Competition in Real Estate: Questions and Answers
Why should consumers care about competition in the real estate brokerage industry?
Buying or selling a home is the largest financial transaction most Americans will ever undertake. The median priced home cost $184,334* in 2009, and the median commission paid to real estate brokers came to $9,733**. Overall, Americans paid nearly $60 billion for brokerage services.
* Inflation-Adjusted Median Home Sale Price based on data for the first half of 2009
**Inflation-adjusted median commission based on data from the first half of 2009.
Learn more: Commission Rates and Fees: Empirical Evidence
What services do traditional full-service brokers offer?
Traditionally, real estate brokers have performed virtually all services related to buying and selling a home, including:
- Marketing the home.
- Marketing services include listing the property in the local multiple listing service (MLS), placing advertisements in local media and on the Internet, and hosting open houses.
- Reviewing contracts.
- Contract review might include providing advice on pricing, home inspections or other contractual terms.
- Negotiating with potential home buyers and sellers.
- Locating potential properties for prospective buyers.
- Arranging for prospective buyers to inspect properties.
- Providing prospective buyers and sellers with pertinent information about a community such as relative property values, most recent selling prices, and property taxes.
- Apprising potential buyers of financing alternatives.
- Assisting in the formation and negotiation of offers, counter offers, and acceptances.
- Assisting with the closing of the transaction.
- Closing services might include assistance with handling paperwork.
For these efforts, real estate brokers typically charge a single fee (the commission) that is 5 percent to 6 percent of the sales price of the home.
Learn more: The Seller's Agreement with the Listing Broker
What other options do consumers have?
In many parts of the country, the traditional full-service real estate broker now faces competition from a variety of real estate brokerage models, many of which use the Internet to reduce costs:
Brokers willing to sell a subset of real estate brokerage services, often called fee-for-service brokers, have emerged throughout the country. Fee-for-service brokers “unbundle” the package of real estate services typically offered by traditional full-service real estate brokers and charge a set or hourly fee for specific services, such as listing the house in the MLS, negotiating or closing contracts, and pricing the home. These brokerage models typically enable consumers to save thousands of dollars by allowing them to purchase only those services they want.
Learn more: Fee-for-Service Brokers
Rebates and Inducements
Some real estate brokers have increasingly begun to compete for customers by offering cash rebates or other inducements to home buyers and sellers. Rebates that go directly to buyers or sellers lower costs on both sides of the transaction. Cash rebates are usually calculated as some fraction of the broker's commission and can result in thousands of dollars being returned to the consumer.
May a real estate agent rebate a portion of the agent's commission to the borrower? If so, how should the rebate be listed on the HUD-1?
According to HUD, yes, real estate agents may rebate a portion of the agent's commission to the borrower in a real estate transaction. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates to borrowers do not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business.
Learn more: HUD's New RESPA Rule FAQs.
Why would some consumers use a fee-for-service broker?
Most consumers want to make as much money as possible on the sale of their home and spend no more than necessary when purchasing a home. In many cases, the standard broker’s commission can offset a portion of the equity value that has been building up in a seller’s home or push the price of a home beyond a buyer’s purchasing power. Consumers who want to perform some of the steps involved in selling a home can reap significant financial savings by purchasing only those real estate brokerage services they actually want.
Just as the Internet has made it easier for consumers to save money by directly purchasing plane tickets and stocks, it is now making it feasible for home sellers and buyers to do more of the work themselves and pocket the savings.
Learn more: The Internet’s Role in Real Estate Brokerage
How is a lack of competition in the real estate brokerage industry harming consumers?
In other areas of the economy, the Internet has dramatically altered the competitive landscape by driving down costs and enabling innovative and more efficient ways of conducting business. Traditional middlemen—such as travel agents and stockbrokers—face more intense competition that has propelled them to change, bringing consumers significant beneifts.
The real estate brokerage industry has been slower to change, with the result that consumers are paying higher commissions and fees than they would under a more competitive system. The most obvious way consumers lose the benefits of a competitive real estate industry is when state laws shield brokers from competition. Two well-known and harmful examples are:
Rebate bans. Ten states forbid buyer’s brokers from rebating a portion of their commission to the consumer. A rebate equal to one percentage point of the sale price, which is commonly offered in states that allow rebates, would reduce the commission on the median-priced home by $1,843.
- Minimum-service laws. Eight states require consumers to purchase more services than they may want, with no option to waive the extra services. This protects full-service brokers who charge thousands of dollars to sell a home from competing against limited-service brokers who charge much less.
How do minimum service provisions work?
Minimum service provisions are laws or regulations that dictate the services that a consumer must purchase when entering into a relationship with a real estate broker. They do this by requiring real estate brokers to provide a bundle of services whether the consumer wants to buy all of them or not. In states with such provisions, brokers cannot agree to provide consumers with less than the required services. While many consumers do want to buy all the services these provisions require a broker to provide, other consumers prefer to save money by performing some services themselves.
Learn more: Minimum Service Requirements
How do minimum service provisions harm consumers?
Minimum service provisions harm consumers two ways.
No evidence has been presented to the Antitrust Division indicating that consumers are better off with minimum-service laws.
Learn more: Minimum-Service Requirements Are Not Necessary to Protect Consumers
Which states have enacted minimum service provisions?
Twelve states and the District of Columbia require consumers to purchase more services than they may want, with no option to waive the extra services. Those states are Alabama, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Oregon, Texas, Utah, Washington, and West Virginia.
An additional eight states have minimum service requirements but allow consumers to waive those extra services, preserving choice. Those states are Delaware, Florida, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee, and Wisconsin.
How do rebate bans work?
Rebate bans are state laws or regulations that prohibit brokers from refunding a portion of the sales commission to consumers. In states where they are permitted, a number of brokers have begun to offer clients substantial commission refunds after closing as a way to compete on price. For example, a buyer’s broker could offer to refund 1 percentage point of the sale price, which on the median-priced American home comes to $1,843.
How do rebate bans harm consumers?
Rebate bans artificially inflate the cost of real estate services. Consumers are forced to pay thousands of dollars more to buy a home than they would if rebates were allowed. In effect, rebate bans prohibit brokers from competing on price, forcing all brokers to charge—and all consumers to pay—the same inflated price.
Which states currently ban commission rebates?
Ten states currently have laws that ban rebates. Nine states have a full ban on broker rebates: Alabama, Alaska, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee. In addition, Iowa prohibits rebates when the consumers use the services of two or more real estate brokers during a transaction.
1 Estimated residential broker commissions were $79.8B in 2007. The total volume of residential sales in 2007 was about $1.743 trillion (HUD, “U.S. Housing Market Conditions, 4th Quarter, 2007”). Brokers assisted consumers with about 88% (NAR, “The 2007 National Association of Realtors Profile of Home Buyers and Sellers,” 2007) of these sales, charging an average commission rate of about 5.2% (REAL Trends ). The estimate of residential broker commissions equals ($1.743 trillion) × (.88) × (.052).