The Consumer Federation of America issued a report declaring that the real estate brokerage industry acts as a cartel to set prices unfairly. Here’s the full report [PDF].
“Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options,” said Stephen Brobeck, CFA’s Executive Director. “But consumers can take steps to lower 6-7% commissions without jeopardizing the sale or purchase of a home,” he added.
The organization believes consumers are harmed because
* traditional brokers charge uniform prices regardless of the broker’s level of experience or quality of service provided,
* traditional brokers who work with both the seller and the buyer “almost always function as facilitators even though consumers, especially sellers, have been led to believe the brokers are functioning as fiduciary agents,” and
* brokers promote their own listings and those of their own firm even if they are not the best choices for the customers.
The organization claims brokers stifle competition through five factors.
* Seller-paid commissions. Seller brokers won’t lower commissions for fear that buyer agents will not show the property. (The buyer agent would see part of that commission, and if it’s lower, the agent would rather show only high commission properties.)
* Discrimination against nontraditional brokers. Traditional brokers persuade legislatures to pass anti-rebate and minimum service laws to restrict pricing options.
* Listing services. Traditional brokers restrict full access to multiple listing services to other brokers. They also hide commission splits from consumers.
* Lack of consumer knowledge. Mitigating circumstances causes consumers not to know they can negotiate for brokerage services, and they don’t do so as carefully as they would when purchasing a car, for example.
* Regulatory capture. Those who design state regulations are often practicing real estate brokers, creating a conflict of interest. Regulations are often designed to favor traditional real estate brokers.
Consumers can protect themselves by keeping the following in mind.
* All consumers should ask for oral and written disclosures of whom their broker represents, if anyone. Brokers functioning as “facilitators,” “transactional brokers,” or “dual agents” can not represent the financial interests of clients.
* Sellers should ask brokers who are fiduciary agents to reduce the standard 6-7% commission by one percentage point and brokers who are facilitators to knock off at least two percentage points since they are usually “double-dipping.” Buyers should ask brokers if they are willing to rebate one percentage point of the commission back to them.
* Consumers should ask about potential broker conflicts of interest, such as pushing their own listings or those of their firm.
Everyone loves real estate brokers when people selling property are making tons of money. Now that home sellers are not making out well (if we are at the top of a boom and perhaps started a decline), while brokers are still making tons of money, people are starting to scrutinize more.
It’s not a good time to be a real estate agent. Competition is fierce, but is there a cartel?
Updated June 21, 2006 and originally published June 19, 2006.
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There are MLS listing services which allow listing of property for a flat fee. I think promoting such services would be both profitable for the individuals and the real estate brokers. People who don’t want a broker intermediate or don’t believe in a realtor, can go for the deal directly in a multiple listing service.