End the Realtor Racket
The Wall Street Journal’s editorial page and op-eds are a lot like certain baseball sluggers: You either get home runs (in the Journal’s case, mostly) or strikeouts (usually on immigration and national sovreignty).
Today they hit a home run with “The Realtor Racket,” which exposes the industry for the national disgrace that it is (requires subscription; bolds are mine):
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.
…. 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.
…. 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.
As you might expect with any industry that needs government protection to keep its racket going, it’s all about the money–the political contributions money:
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.”
There’s no reason why a realtor deserves twice as much income simply because the price of what they sell has in some markets doubled in the past 5 years. In a competitive market for real-estate services, it would not happen.
If BizzyBlog were in charge:
- State lawmakers with active real-estate licenses would recuse themselves from any votes on measures affecting the industry.
- Any lawyer still in practice with real estate clients would do likewise.
- The 10% of so of legislators that remain (not far from the truth in some states) would be the only ones who get to vote on such measures.
Since this will never happen, the next-best thing is to legally challenge and throw out any laws that prevent price discounting and access (for a reasonable fee) to widely-distributed listings.
State attorney generals and The Justice Department should also consider actions against individual realtors and realtor groups who breach their fiduciary duty by failing to make available for buyer consideration all houses meeting the buyer’s criteria, whether they are listed by “full-service” firms, discounters, or owners. Elliot Spitzer, where are you when we need you?
Hi,
I am a Realtor in Austin TX. Consumers are free to choose from many different Discount Brokers, or to interview and negotiate fees with any number of full service Brokers when choosing a real estate agent to list and sell their home in Texas. There is no restriction whatsoever on the commission rate that a consumer and a real estate agent can agree upon.
Austin currently has a Broker running heavy radio spots (disparaging “high commission” Realtors) offering a 1% commission (the ad ommits the fact that the 1% is for the listing side only and there is a $3,500 minimum). Other companies offer a flat $500 listing fee to place a home in the MLS, plus additional services ala cart.
Discount Brokers have been around Austin now for at least 10 years. None of these companies have captured significant market share. Perhaps this is because Austin’s real estate prices have remained flat for the past 4 years while many other parts of the country have seen the tremendous price increases we read of so often. I personally do not feel threatened by nor hold any ill will toward Discount Brokers. It just isn’t the business model I choose, and I am able to justify the fee I charge to those who choose to utilize my knowledge and experience.
The truth is, real estate is a hard business. The latest NAR salary survey shows the average agent with less than 5 years experience averages $34K per year in commission earnings. Subtract from that amount the business expenses and you see why almost half of new agents wash out of the business in the first year. Marketing and selling real estate just isn’t as easy as many think. If Discount Brokerage was as desired and needed as the WSJ article seems to claim, full service Brokers would have been run out of business by now. Why is that? It’s the same reason some people drive a Volvo while other drive a Yugo. The consumer can choose the level of service they desire and most seem to desire a full service Broker.
Comment by Steve Crossland — August 14, 2005 @ 10:14 pm
I don’t disagree that RE is a hard business, that the good ones work their rears off, and that in times like these everyone comes out of the woodwork thinking they can do it, making it a bit tougher on the veterans.
But that doesn’t mean that there isn’t cartel-like behavior to protect the “Full Service” broker as noted.
I would think that corporations doing frequent relos like P&G would be in a position to negotiate rates in the 3%-4% range if they weren’t hamstrung by a lot of state laws.
Also you still have the fact that commissions in other countries average 1.5% lower. There must be a reason for that.
Comment by TBlumer — August 14, 2005 @ 10:35 pm
I am not familiar with all of the factors involved in selling real estate in other countries, so I can’t make an educated comment about whether it’s apples to apples when comparing just the fee percentages alone. I suspect a true analysis would reveal that the agents in other countries actually provide a diferent set of services.
Our recent legislation in Texas was meant to cure a problem that was created when Discount Brokers would list a property in the MLS and then, in the comments, instruct the Buyer’s agent to “submit all offers directly to Seller”.
It has always been a violation for a real estate agent to go around a listing agent and try to deal directly with a seller. In fact, an agent can lose their license for an ethics violation like that. So it created a problem when a listing agent would instruct a buyer’s agent to violate Texas Real Estate Commission rules.
The new law clarifies this and allows the consumer to still purchase a minimum level of service, but outlines the circumstances under which a buyer’s agent can work with a seller who has chosen an anbsentee listing agent. This actually makes it possible for agents to legally work with Discount Brokers whereas before, many Buyer’s agent simply would not deal with those listings at all because they could not legally do so.
Comment by Steve Crossland — August 14, 2005 @ 11:07 pm
Going around the listing agent should be illegal and I’m not going to pretend there aren’t ethical violations in both directions.
The question is whether RE agents can compete on price, and WSJ gives strong evidence that the ability to do so is restricted in a lot of states in a way that’s orchestrated by RE industry lobbyists. TX may be an exception.
Wish I could elaborate more, but am pressed for now.
Thanks for the points.
Comment by TBlumer — August 15, 2005 @ 7:42 am
The only problem Ive had with discount brokers is they frequently try to push work onto the other broker in the transaction. If a broker can change a low amount and do their job that is fine. But usually they try to push work onto the other broker. I have felt I am doing all the work in the transaction while the discount broker refuses to lift a finger. I still show all the houses available to a client. But when certain realtors dont, I would not assume its because of a conspiracy to hurt the discount brokers. Its probably because some realtors are not interested in doing twice as much work while watching the other realtor in the transaction refuse to do anything.
Comment by Ki Gray - Austin Real Estate Person — November 22, 2006 @ 10:36 pm
#5, that may be a legit complaint. I’m not close enough to the business to know.
Comment by TBlumer — November 22, 2006 @ 10:40 pm