoman with the Illinois Department of Financial and Professional Regulation told Inman News at the time that the law "really is a consumer protection bill," heightening continuing education requirements for real estate brokers and agents while also preventing consumers from getting "scammed" by a limited-service brokerage.

One flat-fee MLS listing broker told Inman News that while the public policy intent of the law was "legitimate in terms of consumer protection," he was concerned that the law could be used by Realtor or MLS associations to restrict the practice of business models of Realtors and limit the choices available to consumers.

The broker, Brian Callahan of Homefront LLC, said his business was not affected because instead of entering into exclusive-agency listing agreements with clients, his company provided a marketing agreement that allowed sellers to retain any type of professional adviser who they want to represent them, whether it is a lawyer or another broker.

The MLS battleground

And brokerage company execs and licensees who serve as leaders at some of the nation’s more than 800 MLSs and in state real estate regulatory agencies haven’t been afraid to exercise their power to impede competition and consumer interests, regulators and consumer groups have charged.

In October 2006, the FTC brought to a head a series of enforcement actions by announcing consent agreements with five MLSs in Colorado, New Hampshire, New Jersey, Virginia and Wisconsin. Regulators said the MLSs had refused to transmit "exclusive agency" property listings favored by limited-service brokers to public-facing websites like Realtor.com.

In announcing the consent agreements, the FTC said it was taking action against two Michigan-based MLSs that had refused to settle. One of those MLSs, MiRealSource, entered into a consent agreement with the FTC in February 2007.

But with backing from NAR, the other MLS — Michigan’s largest, Realcomp II Ltd. — decided to fight the FTC in court, racking up more than $2.4 million in legal expenses.

Realcomp did not rescind its policy of withholding exclusive-agency listings from Realtor.com, MoveInMichigan.com, and other public sites until February 2009, when the Sixth Circuit Court of Appeals denied its motion to stay an FTC order.

On March 31, 2011, the appeals court denied Realcomp’s petition to overturn the order. Although Realcomp could still appeal the decision to the U.S. Supreme Court, NAR General Counsel Laurie Janik said at the time of the decision, "I think that would be a long shot."

A Michigan brokerage that offered cash rebates to buyers and commission discounts to sellers sued Realcomp and another MLS, MiRealSource, in 2007, alleging the MLSs’ policies put it out of business. Home Quarters Real Estate Group, which claimed damages in excess of $10 million, reached a confidential settlement with both MLSs last year.

The Department of Justice has also been involved in the MLS arena, filing antitrust suits against two South Carolina MLSs, Columbia-based Consolidated Multiple Listing Service Inc. and

Multiple Listing Service of Hilton Head Island Inc., for allegedly discriminated against discount and fee-for-service brokers. Both lawsuits were settled after the MLSs changed their policies.

Canadian regulators have locked horns with the Canadian Real Estate Association (CREA) over rules governing flat-fee, limited-service brokerages. After a 3 1/2-year legal battle, CREA in October ratified a consent agreement with the Competition Bureau of Canada — Canada’s version of the FTC — which the bureau said protects the right of brokers to provide MLS-only listing services.

Derek Eisenberg, broker-owner of Hackensack, N.J.-based limited-service brokerage Continental Real Estate Group Inc., said he believes his reports on the activities of several MLSs played a role in prompting U.S. regulators to take action.

"In all cases, neither the FTC or the DOJ wanted to be too personal," Eisenberg said, to the point that investigators seemed "removed" at times. "They are not coming to the defense of flat-fee brokers, as much as (taking action to protect) consumers."

Eisenberg said regulators have been "extremely professional" in their attempts to address anti-competitive practices, but he believes they have so far been unresponsive to some issues that still create problems for flat-fee listing brokers who do business in multiple markets.

Some MLSs require brokers to show up in person to take orientation classes or replace lockboxes, he said, by way of example. A Virginia MLS suspended several of his listings and threatened to fine him when, against Eisenberg’s advice, one of his clients put up a "for sale by owner" yard sign, for example.

"I think when it’s their hot spot, they do something about it, and when it’s not, they don’t," Eisenberg said of regulators’ response to his complaints. "It’s not like we can call the sheriff, and (the sheriff) responds."

Several limited-service brokers in Wisconsin have questioned whether one MLS that’s settled with the FTC — Multiple Listing Service Inc. — has since violated the spirit, if not the letter of its 2008 consent agreement.

Suburban Milwaukee-based MLS Inc., they said, adopted rules that allowed one of the largest traditional brokerages in the state, Shorewest Realtors, to block their listings from appearing on its Internet Data Exchange (IDX) site.

MLS rules governing IDX listings — the pool of listings in a given market that brokers have agreed can be published on each others’ public-facing websites — are in most cases based on policies drafted by NAR.

If full and equal access to the local MLS is among the most crucial issues for nontraditional brokers, NAR’s IDX policy may be the area where regulators have had the biggest impact.

NAR amended the policy in 2006, after it was hit with an antitrust lawsuit by the Department of Justice, striking language that allowed MLSs to exclude some properties from display on IDX Web sites based on the type of listing agreement, but preserving the right of individual MLS members to make such decisions.

In a 2008 settlement with the Department of Justice, NAR agreed to modify its model MLS policy for "Virtual Office Web sites," or VOWs, operated by Internet-based brokerages like ZipRealty and Redfin.

Password-protected VOW sites provide consumers with listings data that’s more comprehensive than the information provided on public IDX sites. The Department of Justice said NAR’s policy previous policy, allowing brokers to withhold listings from VOWs, restrained VOW brokers from competing with traditional brokers.

In agreeing to amend its VOW policy, eliminating the option for brokers to "opt out" from sharing property listings information with VOW sites, NAR said it expected the impact to be "minimal, since most consumers do not use VOWs because these sites require online registration."

There are, however, popular real estate brokerage websites that incorporate VOWs. ZipRealty’s overall website consistently ranks as the most popular real estate listings portal operated by any brokerage, and was among the top 10 real estate sites overall in March, according to Web research firm Web research firm Experian Hitwise. And national brokerage company Redfin, which also operates a VOW site, has appeared on Hitwise’s top 20 list of top real estate sites.

In fighting attempts by regulators to impose rules on MLSs, NAR and the MLSs themselves have argued that MLSs are created, operated and paid for by real esate brokerages to promote cooperation between brokers representing buyers and brokers representing sellers.

MLSs, NAR and their owners argue, are businesses — not public utilities providing services to all.

Testifying at a Congressional hearing in 2006, NAR’s then-president-elect, Pat Vredevoogd-Combs, said MLSs are nonetheless "a powerful force in facilitating competition," because of the efficiencies they create in buying and selling a home.

MLSs, she said, "level the playing field so that (the) smallest brokerage firm in the local market can compete with the largest."

If the MLS system were restructured "to take away the rights of the listing brokers to market a property as they and their clients see fit, there could be a significant and harmful disruption to the way real estate is marketed to the widest possible pool of buyers," Vredevoogd-Combs said.

"Rather than reducing commissions as hypothesized, another possible scenario is that large brokers and brokers affiliated with franchises would pull out and create their own systems — which the expanding availability and decreasing cost of technology makes more and more feasible."

Although membership in some MLSs is limited to Realtor association members, that membership requirement has been upheld virtually everywhere it’s been challenged, she noted. Membership in Realtor associations, she said, "is available on reasonable and nondiscriminatory terms."

NAR "does not limit competition by excluding from membership innovative real estate firms," and its members "represent almost every conceivable real estate business model," Vredevoogd-Combs testified on behalf of NAR.

"NAR is not a cartel and does not encourage imitative price-setting," she said, arguing that "it would simply be impossible to implement an agreement on prices among NAR’s 1.3 million vigorously competitive members."

Access to Realtor.com

Another issue that’s cropped up for flat-fee "MLS only" listing brokers doing business in many markets is whether they can represent sellers in states where they are not licensed. Some flat-fee brokers work with sites like ForSaleByOwner.com to place flat-fee listings from around the country on Realtor.com.

Realtor.com — NAR’s officially sanctioned listing portal — only accepts listings from MLSs. To get around that restriction, ForSaleByOwner.com refers for-sale-by-owner listings to partner brokers, who enter the properties in MLSs they belong to — even if the MLS is in another state.

A California broker who allegedly accepted hundreds of listings from sellers around the country was hit with cease-and-desist orders last year by state licensing authorities in Nebraska and Alaska. The Nebraska Real Estate Commission maintained that only licensees are permitted to negotiate the listing, sale or purchase of property in the state, or assist in procuring prospects.

The broker, Leslie Rae Young, has filed court challenges disputing the states’ claims to have jurisdiction over her. Other flat-fee listing brokers worry that MLSs could also stop accepting listings from outside the markets they serve.

Eisenberg said he thinks brokers who find themselves in hot water with state licensing officials might successfully argue that they are only soliciting buyers in the states where they are licensed.

"States don’t license property, they license people," he said.

But Eisenberg has taken a different approach himself, obtaining licenses wherever he accepts listings. So far, he said, he’s become licensed in 19 states, and his associate broker is licensed in two more.

Although he doesn’t object in principal to state licensing requirements — the particulars of how transactions must be conducted vary from state to state, as do laws governing brokers’ relationships to buyers and sellers, he noted — Eisenberg said he thinks states could streamline their licensing process for brokers who are already licensed in another state, without sacrificing the integrity of the process.

Some of the material covered in licensing courses and tests required by states is duplicative, and often there’s no option to take classes or tests online or at remote testing centers, he said.

"I wish they would come up with uniform standards of reciprocity, so they would respect your general coursework, your general exam, and your two years of experience, and only make you take a short exam and possibly an online course that only gets into state law," Eisenberg said.

Despite such obstacles, Eisenberg thinks that flat-fee listing brokers could conceivably command 25 percent of all for-sale property listings within the next 10 years.

His company is growing rapidly — it’s on target to sign 200 listings this month, he said — and its lean operating model means it wasn’t hit as hard as traditional Realtors during the downturn, he said.

"Our position is very much like (discount stock broker) Charles Schwab in the early days," Eisenberg said. "Schwab popped up in the 1970s, and even without the backlash and persecution (that he said flat-fee real estate brokers have faced), it took until the early- to mid-1990s until discount stock brokerages became a viable model."

One problem with that analogy, Eisenberg acknowledges, is that "people trade stocks all the time, and they only sell a house every seven years on average."

However, he said consumers are getting more educated about real estate, and he believes the limited-service brokerage model is gaining acceptance — even though companies that have adopted the business model don’t have big marketing budgets to spread the word.

Continental’s clients include investors, lawyers, and "big-name Realtors who come to me because their own firm won’t cut them a deal," Eisenberg said.

He said if any of his less experienced clients get cold feet after signing a listing agreement with him, he offers a full refund to clients who allow him to refer them to a full-service broker. "It comes down to the consumer," he said, and the consumer’s comfort level with the real estate transaction process.

In an online real estate compensation study conducted by Inman News in February and March with participation by 1,054 respondents, about 12 percent said they offer a flat-fee structure to clients as a compensation option, and about 35.3 percent of respondents said they expect flat-fee services will become more popular within the next five years.

The only fee structure identified by a larger share of respondents (43.6 percent) as likely to become more popular in the next five years is the percentage-based commission model — which 94.3 percent of respondents said they already offer to clients.

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