The Government's Endgame

 

A document from 2021 lays out what the government might want to see when it's all said and done

 

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I spent some time on the powers of the US Department of Justice and what they could do if they chose to.

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A key observation is that no matter what happens in the civil antitrust lawsuits of Sitzer, Moehrl, Nosalek and others, even if there is a settlement that everybody agrees to, the DOJ is not a party to any of those and is not bound by any settlement. The DOJ can pursue its own ends.

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What are those ends?

This is a topic I’ve touched on over the years, but I recently discovered a paper published in 2021 that does quite a bit to lay out the thinking of policymakers. It is also helpful as it summarizes quite a bit of the academic research and other policy papers over the years, so it is valuable as a way to trace the development of the thinking.

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I believe this paper provides a roadmap as to what the DOJ, the FTC and other policymakers inside and outside of government want to see happen to residential real estate. If there is to be significant regulation by the FTC, a lot of those will be guided by the ideas in this paper.

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Let’s get into it.

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The Paper

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The paper was published in March of 2021 and is titled Obstacles to Price Competition in the Residential Real Estate Brokerage Market. Three minor notes of significance:

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1. The author, Mark Nadel, appears to be an attorney and advisor for the FCC. He’s not DOJ or FTC, but he’s in the mix of federal regulatory agencies.

2. Among the people he thanks for the article, we find Ben Harris, Assistant Secretary for Economic Policy and a counselor to the Secretary of the Treasury. Again, he’s neither the DOJ nor the FTC, but he’s in the mix.

3. The paper was financially supported by REX, which provides context to the bias and slant.                                                                                                                                                                                                                                                                     Let me at least embed the paper here in case you want to read it. Bblj Online Nadel 541KB ∙ PDF file  Download

 

You can get a good gist of what the paper says simply by reading the table of contents:

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1. Allowing Listing Agents to Set and Collect Co-op Fees Has Many Anti-Competitive Effects and No                                                                    Benefits to the Public ................................... 100

2. a. Historical Basis for this Practice........................................................ 101

   • Allowing the Listing Agent to Set the Co-op Fees Creates a Conflict of

     Interest Between the Buyer and the Buyer’s Agent........................... 102

     • Buyers’ Agents Will Steer Buyers Based on Co-op Fees ........... 103

     • A Percentage Co-op Fee Incents Buyers’ Agents to Urge Buyers to

       Bid Higher ................................................................................... 107

   • Allowing Listing Agents to Incorporate Co-op Fees into the Listing

     Agreement Inhibits Buyers from Saving Money by Going It Alone. 107

   • Co-op Fees Set by Listing Agents Prevent Price Competition in the 10

     States That Prohibit Rebates .............................................................. 108

   • The Use of Co-op Fees Facilitates Price-Fixing................................ 110

   • Co-op Fees Deter Rates Based on Quality-of-Service or Market

     Conditions.......................................................................................... 111

   • Buyers Should be Able to Amortize Their Buyer Agent Fees in a

     Mortgage............................................................................................ 112

   • In Conclusion: Listing Agents Should be Prohibited from Setting

     Buyer Agent Fees .............................................................................. 113

3. Traditional Agents Have the Means and the Motivation to Steer Their Clients Away from Transactions Involving                                              Disrupter Brokers (Steering II) ........ 113

   • Traditional Agents Have as Much as a $50 Billion/Year Self-interest in

     Preserving the Traditional Business Model with its Lack of Effective

     Price Competition .............................................................................. 114

   • The General Need for Two Agents to Make a Deal Empowers

     Traditional Agents with the Means to Hinder New Entrants ............ 115

   • Traditional Agents Portray Disrupter Brokers as Inferior and Sabotage

     Them .................................................................................................. 117

   • Helping Consumers Defeat Steering ................................................. 118

4. Brokers Should Not be Permitted to Limit the Dissemination of Listings and Related Information Unless That is in the Best Interests of the Seller ...... 120

   • Listing Agents Violate Their Fiduciary Duty to Sellers When They

     Withhold Listings to Benefit Their Own Interests ............................ 120

     • Using Pocket Listings to Double End Can Hurt Sellers.............. 120

     • Withholding Listings from Competitor Websites so as to Attract

       New Buyer Clients Hurts Sellers................................................. 121

   • Sellers Who Prefer to Sell Quickly and Easily (or Secretly) Rather

     Than Getting the Best Price Should be Offered Multiple Options ... 123

   • MLS Rules Should be Designed to Accommodate All Bona Fide

     Business Models ................................................................................ 124

5. In Some States, Laws or MLS Rules Require Minimum Bundle of Real Estate Brokerage Service, Preventing the Emergence of Those Offering

   Specialized à la Carte Services .................................................................. 125

6. What a Diverse Market for Real Estate Services Might Look Like ................. 129

   • Flat Rates, Hourly Rates and à la Carte Offerings............................. 129

     • Flat Rates..................................................................................... 129

     • Hourly Rates................................................................................ 131

     • À la Carte Options.......................................................................133

   • Percentage Commissions Based on Incremental Value Produced .... 133

 

Of course, you can/should read the whole thing even if you hate everything the plaintiffs in Moehrl and Sitzer are saying, hate everything the DOJ is claiming, and hate everything REX stands for. You should at least know what the other side might be thinking.

 

Big Takeaways

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As you can see, it’s a long law review article, but the paper does end up making a few “recommendations” which are then caveated with all kinds of problems. The Conclusion tries to sum up the big takeaways and recommendations:

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As discussed above, to foster innovation and effective competition, including of prices, this article advocates four main policies: (1) prohibit listing agents from setting the fees for buyer agents, (2) attempt to prosecute and otherwise deter agents who steer clients away from non-traditional brokers, (3) permit agents to offer services on an unbundled, à la carte basis, and (4) require agents to disseminate seller listings as widely as in the best interests of the seller. With these in place, one would expect much lower, cost-based real estate agent fees and less time wasted by part-time agents prospecting for clients.

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Let’s take these in order.

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Prohibit Listing Agents from Setting the Fees for Buyer Agents

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This is, of course, the main thrust of the civil lawsuits and if/when there is action by the DOJ. The goal will be to de-link listing agents from buyer agent compensation.

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But the true goal here goes beyond simply not allowing listing agents to set buyer agent commissions. The true goal is to move the industry away from percentage-based commissions to something more like the legal industry: hourly or flat-fee, plus incentives.

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Although the six percent-of-sale-price commissions used by traditional brokers as well as the lower percentages used by most discount brokers have no real economic justification, there is a justification for paying agents a much larger percentage fee, even 20, 30, or 40 percent commissions.

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That much larger percentage fee, however, would be based on over-the-baseline performance, and be a bonus tacked on to the base hourly/flat fee for the agent’s services.

 

So for example, if a home is listed for $500K but sells for $600K, the listing agent might get his $5,000 flat fee plus 40% of the $100K increase.

 

As the author points out, there is a major problem with setting that baseline against which such bonuses would be paid. Perverse incentives would simply drive listing agents to set the list price super low in order to maximize the bonus. A couple of suggestions are floated, like using the Zestimate as the baseline — which merely betrays how little the author understands the industry.

 

Still, we can see the direction that policymakers would like to take things.

 

Prosecute and otherwise deter steering

 

Seems obvious what they want to do. The author admits he doesn’t quite know how to do it, however:

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This type of steering should be recognized as a violation of antitrust laws, but it is not clear how to effectively enforce such a prohibition. Requiring additional disclosures would seem ineffective, given that consumers seem unlikely to notice another warning among the multitude of forms they already sign, usually without reading. A better approach might be to create some informative and engaging videos illustrating this issue, which home buyers would want to watch. Schools–in courses on basic financial skills or home economics–and the press could also do a better job of educating consumers about this practice. [Emphasis added]

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It should be noted that steering is a non-problem if buyer agent compensation is uncoupled from the seller/listing agent. But that the author sees steering as a key problem is noteworthy.

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Permit agents to offer services on an unbundled, à la carte basis

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This section is mostly about state laws and regulations requiring minimum service levels for brokerage services.

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Thirteen states and Washington DC adopted laws that require real estate brokers to provide home sellers with a specified package of services, effectively prohibiting their sale on an à la carte basis. Nine other states have a similar default requirement, but permit sellers to waive their right to some of the identified services. At least four states adopted their restrictions despite active federal opposition.

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I think this was included because of “active federal opposition” and is part and parcel of the general view that there should be national preemption of harmful state laws. It is unclear that such a thing would pass Constitutional muster, but again, what we’re after is trying to discern where the policymaker’s mindset is today.

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I would point out that a transition to an hourly or flat rate compensation model for agents would likely naturally lead to more a la carte options. In an hourly situation, the consumer is incentivized to do some of the work himself; in a flat rate situation, the agent is incentivized to push the work to the consumer in exchange for a lower flat fee.

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But again, as of today, these minimum service laws are at the state level and is subject to the will of the voters in that state.

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Require agents to disseminate seller listings as widely as in the best interests of the seller

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I believe this is where REX’s involvement in the paper most influences the suggestion since REX was representing the perspective of the “non-traditional” brokerage in the halls of power before it was driven into bankruptcy.

 

For example, the author writes:

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When agents gain a new listing, their optimal goal is often to find a buyer among their own or their broker’s clients, thereby securing commissions on both sides of the sale, so-called “double ending.” Thus, agents may initially only share information about a “coming soon” or “office exclusive” listing with colleagues at their brokerage firm and then maybe a wider circle of colleagues before placing the listing in the MLS for other agents to see. This practice is called “pocketing” the listing. Some agents and brokers may pocket most listings for a day or more leading to as many as 10 to 20 percent of listings being pocketed. While the NAR adopted a rule in 2019 requiring listing brokers to submit a listing to the MLS within one business day of marketing a property to the public, this does not prevent brokers from using their internal databases for limiting access to listings before seller complaints force them to “market to the public” by placing them in the MLS.

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These practices severely undermine non-traditional buyer agents who cannot offer their clients access to the full list of available homes that other brokers are offering. Buyers worried about losing the chance to bid for homes before they get to the MLS may forgo less established, non-traditional brokers, even when the buyer has just used the latter broker to sell their multi-million dollar home. One longtime exclusive buyer agent in the inventory-starved Boston market even lost the opportunity to act as buyer agent for his two adult daughters who told him, “Dad, you don’t know about the listings before they go into the MLS.” If the industry really wanted to eliminate pocket listings, the NAR might require that listings be entered into the MLS within one business day after the seller commits to a listing with the broker.

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It is unclear to me how big of a problem this is in today’s residential real estate. Double-ending a deal is not unknown, but just about every brokerage and agent discourages the practice because it causes other problems such as agency. What is far more common is “designated agency” in which the deal is kept in-house at the same brokerage firm, but with a different agent.

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But it is a red herring to suggest that pocket listings or Coming Soons or whatever undermine “non-traditional buyer agents” and is anti-innovation. Fact is, such listings undermine all agents, traditional or otherwise, who don’t have access to these listings.

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If there is a problem at all, it likely cuts in the other direction: requiring submission of listings to the MLS might be problematic. One of the criticisms of NAR’s Clear Cooperation Policy — which PLS.com v NAR lawsuit as well as the DOJ are going after — is that it limits the business judgment of the listing broker/agent on how best to serve the seller’s best interests.

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Wide dissemination is not always in the seller’s best interests. Of course, we know about privacy-related concerns, and everyone (even this author) recognizes those. But there are legitimate marketing reasons to try different strategies. Coming Soon is an example of such. It might not work, but that’s no reason to prohibit brokers and agents from pursuing a strategy that they honestly believe is in the seller’s best interests.

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Too broad an application of the idea that fiduciary duty is met only when listings are marketed as widely as possible leads to plainly ridiculous outcomes. For example, failing to hire sky-writing airplanes is not marketing as widely as possible. But that’s plainly idiotic. Agents are and should be able to exercise some level of business judgment as to the most effective ways to market a client’s property.

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Finally, the fact that not disseminating seller listings as widely as possible is the norm in commercial real estate without any complaint about violation of fiduciary duty suggests that perhaps the author is stretching a bit. In fact, given that the DOJ thinks there’s a possible antitrust problem with CCP, I just don’t see a whole lot of motivation to go in the other direction.

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The Likely Real Direction

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Taken as a whole, the most important concept from this paper and one that the government (DOJ, FTC, the courts) is likely to follow is moving the industry towards an hourly/flat-rate fee structure plus some kind of a bonus based on performance.

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That does mean killing off the compensation part of “cooperation and compensation” in some way. Either an injunction against sellers and/or listing agents paying buyer agents or a federal regulation prohibiting it would get that done. Despite the settlement in Nosalek, I think the government would prefer to see any splitting of commissions or sellers paying the buyer agent go away completely.

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If any kind of incentive for “over-performance from baseline” is part of the compensation story, then there is the problem of setting the baseline. But that can be overcome by the industry and will be, as agents who consistently set low bars to collect massive 30% or 40% of the overage will quickly find consumers avoiding them. Honest players will set the list price they genuinely think is achievable, then work hard to get better results for their clients — and the clients would happily pay for such over-performance.

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In fact, I see the standard arrangement in such an environment to be something like this:

• Base Fee of $5,000 (or whatever the amount)

• Performance fee of 30% of selling price over the list price, capped at $20,000 (or whatever the amount).                                                                

Simply by inserting a cap to that over-performance fee, the Seller is protected from low-baller agents and from surprise giant commissions. Agents would welcome the certainty of the base fee income, and still be incentivized to outperform by the large bonus on a percentage basis. Seasoned agents who can negotiate better would make more money, and crappier agents would make less — and provide huge incentive to get better. Sellers are protected because there is a maximum commission they would pay in any circumstance, and they would save money if there is no over-performance.

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The exact same mechanism would work for buyers: certainty of cost, plus downside protection. That would solve most of the problems.

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Steering would cease to be a major problem, absent truly invidious group action, such as racial steering. That is already illegal, and difficult to prosecute, but enforcement authorities should devote more resources to stamping out the really nefarious steering practices and let the market take care of economic steering.

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As it comes to the wide dissemination of listings front, I believe that the authorities will go in the opposite direction from what the author suggests and do away with the various requirements from the MLS for forced listing entry. If the DOJ goes further, it might look to limit forced participation in the MLS itself, targeting, e.g., the REALTOR-only MLS, and the Principal REALTOR rules.

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A broker or agent limiting distribution of listings for self-serving purposes are already on the hook with the seller for breach of fiduciary duty. Having to justify to the seller that whatever limited distribution was not selfish, plus any damage to the firm or agent’s reputation, plus possible legal liability if a seller chooses to sue, are enough disincentives to be very very leery of messing around with less marketing of properties.

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Let’s leave things there for now. I do encourage you, the most informed readers in real estate, to at least skim through the paper. Not to agree or disagree with the author per se, but to gain a better understanding of how the Washington DC policymakers might be thinking about the issue of real estate commissions.