Realtors fight for business model
Updated 7/12/2006 11:32 PM ET
By Noelle Knox, USA TODAY
When Kathy Kirk sold her Oklahoma City home Wednesday, she paid her discount real estate agent $998 instead of a traditional commission. That's because even though her agent had listed her home for sale and handled closing documents, Kirk showed the house and negotiated the price herself.
Agents and potential buyers who came to see the house were surprised that Kirk, a 49-year-old nurse, was representing herself.
Though she still had to pay the buyer's agent a 3% commission, she "got a lecture from a couple of them, saying, 'You're really making a mistake,' " recalls Kirk, who got a price above what she'd hoped for and saved $3,847 in commissions. "One told me I didn't know how to negotiate, that I was vulnerable and wasn't going to get the price I wanted for the house. They obviously felt this was a real threat to them."
The threat is real. And traditional real estate brokers are fighting the Justice Department and lobbying state lawmakers to protect their business model, which generated $60 billion in commissions last year. Associations of Realtors — big political donors in many states — have pushed for state rules to bar real estate agents from providing less than the traditional full suite of services.
Realtors lobby for laws
So far, Realtor groups in nine states have lobbied successfully for laws requiring all brokers to provide the full services. (Oklahoma Realtors succeeded in getting a law passed late last year, but the state attorney general said it couldn't be enforced against discounters.) Ten other states have passed laws that forbid agents to rebate part of their commission to buyers.
The result: Brokers who offer a la carte services at lower prices have sometimes been shut out.
This isn't the first battle between traditional real estate agents and discounters. Last year, discounters won limited access to the Realtors' Multiple Listing Service (MLS), though the Justice Department is still suing the National Association of Realtors over some of its restrictions.
This time, the full-service brokers are arguing that discounters can hurt sellers who don't fully grasp the complexities of selling a home. Some buyers' agents complain that they, too, often have to bail out sellers who were trying to fly solo and ran into problems.
"This was an effort brought forth by the Illinois Realtors that the agency thought was a good idea to help protect consumers," says Daniel Bluthardt, a top regulator in Illinois, one of the first states to pass a minimum-service law.
Federal government sues
Discounters and federal regulators fire back that traditional brokers are trying to protect their commissions and are forcing sellers to pay for services they may not need. The Justice Department and the Federal Trade Commission have tried to stop states from passing such rules, with mixed success.
But they aren't giving up. On Thursday, the FTC will announce an enforcement action against a regional MLS for restricting access to discount brokers, and the agency says it expects to file more complaints.
After Illinois, Texas, Missouri and others passed their laws, discount brokers in those states either raised their prices to cover their costs for offering more services or pulled out entirely, says Tom Barnett, assistant U.S. attorney general for antitrust.
"We've not seen evidence that there was any need to adopt a measure that would impose that kind of harm on consumers," he adds.
The Justice Department also sued the Kentucky Real Estate Commission and forced it to drop its anti-rebate law. West Virginia and South Dakota then repealed theirs. But most other states have retained theirs. And companies such as ZipRealty, which gives buyers a 20% rebate on commissions, won't do business in states that bar rebates.
"There's no reason to take on the extra challenge of trying to adjust our business model," says Pat Lashinsky of ZipRealty. "It's a significant hurdle for us to overcome."
The current battleground is in Michigan, where the association of Realtors has gotten a bill through the state House and a Senate committee and is trying to convince the governor — who threatened to veto it — that the bill would "make sure everyone can compete," says Rob Campau of the Realtors association.
Barnett, though, has warned that the bill could cause "some home sellers and home buyers to pay thousands of dollars more in commissions to real estate brokers," and that there's "no evidence of consumer harm from allowing fee-for-service brokers to operate."
In a traditional home sale, the seller agrees to pay his agent 6% of the sales price. The agent advertises the home on the MLS and agrees to split the commission with the agent who brings in a buyer. The seller's agent helps price the home, often schedules inspections, holds "open houses" and represents the seller's interests in contract negotiations.
"There's a lot of information that goes into the day-to-day decision-making in a real estate transaction that those (discount) services don't offer and that most consumers aren't savvy enough to do," says Bluthardt, the Illinois regulator.
That's a lame excuse for crushing competition, federal regulators say. Home prices in some markets have soared, but the work it takes to sell a home has declined.
Meantime, some developers offer commissions to buyers' agents to help sell their new homes. Centex Homes in Austin, for instance, is offering 8% for what should be little labor by the agent. Why shouldn't a buyer receive a partial rebate of that?
"We're concerned that rather than compete on merits, Realtors go to their legislators and say, 'Consumers can't make these decisions,' " says Maureen Ohlhausen of the FTC.
Changed by the Internet
The Internet changed Steven Sizemore's business model. After working for a decade as a traditional full-service agent in Oklahoma, he decided to continue as an agent but to sell just three services: MLS listing, consulting/negotiating and closing — each at $499. Home sellers can choose any combination at any time in the process.
Before Sizemore started The Real Estate Place in 2000, he was a typical agent with 10 to 15 listings a month. Now, he has 50 to 75 listings a month — volume that's made up for his lower prices.
In six years, he says, he's had only one case in which a seller got into trouble because he'd signed a contract he didn't understand and had to pay unexpected costs. That client called Sizemore and hired him to help finish the closing.
He said Oklahoma Realtors were "not trying to protect consumers," they were "trying to protect their commissions."
Kirk, one of Sizemore's clients who felt that a discounter would make it easier than trying to sell her home completely on her own, says, "You had to be willing to do the showings yourself, so there is more time invested than working with a full-service broker, but it was worth the 3% I would save."
The trend of states clamping down on discount brokers, and the Justice Department's mixed success in fighting it, show how deeply the Internet is shaking the real estate industry, says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University.
"The technology is so pervasive and so disruptive, I think it's going to be very difficult to stick your finger in all the holes in the dike," Retsinas says.
Posted 7/12/2006 11:08 PM ET
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