Broker Community Under Investigation
by the Feds
Until recently, the only option a seller had to engage a real
estate broker was to pay a fixed-rate commission. Well, not
really... commission are not fixed by law, they are fixed by
custom. Or, are they really fixed at all? That's the question
the Justice Department is looking into.
Price fixing has been illegal in the United States for a
long time. But, as a customary fashion, an industry often
ends up looking like a "fix" because all the players
want to look competitive. Hence, the "standard"
6% listing fee. Until recently, virtually every real estate
broker quoted 6%, and if a broker advertised less than 6%,
the community was in shock and often shunned him.
Buyer's agency is also something relatively new, that is,
an agent who represents the buyer. If the buyer's agent brings
a buyer to the table and the property is listed by a different
agent, then the 6% commission is split, generally 50/50 or
something like 2.8% to the buyer's agent and 3.2% to the listing
agent. Since most buyers are procured by the buyer's agent,
the listing agent's role has been greatly diminished in recent
So, one day sellers started asked the question, "what
do I need a listing agent for?" The answer to that question
is simple... you need to get your property on the Multiple
Listing Service (MLS), otherwise you aren't likely to get
it sold. After all, most buyer's agents look to the MLS for
properties for their clients.
Many listing agents smartened up by offering a limited-service
product for less. The flat-fee broker simply places your property
on the MLS for a flat fee, rather than a percentage of the
sales price. In some markets, some agents are doing it for
as little as $250. The buyer's agent still gets 2.8% for bringing
the buyer to the table, but the seller must coordinate the
showings with the buyer's agent, review the purchase offer
and complete the sale without the assistance of the listing
agent. The fact is, most real estate investors are (or should
be) savvy enough to use do all of these tasks without the
assistance of an agent.
SIDE NOTE: AGENT VS. BROKER VS. REALTOR. In most states,
one must be licensed as a broker to list property. An agent
works under a licensed broker. A realtor is a broker or agent
who is a member of the National Association of Realtors. Most
agents and brokers are Realtors, as well as members of a local
board. Throughout this article, I use the term "broker",
"realtor" and "agent" synonymously.
So, what's the problem? If you want full service, you pay
3.2%, and if you want no service, you pay just a few hundred
bucks and do the work yourself. Sounds much like the stock
brokerage industry, doesn't it?
Well, it seems that the "gold old boy" network
doesn't much like the discounters. I don't blame them, because
it hurts their business. But price fixing is illegal, isn't
it? That's what the Justice Department is looking into. According
to CNN Money, a federal investigation alleges that full service
agents in Tulsa Oklahoma engaged in "boycotting",
that is, refusing to show their buyers properties that were
listed by discount listing agents. The Attorney General has
also sent letters to lawmakers in Oklahoma and Texas, urging
them to reject proposals that would effectively prohibit brokers
from engaging in discount fee services. These propsed laws
require brokers to provide certain services that discount
brokers would normally forego.
The Realtor community claims that the public is being protected
by requiring agents to provide these services because the
consumer might make costly mistakes doing it on this own.
Sounds reasonable, but why do the Feds allow discount stock
brokers? The answer, to me, is simple: don't treat consumers
like babies, let them make their own decisions. Sure, many
consumers will screw it up, but that's their choice. The state
bars, backed by lawyers, tried to outlaw software programs,
do-it-yourself kits and legal form publishers, but the consumers
won the battle. In reality, the consumer is more likely to
make mistakes doing their own legal documents, but that's
their choice. A smart consumer who does not feel comfortable
preparing his own living trust will pay a lawyer to do it.
Personally, I'm all for the discount listing services, especially
for investors who know what they are doing. If a homeowner
does not feel comfortable using a flat-fee, no service broker,
they are free to pay the full commission to get the full service.