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Added: June 21, 2006, 1:08 pm	Share    Print    Email

The Consumer Federation of America (CFA) released a report Monday building a case on how traditional real estate brokers stifle competition and suggesting how consumers can protect themselves.

Much of this criticism is brought on by a low barrier to entry in the field, since all that is required to have a real estate license is to pass a fairly simple test given after a 45-hour course. While the real estate field used to be made up primarily of working mothers and school teachers, bringing extra income to their families, the industry has evolved in recent years to one where professionals from other industries are leaving their once sought after careers and entering the field of real estate. I have hired and trained new agents from Wall Street, the fashion industry, advertising, and most recently we have seen a great many attorneys leave their law practice and enter the field.

Look, if it were that easy, everybody would be doing it, right? Well, almost everybody is, right? Especially in a market like ours, here on the East End, where there are relatively few ways to live here full time and make a living, with the average real estate transaction now over $1mm, which translates into a $50k-$60k commission, no wonder so many people are getting their licenses!

Another issue for the Hamptons is that there is really no Multiple Listing Service (MLS). Yes, the Long Island Board of Realtors does offer its MLS program here on the East End, and many of the smaller brokers do use it. As a matter of fact, in my view, using the MLS is the primary reason that many of the smaller brokers have survived. They are able to get leads from all over the country, and the world for that matter, because MLS listings are fed to the Realtor.com database that is most popular real estate search engine on the planet. Despite that fact, less than 10% of East End listings are on MLS and Realtor.com, because many of the larger firms don't want to "share" their listings with agents/brokers outside the immediate area. How's that for serving the client?

According to the report, "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.

They surmise that the desire of traditional brokers to maintain 6-7% commissions and the opportunity for a "double-dip" - one broker collecting the entire commission - lies behind almost all of their anti-competitive actions. In nearly all areas of the country, traditional brokers have tried to charge commissions of either 6% or 7%, although many sellers of higher priced homes have been able to negotiate reductions of one percentage point or even more, the report says.

The report is based on information from dozens of real estate professionals and from hundreds of articles in journals, real estate publications, and the general press, CFA states.

How Consumers Are Harmed - The report explains ways in which consumers are disadvantaged by traditional real estate brokerage practices. According to the report:

 • Traditional brokers try to charge high, uniform prices regardless of the training and experience of the broker, the specific services offered, the number of brokers involved, and the function of the broker - as fiduciary agent or facilitator. "The $24,000 most brokers try to charge for the sale of a $400,000 home would purchase many new car models or expensive medical procedures," noted Brobeck.

 • Traditional brokers who work with both seller and buyer in a home sale almost always function as facilitators even though consumers, especially sellers, have been led to believe the brokers are functioning as fiduciary agents.

 • To increase chances of a "double-dip," many traditional brokers promote their own listings to sellers and, if these are not attractive, the listings of their firm.

How Traditional Brokers Stifle Competition - There are five factors that allow traditional brokers to restrict price and service competition, according to the report:

 • Seller-Paid Commissions: Sellers and seller brokers are reluctant to lower commission splits to brokers working with buyers for fear that properties will not be shown. If sellers and buyers each negotiated compensation separately with brokers, brokerage services and prices would quickly become unbundled.

 • Discrimination Against Nontraditional Brokers: The anti-rebate and minimum service laws, which traditional brokers have persuaded many state legislatures to pass, are designed to restrict service and pricing options. So are more subtle forms of discrimination by traditional brokers who do not show listings of discount or fee-only brokers or who make access to property listings difficult for exclusive buyer brokers or rebaters.

 • Lack of Consumer Knowledge: First-time home buyers typically know very little about brokerage services and their pricing. Those selling one home and buying another tend to be preoccupied with matching these sales. As a result, many consumers do not shop and negotiate for brokerage services as carefully as they would purchase a car or other expensive products.

How Consumers Can Protect Themselves - The report also urges home sellers and buyers to protect themselves by supporting needed reforms and by negotiating more forcefully with brokers. Consumers themselves can also take steps to protect themselves. According to the report:

 • 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.

 • Consumers should ask about potential broker conflicts of interest, such as pushing their own listings or those of their firm.

Steve Murray, Real Estate Industry consultant and editor of REAL Trends Newsletter says, "In our twenty years of research and reporting on the residential real estate industry there has never been a more irresponsible, speculative, worthless report than this one. There is no research to back up a single opinion, just the authors using the bully pulpit to inflame fears among consumers about housing professionals and take shots at one of the most useful industries ever conceived.

Murray continues, "There is much we can do to improve service to consumers, but the prescriptions listed by Brobeck and Woodall are totally baseless and useless. We should forcefully rebut this report and thereafter ignore anything that comes out of the Consumer Federation of America if this is the kind of junk on which they put their names."

I see where Steve Murray is coming from, and for a professional paper, such as this, I believe that the case should be made through the use of factual information. Much of the info they use is anecdotal and opinion based. That being said, we as industry professionals need to ensure that we are hiring and training the best people we can find as agents and the shenanigans of yesteryear with "pocket listings" and unclear fiduciary representation will not be tolerated. There's simply too much at stake. Welcome to the 21st century folks.

Excerpts of this article taken from RIS Media and Real Trends Newsletter. To read the full report from the CFA, click here.

For more information, click here.

Michael Daly is Principal Broker of True North Realty Associates in Sag Harbor, New York and has been a top selling agent, managing director and vice president for two national real estate companies since 1998. True North serves clients not only in The Hamptons, but also worldwide in various resort destinations. Michael lives in North Haven with his wife and partner Barbara Davis Daly and their dog Luna. He can be reached at 631.642.6300 or by email at md@truenorthassociates.com.