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Transcript: Competition Policy And The Real Estate Industry, October 25, 2005

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Page 1

1I N D E X


3OCTOBER 25, 2005





8      MR. BARNETT





13      DR. COOPER

14      MR. FARMER

15      MR. KUNZ


17      DR. THORBURN





22      MS. QUINN

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3      MS. WHATLEY

4      MR. EARLY

5      MR. LEWIS

6      MR. DelBIANCO




10      DR. YUN

11      DR. HSIEH



14      MR. KRAMER









Page 3



3The views expressed in this conference are the

4views of the participants alone and are not

5necessarily the views of the Justice Department,

6the Federal Trade Commission or any

7Commissioner. Likewise, the selection of any

8panelist or moderator does not necessarily

9reflect the view of the Justice Department, the

10Federal Trade Commission or any Commissioner

11regarding the views or qualifications of any

12panelist of moderator.











Page 4













139:00 A.M.













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1P R O C E E D I N G S

2- - - - -

3MS. OHLHAUSEN: Thank you very much for coming

4on such a wet, windy day. I'm pleased to welcome you to

5the FTC and DOJ's Conference on Competition Policy in

6the Real Estate Industry. I'm Maureen Ohlhausen. I'm

7the Director of the Office of Policy Planning at the

8Federal Trade Commission. Before we get started this

9morning, I wanted to go over a few details.

10First, the matter of security. You're required

11at all times by the Federal Protective Service to wear

12your visitors' badges or these name tags. If for any

13reason you leave the building, my script says to catch a

14breath of fresh air because you're the really hearty

15type to want to be out in the rain today to do that, but

16in case you want to or when you leave for lunch, you

17will need to go back through security when you come in.

18And I'll give you more specifics about the process

19before we leave for lunch.

20In case of an emergency, there are two exits

21that you should know about. One is the front door where

22you came in, and there's another one behind you, there's

23a corridor there next to where the coffee table is. If

24for any reason there's an emergency and we need to stay

25inside, the security personnel will advise us on what to

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1 do.

2If you need to use the restrooms, they're very

3close by. They are on the other side of the lobby.

4Simply go through the lobby and follow the signs. And

5you can always ask any of the staff members or security

6for assistance.

7As for cell phones, our audio/visual staff asked

8me to remind you that our microphones are very

9sensitive, so please turn them off, and if you are out

10in the hallway, actually sometimes the conversations can

11be picked up as well. So, for your own privacy, if you

12are going to make a cell phone call, you may want to go

13out to the main lobby out there.

14During the panels, there will be time for

15questions from the audience. What we are going to do is

16have people write them on cards. They should be in your

17packet. If you need additional question cards or pens,

18our kind staff of paralegals will be walking around with

19additional cards and pens, and if you have a question to

20hand in, you know, hold it up, and they will bring it up

21to the moderator. That way, time is tight, and we're

22able to get through a lot more questions that way.

23Also, if there are any additional comments you

24need to make, the record for the workshop will be open

25another month, until November 25th, and we definitely

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1welcome comments from anyone and everyone. You should

2file your comments with the Federal Trade Commission and

3with the Department of Justice on our web sites. The

4FTC web site is www.ftc.gov, and the DOJ web site is


6Finally, I would like to emphasize that the

7views expressed in this conference are the views of the

8participants alone and are not necessarily the views of

9the Department of Justice or the Federal Trade

10Commission or any Commissioner. Likewise, the selection

11of any panelist or moderator does not necessarily

12reflect the views of the Justice Department, the Federal

13Trade Commission or any Commissioner regarding the views

14or qualifications of any moderator or panelist.

15So, if everyone has turned off their cell phones

16and pagers, to begin our proceedings today, I'm honored

17to present the Chairman of the Federal Trade Commission,

18Deborah Platt Majoras.


20CHAIRMAN MAJORAS: Thank you so much, Maureen.

21Good morning, everyone, and welcome to our workshop.

22The real estate industry is critical to our

23citizens. For many, the purchase of a home represents

24tangible fulfillment of the American Dream, the reward

25for hard work and dedication, sometimes spanning

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1decades. It may also be the most significant personal

2investment that some make in their lifetimes.

3Competition in the real estate industry, therefore, is

4not merely of interest to those involved in the real

5estate industry or to enforcers, but rather to anyone

6who has ever bought or sold or is thinking about buying

7or selling a house.

8As housing prices across the country have

9continued to rise at significant rates, the stakes have

10been raised for home sellers and buyers, as well as for

11those professionals working for sellers and buyers in

12this market environment.

13The vast majority of residential real estate

14sales involve real estate brokers who may assist at

15different times both home buyers and home sellers.

16Traditionally, real estate brokers and their affiliated

17agents have performed virtually all services relating to

18the sale of a home, including listing the home in the

19Multiple Listing Service or MLS, marketing the home,

20negotiating with the potential buyers, and helping to

21coordinate the closing of the transaction.

22Several related developments are presenting

23challenges to the traditional brokerage model. First,

24in response to perceived consumer demand, some real

25estate professionals are offering to provide services

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1more on an a la carte basis rather than as an entire

2package of services. In a so-called fee-for-service or

3limited service brokerage model, a home seller might

4choose, for example, to pay a broker only for the

5service of listing the home in the local MLS and placing

6advertisements and then choose to handle negotiations or

7paperwork for him or herself.

8Second, real estate professionals are

9increasingly incorporating the internet into their

10business models in a variety of ways, as many other

11industries are as well. In general, these models use

12the internet to allow someone else to perform a task

13perhaps traditionally performed by the broker or agent.

14Some brokers, for example, offer potential buyers the

15option of viewing full, detailed listing information

16online, allowing them perhaps to delay contacting a real

17estate professional until they are ready to buy. Other

18firms use web sites to gather lead information on

19customers who seek real estate services and sell those

20leads to real estate professionals, usually for a fee,

21based on the commission that the professional earns in

22the transaction. Still other business models exist that

23use the internet to match home buyers and sellers.

24Actions by individual firms of real estate

25professionals, by groups of professionals acting through

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1MLSs, by industry trade associations and by state

2regulatory or legislative bodies have all spawned recent

3controversies or even lawsuits. Some of the issues

4concern how existing industry members and institutions

5have responded to real estate professionals that offer

6these new business models. Several states have

7considered or passed laws or regulations that would

8effectively curtail fee-for-service brokerage. Further,

9some states have either passed new laws or regulations

10or interpreted existing laws or regulations to prevent

11brokers from passing a portion of their commissions

12along to consumers.

13As you may know, the FTC has a strong and

14growing advocacy program. We not only bring cases to

15challenge anti-competitive conduct or unfair

16competition, we also advocate for competition in the

17marketplace. The FTC, often in conjunction with our

18colleagues at the Department of Justice Antitrust

19Division, provides comments to legislators and other

20policy makers on proposed legislation or actions that

21may impact competition either adversely or sometimes

22even favorably. It is important that competition have a

23voice apart from individual interests, because

24government-imposed barriers to or restrictions on

25competition may have at least as adverse an effect on

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1consumers as private restrictions, if not an even

2greater effect.

3Proponents of government-imposed restrictions

4often tout the consumer benefits of their restrictions,

5perhaps without focus on the potential harms that such

6restrictions may impose on consumers. At the FTC, we

7need to look at both. In our advocacy comments, we try

8to identify the potential harms and suggest ways in

9which decision-makers might accomplish their goals while

10still minimizing restrictions on competition.

11Recently, as you know, the FTC and the DOJ

12together have advocated in a number of states against

13the passage of laws and regulations that would impose

14minimum service requirements on real estate brokers. In

15general terms, under the proposed legislation, real

16estate professionals who agree to list homeowners'

17property for sale would be required to provide a

18state-mandated minimum service package, effectively

19impeding consumers' ability to purchase a more limited

20and perhaps less expensive set of real estate services.

21We have argued that the proposed legislation would

22likely harm competition in two ways.

23First, consumers who want to hire a broker to

24list their property in the MLS will have to purchase

25additional services that they may not want or need,

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1which may cost them more. And second, without

2competition from fee-for-service brokers, the prices for

3traditional full-service options will likely be higher.

4What we want for consumers is choice.

5Admittedly, our efforts thus far in state

6legislatures have not been terribly successful, as

7several have imposed statutory minimum service

8requirements on brokers that likely will limit the range

9of services available to consumers. Nonetheless, we

10have continued to advocate against such measures and, in

11fact, have submitted an advocacy letter urging the

12 Michigan Legislature not to impose a minimum service

13requirement on brokers in that state.

14Critical to being a champion for competition is

15careful study and analysis of the marketplace, as well

16as then educating the public on its workings. The

17Commission regularly holds public workshops on issues of

18importance to consumers in an effort to further educate

19ourselves and others. Given the substantial changes

20occurring in the real estate brokerage marketplace,

21given consumers' strong interest in a competitive real

22estate brokerage industry, and given that industry

23participants have told us that they think that our

24advocacy in this industry thus far has been misplaced,

25the FTC and DOJ are hosting today's workshop, to provide

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1a public forum to discuss current issues affecting the

2competitiveness of real estate brokerage.

3This workshop will afford us the opportunity to

4hear from all sides on the many issues facing the

5industry, hopefully to increase everyone's understanding

6and identify ways to preserve competition while

7protecting consumers.

8In our first panel this morning, we will lay the

9groundwork for discussion of these issues by providing

10an overview of the real estate transaction from both the

11buyer's and seller's sides, defining key terms and

12identifying the various relationships and business

13models that currently exist in this industry. One of

14the areas of focus will be how industry participants are

15using the internet as an efficiency-enhancing tool.

16The second morning panel will address issues

17affecting competition among sellers' brokers, including

18minimum service requirements, state licensing and other

19requirements affecting for-sale-by-owner web sites,

20local MLS rules, and other private actions that may

21impact brokers with non-traditional models.

22In the first afternoon panel following the lunch

23break, we will turn to issues affecting competition

24among buyers' brokers, including state anti-rebate

25legislation, policies that limit the online display of

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1real estate listings, and the effect of minimum service

2requirements on buyers' brokers. With each of the

3issues to be discussed today, we will explore how the

4restrictions or actions impact consumers, either by

5producing benefits or imposing higher costs on them.

6In the final panel, we will address empirical

7evidence on competition in this industry. The panelists

8will examine the data available to test the various

9hypotheses and look at recommended areas for future

10empirical analysis. They will discuss what the data

11show about competition in this industry, for example,

12whether commission rates have been perennially fixed at

136 percent or have fluctuated over time in response to

14market conditions.

15In conclusion, I would like to thank our many

16distinguished panelists for coming from all over the

17country to share their insights and experiences. We are

18very pleased to have a wide variety of viewpoints

19represented at this workshop. Based on pre-registration

20information, we have in attendance today representatives

21from several real estate trade associations, including

22the National Association of Realtors. In addition, our

23attendees represent several different types of

24brokerages, including traditional, discount and

25fee-for-service. I am encouraged by the large number

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1who are willing to participate in this workshop, which I

2think demonstrates the importance of these issues.

3I would also like to thank the staffs of the

4Antitrust Division and the Federal Trade Commission for

5their work in putting this program together. With that,

6I am now pleased to turn the panel over to my good

7friend and colleague, the Acting Assistant Attorney

8General in charge of the Antitrust Division, Tom


10Thank you.


12MR. BARNETT: Thank you, Debbie, and good

13morning. I, too, want to welcome you to our workshop.

14I'm delighted to be here.

15These workshops I think are an excellent example

16of the good and healthy working relationship that the

17Federal Trade Commission and the Antitrust Division have

18these days, and in particular these workshops I think

19are extraordinarily helpful to us in educating ourselves

20about the industries that we are monitoring and policing

21and educating the public about many of the issues.

22Indeed, as I was driving here this morning

23sitting in traffic, much delayed by the rain, I was

24thinking about what I was going to say today, and the

25concept that came to mind, shockingly, was sunshine.

Page 16

1I'd like to have more sunshine today, and I'm glad that

2you all are here to help us today to shed some light on

3issues of great importance.

4These workshops, while very valuable, do require

5a lot of work, and I want to thank up front the staffs

6of the Antitrust Division and the Federal Trade

7Commission for all of the work that they have put into

8organizing the workshop today and to thank you all in

9advance for your help in carrying it forward. Because

10they require a lot of work, we can't do them for every

11industry for every issue, but I think the real estate

12industry is clearly an industry that warrants much


14As Debbie indicated, owning a home is the

15American Dream. In recent years, I think selling your

16home has become the American Dream given the rapid

17increase in prices, and in connection with that, it's

18reported that in 2004, American consumers paid over $60

19billion in commissions for basically real estate

20brokerage services. That's an increase of $20 billion

21or almost 50 percent from the commissions paid the year


23One question we might ask is, why are brokers

24making so much money? Inquiring minds want to know.

25And certainly the FTC and the Antitrust Division want to

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1know. There could be a number of reasons for that.

2There is great change in the industry going on. As

3 Debbie pointed out, the introduction or expansion of the

4internet, our ability to collect and disseminate

5information, have caused new business models to begin to


7I guess what I thought I would like to do is

8just briefly talk about a couple of the areas which one

9could possibly think about or factors that one could

10point to as explaining that increase in the amount of

11money that American consumers paid for real estate

12brokerage services.

13One is that the number of transactions could

14well have gone up. I have no doubt that that's at least

15part of the explanation. It could be that the value of

16homes have gone up substantially and that brokers are

17paid on a percentage basis, but that raises to my mind a

18question, have the costs of providing these services

19gone up that much as well?

20In general, in a competitive market, it's not

21the value of the services that leads to the price. The

22economists tell us it's the cost of those services, and

23many of the technological innovations that we see

24suggest that the costs, if anything, are going down.

25Our ability to collect and disseminate information at a

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1low cost is far superior to what it was even five or ten

2years ago, and as a result, that leads to a suggestion

3of whether or not there are other factors that may be at

4work here.

5I emphasize I am raising these as questions. I

6have -- and based on some of the public statements that

7we have made and actions that we have taken, we

8obviously have some views -- on some specific issues,

9but our purpose here today is to raise questions and to


11One area in particular that Debbie has already

12alluded to is, when there is change, you would expect

13many in the industry to react to that change. They can

14react by bringing out new products, services, trying to

15compete harder, or they may react by going to their

16state real estate commission, their state legislature,

17trying to obtain measures that will protect them from

18the forces of those changes. It's not a new phenomenon.

19I strongly suspect that the manufacturers of horses and

20 buggies were not big fans of Henry Clay Ford, and

21similarly, it's probably true that the makers of the IBM

22Selectric were not big fans of the Wang word processing

23system, but from the consumer perspective, these types

24of changes can be good.

25Now, again, I want to emphasize here that I'm

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1not suggesting that every time somebody goes to a real

2estate commission or legislature that that's not good.

3There are many laws, many regulations that are passed

4that can be helpful to consumers. We certainly suspect

5that there are some efforts that have been undertaken

6recently that are not so helpful for consumers, and

7Debbie alluded to a couple of those.

8One of those -- and it's been going on for a

9number of years -- has to do with the definition of the

10practice of law. There are a number of states that

11allow laypersons, non-lawyers, to provide certain

12closing services relating to these transactions, and in

13the states where that's allowed, people have done

14studies, and they've found out that there doesn't appear

15to be any greater incidence of consumer complaints of

16consumer harm. The cost of those services provided by

17laypersons is lower, and indeed, the cost of those same

18services provided by attorneys is lower because they

19face competition from the non-lawyers. That's an

20example of when we believe something is good and

21successful regulation or, shall we say, limited

22regulation that advances the interests of consumer


24There have been a number of states who have

25looked at expanding the definition of "practice of law"

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1to prevent laypersons from providing those real estate

2closing services. We have been asked in a number of

3instances to provide our perspective, and we have done

4so, and we have had a number of what we view as

5successes in terms of encouraging people to keep the

6definition relatively narrow.

7More recently, Debbie again alluded to the what

8I call minimum service legislation or regulations. On

9the one hand, these can be presented as a consumer

10protection measure designed to ensure that when I retain

11a real estate broker, I am going to get the services

12that I expect. There's another perspective out there

13that suggests that it's no different than passing a

14regulation that says, "When I walk into McDonald's and

15order a hamburger, I'm told that I also have to buy some

16french fries, because the state has decided that it

17might be deceptive or misleading or bad if I only got

18the hamburger, paid for it and didn't realize I wasn't

19going to get the french fries." I may not want french

20fries, and from that perspective, being able to choose

21from amongst a menu of services to buy only the things

22that you want to buy we generally view as a good and

23positive thing.

24What do we do about these situations? Our role

25is threefold. First is to educate ourselves, and that's

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1what we're here to do today. Second is to use the

2benefit of our experience and the information that we

3collect to educate others who have to make a decision,

4and when, for example, a state legislature is

5considering a proposed minimum service law, we have been

6asked to and we try to respond to those requests to give

7the benefit of our knowledge and information, and I'm

8slightly more optimistic than Debbie on this one. I

9think we have had some successes.

10In a fairly public example, the State of

11Oklahoma amended the legislation after looking at what

12we and others had to say about it, to narrow the

13restrictions, to provide and preserve more consumer

14choice. There have been several other states where they

15have reached out, asked us for input, and in response to

16some of that input, they made changes. That, from our

17perspective, is positive.

18Our message to these lawmakers is before you

19restrict consumer choice, before you require a purchase

20of certain services, make sure there's a need to do so,

21and if you decide that there's a need to do so, we

22recommend doing it as narrowly and on limited a basis as

23possible. Ultimately, with respect to the legislatures,

24we understand and respect that it is their choice. Our

25role is to help them make the most informed choices

Page 22


2There are times, however, where we run across a

3state-related restriction that we think allows us to

4have a more active role. An example of that would be

5the case that the Antitrust Division brought against the

6Kentucky Real Estate Commission earlier this year. It

7related to a rebate prohibition that prohibited brokers

8from giving a rebate on their commission to their

9clients. From what we could tell, there was no

10pro-competitive justification for this rule. There was

11certainly an obvious restriction on competition. When

12we looked into it, we looked at some of the statements

13from the brokers themselves who said -- in their words,

14not mine -- that "this regulation was preventing the

15outbreak of a bidding war. It was preventing consumers

16from demanding things that would reduce broker profits,"

17and from our perspective, that made the regulation a bad

18thing, anti-consumer, and we challenged it. I'm pleased

19to say that we have a proposed settlement pending with

20the Court right now and that brokers in the State of

21Kentucky are already beginning to offer rebates and

22other inducements, which we view as a positive thing.

23Stepping back a little bit, I note that, again,

24coming back to what I said, what we are trying to do is

25shed light on the facts, the issues or what is going on,

Page 23

1so legislatures can make informed choices, real estate

2commissions can make informed choices, and if necessary,

3judges can make informed choices.

4Finally, I will mention just briefly that one

5other possible source of the rise in real estate

6commissions and potentially profits is, of course,

7private agreements beyond the scope of what I've just

8been talking about, and I'll have no further comment on

9that for now.

10So, again, thank you very much for

11participating. We do think that this is an

12extraordinarily important issue, appreciate the effort

13that the staff have put into this. We look forward to

14hearing from you, to evaluating the results and seeing

15what we can all do to improve the welfare of consumers

16in this important industry.

17Thank you.


19MS. OHLHAUSEN: Thank you very much, Tom and

20Debbie, for your remarks.

21At this point, we are going to start the first

22panel. So, if you will just give us a moment's

23indulgence, I ask Cathy Whatley and Robert Hahn to come

24up, and we will get started.

25(Pause in the proceedings.)

Page 24

1MS. OHLHAUSEN: Well, this is the overview

2panel, and the purpose of this panel is to, as Chairman

3Majoras mentioned, give an overview of the transaction

4and go through some of the relationships between buyers

5and sellers and brokers and the MLS and different things

6like that and also identify some of the areas that may

7be raising competitive issues and competitive concerns.

8To help educate us all and inform us, we have

9Cathy Whatley, the 2003 President of the National

10Association of Realtors. Cathy is a realtor from

11Jacksonville, Florida, and I should mention that the NAR

12is the largest professional association with over a

13million members. She's been a realtor since 1969 and is

14the broker/owner of Buck & Buck, a family firm

15established by her grandfather in 1907.

16Cathy has also been very active at the state

17level, and she was the President of the Florida

18Association of Realtors in 1996 and received the Realtor

19of the Year Award in 1998. She currently serves as one

20of the nine commissioners on the Florida Commission on

21Ethics and also is a member of the State's Impact Fee

22Task Force. She lives in Jacksonville with her husband,

23and she has five children and seven grandchildren.

24On my left, your right, is Robert Hahn.

25It's all right if we call you Bob? Okay.

Page 25

1He is the Co-Founder and Executive Director of

2the American Enterprise Institute-Brookings Joint

3Center, which focuses on regulation and antitrust.

4Previously, Bob worked for the Council of Economic

5Advisers. He has also served on the faculties of

6Harvard University and Carnegie Mellon University, and

7he frequently contributes to leading scholarly journals

8and general-interest periodicals, including the American

9Economic Review, Yale Law Journal, Science, and the New

10York Times.

11He is the author of "Reviving Regulatory Reform:

12A Global Perspective," which is put out by

13AEI-Brookings, and several other books. He is also

14Co-Founder of the Community Prep School, an inner-city

15middle school in Providence, Rhode Island that provides

16opportunities for disadvantaged youth to achieve their

17full potential.

18I would like to just thank you both for coming


20This is just going to be basically -- we are not

21going to do formal presentations. It's just a

22discussion, so I'll be playing the Oprah character this

23morning, I guess, posing some questions and just going

24through some of these topics and getting the viewpoints

25of these both very well-informed and experienced people.

Page 26

1First of all, I guess, the first question is,

2 who are the relevant players in the real estate

3brokerage industry and what roles do they play?

4Maybe, Cathy, you can -- feel free to both jump

5in, but maybe we will start with Cathy on that one.


7There are a number of relevant players in the

8real estate transaction. You certainly start with the

9 buyer, the seller. You have the real estate

10professional, and then you have a lot of additional

11relevant players, such as the mortgage lender, the

12insurance agent, the home inspector, the termite or WDO,

13as we call it, wood-destroying organism inspector, the

14surveyor, the appraiser, the closing attorney, the title

15company, the escrow agent. There are a number of

16relevant parts to the transaction that are essential to

17get from the buyer and seller actually having a

18discussion about the purchase and sale of that home to

19actually getting the keys to the home when they get to


21I think just to start the discussion, I'd like

22to maybe paint a picture, and I think of it as somewhat

23analogous to a play. You might be at a theater. If

24you're in the audience, everything seems to go very

25smoothly because everyone has a role. They know their

Page 27

1part. They know their part in the script. In the event

2that something were not to go well and someone either

3enters at the wrong time, forgets their lines, it

4becomes very disruptive to the process. The ultimate

5end goal for both the buyer and the seller is to have a

6successful closing. So, all parts of the transaction

7are extremely relevant to make sure that it is a very

8seamless and successful transaction for the buyer and


10MS. OHLHAUSEN: Cathy, maybe you could follow up

11on that and just say, what role does the real estate

12agent play in -- like a number of the things you

13mentioned involved the legal requirements for

14transferring the property in a particular state and

15certain financial requirements.

16MS. WHATLEY: Well, in my role as a real estate

17professional, depending upon whether I'm assisting the

18buyer or the seller, I have different roles in that

19transaction, but ultimately a real estate professional,

20and if there are more than one in the transaction, will

21work together to make sure that all parts of that

22transaction are facilitated appropriately, not only in

23terms of actually showing the property, marketing the

24property, working through the transaction itself,

25meeting the home inspector, helping the seller and/or

Page 28

1the buyer understand what the results of that inspection

2were, overseeing repairs, making sure that things that

3are necessarily time-sensitive get responded to in a

4time-sensitive manner.

5I think that the transaction itself, if you talk

6about what has technology done to the transaction, it's

7not just the internet that has driven things.

8Technology has shortened the entire process time for the

9buyer and seller to be able to transact this sale, and

10so when you talk about the internet, the internet is

11just one part of technology that has driven a shortened

12time frame, which really makes it more critical than

13ever to have someone who understands the script, to be

14able to make every stage of that process work, to come

15to a successful closing.

16DR. HAHN: Can I just comment?

17 MS. OHLHAUSEN: Yes, sure, Bob.

18DR. HAHN: I agree with most of what Cathy says,

19but what strikes me -- my mom was a real estate agent

20and my dad was a real estate broker but dealing with

21commercial, and my mom dealt with residential.

22UNIDENTIFIED SPEAKER: We can't hear you.

23DR. HAHN: I can swallow the mic if you like.

24I was saying that my mom was a real estate agent

25in the residential market, and my dad dealt with

Page 29

1commercial and real estate management, but what's

2striking, even though Cathy is talking about changes in

3technology, is when I look at the kind of transaction

4that my mom engaged in, if I'm allowed to say it, 30

5years ago or 40 years ago since she's not here, it's

6virtually the same as the transaction that most of you

7engage in today when you buy or sell a house.

8I don't see a whole lot of new technology

9entering into this transaction or the kinds of gains

10that we've seen in other industries and the internet

11resulting, at least in the residential market, in

12benefits for consumers. So, in that sense, while I

13think we're beginning to see some new models emerge, I

14think public policy -- and I think Mr. Barnett alluded

15to this in his remarks -- public policy could have an

16impact on the pace at which they emerge and the likely

17benefits that could accrue to consumers.

18MS. OHLHAUSEN: So, Bob, just to make sure that

19I understand what you're saying, you're saying there is

20technology out there, and there is a role for it, but

21it's not being adopted as quickly into the process as

22one might expect?

23DR. HAHN: Certainly based on other industries.

24If you were to look at airlines, for example, you would

25probably go and bring up your favorite web site -- I am

Page 30

1not going to give an advertisement for one of them --

2and go get an airline ticket. You don't have that kind

3of menu of choices, at least the way I and my

4colleagues, Bob Litan and Jesse Gurman, who wrote a

5paper on this recently for the real estate industry.

6MS. OHLHAUSEN: Actually, that brings me to my

7next question, which is the menu of services, because I

8also wanted to talk a little bit about the MLS and the

9part of the transaction, the service that the real

10estate agent provides in listing a seller's property in

11the MLS or showing MLS data to a buyer.

12Maybe, Cathy, you could expand on that a little

13 bit.

14MS. WHATLEY: Sure. The Multiple Listing

15Service -- let me start with the understanding that the

16MLS is a broker-to-broker information exchange that

17provides the opportunity for cooperation and

18compensation. It establishes rules by which we all

19understand are discussion points. It tells me if I put

20the property in as a listing agent, I'm then allowing

21those who are cooperating in the marketplace, in my

22marketplace, to have access to that information, and it

23tells them at what fee that I am willing to cooperate

24with them. So, that's all disclosed up front, and

25that's a very important part, because if you talk about

Page 31

1what brings an efficient marketplace, the ability to

2have aggregated information for me, as a practitioner,

3to be able to go and have information that other brokers

4in my marketplace are willing to share with me, to allow

5me to have the information that I can assist my customer

6and client with.

7It also spells out what the cooperation is that

8that listing agent is willing to pay me if I'm going to

9show the property, and that is highly competitive. I

10can tell you that that is extremely competitive in the

11marketplace. A lot of things are driven by supply and

12demand, and we have been through a period of increasing

13demand for real estate and limited supply. So, if there

14is anything that really can motivate competition, it is

15limited supply and strong demand and vice versa. So,

16you know, it is important.

17The MLS is strategically one of the most

18valuable things to me, and that's done because the

19brokers in my marketplace are all willing to cooperate

20and provide that information in a competitive

21environment but still working in the best interests of

22their customers or clients.

23MS. OHLHAUSEN: Let me just follow up, Cathy --

24DR. HAHN: Can I --

25MS. OHLHAUSEN: Okay, Bob, and then --

Page 32

1DR. HAHN: This is absolutely crucial and an

2area where weary economists like myself might differ

3from the average person on the street, but I want to

4talk about the MLS for a minute and try to quote what

5Cathy just said.

6The MLS provides for cooperation among

7competitors, I think that's what she said, and I think I

8 would also agree -- before I explain where I might

9disagree with Cathy -- that sometimes cooperation among

10competitors can be a really good thing, but by the same

11token, what we as economists know is when we allow

12competitors to cooperate, we want to look very closely

13at the rules that they might have about who can

14cooperate with each other and the conditions under which

15they can cooperate with each other.

16The MLS is essentially a club, and its members

17decide who gets to be in this club, who gets to share

18the listings, and the conditions under which they get to

19share the listings. From an economist's perspective,

20the more different types of folks who might get to share

21those listings, the more likely it is that the consumers

22are likely to be presented with a wide array of choices.

23So, I think this is a point that will come up later

24today, but it's important to note that when Cathy talks

25about competition, yes, it's absolutely true that my mom

Page 33

1would compete vigorously for listings, just as people do

2today, but that's very different from competition about

3who gets in the club, because the club decides the rules

4on who gets to be a member.

5So, for example, in the extreme, if a club

6decided only two people could be members and 17 people

7had a legitimate reason or a legitimate business model,

8albeit slightly different from those in the club, you

9might not think that that's an arrangement that the

10Department of Justice or the FTC would necessarily think

11was a good thing or was necessarily a good thing for

12consumers. So, I think that in a way we might be

13talking past each other, but economists see the problem

14a little bit differently.

15MS. OHLHAUSEN: Actually, that feeds into what

16my question was going to be for you, Cathy, is who runs

17the MLSs and the kinds of rules that they promulgate?

18What do you see as sort of the most important rules that

19an MLS may promulgate for its members?

20 MS. WHATLEY: Well, most of the MLSs do have

21boards. They are made up of realtor members. That

22varies from MLS to MLS, because the MLS is unique to

23each individual market. The National Association of

24Realtors does not have, you know, guidelines that

25everyone must establish, they are unique to the

Page 34

1marketplace, but they are highly competitive as well.

2I want to state, too, that understand that the

3Multiple Listing Service has been validated by the

4courts. So, don't miss the point that it is an

5allowable opportunity to have this information provided

6to us as a benefit of our membership in the realtor

7organization, and the fact is that it is

8broker-to-broker cooperation. It's not trying to limit

9the club. It's trying to make sure that there are

10cooperation and compensation guidelines which everyone

11knows, because that's in the best interests of the


13Actually, again, the fact that you've got a

14distinguishable database of aggregated information helps

15the consumer because it allows us and now the consumer

16in those marketplaces where it's highly visible, such as

17REALTOR.com, to be able to see information and to have

18that efficient marketplace roll smoothly.

19DR. HAHN: I want to respond to that, if I


21Cathy said the MLS has been validated by the

22club, but it's also --

23MS. WHATLEY: By the courts.

24DR. HAHN: Or by the courts, excuse me, but it's

25also true that at one point commissions were totally

Page 35

1non-negotiable, which economists would call price fixing

2of a sort, and the courts struck that down. So, it's

3not as if this club has engaged only in activity that I

4would view as pro-consumer or pro-competitive. I would

5say that there have been major benefits from the setting

6up of a platform however many years ago that was called

7the MLS, but I also think it's time to take a serious

8look at what the institution can and cannot do and

9whether that's good for consumers, which is what I care


11MS. OHLHAUSEN: Actually, sticking with the MLS,

12I understand that not all listings go in in the same

13form, and I was hoping, Cathy, you could explain to us

14the differences between an exclusive right to sell, an

15exclusive agency, and something that's sometimes called

16an open listing contract.

17MS. WHATLEY: Sure. An exclusive right to sell

18agreement is one where the seller lists their property

19with a real estate firm, and there is a fee, either a

20percentage or a flat fee, that is agreed to, and that

21fee is paid regardless of who finds the purchaser for

22the property. So, even if the seller has someone to

23approach him in the store and they say, you know, "I've

24got my house up for sale." The seller then says,

25"Contact my real estate professional." The lead may

Page 36

1have come from the seller, and that comes to me, but

2there is still an agreed-upon commission structure.

3Most oftentimes, it is cooperation between real estate

4companies, an exclusive right to sell.

5An exclusive agency agreement, if that same

6seller lists with me, if any other real estate

7professional brings the buyer to the transaction, there

8is still a fee paid; however, if the seller has someone

9that they may have a pre-arrangement with, that they've

10said, you know, four people have contacted me and said

11I'm really interested, if you ever sell your house,

12please let me know, and they were exclusions and/or the

13seller retained the right to sell to someone that they

14found individually, that would be an exclusive agency


16The third is an open listing, and an open

17listing is where the seller could tell each one of us as

18licensees, "If you bring me a customer, I will pay you a

19fee," but there is nothing exclusive about it. It is

20independent, each one operating in that own environment.

21And I just can't leave the last comment without

22saying to Bob, I think we all serve consumers. The real

23estate professional's major responsibility is to work

24for their customer and client. We are in the business

25to serve the consumer. So, in that regard, we are both

Page 37

1on the same level.

2DR. HAHN: I don't dispute that. The airline

3industry, when essentially fares had to be filed with

4the Civil Aeronautics Board, also could make a strong

5argument that they served consumers in the sense that

6when people purchased a ticket, we knew that it was at

7least worth the value of that ticket to take the ride

8from San Francisco to New York.

9The question from an economic perspective is is

10this industrial structure that we call the residential

11real estate market the best way to serve consumers? I'm

12not suggesting that any individual agent would not work

13to promote the interests of necessarily the buyer or the

14seller, because that's what they're supposed to do.

15MS. WHATLEY: But a real estate transaction is

16unique in that there are multiple consumers who have to

17be served. When you're talking about the airlines, when

18you're talking about other industries such as that, you

19have one consumer who is able to interact with the

20business environment. It's different in the real estate

21transaction where you have two consumers who both need

22to be served, and the public interest, you know, that is

23a very strong component, which I think makes it distinct

24and different from some of the other areas that may be


Page 38

1MS. OHLHAUSEN: Actually, Cathy --

2DR. HAHN: There are a number of markets in

3which you have buyers and sellers and platforms,

4including your cousin, commercial real estate. So, I

5don't see that there's anything particularly unique

6about it. But you're right that you need to cater to

7buyers and sellers to get people to yes.

8MS. OHLHAUSEN: Actually, this might be a good

9point, Cathy, to go into the issue of the relationship

10between the agent who brings the buyer in and the duties

11that that agent may owe to the buyer and to the seller

12and the interaction between the listing agent and the

13agent who brings in the buyer.

14MS. WHATLEY: Understand that the state -- and

15it was mentioned earlier -- that the licensing is

16regulated at the state level. So, you have 50 states

17who have 50 state legislatures who enact laws and 50

18state real estate commissions who implement those laws.

19It varies in terms of what the real estate

20professional's duties and responsibilities are based

21upon what the state may have determined are those duties

22and responsibilities.

23By and large, most states work in an agency

24environment, meaning that there's common law areas,

25common law of agency, which talks about fiduciary duties

Page 39

1of obedience, loyalty, confidentiality, disclosure.

2There are some states who have established a little bit

3different type of fiduciary responsibilities and the

4real estate professional may be working in a transaction

5or a facilitator capacity, and so there are different

6defined fiduciary duties in those circumstances.

7There are times when a real estate professional

8may be working with a buyer who is actually their

9customer as opposed to their client. So, there are

10various levels at which the responsibility of the real

11estate professional may be in terms of fiduciary duties

12to their buyer, customer or client.

13MS. OHLHAUSEN: And in that also, could you

14explain how the splitting of the commission works

15between the listing and the cooperating brokers?

16Typically. I understand it varies.

17MS. WHATLEY: Sure. When I go out and I list a

18property, at the time that I list that and put it into

19the Multiple Listing Service, I make a definitive

20determination of what my real estate company will pay to

21a cooperating real estate firm and that broker. That is

22disclosed in the Multiple Listing Service where anyone

23who is going to show that property knows what I'm

24willing to pay.

25If they have any question about that payment,

Page 40

1they have to address that with me and either renegotiate

2it up front if they're unhappy with it, because once

3they've shown the property, then I have presumed that

4they have understood that is my compensation and that's

5what they will receive if they bring a customer and a

6buyer and we ultimately negotiate the contract.

7Everyone is considered a cooperating broker.

8You may have a cooperating broker who is a buyer's

9agent, who is working exclusively for the buyer, has

10exclusive fiduciary duties to that buyer. You may have

11a cooperating broker who is a subagent, actually is

12working on behalf of the seller. You may have a

13cooperating broker who is a transaction broker who has

14limited fiduciary duties, but their role is to make sure

15that the transaction works smoothly.

16But the compensation part is actually

17established, and that's why it's so important that it is

18known up front, because it would be extremely disruptive

19in the marketplace if I didn't know that, if I couldn't

20go into the MLS and it tell me what it was that the

21other broker was willing to pay me in the event I had a

22customer who was willing to buy that.

23DR. HAHN: Let's explore that for a minute.

24First of all, I just want to make a comment about these

25split arrangements. Sometimes they have been required

Page 41

1by the MLS bylaws, these traditional split arrangements,

2and from an economics point of view, that isn't

3necessarily a good thing.

4But when you tune in to -- if you're thinking

5about taking a flight, say, from Washington, D.C. to

6Providence or Boston, you don't necessarily have your

7fees or your splits set up front. You go look at the

8computer screen, and you say, "Today it's going to cost

9me $100 on Airline X and 50 bucks on Airline Y," and you

10decide whether the time's convenient or not and you


12So, it's not necessarily clear to me that having

13the consumer know everything with certainty up front as

14a particular fixed price is a good thing. I mean, we

15may want to see more competition over price and

16certainly the menu of services that's offered. So, I

17think that's an open question, and that's why economists

18like the idea of different business models out there so

19we can see which ones actually will win in the


21MS. WHATLEY: As a practitioner, though, if I

22did not have that information and I am working in an

23exclusive buyer agency relationship and I don't know

24that and my customer has a commitment to a certain level

25of compensation to me, in the event that that is not

Page 42

1achieved and I can't tell my customer that up front, I

2haven't served my consumer customer. So, it's very

3important that the entire process is known.

4For instance -- and it is highly competitive --

5in my marketplace, I can look on my MLS, and it will

6vary from listing to listing as to whatever the

7cooperating compensation is to me. Some it might be X

8percent, some it might be $1, because it can be a flat

9fee, and it can be as low as $1.

10Now, if it is a $1 cooperating compensation and

11I have a buyer broker agreement and the buyer is

12committed that I am going to receive at least a minimum

13compensation of X and I can't tell my buyer that before

14we even start in to go look at this property, I don't

15think I'm serving my buyer well. So, I think that the

16fact that the information is disclosed is very

17competitive, and the marketplace itself has driven very

18competitive pricing in terms of, you know, what the

19cooperating commission is.

20DR. HAHN: I'd like to take a poll here, see a

21show of hands of those people who own houses and have

22actually sold them, how many people sold them and had to

23pay a commission of 5 and a half to 6 percent?

24That doesn't suggest that there's necessarily

25collusion, but it does raise a flag that you want to be

Page 43

1thinking about, that this price-setting arrangement may

2not necessarily be the best way of serving consumers


4MS. OHLHAUSEN: Actually, that also brings up

5another question I think that Tom Barnett had brought up

6in the Kentucky case, on the buyer side, the rebates

7that occasionally are paid to the buyers, and I just

8wanted to get your impression, Cathy, of whether that's

9common. Does that raise issues that you think can

10affect the effectiveness of the MLS, or do you see any

11issues or concerns with that?

12MS. WHATLEY: Well, I'm not sure how it would

13play in your question as to the MLS. You know, are

14there opportunities for people to be able to work with

15their buyers and sellers? Yes, there are. In Florida,

16am I allowed to compensate the buyer or seller back for

17my commission? Yes, I am, and that may come in some

18type of negotiated arrangement. In.

19The event that we get into discussions with the

20seller, if I'm working with the buyer, if we get into

21discussions with the seller and I find that what it's

22going to take to actually put this transaction together

23is eliminating a part of my fee or something, I mean,

24there are ways that compensation is rebated. Sometimes

25it's direct. I'm limited to directing it only to the

Page 44

1buyer, to the parties in the transaction, in my state,

2but state by state makes those determinations.

3That's why you have state legislatures, and

4that's why you have regulatory bodies who implement the

5state legislation. They adopt what they believe is best

6for the consumers who have elected them.

7DR. HAHN: I don't get involved too much in

8state legislation, but from what I read in the papers

9and the academic literature, it's not unusual for the

10National Association of Realtors to come out on the side

11that price competition, which is essentially allowing

12rebates, is not a good thing and also supporting what

13Mr. Barnett alluded to, minimum quality standards

14related to real estate transactions, which is a flag

15also for economists, keeping certain competitors out who

16may only want to offer one part of the menu and not the

17total menu.

18So, I'm delighted to hear that Cathy is

19suggesting that this price competition is out there

20among realtors, and I would just urge the NAR and other

21groups at the state level to vote against legislation

22that puts restrictions on price competition.

23MS. WHATLEY: Well, I don't think minimum

24standards actually place restrictions on competition.

25In fact, I think minimum standards -- and I'm not

Page 45

1speaking for the National Association of Realtors,

2because NAR is very neutral on this position -- but as a

3practitioner, what I believe is important is that both

4parties are able to actually get to the closing, and you

5cannot make unilateral decisions oftentimes as one party

6that don't ultimately have an impact on the other party

7in the transaction.

8If the consumer is making the selective decision

9that they're going to try to work through this process

10on their own, there's no issue to that as long as they

11understand all of the things that are responsible in

12that entire transaction, where they understand the level

13of service that is necessary, that they are having to

14bring to the transaction. There are financial

15consequences to buyers and sellers when the transaction

16does not close.

17Buyers have paid for appraisals. They've paid

18for credit reports. Often their lenders have charged

19them up-front processing or application fees. They are

20time-restricted to be able to close the transaction.

21They have lock-ins on their loans, and if they do not

22close within 30 days, their interest rate is at risk,

23and those costs are at risk for them. In addition, the

24buyer is out there. They've actually given notice to

25their apartment or wherever it is they're living. So,

Page 46

1there are real time constraints in which the process has

2to work.

3And you're talking from one side of the seller's

4capability to be able to do all of it on his or her own,

5and that's fine as long as they understand. Oftentimes,

6though, the negotiation part requires somebody to help

7them understand exactly what it is that they're

8obligating themselves to, and in some contracts, the

9seller is obligated for those financial consequences if

10they are not able to bring the closing to the


12So, you know, if the seller is not told, "If you

13don't get to closing by 30 days, then you can't do

14this," then you have got all these buyer costs, and

15although the buyer said they were going to pay them in

16the contract, they are yours to pay now, Mr. Seller.

17It's just the understanding of the entire

18process, and the minimum level is either just making the

19seller aware that there are things that they need to

20know or minimal steps to be able to assure that both

21parties in that transaction can actually get to the

22point where the seller is handing the buyer the keys to

23the house.

24DR. HAHN: I agree with that. I also think

25that's one area where the different kinds of internet

Page 47

1models can play an incredibly important role simply

2 because all you have to do is have one web site, and you

3know, if you're trying to build a new business model,

4and you can decide whether you want to target sellers

5and educate them and maybe get some fee for that or do

6the opposite for buyers. So, I agree with you that the

7transaction is complicated, but I also think there are

8other ways of skinning the cat and other models that

9should be allowed to emerge.

10MS. OHLHAUSEN: Cathy, actually, I wanted to

11follow up. In our competition advocacy filings, we've

12certainly brought out the issue that consumers, to the

13extent they're not understanding an issue, what they're

14giving up, you know, the unbundled services that maybe a

15disclaimer or waiver or something might work, but also,

16the other issue that we've heard is concerns from agents

17that they might be put in an undisclosed dual agency

18situation, and maybe if you could expand a little bit on

19that, what that entails.

20MS. WHATLEY: I would say if either party in the

21transaction has questions, what tends to happen is that

22they will ask whoever is there in front of them. So, if

23I'm representing the buyer and the obligation for me,

24based upon the relationship that the listing agent has

25with the seller, is that I'm to fax the contract to the

Page 48

1seller, I'm to present the contract to the seller, and

2that's not customary in my marketplace. In my

3marketplace, the listing agent presents all offers.

4That's not necessarily the case across the country, but

5that's what it is in my marketplace.

6I have a fiduciary duty to my buyer, but the

7seller who is sitting there is going to very naturally

8ask me questions about the contract. I mean, that's

9just typical. As they ask me those questions, I'm put

10in the position of either trying to say to the seller,

11"You know, I really can't answer that for you," which

12tends to not put my buyer in the best position, because

13the seller's automatically thinking I'm not trying to

14help them out. So, there are situations where it's a

15darned if you do and darned if you don't.

16If you try to answer those questions, you may be

17putting yourself in a position that you are not allowed

18to do based upon your fiduciary buyer duties with your

19client, and you are darned if you don't because the

20seller takes offense and they don't want to sell to your


22DR. HAHN: I think it's a difficult area. As

23Cathy points out, there can be conflicts of interest,

24and even if you sell your house and you have an agent,

25there are issues about how much effort that agent will

Page 49

1put into selling your house. Steve Levitt, the

2author -- I guess the now famous author of Freakonomics,

3did this amazing little study where he looked at sellers

4selling their own houses versus sellers selling other

5people's houses and the prices that were fetched for

6comparable houses, and needless to say, when the agent

7sold her own house, the price fetched was considerably

8higher. They put a little bit more effort in, because

9at the margin, it was worth it to them, they were

10getting the pull pay-off, versus if they got an extra

11$20,000 for a seller, they are going to get, say, 1 and

12a half percent of that. So, there are incentive issues

13all over the place in the real estate market.

14It's a complicated market. I'm not saying

15there's anything wrong with putting more effort into

16selling your own house if you're an agent than if you're

17selling somebody else's house, but we need to look at

18those, and that's all the more reason -- I realize I'm

19becoming a broken record on this -- but that's all the

20more reason to have different competitive models out

21there and different kinds of services being offered to

22the consumer.

23MS. OHLHAUSEN: Cathy, I wanted to give you the

24opportunity if you wanted to say anything on that.

25MS. WHATLEY: Sure. You know, sellers make

Page 50

1decisions for a lot of different reasons. They may

2elect to take a negotiated price because, in fact, if

3they figured that they had to pay another mortgage

4payment or two, it would be the same dollars to them.

5Maybe based upon the time sensitivity of the market,

6when you're in a hot seller's market -- in fact, our

7market is still an extremely strong seller's market.

8There isn't any seller who is going to take a property

9contingent upon the sale of their home.

10So, the time sensitivity of being able to get a

11contract, know that they can then go out into the

12marketplace and buy a home and not be at the price point

13of what it is today versus what it might be six months

14from now, it's all relative. Those are all things that

15the buyers and sellers take into consideration as

16they're considering offers.

17I won't speak to whether or not, you know, an

18agent may or may not make additional money. There may

19be an investment property versus something where the

20home seller is needing to get out. So, there are

21different stages of things, but I think it's very

22important to know that when I'm meeting with sellers

23every day, they make their selling decisions based upon

24a number of factors that influence what their housing

25decisions are going to be.

Page 51

1Homestead Exemption, you know, are they going to

2be able to get in and be able to qualify for Homestead

3Exemption for that next year? In Florida, we have a 3

4percent cap on properties. So, it's very important that

5once you can get to that stage, then the property taxes

6are not going to increase by more than 3 percent. So,

7establishing that value as early on as possible is very

8important for people in my marketplace.

9So, there are a lot of things that weigh into

10the fact of why sellers make decisions based upon what

11they think is a reasonable price at which they're

12willing to sell.

13DR. HAHN: I agree.

14MS. OHLHAUSEN: Bob, you had mentioned how many

15people had sold homes and paid the 6 or 7 percent

16commission. Based on some of the research that you've

17reviewed, does it suggest that there is some sort of

18optional rate out there, commission rate?

19DR. HAHN: There may be, but I have no idea what

20it is, and I don't think anybody else does either. I

21think the more interesting question that came up a

22little earlier is are these rates going down and what do

23we know about them? That's why I kind of did this

24little poll. The sad truth is that we know very little

25about them.

Page 52

1When I issued or we issued an initial draft of

2our paper, we had hoped that we were going to get

3detailed microdata, not Mrs. Smith's, you know, we don't

4get to know who that is, but we wanted to see whether

5most folks were still paying 5, 6, whatever it is, and

6how that had changed over time.

7Steve Murray, who very graciously agreed to

8share with us some of his aggregate data along with the

9Wall Street Journal and everyone else, I mean, he has

10this generalized data, but I don't think it tells us

11very much about the structure of this market. So, one

12of the things that I would hope the FTC or Justice

13Department or Congress would do would be to figure out a

14way to get better data, but that's what economists like

15anyway, so we can publish papers.

16MS. OHLHAUSEN: That's what I've heard from our

17economists all the time, better data.

18Well, turning away from price competition, the

19recent GAO study suggested that brokers are competing

20more on non-price variables such as quality and

21reputation and level of service, and Cathy, I was

22wondering, do you think this is happening and sort of

23how does that play out in the market?

24MS. WHATLEY: Well, I can say I would disagree

25with the GAO in that there is price competition. I'm

Page 53

1dealing with it every day in the marketplace. So, to

2presume that it is not there I think is a false

3presumption. And Bob, I would also presume that you

4feel that is a very positive thing. I think that's good

5for consumers. I think consumers need to be able to

6weigh the level of service, the quality of the company,

7the quality of the activity that's going to be brought

8to them, what they need to do versus what someone else

9is going to handle for them, and they weigh that in

10relationship to whatever their fee structure is.

11I think people are concerned about the

12transaction, because as was mentioned right at the

13beginning, it's the single largest transaction most

14people ever make in their lifetimes. They want it to go

15smoothly. When they're sitting in the theater, they

16want the play to end with a happy ending. They don't

17want someone to have messed it up along the way and not

18be able to get to the closing.

19So, I do think people do weigh -- you know, they

20ask their friends, you know, "Who have you used? Did

21you have a successful transaction with them? Would you

22recommend them again?" A lot of people, word of mouth,

23networking, ask those type of questions, because that's

24what's important to them. That is truly what is

25important to the consumer, is that they are able to get

Page 54

1to the closing.

2They have told their family they're moving, they

3have made all of these arrangements, and so determining

4who is best capable of bringing that to them, and

5whether that's in a bundled service, a fee-for-service,

6a flat fee, I do part of it myself and somebody else

7does part of it, or a full-service relationship, I think

8all is in the discussion points with the consumer today.

9MS. OHLHAUSEN: So, you are sort of making the

10point, which certainly I would agree with, that there is

11no one consumer, there is a variety of consumers, and

12they have different experience levels, abilities, risk

13tolerance, so certainly it sounds like -- I think, Bob,

14in your paper you said 77 percent of home buyers use a

15real estate agent or broker. So, there is certainly a

16large majority of consumers who seem to want the

17traditional model, but for those consumers who maybe

18have more experience or just would like to try a

19different model, I wanted to spend a little bit of time

20now, we have got 10 minutes left on the panel, turning

21to some of the new real estate models and how they


23Bob, I may have you speak on that first.

24DR. HAHN: I'm not sure I consider myself an

25expert on this, so I'll do something I was taught in my

Page 55

1TV training, which I never do very well, which is I'll

2try to answer another question and then come back to the

3question, and hopefully Cathy can bail me out on this

4one, because I don't consider myself an expert on the

5business models.

6But one of the findings in the GAO report which

7Cathy disagreed with may or may not be right, but I

8think it's a logical consequence if what they're saying

9is true of not having a lot of price competition.

10They're noting that they're competing over other

11variables other than price. Well, that's exactly what

12we observed in the airline industry before Fred Kahn,

13Steve Breyer, Ted Kennedy deregulated airlines, got rid

14of the Civil Aeronautics Board.

15For those of you who are old enough to remember,

16we had things like the sandwich wars on some airlines to

17get people to come on. We had things like -- dare I say

18it in mixed company -- the mini-skirt wars to get some

19people to come on planes. So, it's not surprising to me

20that we observe non-price competition if, in fact, there

21isn't a lot of price competition.

22As for different models, I think Cathy alluded

23to most of them in her remarks. There are also

24full-service internet brokers. You can have flat fees

25for getting on the Multiple Listing Service, although I

Page 56

1have to tell you I have one anecdote where my office

2mate or the guy next door tried to sell his house as

3sort of a for-sale-by-owner and get on the Multiple

4Listing Service only to learn that he did not get the

5same level of privileges as your typical agent did when

6he or she has access to the Multiple Listing Service, so

7he couldn't put his phone number there or whatever, and

8it was just hard for people to get in touch with him.

9But there are a whole lot of models out there.

10I don't think that's the issue. I think for me, there

11are really two issues. One is the fact that competition

12is being restricted at the state level, which may or may

13not be a federal issue, and we talked about price

14competition in these minimum service standards, which I

15don't necessarily think are a good thing.

16The second thing is the MLS, and I think that's

17kind of the 800-ton gorilla in the room, and the fact

18that the folks who are in that club get to make the

19rules needs to be scrutinized very carefully.

20MS. OHLHAUSEN: So, Bob, you kind of answered

21the previous question and at the tail end jumped into a

22little bit of what I was asking about, but, for example,

23you mentioned the MLS. So, if somebody has a, you know,

24a flat fee listing, they put their house in the MLS, and

25then they may offer compensation to a buyer's broker or

Page 57

1they may --

2DR. HAHN: Right.

3MS. OHLHAUSEN: -- give a flat fee.

4Now, there was another business model I don't

5think we've touched on, which is customer referral

6firms, where, for example, we have a representative from

7Lending Tree on a panel later in the day, and so they

8have information they're providing to interested buyers

9who are certainly coming on the site to find out about

10what size mortgage they can qualify for, and then if

11those customers are interested in using a real estate

12agent, then they refer them to a realtor in a network

13and I guess for a referral fee.

14I just wanted to get your views on that, Cathy,

15is that a growing area of the market? Has that always

16existed? Is it something new? Is it causing, you know,

17new issues to arise?

18MS. WHATLEY: Well, there's always been referral

19business, broker-to-broker referral business. You want

20to refer your important customer, because they

21ultimately would drive business to you, you want to

22refer them to someone that you believe is trusted and

23capable of handling their transaction for them. So,

24referral activity is not new.

25Keep in mind, there are two distinct databases.

Page 58

1The first one is the Multiple Listing Service, which I

2want to reiterate is broker to broker. That talks about

3cooperation and compensation. If a seller wants to get

4their property put into the Multiple Listing Service,

5they do that through a real estate professional. They

6don't enter it directly, because the consumer is not a

7member of the realtor organization. So, they contact a

8real estate professional.

9If the real estate professional, they reach an

10agreed-upon fee or for free or whatever their

11arrangement is, that goes into the MLS, but then there

12is, again, the part of the MLS is not only cooperation,

13but compensation, and the broker who is adding that

14information in is the one who is agreeing to the

15compensation. So, they are agreeing that they will pay

16my firm $1 or X percent or whatever it is if I bring

17them a buyer ready, willing and able. They have a

18separate relationship with the seller, and the seller

19has said this is the fee that I'm willing to pay, but

20what's in the MLS is cooperation offered broker to


22There's a separate informational resource that

23the consumer has the capability to see, but that's

24advertising. That's basically, when you go out on my

25web site and you see my information and other people's

Page 59

1information, that's advertising, and a broker ought to

2be able to have the ability to say who has the right to

3advertise his or her properties for the public to see.

4They have had to work hard to get that listing, and in

5fact, some real estate commissions actually -- most are

6required to have permission of that listing broker to be

7 able to advertise their property.

8So, have there been referrals? Yes, there are

9ongoing referrals every day. I send referrals to

10qualified real estate professionals that I know in other

11 marketplaces. If they're successful in closing the

12transaction, I may receive a fee for that, but that is

13done broker to broker within the MLS. The separate

14thing of what is allowed on the internet and viewable

15and the access to that by the consumers should have some

16opportunity for the broker who has spent time, money and

17vested a lot of information in that to be able to

18determine that it's being advertised in places that they

19 are comfortable.


21DR. HAHN: I want to respond to that at a couple


23Cathy, Joseph Heller once wrote a book called

24Catch-22, some of you may have seen the movie or read

25the book, but the catch-22 here is that the MLS --

Page 60

1remember we talked about that earlier? -- the MLS

2decides on who gets to be in the club and decides on

3what's a broker. So, you or I may think that a

4full-service internet provider of real estate services

5might be a broker, but the MLS can decide whether that

6person or whether that entity is a broker.

7 I may think that the firm HomeGame is a broker,

8but the MLS in Dade County, Florida or wherever it is

9might decide it's not a broker. It also decides that my

10colleague Scott cannot post his phone number when he

11wants for-sale-by-owner and access to the Multiple

12Listing Service, which makes it a heck of a lot harder

13for him to sell his house directly if he wants to do

14that, even if he purchases that privilege from an agent

15or broker to get onto the MLS.

16So, my only point is the MLS has quite a bit of

17power to set the rules and therefore affect the kinds of

18services that consumers get offered, and some of the

19rules that they endorse may neither be pro-competitive

20nor pro-consumer, and that's where there is a role for

21people, analysts and public servants like yourself, to

22take a serious look.

23MS. OHLHAUSEN: I wanted to emphasize that this

24is an overview panel. So, a lot of these issues that

25we've raised, we're sort of giving you the appetizers,

Page 61

1and you'll get a little more into the entrees in the

2specific panels that will deal with buyers' issues and

3sellers' issues and some of the empirical evidence.

4In our last three minutes here, I wanted to give

5both of our panelists just a chance to say -- we have

6covered a lot of topics here, but what other issues and

7challenges do you see coming down the road for real

8estate brokerage?

9MS. WHATLEY: As a real estate practitioner, I

10am challenged every day to ensure that affordable

11 housing is available for the consumers that I try to

12serve. I think there are a number of things that play

13in the marketplace. You've got changing insurance

14availability and affordability. That's an issue for the

15real estate community as a whole to have to deal with,

16and certainly with all the hurricanes and things that

17are happening, that's an issue that we have to deal


19I think potential tax law changes could be an

20extremely big issue that we have to deal with, and I

21think the availability of mortgage money, if limited,

22could be a huge thing that we have to deal with in the

23brokerage community, because right now, consumers are

24very, very well served by being able to go out and know

25that there is available money, assuming that they have

Page 62

1the qualifications, that there is available money there

2for them to be able to borrow. They know what benefits

3are there based upon their home ownership purchase, and

4you know, if they find the right house and they can't

5get insurance, they're not going to buy the house,

6because the lender isn't going to make the loan.

7So, those are all things that I think are

8greatly influencing and impacting the real estate

9brokerage community today, and I see that in the future.

10MS. OHLHAUSEN: Thanks.


12DR. HAHN: I think the real challenge for all of

13us is how we're going to or how this industry is going

14to evolve from the 20th Century into the 21st Century,

15and again, I'm just a narrow card-carrying economist,

16and the way I think about it is what policies can we

17promote to get us from here to there, and at the state

18level, it's a no-brainer. Forgive me. I mean, the

19literature on regulation has shown time and time again

20that price and entry regulation, i.e., minimum service

21standards and other things like that, are bad for


23I think the MLS is a more complicated issue. I

24think Cathy makes a good case that there have been

25definite benefits for consumers over time with respect

Page 63

1to having a platform where buyers and sellers can meet

2and share listings. The question is, what should be the

3rules for that and what should be the rules for access

4and so forth?

5And even though I was told not to talk about it,

6I'm going to spend five seconds by mentioning that I

7also think it's not a bad idea to allow banks into the

8real estate business under certain conditions, because

9it would promote competition, and that's what this

10seminar is supposed to be about.

11MS. OHLHAUSEN: Just to clarify, what I told Bob

12was it was beyond the scope of the workshop. It's all

13in the interpretation certainly.

14DR. HAHN: I'm just pulling your leg.

15MS. OHLHAUSEN: Well, I would like you to join

16me in thanking our panel, Cathy and Bob.


18MS. OHLHAUSEN: We will reconvene at 10:45,

19where we will look at sellers' issues. Thank you.

20(A brief recess was taken.)

21DR. COOPER: Thanks. Thanks for coming and

22welcome to today's second panel.

23We are going to focus today on issues affecting

24competition among the sellers' brokers. I'm James

25Cooper, the Assistant Director of the Office of Policy

Page 64

1Planning here at the Federal Trade Commission.

2 Before we get started, I want to remind you all

3that we will have questions from the audience during

4this session. They will be on written cards. For those

5of you who picked up packets, there should be a card in

6your packet. There will be ushers walking around to

7pick up those cards, and in case you didn't get a card

8or you don't have a question card, those ushers will

9also have a card and a pen. So, please feel free to

10fill out your card and give it back to the usher, they

11will work their way through some magic and end up with

12me, so we'll go from there.

13A recent NAR survey reports that 82 percent of

14home sellers hire a real estate agent to help them sell

15their home, and the vast majority of these people appear

16to be contracting with real estate agents to provide

17them with a full range of services associated with

18selling that home; for instance, providing pricing

19advice, listing the house in the MLS, conducting open

20houses, otherwise marketing the home, showing the home

21to prospective buyers, negotiating with the buyer, and

22then accompanying them to the closing.

23Although the data seem to indicate that this is

24the predominant model, the one that most consumers

25currently purchase, there are new business models that

Page 65

1are arising that offer consumers the option of

2purchasing some of the services as opposed to the full

3bundle. For example, a popular option offered by

4so-called fee-for-service brokers is the MLS listing.

5Under that sort of service contract, the listing agent

6will place the home in the MLS, but the rest of the

7transaction is pretty much left up to the home seller.

8Taking it one step further, there's a whole

9class of home sellers that do it on their own, and these

10so-called FSBOs or for-sale-by-owners, they don't pay a

11broker's fee, but at the same time, they take on all the

12effort themselves. An entire industry now exists to

13help these home sellers perform the tasks involved in

14selling their home.

15In this panel, we hope to explore these

16different business models and discuss how they compete

17to gain home sellers' business. We are also going to

18examine state-imposed restrictions on some of these

19models; for instance, minimum service laws which several

20states recently have considered or adopted and which, I

21might add, that the FTC and DOJ is opposed to, most

22recently in Michigan. We sent a letter to the Michigan

23Legislature last week which some of you may or may not

24be aware of, and if you're not, it's in your packet.

25We'll also discuss reported discrimination

Page 66

1against for-sale-by-owners and other fee-for-service

2business models by private parties.

3We are lucky to have a distinguished panel to

4discuss these diverse issues. First, over here on my

5far right, we have Aaron Farmer. He's the owner Texas

6Discount Realty and recently named one of real estate's

7most influential people for his vociferous struggle

8against minimum service regulation in Texas.

9Next we have Thomas Kunz, President and CEO of

10Century 21 Real Estate. He's been involved in virtually

11all aspects of the real estate transaction for over 30

12years or around 30 years, I'm not sure which.

13We also have over here to my immediate left

14Colby Sambrotto. He's the Chief Operating Officer of

15ForSaleByOwner.com. This is a web site that offers FSBO

16listings and also offers consumers who are trying to

17sell their house on their own a wide array of products

18and services to help them sell their house on their own.

19And finally, we're pleased to have Wayne

20Thorburn down at the far end of the table. Dr. Thorburn

21has a Ph.D. in political science from the University of

22Maryland. He's been a professor. He's worked with HUD,

23the Department of Housing and Urban Development. He's

24the Immediate Past President of the Association of Real

25Estate License Law Officials and currently is

Page 67

1Administrator of the Texas Real Estate Commission.

2Sam Licklider, who was supposed to be with us

3today, unfortunately will not able to join us.

4Each panelist is going to give a brief

5presentation, and then we will have what I hope is a

6very lively discussion about these issues.

7So, without further adieu, let me turn it over

8to Aaron Farmer.

9MR. FARMER: Hello, my name is Aaron Farmer. I

10am the broker/owner of Texas Discount Realty out of

11Austin, and I would first like to thank the FTC and the

12Department of Justice, specifically James Cooper and

13Maureen Ohlhausen, for inviting me to be on this panel.

14I'm very honored. I appreciate it.

15I'd first like to start with showing the

16organizations that I'm a member of. I'm a member of the

17National Association of Realtors, of course, the Texas

18Association of Realtors, Austin Board of Realtors,

19Houston, San Antonio, Arlington Board of Realtors and

20MLS, Brian/College Station, Waco Board of Realtors, New

21Braunfels Board of Realtors, Alice Board of Realtors,

22and finally, the Tyler Board of Realtors. Last year I

23paid over $4,000 in dues and fees to various realtor

24organizations. So, I consider myself a realtor.

25I'd first like to get into my business, a little

Page 68

1bit about my business model. I founded Texas Discount

2Realty as a one-man operation in Austin, Texas in the

3summer of 2000. We work, as today, primarily with

4sellers. We offer three different listing packages, a

5menu of services, if you will.

6The first one and the most controversial one is

7our limited service package. We charge $595 now. When

8I first started, we charged $395 and have since raised

9our prices to $495 and then up to $595, and this is the

10most controversial package that we offer and the one all

11of the fights have been about.

12The next service we offer, I call it our flat

13fee plus. We charge $495 at the time of listing and

14then a flat rate of $1,500 at closing for full-service

15assistance to the seller once a buyer is found. We

16don't do any additional marketing of the house other

17than putting it onto MLS, and it goes onto REALTOR.com,

18AustinHomeSearch.com, IDX sites, various places like

19that. Of course, out of all of our packages, we do

20offer 3 percent to the buyer's agent.

21Finally, I have a full-service plan. Granted, I

22don't sell a lot of these, but we do charge 4 to 6

23percent paid at closing, and yes, we have charged 6

24percent to some certain sellers with very low-priced

25properties. Finally, we do offer rebates to buyers who

Page 69

1do a lot of their own legwork.

2How I got involved with all this was through the

3minimum service laws. Texas was the first state in the

4U.S. to pass a minimum service law in September of 2002,

5and I'd like to read a little bit to you of the first

6shot I guess that was fired through the minimum service

7laws, and this is directly out of the Texas Register.

8It says, "This amendment adds new Section 535.2

9to define minimum level of service that a consumer may

10expect to receive from a broker who represents the

11consumer. This clarification is proposed based on

12concerns raised by various industry organizations

13regarding limited service listings. A limited service

14listing agreement is an agreement by which a broker

15provides fewer services than those provided for in a

16traditional real estate listing agreement. A limited

17service agreement may provide for a menu of services or

18reduced fees for certain specified services rather than

19a full commission for the complete range of brokerage

20services generally found in a traditional real estate

21agency relationship."

22Now, this is the State of Texas that is putting

23this out. This is not the National Association of

24Realtors. This is not TAR. This is the State of Texas

25who's telling me that I should charge a full commission

Page 70

1instead of a menu of services, and of course, this

2outraged me, and this is what provoked me to go and do

3what I've done.

4So, I filed suit. I did what any warm-blooded

5American does these days, I filed a lawsuit against the

6State of Texas and the Texas Real Estate Commission

7specifically. In fact, I believe Dr. Thorburn was the

8one who was served with the papers, I believe.

9We were immediately granted a temporary

10restraining order. The next day, after this restraining

11order was granted, the State Attorney General's Office

12called my attorney and said, "How do we make this thing

13go away? How do we make this lawsuit go away?" We

14said, "Simply repeal the rule. Just repeal the rule,

15that's all we want." And immediately the rule was


17There is a process, you know, later in 2003, it

18was repealed, but immediately, the wheels began in

19motion again to pass a new rule, so to speak, I guess

20that TAR and the TREC thought maybe could make it

21through the courts, I guess, and so we attempted to

22negotiate and were invited on several occasions to try

23to make a more consumer friendly rule or law.

24Then, in February of 2005, a law that was deemed

25to be not consumer friendly by myself and by others was

Page 71

1proposed through the Real Estate Commission again, and

2then this is when the Department of Justice and the

3Federal Trade Commission stepped in and wrote their

4letter saying that this new rule would harm consumers,

5of which I agreed with most of the letter.

6At that point, seeing that we were probably in

7for another fight in the court system, Texas Association

8of Realtors goes through the Legislature and has a law

9attached to a general housekeeping bill 11 days before

10the end of session, and of course, Governor Perry signs

11the law into effect on September 1st of 2005.

12So, now we get to the present day, and I want to

13talk a little bit about kind of who was behind these

14laws. In Texas, the law was filed or the amendment was

15tacked onto the housekeeping law by a state

16representative who also happens to be a real estate

17broker out of El Paso and also happens to be a ranking

18member in the Texas Association of Realtors. Something

19I find more egregious is in Utah, a minimum service law

20recently passed, and it was pushed through by a state

21senator out of Utah who also happens to be the President

22this year of the National Association of Realtors. But

23of course, NAR is neutral on the minimum service


25But you kind of see a pattern here. This is not

Page 72

1Ralph Nader or John Stossel or any other consumer

2organization coming out for these laws. These are

3industry insiders who are pushing these laws through,

4and in fact, just the opposite is happening with the

5consumer rights groups, they are coming out against

6these rules and laws.

7So, what are some of the arguments nowadays?

8You know, the first argument was, well, you know, we

9think agents should charge a full commission, whatever

10that may be, instead of a menu of services. Well, now

11the arguments for this new law have changed a little

12bit, and now they say, but we owe a fiduciary duty to

13our clients, which I absolutely agree with. I agree

14that we owe a fiduciary duty to our clients. But when I

15was going through school, I learned fiduciary duty meant

16you do what's in the best interests of your client ahead

17of your best interests.

18If my client comes to me and says, "You know

19what, Aaron, I know more than you. I can negotiate my

20contract better than you. I can sell my house better

21than you. I just need you to help me with this, this or

22this," am I not doing my fiduciary duty by doing what my

23client is telling me is in his best interests?

24So, another thing that I find that these laws,

25these minimum service laws do is we're essentially

Page 73

1saying someone who just took 120 hours of real estate

2classes maybe online, who's maybe never bought or sold a

3house, who passed a real estate exam yesterday, is more

4qualified to sell a house than someone who maybe has

5been a real estate attorney for the last 30 years and is

6not a member of an MLS. That's what these laws are

7essentially saying.

8Last year in Texas there was around 3500

9complaints against traditional brokers in the State of

10Texas. How many against limited service brokers? None.

11Against limited service transactions? Zero. Never.

12There's never been a consumer complaint in the State of

13Texas on a limited service transaction. I think if the

14realtor establishment would really like to help the

15consumer, let's look at some of these 3500 complaints.

16Let's look at the root causes of some of those. Let's

17go after some of those instead of going after something

18that there's no consumer outcry for.

19And what about competition? NAR says that

20there's competition in the real estate industry, and I

21agree. I agree there's a lot of competition in the real

22estate industry, but the competition is among

23traditional brokers. There's not the competition

24between traditional agents and alternative brokers.

25This is the kind of competition that I see practiced on

Page 74

1me in my markets.

2I've personally had brokers, agents, tell

3potential sellers that no one would show my listing. If

4they listed their house with me, no one would show the

5house. I have had brokers tell people that, hey, he's

6gone out of business. I heard he's going out of

7business soon. You know, I have had signs stolen. I've

8received hateful emails. I even had one agent who was

9ridiculed in public for being a discount broker at a

10public realtor event, and other agents around the

11country have had frivolous complaints filed against

12them, have had their listings removed from MLS for no

13reason, have been asked for every copy of every listing.

14I don't really call this competition. I call

15this harassment and discrimination. Not only is it

16discrimination against us as brokers, it's

17discrimination against the consumer, the seller, who

18might be drawn to us, who doesn't feel like that they

19need a traditional agent. The discrimination doesn't

20even stop there. You know, it goes up to, you know, the

21State of Texas, who's saying that I shouldn't have a

22menu of services. I should charge a full commission.

23Now, something that we're seeing go through some

24of the local MLSs now are exclusive agency laws that are

25being passed that says that if a seller chooses to have

Page 75

1an exclusive agency listing, well, you can list your

2home on MLS, but it's not going to be listed on the

3REALTOR.com or any of the IDX web sites, and this is

4something that's happening through some of the local

5 MLSs, including my home MLS of Austin, Texas.

6So, what does the future of the industry bring?

7I believe that we must stop the lies and discrimination

8as an industry against people who are different, against

9brokers who are different, against consumers who want to

10do things different. We have got to remember that not

11every consumer is the same, not everyone fits in the

12same little box, not everyone has the same experiences

13as other people. There may be people who have bought

14and sold 20 houses over the last five years, which I

15have several of those clients, real estate investors,

16and we can't treat them the same as traditional agents

17have in the past.

18Also, most alternative brokers are also

19realtors. I personally agree with the National

20Association of Realtors and the realtor establishment

21most of the time. Seventy-five to 80 percent of the

22time, I believe that they do great things for the

23 communities. You know, in Texas, they have raised a lot

24of money for hurricane victims, and they do great

25things, and they provide great resources for me as a

Page 76

1broker and me and my agents. They provide great

2resources and tools for us.

3I think they have lots of value, and you know, I

4wouldn't be paying $4,000 a year if I didn't agree that

5I was getting value out of that, but I just don't agree

6with their definition of competition and how they

7practice it.



10 MR. KUNZ: Ladies and gentlemen, it's a

11privilege for me to be here with you today. My name is

12Tom Kunz, and I am President and CEO of Century 21

13Realty, LLC. I hope to show the unique perspective of

14someone who currently sells franchises to real estate

15brokers and provides services to affiliated brokers and

16sales professionals.

17Previously, I have been president of an

18independently owned and operated real estate brokerage

19company in Southern California and also head of a

20software company earlier in my career. I am here to

21represent the over 137,000 small, independent

22businessmen and women who are members of the Century 21

23Franchise System either as brokers or sales associates.

24We have more than 7500 offices worldwide, but half of

25our offices have 17 or fewer sales associates, and the

Page 77

1median number of closed transactions by offices last

2year were 141 closed transactions. We're a big system

3but one that is proud to have so many small to

4medium-sized businesses in our ranks along with our

5larger brokers.

6I also can speak from a real estate consumer's

7perspective, because in the past year, I sold my primary

8residence in California, moved across the country,

9purchased a new home in New Jersey, and I might add that

10precisely because of my 31 years of experience in the

11industry, I made an educated decision to work with a

12full-service real estate professional on both

13transactions, using both a seller's agent and a buyer's

14agent. I got what I paid for, too. Excellent

15marketing, local knowledge and advice and counsel

16throughout the process.

17Since this is a seller's panel, I'd like to open

18by talking about the listing. The issue of who owns the

19listing is fundamental to this conversation. I will

20tell you in rather no uncertain terms that a listing is

21a broker's work product. It is interesting to hear some

22people espouse that the theory that selling a home is a

23simple process and that one must only list it with an

24MLS in order to make a sale, anyone who has ever sold a

25home fully appreciates that the listing is merely the

Page 78

1first of many steps in the process.

2A listing is the agreement between a broker and

3a homeowner that describes the manner in which a home

4will be marketed and sold. It often defines the manner

5in which the home will be presented, marketed to the

6body of prospective buyers. The terms of this agreement

7are, and we believe should remain, a matter for private

8negotiation between the listing homeowner and the broker

9of his or her choice rather than the subject of

10government regulation at the federal, state or local


12If anything, the increased use of the internet

13by potential sellers and buyers of residential real

14estate have significantly increased the negotiation

15power of the listing homeowner in setting the terms of

16such transactions, which are already significant as a

17result of his or her control of the key asset, that

18being the home itself. It is our firm belief that the

19Federal Government should not get involved in dictating

20to state-licensed real estate professionals and

21homeowners on how these individual marketing plans

22should or should not be implemented.

23Let me ask you, in what other industry do

24individual service providers negotiate a competitive

25price for their services and then aggressively market

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1their products to the competition, sharing upwards of 50

2percent or more of their fees to attract buyers? And in

3what other industry do individual competitors

4voluntarily make their inventory available to other

5industry participants, empowering the competition to

6avoid the cost of infrastructure necessary to produce

7their own inventory?

8I'll tell you, the residential real estate

9industry is one of the last great industries where

10entrepreneurs can open up shop next door to the largest

11brokerage firm in town, join a cooperative group called

12an MLS, and share in their competitors' inventory,

13investing relatively little in startup costs and

14actually making a living.

15This industry is dominated by small to

16medium-sized family-owned-and-operated firms, many

17handed down from generation to generation. There are

18more than one million sales associates and brokers

19operating in nearly 100,000 offices around the country.

20They are fiercely independent, yet with the voluntary

21efforts unique to the industry, they are cooperative

22with the competition in ways unheard of in any other

23industry that I know of. And why? Because cooperation

24best meets the needs of the consumer.

25This is facilitated through a cooperative known

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1as the Multiple Listing Service or MLS. Depending on

2who you ask, there are anywhere between 800 and 2000

3MLSs operated in the country today. Long ago, the

4industry recognized that through cooperative efforts,

5brokers and agents can sell a consumer's home faster and

6more efficiently. If you look at the past several years

7in particular, where many transactional investments and

8those who manage them have failed, real estate

9professionals have done their job quite well. Simply

10put, the process works and works rather well.

11In a performance-driven economy, I would say the

12real estate industry has outperformed. The simple fact

13of the matter is that the U.S. housing marketplace tends

14to be very efficient for consumers. When a real estate

15professional represents himself to a prospective home

16seller and makes a listing presentation, she does so

17with a full understanding of the very real pricing

18pressures and competitive issues. She presents her

19skills, resources, technology, marketing plan for the

20home. She also presents and explains her fees.

21Generally, the typical homeowner will invite

22listing presentations from more than one agent. Through

23the cooperative effort in the industry, the internet

24empowers home sellers to be well educated on the market,

25attributes of various firms and specific sales

Page 81

1associates, pricing, and the list just goes on and on

2and on.

3Ultimately, the home seller selects the real

4estate professional, he or she, and her brokerage firm.

5Each real estate professional competes against the other

6ultimately in a very efficient process driven by the

7homeowner determining which fee and which services best

8meets the homeowner's needs. As you are aware, sales

9associates are almost always independent contractors,

10and our experience shows that all commission fees are

11negotiable. This very efficient price/value proposition

12process takes place thousands of times each day

13throughout this country.

14Some sales associates are simply better than

15others, and they are able to demand and earn higher

16fees. Some choose to discount their fees, which may or

17may not reflect their service levels. At the end of the

18day, it is the homeowner who decides if the price/value

19proposition meets his or her needs.

20The home seller ultimately controls the listing

21decision, which gives him a great deal of influence over

22the price of the services. As my father used to say to

23me, "People vote with their cash." Thus, the

24marketplace determines what is acceptable.

25The fact is that the national average broker

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1commission rate over the past dozen or so years has

2trended down from the 6 to 7 percent range down to 5.1

3percent according to REALTrends, a leading industry

4consultant and analyst firm. That said, it is almost

5impossible to determine what the competitive price level

6is in any industry, especially one as dynamic as the

7real estate business, where there are highly individual

8services and rapid technological changes taking place

9every day.

10If you are the listing broker, a number of

11states have determined that you must actually have a

12physical presence to properly represent sellers and

13provide the services necessary to manage the sales

14process. More than a dozen states have determined that

15one cannot properly represent a seller's interest while

16operating out of a call center located two states away.

17Thus, we have seen a recent uptake in minimum service

18requirement laws passed at the state level.

19First and foremost, this is a states rights

20issue. I cannot, nor can you, dissuade the states from

21doing what they think is best for their respective

22citizens. They are acting to protect their customers or

23their consumers, not to shield the real estate industry

24in some way.

25For the record, while we have no reason to

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1believe that the states' motives are anything but

2well-intentioned, neither Century 21 nor our parent

3company, Cendant, believes that minimum standards

4legislation is truly necessary. We believe in

5consumers' rights to choose their real estate

6representation, or not, and we also believe that the

7full-service real estate model employed by the majority

8of our brokers presents a compelling value proposition

9that is recognized on its own merits by today's

10increasingly savvy consumers.

11 That being said, it is important to note that in

12the past five years, there have been a variety of

13alternative real estate models launched, which is strong

14evidence that competition and the ability to innovate

15are alive and well and thriving in our industry. And

16who benefits most from this competition? The consumer.

17They have more choices than ever before.

18At the end of the day, the consumer should

19determine what is in his or her best interests, and in

20fact, when I look across residential real estate in

21America, I see a very dynamic and competitive industry

22that should be left free of Federal Government

23regulatory intervention to sort itself out.

24Thank you very much.


Page 84

1(Technical difficulty.)

2MR. SAMBROTTO: Once again, my name is Colby

3Sambrotto. I'm the Chief Operating Officer of

4ForSaleByOwner.com, and I'd like to thank the FTC for,

5A, convening the workshop today, but B, for allowing us

6to take part in it. It is a privilege. Thank you very


8I'm here to talk about ForSaleByOwner.com but

9also to talk about changes that are taking place in the

10real estate services industry, changes that we think

11we're playing a part in driving. ForSaleByOwner.com is

12dedicated, of course, to no-commission real estate, to

13not using agents at all, but we do have a section of our

14services that is predicated upon us closely interacting

15with realtors. So, while it does get adversarial at

16times when we talk about our model relative to realtors,

17we do work closely with them oftentimes.

18Over the course of the last six years, we've

19built this business on the internet, primarily on the

20internet, although we do have bricks and mortar offices

21across the country. Over the course of those six years,

22there are a number of trends that we've noticed taking

23place, becoming evident in the industry, trends being

24driven by consumers and the changing aspect of consumer


Page 85

1One thing is that consumers want unbundled real

2estate services. That's a certainty. The second and

3probably the biggest driving force in the growth of

4ForSaleByOwner.com is the fact they want to reduce

5transaction costs associated with buying and selling

6real estate. So, those are the two big factors that

7have driven the growth in our business. I think those

8are the two biggest factors driving growth in the real

9estate services industry today.

10To a certain degree, the traditional real estate

11service industry, that end of the industry that's, you

12know, populated by agents, has resisted change I think

13to a certain degree. What most concerns us is that over

14the course of the last year and a half to two years,

15they seem to be actively moving to prevent us from

16offering services that consumers have a great deal of

17demand for. So, that's why we're here today.

18One of the things I wanted to talk about -- and

19if I had my Power Point presentation, I would have a

20snappy page here to show you -- the internet is driving

21the change in real estate. Real estate, it seems to

22ForSaleByOwner.com, has changed more over the course of

23the last five years than it did probably in the previous

2490 combined, and the reason that that change has taken

25place -- well, the change is being driven by consumer

Page 86

1demand, but it's being facilitated by the internet, and

2the fact is that the internet brings enormous

3efficiencies to the process of buying and selling real

4estate, and those are the efficiencies that we use and

5deliver to the consumer, and the consumer seems to be

6reacting positively.

7It is having an effect on commissions. We have

8heard that talked about already today, but you know,

9traditionally while we've seen commissions up above 6

10percent, they are still between 5 and 5 and a half

11percent, and it's our feeling that if you're selling

12your largest asset, which is the case for most

13Americans, you should be able to hold onto that equity

14that you have worked so hard to build up over the course

15of the lifetime of being in the home.

16The internet is an ideal platform for marketing

17real estate. You can post color photos. You can post

18virtual tours. In the case of ForSaleByOwner.com, you

19can put up a 3000-word description of your property.

20And you can have that information easily searched and

21frequently searched by buyers from their own homes on

22the internet. So, to a certain degree, we consider

23ForSaleByOwner.com and models like us to be a consumer

24version of the MLS. The MLS is kind of a closed

25corporate intranet. We're available to the whole

Page 87

1public, to the entire public, via the internet.

2I do have my Power Point now, so I am going to

3try to skip ahead.

4Again, the change isn't being driven by new

5models. The new models are there in response to demand

6on the part of consumers.

7A thumbnail sketch on ForSaleByOwner.com, it was

8founded in 1999. It is primarily a web-centric

9business. It started really with the URL and grew from

10there to the point now where we have 70,000 or roughly

1170,000 listings across all 50 states. We're one of the

12largest real estate web sites in the world based on

13traffic, probably fifth or sixth if you rate them across

14all different categories.

15While our core competency is no-commission real

16estate, a significant part of our business is centered

17around offering consumers reduced-commission access to

18the local MLSs in their area. So, in that sense, we do

19have a vested interest in talking about minimum service

20requirements, and I'll get into that a little bit later


22We do have a portion of the business that also

23refers out real estate to agents through an affiliated

24brokerage. So, on a number of different levels, we

25interact with traditional real estate, but obviously

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1we're focused really on no commission.

2I think one of the biggest factors in our

3success, beyond the fact that there's enormous demand

4for our services, is that while we're affordable, we're

5also effective, and one of the things that we pay close

6attention to is the success rate of the sellers on our

7web site. So, we do poll them on a regular basis. When

8they take a listing off the site, we ask them did the

9home sell, and 65 percent of those respondents say that

10the home did sell, and it was due to the fact that we

11drove buyer interest to the ad.

12The size of the market that we serve, although

13we consider all real estate consumers to be a target for

14our services, the size of the ForSaleByOwner market is

15often debated. The NAR typically pegs the size of that

16market at about 14 percent of all sellers, but there are

17competing studies that indicate that it could be

18significantly higher, as high as one in five sellers

19consummating real estate transactions without an agent.

20So, I mean, just from an anecdotal standpoint, it seems

21to us that that rate is growing, and it's growing

22significantly over the course of the last three years,

23three to four years.

24The demand for our services has allowed us to

25grow at the rate we have. We grow on an average rate of

Page 89

1about 100 percent year over year. So, we have grown

2very rapidly. We have been profitable from year one.

3We think those figures go a long way towards validating

4the efficacy of our model.

5The fact of the matter is, if you're going to

6sell a $200,000 house and you're going to use an agent,

7you are going to spend, on average, close to $12,000 to

8sell that house. If you use ForSaleByOwner.com or a

9service like ForSaleByOwner.com, you're going to spend,

10on average, about $300. So, the extreme differences in

11price makes it very compelling for the average seller.

12It's very easy for us to get our foot in the

13door when we can say, "Look, what do you have to lose?

14Give it a shot. Give it a shot for a couple months.

15Spend a couple hundred dollars. We're very effective,

16we're very affordable. You can always move on to the

17full commission approach down the line if you so


19As I alluded to earlier, there seems to be an

20effort to throw up roadblocks to change to allow

21competition to flourish in the industry. These are the

22three big ones, four big ones actually, and I think the

23first one, not to belabor it, is probably the easiest

24for us to knock down. There seems to be no rational way

25to defend minimum service requirements, so I'm not even

Page 90

1going to bother, but that's something that we struggle

2with on a state-by-state basis. Certainly Texas is the

3biggest example of that.

4Efforts to prevent our customers from getting

5full distribution of their EA listing, exclusive agency

6listings. When one of our customers opts for an MLS

7package, they go into the MLS as an exclusive agency.

8That means that they're obligated to pay an agent, if

9the agent brings a buyer, 3 percent, but we seem to be

10running into some resistance to how those listings are

11distributed after they get placed into the MLS. Most

12importantly, do the listings get uploaded to

13REALTOR.com, and there seems to be a degree of

14resistance to uploading them to REALTOR.com if they're

15an EA listing.

16Second, something that we have had trouble with

17in the past is an overly broad interpretation of

18licensing laws at the state level. We have had states

19send us cease and desist letters, saying the services

20that you offer rise to the level of an agent. You

21should be licensed as such, and until you are, stop

22doing business. So, we did fight a legal battle in the

23State of California on that issue.

24Finally, I think one of the things that drives

25some of the resistance to change is the fact that

Page 91

1departments of real estate around the country are for

2the most part controlled by agents and realtors, and

3they're able to kind of rubber-stamp that legislation

4when it comes down the pike. I would point out the

5State of Texas as being an example of that with minimum

6service requirements. Six of nine of their board

7members, I believe, are agents or realtors, and four

8should be removed. I'm sorry, that shouldn't be there.

9The forms that we think would help us to

10continue offering services that are competitive and

11there's a great demand for on the part of the consumer,

12repealing on a state-by-state basis minimum service

13agreements; ensuring that EA listings receive full

14distribution; eliminating onerous licensing requirements

15on a state-by-state basis that prevent for-sale-by-owner

16type models from existing and flourishing; ensuring that

17there's more of a balance in the departments of real

18estate in regard to who sits on those boards, so that

19there's maybe a more diverse set of professionals on the

20board helping implement real estate law around the

21country; and then again, number four is making sure that

22the EA listings get full distribution.

23That's really it. Thank you very much.


25DR. THORBURN: Well, this is one time in my life

Page 92

1where I'm glad that I'm technologically challenged,

2because I don't know the first thing about using that,

3and it won't break down on me.

4I'm Wayne Thorburn, and I am here today as the

5 Immediate Past President of the Association of Real

6Estate License Law Officials and also as Administrator

7of the Texas Real Estate Commission, and correspondent

8with Aaron on various matters, as you can imagine.

9Now, however, my comments today are solely mine

10and should not be construed as an official position of

11either ARELLO or the Texas Real Estate Commission, and

12while the issue of competition in real estate is a most

13important one for regulators and for ARELLO, the

14organization has not taken any official position on

15modes of competition or the requirement of providing

16specific services in an agency agreement.

17I would start by saying that about 50 years ago,

18a gentleman by the name of Richard Weaver wrote a very

19important book, and its title says everything. The

20title of the book was Ideas have Consequences, and it's

21an important reminder that just as ideas have

22consequences for future action, so, too, despite what

23the Mad Hatter said, words do have specific meanings,

24and I would urge everyone to concentrate on what is

25actually the meaning of the word "agency" and what is

Page 93

1meant by the concept of representation, because I think

2those are two of the things that sometimes, in some of

3the perspectives that you have heard today -- and you

4will hear from others, including some federal

5officials -- there seems to be a sliding over of what is

6the concept of agency and what are the fiduciary

7responsibilities of one who holds one's self out to be

8an agent of another.

9I would just as a quick analogy say that I think

10Professor Hahn was making a very poor analogy when he

11made the comparison to airline tickets. I think when

12you consider, I came up yesterday, certainly I went on

13the internet and I purchased an airline ticket. I had a

14service that was delivered to me yesterday, and that was

15the end of that transaction. It was a one-time event on

16one day, quickly delivered. What we're talking about

17here, I think, as Mrs. Whatley pointed out and others

18have pointed out, is not a one-time occurrence, but

19rather, a transaction, over time, that involves a number

20 of players working together, all of whom are directed --

21again to use her analogy -- it is the director of the

22play who is responsible for all of the activity that

23takes place in that event. It is the real estate broker

24or salesperson who enters into an agency agreement with

25a client who is responsible for making sure that all

Page 94

1those elements come together.

2Let me begin by saying that it has been accepted

3for some time that a real estate broker, while acting as

4an agent for another, is a fiduciary. As a fiduciary, a

5real estate broker is held to owe specific duties to his

6or her principal, including, as was cited earlier,

7loyalty, disclosure, confidentiality, reasonable care

8and diligence, and as an agent, the broker has agreed to

9provide representation to his or her client throughout

10the entire real estate transaction, not solely on the

11day that the agency agreement is signed.

12In its last regular session, as Aaron has

13pointed out, the Texas Legislature enacted a provision

14whereby a broker who obtains an exclusive right to sell

15or an exclusive agency agreement to represent a party in

16a real estate transaction is that party's agent. Such a

17person may not instruct another broker to negotiate

18directly with the first broker's client. Those of you

19in the audience who are attorneys are very familiar with

20this concept. If someone is represented by an attorney

21in any kind of a legal matter, it is not appropriate,

22without the consent of the other attorney, for that

23individual, that attorney, to talk directly to your

24client, and that is the similar situation in our state

25law and has been there for some time.

Page 95

1Also, the individual must inform his client if

2he receives material information related to a

3transaction and must answer the client's questions and

4present any offers to or from the client. Answer

5questions relating to the transaction, presents any

6offers to or from the client, and provide any material

7information that comes into that person's possession

8relative to the transaction.

9Now, these seem to me to be rather basic

10characteristics and requirements of representation, the

11kinds of services that virtually all consumers would

12expect when they do what? They hire someone to

13represent them as their agent in an undertaking.

14Now, under our system of federalism, the

15responsibility for licensing and regulating real estate

16professionals has been placed in the hands of the

17various states, and as regulators, we are required to

18apply state statutes and set forth the requirements for

19obtaining and retaining a real estate license.

20However, somehow it appears that certain

21individuals here in Washington do not believe that these

22basic elements should be requirements for

23representation, that an individual can claim to be an

24agent without performing any of these duties for the

25person they are claiming to represent in a real estate

Page 96


2Perhaps it would be more helpful if their

3emphasis were placed on what I would say is preventing

4false claims by those who sign an agency agreement with

5a client, promise to provide representation, place the

6property on the internet, and then walk away from any

7further involvement in the real estate transaction.

8Frankly, I have no problem with this alternative

9business model as it has been called, except that it is

10neither agency nor representation. Simply stated, it's

11a marketing or advertising agreement that an individual

12has with a client.

13I think that brings us to a related issue which

14lies beneath the surface of much of the involvement of

15the federal agencies and their efforts to support

16alternative business models for consumers. Somehow,

17there has developed a belief in Washington that there is

18only one way of effectively marketing residential real

19estate, and that is through the private entity called

20the Multiple Listing Service.

21Now, as state licensing agencies, we do not

22regulate the MLS. It is a private, voluntary

23organization which establishes its own membership

24criteria, as you've heard earlier today. Now, since the

25FTC and the DOJ apparently are unable to coerce this

Page 97

1private entity into changing its criteria for membership

2to meet their demands, they are approaching the issue

3indirectly by attempting to influence state legislatures

4and regulatory bodies.

5Let's just look for a moment at competition in

6the marketing of residential real estate. Not only is

7there this entity called the MLS, but every daily

8newspaper in the country -- this is one from the Austin

9paper -- runs classified and display ads that can be

10placed by owners, by agents, by others, and I think if

11you talk to the newspaper industry, they would tell you

12that this is an effective means of selling residential

13real estate.

14In addition, I went to my neighborhood

15supermarket, and I picked up something called Homes of

16Greater Austin, For Sale By Owner, Homes & Land of

17Greater Austin. Individuals pay good money to place

18advertisements in these publications. Why? Because

19they believe that they are effective methods of

20marketing and advertising their residential real estate.

21There's been a lot of discussion today of the

22internet. Well, let's look at the internet for a

23minute. Here's just a few, you know, there are pages

24and pages. This is called American Home Guides, this is

25the Austin Home Network, this is House.Info, this is

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1ForSaleByOwnerandBuilder on HomesByOwner.com, and now

2what's been happening is just like in the timeshare

3industry, the major entities are getting involved in

4this. So, very respected trade names are now entering

5into the process.

6Here's Yahoo Real Estate, here's Lycos Home

7Sales, and of course, the inevitable eBay Real Estate

8that is also available. The next thing you know, it's

9going to be amazon.com real estate. Is there

10competition? Certainly there is, and it's not just

11 REALTOR.com or the MLS system. There are any number of

12other entities that are available for the marketing and

13advertising of real estate.

14To pretend that the MLS system is the only way

15to market real estate belies the reality of the

16competition present throughout the United States. To

17purport that an agent who claims to represent another

18has no fiduciary duty to provide minimum service runs

19counter to both public expectations and negates the

20ability of states to effectively license and regulate

21real estate professionals.

22 I think it's safe to say that most state

23regulators have no problem at all with individuals

24entering into marketing or advertising agreements with

25clients to promote the sale of real estate. In fact, in

Page 99

1most states, one does not even need a real estate

2license to do so, but I do object, and so do many other

3regulators, to individuals claiming to be an agent and

4then refusing to perform the most basic duties of


6I think, in conclusion, that is a matter which

7should be of interest to the Federal Trade Commission in

8ensuring that the public is truly receiving the service

9for which they have entered into an agreement, an

10agreement for representation.

11Thank you.


13DR. COOPER: I want to thank all the panelists

14for very enlightening presentations.

15Let me just start off our discussion here

16with -- this panel's about competition among sellers'

17brokers, so I just want to talk, go back to first

18principles, how do sellers' brokers compete? How do

19they compete for listings?

20What I have in mind is how price-sensitive are

21consumers? Do they often negotiate for commission? How

22many listing brokers will they typically look at if

23they're trying to sell their house? Are they typically

24under time pressure? We heard earlier that often

25they're under a time pressure to sell their house and

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1move on to the next one because of some sort of

2exogenous factors going on. So, I will just turn it

3over to each of you to discuss -- we have different

4business models here, or maybe we don't -- and find out

5how this competition really works.

6MR. FARMER: Well, I would first like to touch

7on some of Wayne's comments about the advertising. If

8you look at his -- some of his examples, virtually every

9house in those examples are in MLS, and I've done some

10informal polling in my marketplace with some different

11title companies, and I know Colby said, you know, that

1215 to 20 percent of all homes are for-sale-by-owners.

13In my marketplace, I'm finding that it's less

14than 5 percent. Very rarely, if you look through

15Wayne's example from the Austin newspaper, virtually

16every one of those properties will be in MLS. There are

17probably no more than 10, 15 for-sale-by-owners out of

18that whole book. So, the MLS is the marketplace in most


20As far as competition goes, you know, we get a

21lot of our leads through the internet, but also

22referrals from past clients because we do a good job.

23You know, we try to personally go out there and touch

24every consumer that we go to. We don't just sit behind

25a computer like some limited service brokers do.

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1Now, my company may be different than some

2companies. I mean, one of my agents goes to every one

3of our listings, and so we do offer value.

4I'll turn it over to Tom.

5MR. KUNZ: Well, I guess I probably sit in a

6little bit different position, but I would dare say that

7if you look at our franchise organization and the

8realtors that we have in our organization, you would

9probably find pretty much most of the models that have

10been talked about here today, with the exception, we

11haven't quite figured out how to franchise the

12for-sale-by-owner person, but maybe we should look at

13that. I don't know.

14In terms of the number of agents that a consumer

15would have sitting in front of them, I don't know that

16there's any number that has been put there. I can tell

17you, as a consumer, I sat and listened to seven agents

18do their listing presentation for me before I made a

19decision as to who I was going to have represent me in

20the property that I had, and I can also tell you that as

21a consumer, that there are a number of things that I

22look at, especially because, as you heard, in my

23transaction, I was moving across the country, and I was

24taking on a job that was very demanding in terms of

25 time, and I wouldn't have sold my home had that not been

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1the case, and I think that's the situation that a lot of

2us tend to forget, is that most transactions happen

3because of events happening in people's lives. Most

4people don't get up in the morning and decide to just


6I did choose a full-service person and I was

7willing to pay those fees because of what I was asking

8that person to do, and that was not something that they

9came in and said that this was just the fee that you

10have to pay. It was something that we sat down and

11talked about and negotiated, because I told them exactly

12what I wanted, and I wanted services over and above what

13would be typical in a normal transaction, and that was

14that I needed somebody who could be at that home when I

15needed somebody there to help me move across the

16country. And I don't think I'm too unlike a lot of the

17services that are out there.

18In terms of marketing and advertising, I mean,

19come on, anybody that has any type of ability to put --

20if I'm going to go out and represent somebody in the

21marketplace in terms of marketing their home, that's

22what they're hiring me for, and so if I can expose that,

23I want to expose that to as many possible buyers as I

24possibly can, and that's one of the things at Century 21

25that we look at, is that we, because of our name

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1recognition in the marketplace over the last 30-plus

2years, you know, we have a large draw to our web site,

3and in some cases, it might even be a situation where,

4you know, we have as many consumers come to us as some

5 of our major competitors or even, you know, the industry

6web sites.

7So, I think that a real estate agent really is

8sitting down and looking at all of the areas that they

9possibly can list that property to put out there,

10 because at the end of the day, what we're looking for is

11somebody who's taking a listing, is to see how many

12buyers we can bring to that table and how we can

13negotiate the best possible price in the quickest

14possible time period for the consumer based on what

15they're looking to get out of it.

16DR. COOPER: Colby?

17MR. SAMBROTTO: We acquire our sellers off the

18internet primarily. We spend a significant amount of

19money on paper click advertising, but in addition to

20 that, we get a significant number of customers who are

21referred to us after talking to a friend who has used

22our service and who has seen our yard sign in a

23neighbor's yard or in their neighborhood.

24Our sellers are conscious of price, and I think

25they do shop around, to answer your question, but I

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1don't think that price is the biggest motivating factor.

2Certainly there are services like ours that are cheaper.

3I think the primary motivating factor is, A, not having

4to pay 5-6 percent to an agent, but B, making sure that

5the company that they are paying to market their

6property has the reach to actually sell that property.

7So, people are cognizant of, yeah, price, but

8also how many people are on the site. So, they are very

9interested in the number of visitors we get to the site

10and how many buyers we can drive to their listing, and

11those are the two big motivating factors for


13DR. THORBURN: I have no comment.

14DR. COOPER: Yeah, we will leave you out of this


16Aaron, this goes to you and perhaps Colby, but

17how often when you are competing to get a listing, say,

18is the consumer's next best option going to be going

19with more of a traditional broker? They are trying to

20weigh it. Should I go traditional, should I go MLS

21only, should I go FSBO? What is the marginal consumer

22like, I guess to use an economic term here?

23MR. FARMER: Sure. Well, you know, I'm not

24knocking traditional agents at all. I think there's a

25lot of great traditional agents out there that earn

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1their 6 percent, earn their 5 percent or whatever, it is

2what they charge, but there are also a lot of agents

3that charge those same rates that have the 3P marketing

4plan, which is put up a sign, put it in MLS and pray.

5You know, there's a lot of agents out there that offer

6little or no value to the transaction, and

7unfortunately, for the traditional industry, that's the

8majority of the agents that we're competing against, and

9they see that, hey, you know, Texas Discount Realty will

10do the same thing, but they won't charge as much.

11MR. SAMBROTTO: Well, our customers I think,

12given the fact that they're on our site, they have

13gotten to our site, are predisposed to not paying a

14traditional broker or agent the typical 5-6 percent.

15The vast majority of our customers want to pay no

16commission whatsoever. Those who do understand that

17they might benefit from the marketing power of the MLS

18are interested only if they can pay a reduced

19commission, and in our case, that's a 2-3 percent

20commission to the buyer's agent as opposed to the

21traditional 5-6 percent. So, they are definitely

22interested in saving on the commission if they have to

23pay commission at all.

24DR. COOPER: Related to that, I just want to

25follow up. Your site obviously offers both the FSBO,

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1the pure sort of I'm going to do everything on my own,

2but you also offer the MLS listing only.


4DR. COOPER: I guess one question is, what

5percentage of your clients, say, start out as an FSBO,

6then go to MLS, and I guess related to that, what would

7be the marginal impact of being on the MLS versus just

8being a FSBO as far as if you have data or have anything


10MR. SAMBROTTO: Sure. Well, less than 10

11percent of our sellers utilize the MLS package, but

12still, you know, to date we've done something like 5000

13MLS listings nationwide, reduced-commission MLS

14listings, and the way that works is we have a network,

15proprietary network of listing agents that we farm that

16work out to. They put it into the MLS for a flat fee, a

17portion of the fee that the consumer pays us, and then,

18of course, the buyer's agent is still incentivised to

19the same degree that he or she might otherwise always be

20incentivised. They still get that 2-3 percent

21commission if they bring a buyer that the seller


23At the same time, they're listed on

24ForSaleByOwner.com. We don't allow people to just do

25MLS listings. We bundle them together, an EA listing on

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1the MLS in conjunction with a listing on


3DR. COOPER: Okay. Do you have any idea what

4the marginal impact of that is? Say if I'm on the MLS,

5I have a higher probability of selling my house versus

6just being on the web site as a FSBO?

7MR. SAMBROTTO: Right. We haven't to date

8tracked how including the MLS in addition to the

9ForSaleByOwner.com listing improves your success rate.

10That's something we've just started tracking. Today

11we've only tracked, has it sold via ForSaleByOwner.com?

12Do you as a seller believe it sold via


14DR. COOPER: Okay, Aaron, I have a -- sorry to

15keep picking on Colby and Aaron here, but I want to ask

16a little more about that, the fee for service that you


18The people who come to you and say I just want

19the MLS only package, how often do they come back later

20on? They get the MLS only package, they think they're

21ahead of the game that, you know, I can take care of

22this, I can sell my house, but later on they realize,

23maybe I do need a little help here. Does that happen


25MR. FARMER: I would say it's less than --

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1probably about 30 percent of the time that the consumer

2who does a limited service listing with us will come

3back and ask for more services, but it does happen. You

4know, I would guess, you know, somewhere in the 30

5percent range.

6But you know, the demographic of our typical

7limited service consumer is someone who is generally

8more educated. Our average list price in Austin last

9year was $295,000, where the average list price overall

10was about $160,000. You know, they've generally -- very

11rarely do we get first-time home sellers or first-time

12home buyers that are attracted to us. It's people who

13have been through several transactions and who know how

14the game's played, so to speak.

15DR. COOPER: Yeah, go ahead.

16MR. KUNZ: Sitting here listening to this, it's

17very interesting, and I referred to this in my remarks,

18too, and I think this is the perception of a lot of the

19consumers in the marketplace, is that all I need to do

20is get my home on the MLS, and everything is taken care

21of and it's done, when in fact, the majority of what

22probably a real estate agent really does happens at the

23time when there's an offer put on the table. From that

24point until closing, there's a tremendous amount of

25effort that's put in, a tremendous amount of money

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1that's expended to go out and make sure that the

2transaction gets closed, and yet we still keep focusing

3on just the aspect of, okay, let's put it on MLS and put

4it on some kind of service that gets it out there.

5Now, I think if we're going to look at what a

6real estate agent does and how the transaction takes

7place and the fees that get paid for that, then I think

8we need to look at the whole transaction, from the time

9that a consumer starts to decide to put a home up for

10sale or a consumer decides to buy a home until they

11actually move into that property and maybe even until

12the next time that they put the home back up for sale,

13and that's the transaction process I think we need to

14look at if we're really going to get to the facts of

15what really happens in a real estate sale transaction.

16MR. FARMER: I couldn't agree more, but I just

17think that we can't put every consumer -- not every

18consumer is the same. I mean, in general, I think that,

19you know, no more than probably 10-15 percent of the

20consumers out there are even qualified to do a limited

21service listing and should do a limited service listing.

22DR. THORBURN: James, if I could just throw out

23a few numbers and calculations here.

24DR. COOPER: Sure.

25DR. THORBURN: If we accept what Professor Hahn

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1indicated earlier was about 23 percent of residential

2sales occur without the use of a broker, and then we

3keep in mind, also, the terms "broker" and "realtor" are

4distinct terms, and a realtor is a member of the

5association that Mrs. Whatley represents or did

6represent as president, and there are other people out

7there with licenses who are engaging in real estate

8brokerage who are not members of that organization.

9Also, in most communities, although not all, to

10get into the Multiple Listing Service, a broker has to

11be a realtor. I don't think it's universal, but it's

12almost everywhere. So, if we have at least 23 percent

13of all sales that are occurring without a broker,

14there's also a percentage that's unknown above that that

15are occurring without a realtor. So, to focus solely on

16the MLS and the realtor I think is missing the entire


18I'll give you another perspective. The latest

19numbers I heard is that there are 2.3 million

20individuals in the United States who have a real estate

21license, broker, salesperson, whatever. Correct me if

22I'm wrong, but I think maybe the National Association of

23Realtors is at like 1.1-1.2 million? What is that,

24about 50 percent? In my own state, we have 135,000

25people who today have a license as a salesperson or a

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1broker. There's slightly over 70,000 members of the

2Texas Association of Realtors.

3So, while I will certainly concede that the

4Multiple Listing Service is an important ingredient in

5this whole equation of how there's competition in real

6estate, and while I will agree that the National

7Association of Realtors is the premier trade association

8for real estate professionals, let's not lose

9perspective on the fact that there are real estate

10transactions occurring outside of the MLS, outside of

11use of a member of the National Association of Realtors,

12and I think all this emphasis on the MLS as the only

13vehicle to market and sell homes has put a smoke screen

14in front of a lot of Washington bureaucrats who focus on

15that and realize that they can't perhaps do anything to

16affect that private organization, so they're going

17roundabout to state regulators and legislatures to

18impose their position on them.

19DR. COOPER: I guess I'll jump ahead, since you

20kind of jumped ahead a bit here, and ask this question

21to you, Wayne.

22You talked in your presentation and you just

23talked here that there is certainly a distinction

24between what state regulators do in their laws and their

25duty to protect consumers versus what the MLS is. The

Page 112

1issue you posited that we bureaucrats -- I don't include

2myself in that -- we're trying to get to the MLS. I

3have a question.

4When you issue regulations and you're worried

5about the consumer, there's a marketplace out there, and

6there are marketplace realities. Is it necessary to

7take those into account when you are trying to think

8about how my regulation is likely to affect consumers?

9Yes, there's an MLS, yes, state law has no effect on it,

10but it's there, and those rules are there. So, if I

11issue a rule, given the MLS, it's likely to have this

12effect on consumers. Doesn't that need to be taken into


14 DR. THORBURN: Well, yes, I think it does, and I

15think also what has to be taken into account is what the

16individual is representing themselves as doing, and

17that's where I get back to this definition of "agency,"

18the definition of what it means to be a fiduciary, what

19it means to be representation.

20In our state, newspapers don't have to have a

21real estate license. The magazines I showed you don't

22have to have a real estate license. If I went to an

23individual and said, I'll give you a sign, I'll put you

24on my web site, I'll draw up an advertisement and put it

25in the Austin American Statesman, I don't need a license

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1for that, because I'm not claiming to be their agent.

2I'm not saying that I am providing them with

3representation through a transaction. All I'm doing is

4giving them marketing and advertising advice.

5Frankly, I think if, you know, the model that is

6being presented here was presenting itself as an

7advertising, promotional, marketing model and agreement,

8we wouldn't have any problem with it. Frankly, I don't

9even think you'd need a real estate license for that,

10because you are not holding yourself out as a fiduciary,

11as an agent providing representation.

12DR. COOPER: Okay, well -- I'm sorry, Colby.

13 MR. SAMBROTTO: Well, I would like to respond,

14because in regard to minimum service requirements,

15there's an enormous demand on the part of the consumers

16to be able to use the MLS. They respect it. There's a

17prestigio marketing power associated with that in the

18 mind of the average consumer, so they want to get their

19listing in there.

20If they're unwilling to pay a listing agent 3

21percent, they don't think it's worth 3 percent of the

22equity they have worked so hard to build up in their

23house, we came up with a plan where the listing agent

24gets a flat fee. The listing agent is providing a great

25service. They oftentimes are providing them with advice

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1in regard to how to market that home, how to field

2offers from buyers' agents. The buyers' agents are

3still getting the 3 percent.

4But we don't understand why if you're worried so

5much about the consumer, just make a disclosure law. If

6you're worried about the consumer is signing up for

7something and not getting the services that they thought

8they were getting, it could easily be solved by just

9asking them to sign a piece of paper saying I understand

10what I'm paying for, I understand I'm not getting these

11additional services, but I am getting a price break.

12So, it seems to me that you would have to take

13that into account at some level if you're concerned

14about the consumers of Texas who are trying to sell

15property and keep as much equity as possible in their


17DR. COOPER: Well, let me move into the minimum

18service issue here. I've talked about this at a couple

19of forums, and I have been to forums and I've listened,

20and I have heard minimum service requirements

21alternatively referred to -- the analogy of merely

22requiring the pilot to check the weather and inspect the

23airplane before he takes off, and alternatively I've

24heard kind of along the lines of what Tom Barnett said

25earlier today, is going into a restaurant and being

Page 115

1forced to have an appetizer, a salad and a desert when

2all you want is a main course. So, which is it? I open

3it up to all of you.

4MR. FARMER: Well, I think Wayne made an

5important analogy earlier when he talked about lawyers,

6you can't talk with another lawyer's client, but he did

7 put the caveat in there, "without consent," and I think

8that that is the simple cure to all these minimum

9service laws, like Colby had said, is let's have some

10consent. Let's have a disclosure form. Instead of

11throwing the baby out with the bath water, there's

12easier ways to do it.

13MR. KUNZ: Well, I think having been around this

14industry for a long time that the consumer has really

15spoken as to what they feel about service, and they will

16go out and talk to their friends, they will talk to

17their neighbors, and they'll talk about if you had a

18real estate transaction, who met your needs and who

19serviced your needs? I don't think we need to have

20legislation that says that, you know, that you have to

21do 15 different things in order to serve a real estate


23I think there are fundamental service ideas that

24are in the marketplace right now, and a consumer

25understands what they're -- hopefully they understand

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1what they're really trying to get at, and that is to

2sell my home, market my property, because I have some

3other thing going on that I have to take care of. In my

4case, it was moving. I had to get out -- I had a job

5change. So, I don't think we need legislation to sit

6down and say what good service is or what a minimum

7service level should be. I think that those are things

8that each company, each agent and the consumer are going

9to make that determination by themselves.

10DR. COOPER: Colby?

11 MR. SAMBROTTO: From our standpoint, there seems

12to be no demand on the part of the consumer for those

13types of laws. I don't discern any demand for those

14types of laws coming from our listing agents in our

15network. Certainly the buyers aren't involved in that,

16so they don't care, but I mean for me it's a bundling of

17services. It doesn't make any sense. There's no demand

18for it, and it seems to only kind of pop up this

19antiquated commission structure that no one -- well, no

20one outside of traditional real estate and no one who's

21a consumer really wants.

22 DR. COOPER: Wayne?

23DR. THORBURN: Well, I think it goes back to

24terminology and I think what individuals are purporting

25to be providing to their clients or their customers, and

Page 117

1that's where I'm really focused, again, on what is the

2meaning of being an agent, what is representation

3throughout a transaction, and does the state, the

4various 50 states and territories -- I know we're in the

5District of Columbia, and I don't want to in any way

6overlook them also -- do they have the ability to define

7what it means to be an agent, what are the obligations,

8the minimum obligations, and what we're talking about

9here really I think has to stress the word "minimum."

10 Answering questions, presenting offers,

11providing any information that comes in to their purview

12to their own client. Those are what I would regard as

13simple essentials of what it means to be representing

14someone else. Once again, we don't have any problem

15with a new business model that offers only these limited

16services as long as they're not claiming to be an agent

17 of another, claiming to provide representation.

18MR. FARMER: I believe that the consumer should

19have the right to waive these and not have the state

20force these fiduciary duties on them, and if a

21consenting adult, so to speak, you know, says -- an

22informed consenting adult says, "I don't want this

23 stuff, I know I have other options, but I don't want

24them," I think that should be legal.

25DR. COOPER: Colby

Page 118

1MR. SAMBROTTO: The only thing I would add is

2it's kind of a footnote to our model. We are devoted to

3no agents, no commissions, and we are going to make an

4end run around the entire system, which is our goal in

5the long term, so we are not really concerned with that

6end of the industry, because ultimately it won't move to

7strengthen ForSaleByOwner in our minds.

8DR. COOPER: I have a question from the

9audience, and I swear I didn't make this up, but Wayne,

10doesn't the law of agency in Texas permit the principal

11to define the scope of his agency in the sense that you

12can -- if I'm the principal, I'm the homeowner, I want

13to -- I can define how much my agent is going to do for

14me from the git-go, and if I just want him to do a

15couple things, that shouldn't violate the

16principal/agent duties or the fiduciary duties that go

17along with agency.

18DR. THORBURN: Well, within certain limitations,

19that's true, but there is also a provision in state law

20that says that an individual who is represented by

21another broker, you cannot engage in negotiations

22directly with the principal. So, that I think is one of

23the points that overrides that ability of the principal

24 to give directions to his or her agent in a situation.

25MR. FARMER: I know in Texas law, when I've been

Page 119

1through this with Wayne at the several commission

2meetings over the last three years, and actually, Texas

3statute defines negotiations, this is Section 535.15, I

4can quote the law by heart, but is simply bringing a

5buyer and seller together is negotiations in Texas.

6That's how it's defined under that section anyway.

7DR. COOPER: I guess keeping on this theme, is

8there a distinction that's being blurred here in these

9minimum service rules between qualifications, core

10fiduciary duties, such as honesty, fair accounting,

11loyalty, that sort of stuff, and then service provision?

12For instance, I'm an attorney, and I know that

13if I engage a client, I have certain duties to them, but

14then that client comes to me and says I just want kind

15of a discrete -- some advice on estate planning. Well,

16I can give him that discrete advice and send him a bill,

17but it also doesn't mean I have to write their will for

18them and set up trusts for their children. And maybe

19that's an extreme analogy, but as long as I do those

20tasks honestly and keep my confidences, I haven't

21violated any of my duties.

22 What's the difference between the core fiduciary

23duties that an agent has, but as long as he performs

24those tasks, doing those core -- keeping with those core

25fiduciary duties in mind, where has the agency

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1relationship gone wrong?

2DR. THORBURN: Well, I just think that what the

3state legislatures in a number of jurisdictions have

4decided is that there needs to be further definition of

5what those fiduciary duties are and to clarify, and in

6the clarification, they are not going beyond what I

7believe is the common perceived public perception of

8what is representation in a transaction, and again,

9stressing what it is is answering questions related to

10the transaction, assisting in the developing of offers

11or counter-offers, maybe phrased differently from one

12jurisdiction to another, but normally it also may be

13this presenting all information that's relevant to the

14transaction. All it is is spelling out what are those

15core fiduciary responsibilities.

16 MR. KUNZ: You know, in the company I had in San

17Diego, I didn't need a government agency to sit down and

18tell me how my agents need to service the customer, but

19I spent money going out and talking to consumers that we

20had done business with, other companies in our

21marketplace had done business with, and talked about the

22transaction and asked them what they wanted out of that

23transaction, and we had a list of about 22 or 23 things

24that every one of my listing agreements had in them that

25said these are the functions that we are going to

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1provide to you and these are the services that we sat

2down and talked to consumers about and said, if we do

3not provide these kind of services to you, you have the

4right to take back your listing and put it with anybody

5else that you would like to.

6I didn't need a regulatory body to sit down and

7tell me that that's how good business runs. I was an

8entrepreneur. I sat down and decided that if I was

9going to put a business in place in that marketplace and

10within this industry that there were certain things that

11I had to provide the people that I was going to service,

12and so we sat down and did that ourselves, and I don't

13think that I was, you know, the extraordinary office

14that did this. I think every one of the competitors

15that I had in the marketplace in San Diego basically had

16the same kind of things that they went out and talked to

17their prospective sellers with.

18 So, I don't think that we need to really have

19regulatory issues that come up and say, "You must do

20this, you must do this or you must do this," or "Here is

21a minimum." Where is the minimum? Where do you draw

22the line? So, I still say that I think that the

23 consumer will speak, and they will speak with the

24dollars they have, or in the seller's case, with the

25homes that they're going to put on as inventory for us

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1to go out and work with, and I think that entrepreneurs

2are getting in the business, business people, and

3independent contractors, called agents, know they have

4to provide a certain level of service in order to gain

5the trust that a person's going to have to give them the

6biggest asset that they have and ask them to go sell

7that product for them because they have to go do

8something else with their life.

9MR. FARMER: Again, I agree with Tom, but I also

10want to point out that not providing a service for

11reduced fees for people is a service. By not providing

12a service, I'm providing a service to consumers who are

13coming after me and seeking me out.

14DR. COOPER: Recently, in the last week or so, I

15think, a task force set up in Ohio, set up to look at

16these minimum service requirements or the proposed

17minimum service requirements, a task force that was --

18the Ohio Association of Realtors, I believe, came up

19with a recommendation of sort of a disclosure and waiver

20model. You have these core minimum service duties that

21the real estate agent is supposed to provide, but as

22long as there's disclosure and informed consent, a

23consumer can waive those.

24Is there anything wrong with that, or would that

25work? And I think I know the answer of these three, but

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1I'd ask Dr. Thorburn down there about this kind of a

2disclosure and consent. If we're worried about

3consumers not getting what they think they're paying

4for, which is something that was in your opening

5remarks, would that be something that could solve this?

6DR. THORBURN: It's possible. Certainly given

7our state law, it's not applicable in our particular

8situation in Texas. It's the decision of the

9Legislature has been to spell out what is representation

10involved with an agency agreement, but I have not had an

11opportunity to read the Ohio report, although I did

12receive it. I think probably in a number of

13jurisdictions that may be a way that they may wish to

14approach this question. So, I can't really comment in

15any great detail, although I think it is a viable option

16for consideration in a number of jurisdictions.

17MR. FARMER: I just wish I could have some of

18the money back from my attorney and the hours that I

19 spent sitting in TREC board rooms trying to make this

20particular compromise that, hey, let's just have some

21informed consent here, and you can pass your minimum

22service with informed consent. That's all we were

23arguing, and that was a simple compromise that we


25DR. COOPER: I want to switch gears a little bit

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1here away from the minimum service area. We're rapidly

2running out of time. I want to talk a little about sort

3of private conduct that we hear reports about. Aaron

4talked about it in his introductory comments, and I

5think Colby touched on it a little bit, discrimination

6against exclusive agency listings.

7Now, back in the 1980s, the FTC gained a series

8of consent decrees against various local MLS or real

9estate boards and their MLS policies that would exclude

10exclusive agency listings, and here we are 20-some odd

11years later, and we read the reports that exclusive

12agency listings, while they're being accepted now,

13they're not being sent into REALTOR.com or put on the

14web site.

15A recent NAR report shows that 80 percent of

16home buyers check the internet as part of their

17home-buying decision, and the most popular web site is

18REALTOR.com, and then after that is the local MLS web

19site. So, exclusive agency listings are at least

20arguably being excluded from these important marketing

21tools with important exposure.

22You know, I guess I'll ask this question to

23anyone who wants to answer, but number one, how

24prevalent is this? Is this something that's going on?

25Is it widespread? And are there any justifications for

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1this? I mean, I am aware that apparently exclusive

2agency listings, you know, they're different from

3exclusive right to sell, and in some MLS rules, it's

4marked differently in the MLS just because it presents a

5special risk to cooperating brokers, perhaps. So, I'll

6just throw that out there.

7MR. FARMER: The only risk that or the only

8reason that I have been told is that it possibly could

9create confusion among home buyers. That's been the

10only rational explanation that I've been given in

11Austin, and I know there's several other MLSs. I know

12Cleveland, Raleigh-Durham, some other MLSs have enacted

13this as well, but as far as reasoning, it makes no sense

14to me.

15DR. COOPER: Tom, with respect to the exclusive

16agency listing, is there any reason that the exclusive

17agency listing is inherently more risky or more suspect

18for the cooperating broker than the exclusive right to


20MR. KUNZ: I don't know. You know, I think that

21when a real estate agent sits down with a prospective

22consumer and talks about how they're going to take a

23listing and what does that really mean, and as I said,

24 spells out the services that they're going to provide

25for that, for whatever compensation that the seller is

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1willing to give or pay for the services that they're

2going to get, then I think that that almost becomes a

3mutual negotiating point in terms of letting the

4consumer know what does that mean to them and what's it

5going to mean to their property if they put it out

6there. So, I don't know.

7 I don't know that there's enough information

8that I've seen that I could sit down and say that it's

9going to be detrimental one way or the other.

10MR. FARMER: I also want to note that this is

11not something that just -- this exclusive agency

12discrimination, if you want to call it that -- is not

13something that just affects the alternative broker

14model. In Austin, one of the top agents in Austin

15advertises, "If you sell your house yourself, you pay

16nothing." He's actually a RE/MAX agent, and this is how

17he competes to get listings, and he's a traditional

18agent with a traditional company, and you know, it

19affects him as well, because he's technically doing an

20exclusive agency listing. While he may not list it that

21way in MLS, that's what it is.

22DR. COOPER: Do you want to weigh in on that?

23MR. SAMBROTTO: Obviously there's demand for it.

24Consumers want those types of listings because they

25retain the right to sell by owner, and that's central

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1to the model that we have. It's central to the

2package that we include on our web site, which

3bundles an MLS listing with for-sale-by-owner.

4A sale through MLS, you pay 2-3 percent; otherwise,

5you pay no commission.

6I understand the agent's concern is the

7possibility that you could put a significant amount

8of time marketing that property and then not be paid

9for that, but I think that's the nature of the beast,

10and I think ultimately it's about competition and

11choice, and ultimately the winner in that type of a

12fight is the consumer even though real estate

13professionals may be forced to sometimes work a little

14harder for less. That's just the nature of what the

15consumer's demanding.

16DR. COOPER: Okay, I'll finish off this last

17question here I got from the audience, and this is

18directly to Tom, and I think I would be remiss if I

19didn't ask it.

20It has to do with who owns the listing. It

21says, if I list with Century 21, why do you consider

22the listing to be your inventory? If I were to go

23to The Washington Post and put a home in their

24classified ads, that home listing doesn't become The

25Washington Post's inventory. So, why do you consider

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1my listing your property and not the homeowner's

2 property?

3MR. KUNZ: Well, first of all, I don't consider

4 it mine as Century 21. I consider it the broker's who

5signed the agreement. The reason I consider that is

6because the consumer has sat down with that individual

7and they have worked out an agreement. It's a contract,

8it's signed, and it states the facts that are pertinent

9to that particular contract, and therefore, they've

10contracted with us. If that doesn't in any way, shape

11or form say that that product now is mine to go out and

12market because the consumer who owns that product has

13decided that based on their exposure to me and other

14 competitors in the marketplace, they feel I might do a

15better job of making that happen. So, therefore, I

16would look at it as my product.

17DR. COOPER: Okay.

18Well, we're about five minutes over, but I think

19that leaves everyone plenty of time to get lunch and get

20back here for the afternoon panel. I want to thank

21everyone for their hard work.


23MS. OHLHAUSEN: I just wanted to remind

24everyone, the packet has a list of local eateries. If

25you need more information, it's outside. We'll

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1reconvene at 1:30, and you will need to go through

2security again. Thanks.

3(Whereupon, at 12:17 p.m., a lunch recess was























Page 130


2(1:30 p.m.)

3 MS. OHLHAUSEN: Well, thank you very much to

4everyone for returning so promptly. I just want to

5remind you, please turn off your cell phones. Lee

6mentioned it, and I am just going to reiterate. Some of

7the feedback we are getting on the microphones is from

8the cell phones. So, if everyone would please turn them

9off, I think it would be kind of an easier listening

10experience for everyone this afternoon.

11To start our afternoon session, I'm pleased to

12introduce Commissioner Jonathan Leibowitz of the Federal

13Trade Commission, without further adieu.


15COMMISSIONER LEIBOWITZ: And thank you, Maureen,

16and if any of you didn't get a chance, there's a

17terrific little handy two-pager here called "Where to

18Eat in the Vicinity of the FTC Building," and it rates

19restaurants according to price.

20MS. OHLHAUSEN: We're all about the consumer.

21COMMISSIONER LEIBOWITZ: And I like the Capitol

22City Brewing Company and Corner Bakery.

23Anyway, good afternoon. I am Jon Leibowitz, a

24member of the Federal Trade Commission -- thank you,

25Maureen -- and I would like to begin with the usual

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1disclaimer, that the views expressed here today are my

2own and they don't reflect the views of the Commission

3or any other Commissioner.

4T. S. Elliott once wrote, "Home is where one

5starts from," no doubt realizing the complexities of

6buying a home in the United States and wanting to spend

7his time penning poetry rather than signing disclosure

8forms, he immediately moved to England, where things are

9apparently simpler. As Elliott would no doubt agree,

10owning a home makes people feel connected to and

11invested in their communities at a very fundamental

12level, and the purchase or sale of a home, as Tom

13Barnett said this morning, Debbie Majoras said this

14morning, is really one of the most important decisions a

15family can make. But buying a home is a complicated

16task, and the purchasing process can be somewhat, well,


18Take, for example, the recent house-hunting

19experiences of four of my staffers. Their names have

20been changed to protect the innocent. Dorothy, who is

21the buyer in her transaction, retained a broker and

22blithely proceeded with her purchase without inquiry as

23to what the total commission cost might be, because she

24knew in this instance that the fees, although embedded

25in the purchase price, would not come directly out of

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1her pocket.

2Lion retained a -- you see where this is going,

3don't you? -- who retained an agent to assist in both

4the sale of his old house and the purchase of his new

5one, negotiated such a favorable commission rate from

6his broker that he had to sign a confidentiality

7agreement. This is absolutely true. He is prohibited

8from talking about the terms of the deal, but we can

9imagine that they were pretty good for him.

10Tinman, who is the purchaser in his transaction,

11ended up agreeing to compensate his realtor and we'll

12call her an "uber-realtor," for an extra one-half

13percent in the event that her share of the seller's

14commission didn't exceed two and a half percent.

15And Scarecrow and her buyer both dispensed with

16agents altogether when she sold her house, and they

17bypassed commissions entirely.

18Now, what does this tell us about the

19residential real estate industry today, or

20alternatively, what does it tell you about my staffers?

21That was a joke, although it is revealing. Is this

22indicative of a market where consumers can get better

23deals or superior representation based upon informed

24evaluation of their options, or is it reflective of a

25market where consumers lack even the most medieval evil

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1level of information upon which to make a decision?

2And, no matter how you ultimately answer this question,

3the stakes are enormous.

4The median price of a single-family home in

5America is now approximately $180,000, and of course, it

6soars much higher in sought-after areas like Los

7Angeles, New York and D.C. Indeed, the median purchase

8price of residential real estate in San Diego, which is

9I think the seventh largest city in the country, is

10nearly a half million dollars, and that doesn't include

11Tom Leary's lavish condominium in Coronado. Tom Leary

12is one of the Commissioners here at the FTC.

13An estimated $60 billion, roughly one-half of

141 percent of the GEP for 2004, changed hands last year

15in real estate commissions, much of it coming from the

16traditional full-service brokerage fee. However, the

17real estate industry, as you know, and its traditional

18model is beginning to undergo a sea change.

19Increasingly savvy customers, empowered by the internet

20and the information age, are demanding more at lower


22 Consequently, a new category of service provider

23is surfacing that seems attuned to consumers' clamoring

24for more autonomy and a greater range of service and

25price options. These providers, who range from mortgage

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1lenders with brokerage licenses to flat-fee limited

2service brokers to full-service discounters, have

3deployed internet technology to drive sales. In the

4process, they are re-allocating home sale commissions

5that have traditionally gone to the full-service


7The agents, understandably, are feeling as

8though they're unfairly under siege. They cite to

9vigorous intra-industry competition, including among the

10 1.2 million agents who are members of the National

11Association of Realtors, and they're quick to claim that

12average commissions have fallen from about 6 percent to

13 5.1 percent over the past decade. Realtors also worry

14about internet loan companies who provide limited

15reality services in addition to mortgage financing. The

16full-service realtors protest that these competitors

17are, in effect, wearing two hats and free riding on


19Additionally, realtors are concerned about the

20integrity of their respective MLSs, many of which are

21owned and operated with realtor boards affiliated with

22the national association. The realtors assert that the

23 security and accuracy of the system will be compromised

24unless local and national NAR affiliates continue to

25screen participants and control distribution. To that

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1end, local boards have set parameters in certain

2jurisdictions governing who may enter or view the MLS

3and how entries will be treated. Some boards have

4downgraded the prominence of certain listings entered by

5discount limited service brokers. Often they involve

6the houses that we would commonly call

7 for-sale-by-owner. Others have removed these listings


9 Now, the NAR and its allies argue that their

10ultimate concern in these instances is for the consumer,

11more specifically, eliminating potential confusion among

12 agents, sellers and buyers regarding whether a seller is

13represented by an agent, and protecting the unweary

14consumer by being compromised by service that falls

15below expectations. The realtors cite failed

16transactions and recall having to clean up messes left

17by limited service brokers. No doubt in certain

18circumstances this is probably true.

19Critics of the traditional full-service

20brokerage model make several arguments in response.

21Those seeking to offer fee-for-service options argue

22that a la carte pricing can potentially save individual

23consumers thousands of dollars per transaction. Online

24lending services such as LendingTree assert that they,

25in fact, bring in more business for brokers -- who do,

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1by the way, participate willingly with them -- while at

2the same time offering customer friendly discounts

3generated by technological efficiencies and economies of


5Discount brokers argue that efforts to block

6their access to the MLS on the same terms as

7 full-service realtors is unfair, geared solely towards

8protecting the traditional full-service, high-commission

9model. The Progressive Policy Institute, a Washington

10think tank, has estimated that these newer

11internet-based business models could save consumers

12close to half of that $60 billion currently spent on

13real estate commissions. If that's true, or if it's

14even partially true, that would represent a huge savings

15obviously to consumers.

16 Further complicating matters are various state

17legislative proposals, heavily backed by full-service

18providers, which require that real estate agents provide

19a minimum level of service to clients purchasing or

20selling property. Despite discouragement from the

21federal antitrust agencies, these proposals have

22recently become law in several states.

23Now, restrictions of this sort erect entry

24barriers for new business models that provide consumers

25with the ability to purchase only those services that

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1they want or need, and they lock in a business model

2that bundles together high-end services. The Commission

3generally has argued that these minimum service

4requirements can harm consumers by eliminating choices

5and causing higher prices, and certainly from my

6perspective the threatened proliferation of similar laws

7 is troubling, because once these laws are enacted, there

8is no going back, and there is little anyone can do to

9address potential anti-competitive effects absent

10repealing the laws.

11Having said that, I am very interested to see

12what empirical evidence reveals about the economic

13impact of these laws and the impact they may have on

14consumers, and hopefully some of that evidence has been

15unveiled today and will be unveiled this afternoon.

16Here's why this is so important.

17The reported price increases to date from at

18 least one recently enacted state law -- and I note that

19they are anecdotal -- have not been exorbitant from a

20monetary standpoint. For example, a discount broker in

21Texas reported to the New York Times that his increases

22have increased from $600 to only $700 per home.

23To be sure, the type of debate that's pervading

24the real estate industry where high-technology

25competition challenges a traditional business model is

Page 138

1nothing novel. Indeed, we've witnessed resistance to

2internet-based competition with respect to wine, contact

3lenses and toy sales, to name just a few, and we have

4seen, I think to the great benefit of consumers, a

5quasi-revolution in the travel industry, another

6business in which agencies are compensated largely

7through commissions.

8Travel agents, by the way, have largely adapted

9to the challenges of high-tech rivalry by concentrating

10efforts in a few sectors, like business travel, cruises

11and tours, where consumers tend to prefer full-service

12assistance, and the results have been telling. Although

13internet sites like Orbitz, Travelocity and Expedia are

14among the top competitors in sales, traditional agencies

15like American Express Travel still claim the top spots.

16Indeed, the vast majority of travel agents have opted to

17stay in the business, and they just raised the level of

18their game to meet internet competition.

19So, where does this leave us? For now, I think

20we are squarely at the crossroads between investment in

21and comfort with the traditional real estate model and

22the promise of new, innovative alternatives. My own

23sense is that there's a way to create more competition

24for the consumer clearly and without confusion, because

25like my staffer Tinman, there will always be consumers

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1who prefer a full-service broker and are willing to pay

2the price, and these people surely should be able to do

3so. Conversely, though, consumers may prefer to choose

4among a disaggregated selection of services and receive

5adjusted pricing, sort of closer to my staffer Lion, and

6should likewise have that option, too.

7Now, I am very empathetic to concerns regarding

8free riding and certainly to protecting consumers from

9confusion. I mean, this is, after all, at the heart of

10the second hat that the FTC wears -- and our consumer

11protection staff would, of course, argue that that's the

12first hat that the FTC wears -- but I have yet to see

13any real indication that either of these phenomena is

14 likely to compromise the efficient operation of the MLS


16Put differently, a relaxation of the realtor

17rules of engagement rather than a tightening of the MLS

18screw might be in consumers' best interests, and it

19might not result in the sky falling down on top of a

20full-service brokerage model either.

21However, we are still learning about this

22rapidly changing industry, and everybody here today is

23listening. Workshops like these are a good start

24towards understanding the marketplace and I think also

25towards understanding each other.

Page 140

1In that regard, we are most fortunate to have

2two distinguished panels here this afternoon, which

3include an array of knowledgeable and competent people,

4ranging from federal enforcement officials to professors

5of economics to industry experts, and I am particularly

6appreciative of the realtor presence here today, and not

7just the realtor presence from across the street, but

8also the realtor presence from around the country.

9No matter what our differences are, some of

10which we hope to bridge this afternoon, I am sure that

11we all agree with Dorothy's statement, which is "there's

12no place like home." Thank you very much.

13I'm happy to take a couple questions, then we

14have a Commission meeting, and then I will turn it over

15to the panels, if anyone has a question. If anyone

16doesn't have a question, I will immediately leave. Any


18(No response).

19COMMISSIONER LEIBOWITZ: No questions. I will

20adjourn to the panel. Thank you so much.

21 MS. QUINN: Thank you so much, Commissioner



24 MS. QUINN: My name is Lee Quinn, and I'm an

25attorney with the Antitrust Division, Department of

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1Justice, in one of the litigation sections.

2This afternoon, we will turn our attention to

3buyer side issues, things that will affect, in

4particular, buyers when they go into the market.

5Certainly one of the major issues that I know one of our

6panelists will discuss will be anti-rebate legislation.

7Additionally, while some of the issues that were

8discussed this morning you may feel have been covered,

9they actually take a different cast when they're looked

10at from the buyer's side. For example, take the MLS

11issue that we talked about this morning. One recent

12commentator said over 70 percent of all buyers use the

13internet to search for homes, and so maybe that might

14cast a different light on how we might look at the MLS

15or any of the internet services in terms of their

16usefulness to the buyer consumer.

17To start our discussion, we have assembled a

18knowledgeable and diverse panel to help us explore the

19issues. Let me introduce those panelists, as I know you

20want to hear from them, not from me.

21On my right is Alex Perriello. Mr. Perriello is

22President and Chief Executive Officer of Cendant Real

23Estate Franchise Group of Cendant Corporation. With the

24recent announcement -- I wrote this yesterday and it's

25already out of date -- but Cendant is the largest

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1franchisor of residential/commercial real estate

2brokerage offices in the world, and in this capacity,

3Mr. Perriello oversees Century 21, Coldwell Banker,

4Coldwell Banker Commercial, ERA and Sotheby's

5International Realty. These brands have more than

614,400 franchise and company-owned offices and 303,000

7brokers and agents worldwide.

8In addition, Mr. Perriello is responsible for

9the franchise group's shared support services, which

10include franchise sales, operation, technology, learning

11and the preferred client group.

12Our next speaker will be Philip Henderson.

13 Mr. Henderson is Vice President of LendingTree, LLC. He

14joined LendingTree in 1999 as legal counsel where he

15helped to build the company's mortgage services

16business. As LendingTree expanded to include real

17estate services, Mr. Henderson has held positions in

18both the legal and business strategy groups.

19LendingTree operates RealEstate.com, which is a one-stop

20shop to simplify the often complex real estate

21transaction and help consumers save time and money.

22Mr. Henderson was an associate with Kirkpatrick &

23Lockhart here in Washington on mortgage banking matters

24and received his law degree from the University of

25 Virginia.

Page 143

1The next speaker will be Cathy Whatley. You

2were introduced to Cathy this morning. I think her

3resume is very impressive. She was the 2003 President

4of the National Association of Realtors and is a member

5of the family firm that was founded in 1907. So, we

6welcome Cathy back to our panel and thank her for doing

7double duty for us today. Cathy resides in

8Jacksonville, and she is also on the Florida Commission

9on Ethics and a member of the state's Impact Fee Task

10 Force.

11Next, and to my left, is Tom Early, President of

12the National Association of Exclusive Buyer Agents. Tom

13has been in the real estate business for 24 years

14starting as a salesperson and then becoming a broker in

151987. He opened one of the first exclusive buyer

16representation real estate brokerages in 1989, making

17him a pioneer in the field of buyer representation. He

18helped found the National Association of Exclusive Buyer

19Agents in 1995 and served as President of that

20organization in '97 and '98. Tom is considered to be an

21expert in the area of common law of agency as it relates

22to the real estate industry and speaks on the subject to

23many organizations, including the REVAC, at the NAR

24convention on several occasions. Tom served in Vietnam,

25with honor, as a member of the Special Forces, Green

Page 144

1Berets. He notes that some say this is the reason he is

2so hard-headed; some say it is the reason he is so

3dedicated to the causes he supports. Either way, I

4think he will be a force to be dealt with today.

5 Our second to the last speaker will be Geoff

6Lewis. Geoff has a very varied business background, and

7he now is a member of the RE/MAX Network, serving as

8Senior Vice President and Chief Legal Officer of RE/MAX

9International. He previously served as vice president,

10corporate development, and general counsel for

11Hyster/Yale Materials Handling in Portland, and before

12that as Vice President and General Counsel for American

13Health Properties in Greenwood Village, Colorado from

14'91 to '95. He also practiced law with the firm of

15Jones Day in Los Angeles, received his Bachelor of Arts

16from Brigham Young and a JD from the University of

17Virginia and an MBA from the University of Colorado.

18Our last speaker will be Steve DelBianco. Steve

19is an experienced business leader and policy expert in

20internet and information technology. He ran an IT

21consulting firm before helping to start two tech policy

22groups, the Association for Competitive Technology and

23NetChoice, a coalition of Ecommerce, business and

24consumers, and at the present time, he is the Executive

25Director, NetChoice Coalition, Washington, D.C. In

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1addition, Steve was an investor and board member of

2eRealty.com, a startup brokerage that empowered realtors

3with internet technology to better serve home buyers who

4want the convenience of online search and

5 communications.

6I think you'll agree with me that we have an

7excellent panel to help lead our discussions today.

8So, shall we begin, Alex?

9MR. PERRIELLO: Thank you, Lee, and good


11I'm here, as Lee said, representing the more

12than 300,000 sales professionals, managers and brokers

13of the four real estate brands, Century 21, Coldwell

14Banker, ERA and Sotheby's International Realty.

15First, I would like to thank our hosts today,

16the Federal Trade Commission and the Department of

17Justice. I'm pleased to be able to present my comments

18in this forum, and I am doing so with the intention of

19helping foster a greater understanding of the topic of

20competition in the residential real estate industry.

21First, let me begin by saying and addressing the

22heart of the matter, which is competition. The

23residential real estate business is a very, very

24competitive business. As we have heard earlier, there's

251.1 million licensed realtor members of the National

Page 146

1Association of Realtors in the U.S. This figure is at

2an all-time high and speaks volumes to the competition

3levels that are in the business.

4Moreover, there are no significant barriers to

5entry or expansion in the residential real estate

6industry. As a result, there has been a dramatic number

7 of new agents and new entrants into the industry in

8recent years. Even in areas where a new entrant faces

9one or more long-established competitors, there is a

10proven ability of such dedicated, hard-working

11professionals that they can attract listings on both the

12buy side and the sell side, and that ensures to the

13extent that if there is local demand for alternative

14pricing or service models, that this demand will be

15filled either by the incumbent firm that is willing to

16adapt their business model or the new firms will fill

17that void.

18Just last week, I was talking to one of our

19brokers, Brad Holter of Coldwell Banker Caine Halter in

20Greenville, South Carolina. During our conversation, I

21mentioned to Brad that I was going to be down here

22speaking on a panel about competition in the real estate

23industry, and I'd like to share with you what he said to

24me. This was his exact quote. "Alex, are you kidding?

25Have they come to Greenville if they want to see

Page 147

1competition? My family has been in this business for

2over 75 years, and during three generations we have

3never seen or experienced more competition than we're

4seeing today, not only from traditional real estate

5companies, but also from a host of discounters and

6limited service providers." He said, "It seems as

7though there is one opening up every month in our

8 market."

9Accordingly, based on Mr. Halter's remarks and

10similar stories that are conveyed to me by brokers all

11across the country, I must admit to being puzzled as to

12statements that the residential real estate industry

13lacks competition, shuns technology or operates in some

14sort of anti-competitive manner. The U.S. real estate

15 market thrives today because buyers and sellers have

16choices, and choices mean more competition.

17 Let's take a look just for a second at the many

18options a home buyer has when purchasing a home.

19 There's a number of ways that they can begin their home

20search process, continue and complete their home search

21process. They can buy directly from the homeowner or

22for-sale-by-owner. They can enter into an exclusive

23buyer agency agreement and deal with that particular

24agent to find a home. They can deal with any number of

25listing agents and buy directly from them. They can

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1work with a number of agents and say this is what I'm

2looking for, go find it, and when you do, I'll do

3business with you. They can shop the internet and look

4for agents online and review resumes and send emails and

5interview people electronically, or they can go through

6an intermediary who will refer them to a sales

7professional perhaps so that that buyer may receive some

8sort of a rebate on the commission. As you can see,

9there's a myriad of choices for buyers to choose

10representation or not as they seek to purchase a home.

11From personal experience, what I can tell you,

12though, is home buyers usually end up selecting someone

13that they like, that they respect, and someone who is

14willing to do what it takes to bring the transaction to

15a successful close. Real estate, by its very nature, is

16a local business. Sales associates are predominantly

17independent contractors, and they only make a commission

18when the transaction closes, and they only make a living

19in the business by having satisfied customers time and

20time again. This requires them to be very competitive

21and use all the tools at their disposal, including the

22willingness to negotiate price and other terms on which

23their services will be offered.

24I'd now like to address the impact of

25technology, and more specifically the internet, on the

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1home-buying process. Today, the true value of the

2internet to the residential real estate industry and

3consumers alike is that it's a very highly effective

4marketing tool as well as a tremendous information

5 resource and communication tool. Unlike some

6industries, the residential real estate industry was

7 among the first industries to really embrace technology

8and the internet to help their consumers. Real estate

9companies began posting listings on web sites back in

10the 1990s, and today, those web sites are amazing.

11Property photos, virtual tours, rich text, mapping

12functionality, neighborhood information, and on and on

13and on.

14In doing so, real estate brokers and agents have

15incurred a variety of new costs associated with

16technology in an already low-margin business. For

17example, online advertising and marketing costs, those

18are significant, and this is in addition to the more

19traditional print media and advertising that their

20buyers and sellers expect. Hardware, PCs, laptops,

21servers, software, digital cameras, virtual tour

22equipment, professional services, personal and office

23technology products, on and on and on.

24Now, these costs have been absorbed virtually in

25their entirety by the industry itself. Consumers have

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1not realized increased transaction costs due to the

2adoption of new technology in marketing real estate. In

3fact, online searchs are a definite time-saver in the

4way they empower the customer to select a buyer or

5seller's agent and narrow their home search process from

6the comfort of their own home. What the internet does

7very well is to act as a marketing tool to promote

8 transactions. It's a search tool for customers and an

9advertising and communication tool for sales associates.

10Now, looking to the future, there are numerous

11potential benefits to the increased use of technology in

12real estate transactions, primarily revolving around the

13speed of the transaction process, and we believe that

14those efficiencies and cost savings will come as

15 transaction management platforms become more

16sophisticated and more widely used, but with that said,

17real estate is not a commodity. Unlike an airline

18ticket from Orbitz or a book that you buy on Amazon, a

19house is a unique item that requires in-person

20investigation and evaluation.

21The ultimate cost of a wrong decision on a real

22estate purchase is significant. The role of technology

23in our business, accordingly, is pretty difficult to

24predict. Undoubtedly, because of the competitive nature

25of the business, there will be winners and losers just

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1like there have been over the past many decades.

2Respectfully, I would suggest that there is really no

3need for the Federal Government to intervene to fix what

4really isn't broken.

5Let me now turn to the issue of rebates and

6inducement, my final point, just for a moment. In

7today's marketplace, consumers expect discounts, rewards

8and other benefits when shopping for everything from a

9car to a hotel room to a meal in a restaurant. Still,

10some states prohibit all forms of inducement by real

11estate licensees. This deprives those consumers of

12potential advantages and benefits available to consumers

13in other states and may limit the competitiveness of

14real estate offices in the state where those

15prohibitions exist.

16Our parent company, Cendant, has been working

17with many of the real estate commissions to repeal rules

18that would prohibit the use of incentives, discounts,

19sweepstakes and other consumer benefits in a real estate

20transaction. Simply put, we feel that those

21prohibitions on inducements are not necessary. The

22remaining anti-inducement states should remove those

23antiquated laws, as just occurred in West Virginia, and

24stop denying businesses the opportunity to offer rebates

25or inducements.

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1With that said, though, I feel it's incumbent on

2me to raise one concern as it relates to rebates and

3inducements. Choosing someone to represent you in a

4real estate transaction is a very important decision.

5Making that decision based solely on who will give you a

6rebate at the closing is akin to buying a car that you

7don't like just to get the manufacturer's rebate. My

8advice to home buyers and sellers is to do their

9homework, interview several agents from competing firms,

10ask tough questions, and then decide who you feel is the

11most qualified person to represent you in the


13In closing, choice is important. We believe

14that consumers, home buyers and sellers, should be able

15to choose their service models as well as the provider

16of those services, whether they be limited service or

17full service. We encourage free and open competition in

18the marketplace. Discount brokerages, referral

19businesses, lead generation companies have a role to

20play in the real estate industry. Discounters have been

21in our business for decades. Some of our brand

22affiliate brokers participate in referral networks or

23 purchase leads from third-party marketing companies.

24However, with all that said, we believe that

25property listings are the work product of the brokers.

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1The MLS is a B2B relationship that was never intended to

2be a consumer-direct resource. If an independently

3owned and operated broker wants to make a business

4decision to share their work product, that's their

5decision, and they have that right, and we respect that

6right for them to do that.

7But last and certainly not least, let me

8conclude by saying that competition is alive and well in

9the real estate industry. I hear it every day from our

10brokers, and as Mr. Halter said to me, just come to

11Greenville if you would like to see it in action. There

12is simply no need for government involvement at this

13point in time to interfere with the competitive ebb and

14flow of the free market for residential real estate


16Thank you.

17MS. QUINN: Thank you, Alex.


19 MS. QUINN: Philip?

20MR. HENDERSON: Thank you, Lee.

21 Good afternoon. My name is Philip Henderson,

22and I'm with LendingTree, and as has been mentioned

23several times, we operate RealEstate.com, and I'm going

24to tell you a little bit more about that business.

25I first want to thank the Federal Trade

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1Commission and the Department of Justice, the leadership

2of it and the staff, for putting on this excellent

3event. As Commissioner Leibowitz said, the industry and

4the structure of the policy are often opaque, and events

5like this and others will help bring some light to it I

6think that will benefit both the industry and consumers

7and the market.

8Several commentators recently, the Government

9Accountability Office's report, the American Enterprise

10Institute-Brookings, the Department of Justice, the

11Federal Trade Commission, have identified significant

12 barriers to competition in the industry. I'd like to

13touch upon one of them and ask you to think more about

14one of the barriers to competition, and it's one that

15Alex just mentioned, the states that prohibit brokers

16from giving consumers a rebate.

17Before I do that, I want to tell you a little

18bit about RealEstate.com so you can understand why we

19use that practice and what our business is about.

20RealEstate.com has built a network of local brokers and

21agents. These are brokers and agents who have joined

22our network because we deliver value to them. We can do

23for them things that they could do for themselves, but

24they opt to have us cooperate with them in a partnership

25relationship. Many of the things that Alex mentioned

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1that are costly and difficult to do for an individual

2 broker, those individuals can become more efficient by

3partnering with other entities. It's not true for every

4brokerage, but some use it and find value in it.

5We deliver consumers to those brokers after

6having cultivated that consumer with online tools and

7information so that those brokers do realize value.

8They become more efficient. Those brokers pay us a

9cooperative brokerage fee, and in many cases, where

10we're permitted, we deliver some of that value back to

11the consumer in the form of a rebate.

12 So, why do we use rebates? Why do many brokers

13use them? They have been around for a long time. Well,

14the first concept is the mechanics of the transaction

15work against a broker who's working with a buyer from

16reducing the cost of its services. If a broker wishes

17to use price competition, a common practice in most

18industries, to gain market share, to obtain new

19consumers, it's very difficult for the buyer side to do

20that, because the custom in the industry, which a number

21of people have touched upon, is for the seller's broker

22to split its commission with the buyer's broker. So,

23the buyer's in a difficult negotiation position, but a

24rebate helps to facilitate that price competition and

25deliver value back to the consumer.

Page 156

1One of the things we've seen is that although

2rebates have been around for many years, the internet

3and the increased role of the internet has really

4turbo-charged the need for them, the demand for them,

5and brokers' desire to use them. Why is that? Well,

6one of the great powers of the internet is the ability

7to build a network like we've done, have a network that

8local agents and brokers, rather than having to build

9branchs around the country or franchise, the internet

10enables this sort of networking. So, a number of groups

11that are built on membership rules, such as Costco's a

12membership entity, USAA, a group that serves the

13military community, will team up with a company like us

14that's built a network to deliver value back to its

15members, to say use this network and you receive a

16rebate. So, the demand for these rebates has increased.

17 It's often cast as a consumer issue, right? The

18consumer should have the ability to get value back. But

19what I'd like to stress today is it's a brokerage. It's

20good for brokers to have the ability to compete, to use

21tools to increase its market share and to gain

22consumers, and I think that's a theme throughout many of

23the subjects that we've talked about today, is that it's

24about unleashing brokers to have the ability to use new

25methods and tools to expand, to succeed, and to succeed

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1in this market that is competitive in many ways. There

2are many brokers and agents out there. Giving them new

3tools to compete will help the industry.

4So, what's the argument against rebates? Why do

5states, many of them, have statutes and regulations,

6rules, that say brokers cannot give rebates? Well, the

7truth is, it's hard to find a good articulated defense

8of them. In many cases the statutes are quite old and

9there is no sort of regular debate about the issue, but

10the things we hear periodically fall into three groups,

11arguments for laws that prohibit rebates.

12The first is what I call the truth is stranger

13than fiction concept, because the logic used is quite

14unusual. In some cases, the real estate commissions

15say, well, we have a licensing statute that requires

16persons who are acting as an agent or broker to be

17 licensed. So, if the consumer's receiving money back

18 out of the commission, that means they're acting as an

19agent, and they're not licensed. So, it's okay for

20consumers to get a rebate as long as they go become

21licensed as an agent. It's Alice in Wonderland logic,

22but that's what's used.

23The other is different, and I think it had a

24more legitimate genesis, and it's the anti-inducement

25statutes, laws that said -- I think they were originally

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1designed and aimed at third parties from receiving fees

2to induce a transaction, but they've been interpreted

3and used to say brokers can't give a rebate because it's

4an inducement to do a deal. I think it falls into the

5category that Alex touched on about whether consumers

6should be persuaded by the rebate to hire a specific


8In the third category of states that limit --

9don't prohibit -- limit here the ability of a brokerage

10to give rebates, they require the broker to do it at the

11closing table. You can't do it after the commissions

12have been received and netted out in delivering rebates

13back to the consumer, and that's very difficult as a

14practical matter. It requires the seller receiving a

15lower price for their home and a lower fee going to

16seller's broker and the seller's broker passing that

17 discount back to the buyer's broker. It's confusing to

18the seller, it's difficult to do, and it's a practical

19significant limitation on using rebates.

20So, to sum up, what we see, I think, on a number

21of fronts, and in particular with rebates, is brokers

22and agents in the industry seeking to use new methods

23and models and practices to compete and to succeed, and

24I think our message to the leadership of the industry

25and to policy makers is that these barriers deserve

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1significant scrutiny, and we have to ask, is there a

2real pro-consumer, pro-industry argument for them? I

3think in many cases, barriers don't stand up to that


5So, again, thank you for being here today.

6Thank you to the Federal Trade Commission and the

7Department of Justice for hosting this, and I look

8forward to good questions from this group.

9MS. QUINN: Thank you, Philip.


11MS. QUINN: Before Cathy speaks, in order to get

12her to do double duty today, we have to respect the fact

13that she has to leave exactly at 3:30. So, if you want

14 to ask Cathy some questions on your little index cards,

15get them up first.

16MS. WHATLEY: Thank you very much, Lee, and I,

17too, want to echo the appreciation of being able to

18participate, and although I have had the privilege of

19serving as President of the National Association of

20Realtors, I think I come today as a practitioner, and I

21think that's what I bring to the discussion, because

22when I'm in my marketplace, I am every day working with

23buyers and sellers, seven days a week, 12 to 14 hours a

24 day.

25People used to talk about our real estate

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1campaign, and one little boy said, "Oh, I understand

2you're in real estate. You have no life." And

3sometimes that -- you know, it is a very highly

4intensive activity that you do when you are representing

5your customers and clients.

6So, I want to talk about -- because this morning

7I started by saying it's like a play, that there were

8actors in the play and there was a director who kind of

9orchestrated things, and if it didn't go well, the end

10result wasn't the experience that the audience expected,

11and I want to state unequivocally in my mind that the

12buyer's single most important objective is to get to

13closing. They want to make sure that they are sitting

14at a closing table with an attorney or a title company

15or an escrow agent getting the keys to the home. So, if

16that's the end of the story, if that's the end of the

17play, what takes place to get there and what's happened

18over the course of time that actually has amplified,

19streamlined, moved things forward?

20Certainly the first thing that the buyer needs

21to have information about are properties that are

22available, and over the last ten years, we have seen so

23much expansion in the capability of the consumer to have

24information online that they may do research, not only

25about what properties are available, but about the

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1process of buying and selling real estate. In the

2Multiple Listing Service, which has been touched on

3today, that is a very valuable tool for me as a real

4estate professional. What it brings to me is

5information about listings that have been provided by

6all brokerages. Anyone who is a member of the realtor

7organization, whether they are a discount broker, a

8limited service broker or a full-service broker, have

9their listings in the Multiple Listing Service, and in

10that broker-to-broker cooperative compensation

11environment, that is real time information for me to be

12able to deliver to my customer or client, the buyer, and

13real time is important, especially if you happen to be

14in a seller's market, because the advertising vehicles

15that are out there on the internet are not real time,

16and by the time even that a consumer might be able to

17see something online, it could be gone.

18 So, being able to have a real estate

19professional who can tell them the minute something is

20listed, "Let me tell you, there was a new listing that

21just popped up, it's matched your criteria, I think we

22ought to go out and look at it," that is extremely

23valuable, and that's part of the strength that I bring

24 to the transaction.

25Actually, writing the offer, the offer itself

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1has been streamlined. It used to be 45 to 60 days from

2the time you wrote the contract until the time you

3closed, because it took a longer time for the mortgage

4process to take place. It took more time for all the

5steps to be ready to close. Now, most closings that I

6do are within 30 days. So, if you think about that

7shortened time frame, that's been caused by technology,

8because most of that is in the lender community. They

9now have automated underwriting, they have capabilities

10that they were unable to achieve before. Technology has

11 driven that.

12So, what does that mean to my buyer? To my

13buyer it means we better be able to enact every part of

14that process. We better be able, not only from the time

15we sign the contract, to be able to make the mortgage

16loan application, to be able to get the appraiser out

17there, to be able to do our home inspections and to be

18able to respond with those concerns or issues back to

19the seller, be able to have the termite inspection done,

20to be able to have the survey done, and in some markets,

21the buyer is not in control of each and every one of

22those steps. So, you'll have some markets where the

23seller is responsible for securing the title insurance

24and the survey, and in others, the buyer does it, but

25all of this is in an abbreviated time frame.

Page 163

1Again, if the ultimate goal of my buyer is to

2get to closing, it is really essential that there is the

3capability to have all of those players understand that

4they have a timely role to play. In the event we don't

5have the right ending, what are the potential downsides

6to my buyer? Number one, their binder deposit can be at

7 risk. You're talking about competition and savings.

8There are really some potential challenges that the

9buyer faces if they don't close in a timely fashion.

10They could have their loan approved, but if everything

11else isn't done, because most contracts are just subject

12to loan approval, so their loan's approved, but they

13can't close for another reason, their binder's at risk.

14Secondly, their interest rate lock-in is

15generally for 30 days now. If you don't close within

16that time frame, your interest rate could be at risk

17and/or the costs that they would have.

18Third, the actual capability of where are they

19going to live, because most of them have given notice

20that their apartment or they have sold their home, and

21everything is dictated upon this wonderful closing

22that's going to happen, when they're going to get the

23keys to their house.

24So, in the world of competition, there are

25multiple players in this story, and the buyer's ultimate

Page 164

1objective is to make sure that he or she is sitting at

2the closing table, signing the mortgage documents,

3seeing everything necessary to be able to close, and the

4rest of it is just the beginning and the middle, but the

5most critically important factor to them is actually



8MS. QUINN: Thank you very much.


10MR. EARLY: In the short time I have, I'm going

11to try to touch on four subjects, minimum service

12requirements, non-disclosure, designated agency and

13realtor procuring cause if I have the time.

14I want to thank the DOJ, I want to thank the FTC

15for holding these meetings. I've picked up an awful lot

16of information, and I've met some great people here

17today and last night.

18Minimum service requirements, it seems

19 everything I've read or hear from realtors today about

20the level of service being recommended by NAR for its

21state associations -- and ladies and gentlemen, NAR is

22not neutral in these matters where the state legislation

23is being passed. Please, don't swallow that one.

24 Everything I hear about these minimum services

25says it's a good thing for the consumer. The problem is

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1the only person they're talking about when they're

2talking about the consumer, they're talking about the

3sellers. When 90 to 95 percent of the complaints that

4are filed by consumers are filed by buyers, why are we

5looking at these minimum level services for sellers?

6We're looking at them because the real estate industry,

7the organized real estate industry, is losing listings.

8They're losing sellers. They're not losing buyers.

9 They're trying to find a way to stop the bleeding.

10They're trying to find a way to stop the loss of the

11listings to the traditional setting of brokerage.

12For roughly 80 years, NAR embraced a minimum

13standard in real estate transactions. That minimum

14standard was called the common sense common law of

15agency; agency, which mandated the firm and its

16licensees to put the interests of the client ahead of

17all others, including their own. This level of service

18obligated the brokerage to loyalty, confidentiality,

19obedience, reasonable care, accounting and disclosure.

20This was the industry's only way of delivering service

21to the one client we had at the time, the seller.

22The introduction and the growing awareness of

23buyer agency turned everything upside down within the

24industry. We in the industry now found ourselves with

25the potential of having two clients as buyers began to

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1expect full representation, too. How can one firm,

2which has a major incentive to bring a transaction

3together, fully represent adversaries? Attorney firms

4don't represent adversaries because they recognize the

5 inherent conflicts of interest. Who would agree that a

6buyer and seller aren't in an adversarial situation?

7One wants the highest possible price on the best

8possible terms; the other one wants the lowest possible

9price on the best possible terms. Adversarial, by the

10way, does not mean hostile. How, then, can one real

11estate brokerage faithfully represent these opposing

12 parties?

13In its search for the resolution, some of us

14have fully embraced the common law of agency and decided

15to open up companies that represented one party to the

16 transaction and one party only. In my case, it was the

17buyer. Agents who do such are called EBAs or exclusive

18buyer agents. Many of these brokers came together to

19form an association called NAEBA, the National

20Association of Exclusive Buyer Agents, the organization

21I am proud to represent.

22The majority of the industry made other choices.

23These choices ranged from facilitation, commonly known

24as transaction brokerage, which provided no higher level

25duties -- and by the way, no fiduciary duties -- to

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1designated agency. Designated agency allows licensees

2from the same firm to purport to offer full

3representation as a fiduciary to opposing parties in the

4same transaction from the same brokerage with no

5conflicts of the -- just no disclosure of the conflicts

6of interest that are inherent in dual agency.

7Designated agency is dual agency. Designated

8agency is a product of legislation being passed on a

9state-by-state basis, with NAR guidance, advised by

10state associations of realtors. It is dual agency. The

11definition of dual agency under full disclosure and

12informed consent, two parties at the same brokerage

13representing opposing parties in a real estate

14transaction. The definition of designated agency, two

15parties from the same brokerage representing opposing

16parties in the same transaction. One, dual agency under

17the common law, required informed consent. Designated

18agency does not require informed consent.

19The common law of agency has now been replaced

20in roughly 26 states by designated agency legislation,

21making legal that which was previously unethical and

22illegal under the common law. Now, agents from the same

23brokerage can represent opposing sides without the

24cumbersome informed consent disclosure required under

25dual agency. In every instance, it has been the state

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1realtor associations which have called for, written and

2paid for with PAC dollars, passed this legislation, just

3as we are seeing done today with minimum level services.

4NAR is not neutral. The latest example of

5designated agency legislation being passed was passed in

6 Massachusetts after failing to pass on a committee on

7two separate occasions. It was passed by attaching it

8to a midnight piece of legislation, the State Budget

9Bill. In Connecticut, it was attached to another

10midnight piece of legislation, in this case Megan's Law.

11The consumer should have no problems with firms serving

12 them as customers, clients or as dual agents, as long as

13there has been full advanced disclosure of what each

14relationship entails and informed consent has been given

15by the consumer.

16 In other words, tell the consumer of her options

17and get their permission to proceed under one of those

18options. Consumers should, though, have a real problem

19with designated agency, as it encourages dual agency

20without full advanced disclosure of the conflicts, nor

21does it seek informed consent.

22 The mandatory minimum level services being

23passed state by state do nothing more than bring back

24what was thrown out with the bath water, aspects of the

25agency representation and fiduciary duties. The

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1Massachusetts Office of Consumer Affairs and Business

2Regulation conducted a sting operation, visiting 45

3offices to find out how many were in compliance with

4their two-year-old law requiring agency disclosure at

5first meeting with a contact. The results were both

6dismal and predictable. Zero compliance.

7Many states, including my home state, Ohio, has

8moved disclosure from first meaningful contact to as

9soon as practical but no later than the writing of an

10offer. Practicable for whom? How good is it for a

11buyer to be getting to a table, getting ready to write

12an offer on a home, to find out that the agents who are

13sitting in front of them represent the seller, or if

14they want to write that offer and continue with the

15process of putting an offer in on that home, they are

16dealing with a dual agency? How practical is it to do

17disclosure of your agency relationship at the table when

18 you're writing an offer?

19This brings us to the last issue that I

20mentioned I would be addressing, and that's realtor

21 procuring cause. I'm going to be real short on this,

22because it's considered by the industry to be an insider

23thing, and it really doesn't involve the consumers and

24so on and so forth. Nothing could be further from the

25truth. Do buyers know that working with a realtor, in

Page 170

1most cases the listing agent, that they jeopardize their

2ability to be fully represented? This is never

3discussed, it is never disclosed, it is never mentioned,

4and if that buyer decides they don't want to work with

5the seller's agent and they don't want to accept the

6conflicts of interest that come with working with the

7buyer's agent from the same firm that is represented by

8the seller, what good does that do?

9This buyer could choose not to use the dual

10agent or their brokerage and hire a true buyer's agent.

11The buyer's agent is the only person involved with the

12buyer who has a contract for representation. This

13brokerage provides all of the services required to

14purchase the property, and yet his income is in jeopardy

15by an agent who may have introduced them to the property

16and maintained contact even though the buyer decided he

17didn't want to use that agent anymore. The buyer moved

18on and found other representation.

19I'm going to close it right there. I've got

20some other things to say on that subject, but I won't.

21We have a white paper that we've put out, and I'd be

22more than happy to answer any of your questions later.


24MR. LEWIS: I'd like to begin by thanking the

25FTC and the Department of Justice for including RE/MAX

Page 171

1in this workshop, but more importantly, I'd like to

2thank the DOJ for not including us in your lawsuit.

3UNIDENTIFIED SPEAKER: There's still time.

4MR. LEWIS: And I was going to add that I hope

5you don't change your mind after you hear my remarks.

6 Those who decry the lack of competition in the

7real estate industry would be prudent to follow the

8common sense advice applicable to every weather man.

9Before you broadcast current weather conditions, stick

10your head out the window to make sure you know what's

11really going on.

12In today's real estate market, consumers are

13bombarded with choices via the internet and in the

14physical world, discount commissions, flat fees, low

15commissions, rebates, credit cards, home warranties and

16the like. RE/MAX International knows about competition

17in the industry. The day when Gail Liniger started

18RE/MAX 33 years ago, they had a revolutionary new

19business model: Let the agent keep all of his or her

20commissions and give them the freedom to run their

21business as they see fit. This came at a time when the

22traditional industry kept up to 50 percent of the

23agent's commissions and exercised tight control over how

24they operated.

25To Mr. Farmer who spoke this morning, RE/MAX

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1knows about competition. We know about breaking into an

2industry. We know about lies and misrepresentations.

3But today, more real estate is sold under the RE/MAX

4brand than any other brand. How did RE/MAX overcome our

5competition and reach the pinnacle of our industry?

6Well, one thing is for sure. We did it without the

7intervention of the Federal Government. We did it

8 because we had a better model, and we made it successful

9the old-fashioned way, through hard work and customer

10service. The marketplace recognized the value of the

11RE/MAX business model and rewarded it.

12Today, as always, RE/MAX welcomes competition

13from any legitimate business that can stand on its own

14merits and its own resources. RE/MAX believes there's

15no need for Federal Government legal or regulatory

16intervention in the residential real estate brokerage

17industry. There are no barriers to entry in our

18industry, and there is no evidence that free market

19forces are being impeded in any way.

20Let me speak about commission rates. Commission

21rates have been trending down over the past two decades.

22They've gone from 7 percent to the current average rate

23of 5.1 percent. That is a 40 percent decrease. How

24many other industries have experienced that level of

25decrease in pricing over the same period of time?

Page 173

1RE/MAX believes that the RE/MAX system has been

2a significant factor in the decrease in commission

3rates. Because a RE/MAX agent does not split his

4commission with his broker, he's empowered to negotiate

5the commission directly with the customer.

6Many have questioned how, with the rapid rise in

7housing prices recently, the commission rates have not

8come down further than they have. Well, notwithstanding

9the rapid rise in housing prices, agent income has not

10increased correspondingly. The median gross income for

11real estate professionals in 2004, as reported by NAR,

12was -- prior to business expenses, which are not

13insignificant -- was $49,000. That's without

14healthcare, that's without retirement, that's all paid

15for by the agent. On a net basis, average income is

16lower than average school teachers' salaries, and over

17the past two years, income is down 6 percent.

18How do you explain the lack of increase in agent

19income given the rising housing prices? Well, I think

20the explanation is due to the large increase in the

21number of agents entering the industry. NAR's reported

22a 26 percent increase in membership over the past two

23years and a 40 percent increase over the past five

24years. These agents are being drawn in by the increase

25in housing prices. I think also a lot of these agents

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1are coming from the downsizing that has occurred in

2corporate America.

3 As a result of the increase in number of agents

4searching for transactions, the average number of

5transactions per agent is decreasing, and that is

6putting a little bit of a limit on the ability of

7commissions to continue to come down further, although

8the trend is increasing, and as you stick your head out

9the window, any agent will tell you that there is

10tremendous pressure and tremendous pricing pressure in

11 our industry.

12Let me speak for a minute about internet

13companies and new business models. There's little

14difference between traditional companies and online

15companies because traditional companies all embraced

16internet years ago and have a significant online

17presence. Virtually every broker and most agents have a

18web site that allows consumers to search all MLS

19listings in their market. It's easy to say the internet

20has brought down costs in other industries, so it should

21do the same for real estate, but not all industries are

22the same.

23The internet has not affected prices for doctors

24or attorney services, newspaper advertising or

25subscription rates, landscaping or a myriad of other

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1industries, including, I might add, government services.

2Not every industry is going to be impacted by the

3internet the same as airline ticket vendors,

4stockbrokers or book sellers. After all, these

5industries are selling commodities. Real estate agents

6are selling unique properties and providing

7individualized services. An experienced real estate

8professional provides a value-added service that assists

9sellers to obtain the best price for their homes and for

10buyers to find the best home at the lowest price.

11I'd like to take a few minutes and venture into

12the area of internet listing display. Since we're not a

13part of the litigation, I'm going to exercise my First

14Amendment rights to speak about this.

15Despite misrepresentations to the contrary, the

16new internet listing display policy adopted by NAR does

17not allow a broker to withhold his listings from the

18MLS. Every broker in the MLS has the right to receive

19the listings of all other brokers. The Multiple Listing

20Service, as has been explained today, was designed as a

21B2B vehicle, not a business-to-consumer vehicle. It was

22designed as a mutual sharing of information by industry

23peers to facilitate the sale of and search for

24properties by customers. The idea was that brokers and

25agents would work to earn their own customers using

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1their own assets. The concept is simple. You earn a

2customer, you get to use the MLS with the customer. The

3concept is not you get free access to the MLS, and then

4you use it to advertise the properties on it in order to

5attract a customer.

6The starting point of the internet listing

7display policy is that each broker will provide all

8listings to all other brokers for display on the

9internet. Although the policy does contain a blanket

10opt-out provision, the ILD policy imposes severe

11 consequences on a broker who opts out such that it is

12extremely unlikely that any broker will do so. RE/MAX

13 encourages all of its brokers to share their listings

14and is not aware of any broker who has opted out.

15Brokers and other third parties do not have an absolute

16right to display the listings of other brokers in order

17to advertise them in an effort to attract customers.

18 The MLS is not a public utility.

19If I can make an analogy to the sale of an

20automobile, you have a number of options when you sell

21an automobile. One is to simply take it and trade it in

22when you buy a new car. Another is to sell it yourself,

23using the papers, other vehicles that you have to

24advertise it. Many of you have probably seen, and I

25have used this tactic myself, take a vehicle and park it

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1in a high-traffic area with a for sale sign in the

2window. I don't think any of us would presume that we

3would have the right to drive our vehicle onto the lot

4of one of the largest brokers on auto row and park it

5right next to the street and put a for sale sign in the

6window. That lot is proprietary to the broker, just as

7the MLS is a system that brokers have agreed to use with

8each other. It is not a system that's a public utility

9that's open to third parties who are not engaged in the

10real estate brokerage business.

11As such, the provision in the internet listing

12display policy that prevents non-brokers from internet

13display of listings is lawful and is consistent with

14state laws and the purpose of the Multiple Listing

15Service. To open up the MLS for internet display

16listings by parties who do not actually engage in

17brokerage would risk causing genuine brokers to withdraw

18from the MLS. This could jeopardize the viability of

19the system that has and continues to serve consumers


21On the subject of state law restrictions on

22limited service providers, if I were looking for someone

23in support of these, after hearing all of our panelists

24today, I think I'd feel a little bit like I believe it

25was Diogenes in Greek mythology, searched with a lantern

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1looking for an honest man. There doesn't seem to be

2anybody today willing to stand up and support these

3laws. RE/MAX believes this is a determination left to

4the individual state legislatures.

5All 50 states require real estate professionals

6to be licensed. In order to obtain a license, would-be

7professionals must become knowledgeable about the

8intricacies of real estate transactions, including

9agency, fiduciary obligations, sales contracts, escrow,

10title, appraisal, survey, property disclosure,

11environmental hazards, Megan's Law, mortgages, deeds of

12trust and a number of other factors.

13Given that for most people the purchase or sale

14of a home is a transaction involving their most valuable

15asset, a state legislature may legitimately determine

16that the fiduciary duty and agency responsibility of a

17broker or agent requires full representation of a

18 client; however, if a state legislature determines to

19allow limited service providers, RE/MAX believes that

20the state should require that such providers make a

21thorough disclosure to their client of all the steps

22involved in a real estate transaction and identify the

23aspects of the transaction where the client will be left

24on their own. Mr. Farmer alluded to this this morning,

25to full disclosure being an acceptable compromise. We

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1agree with that.

2 While some consumers may be sophisticated enough

3to represent themselves in some or all of the steps of a

4transaction, most are not. Interestingly, Mr. Farmer

5defined his market this morning as only about 10 to 15

6percent of consumers selling homes that he felt should

7use his services. A consumer who does not receive full

8disclosure may believe he will receive more

9representation than he has contracted for from a limited

10service provider. He may not be aware of the risks.

11Full disclosure is the answer.

12If a state legislature determines to allow

13limited service providers, RE/MAX believes that the

14state should not allow such providers to disclaim their

15agency relationship and fiduciary duties. To do so, as

16Mr. Thorburn pointed out this morning, has simply

17reduced them to a marketing relationship. If that's the

18role they play, that's fine, but then they should

19remember that the Multiple Listing Service is a

20business-to-business vehicle for brokers, not for

21marketing agencies.

22Another area state legislators should address,

23if it determines to allow limited service providers, is

24proper protection of and compensation to a full-service

25agent involved in one side of the transaction. RE/MAX

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1is increasingly hearing complaints from its agents who

2encounter parties in a transaction who expect the RE/MAX

3agent to pick up the responsibility of the other side

4who has contracted for limited service. In addition to

5this being economically unfair for the full-service

6agent, it also puts them in a difficult position with

7respect to their fiduciary responsibilities and their

8agency relationship with their own client.

9On the subject of state law restrictions on

10rebates, RE/MAX believes that brokers and agents should

11be allowed the ability to freely negotiate transaction

12servicing pricing with their clients in any way they see

13appropriate. The RE/MAX business model empowers the

14agent to do this.

15I would like to conclude by noting that I have a

16much more expanded white paper that addresses my

17comments that's available on RE/MAX.com, on the

18residential homepage, and I would refer you there, and

19I'd be happy to answer any questions later.

20Thank you very much.


22MS. QUINN: Before Steve speaks, I want it noted

23that I said while we had a topic, panelists could say

24anything they wanted, so...

25MR. DelBIANCO: Thank you, Lee.

Page 181

1Batting last in this distinguished line-up

2during World Series season has a couple of implications.

3In a National League city like Houston tonight, the

4bottom of the order, last batter's up -- well, it's a

5weak batter, the pitcher is likely to lay down a bunt.

6But in an American League city it is going to be

7something altogether different. I'd like to be thought

8more of as the designated hitter.

9NetChoice members includes some Ecommerce giants

10like America Online, eBay and Oracle, but also our

11founding members included some Ecommerce pioneers,

121-800-CONTACTS, Orbitz and eRealty. Do you know who the

13pioneers are? They are the ones with all the arrows

14sticking in them.

15Starting with Orbitz, which was the online

16travel, search and booking service that was vehemently

17opposed by travel agents who had their own powerful

18national trade association. Orbitz fought through those

19barriers and became immensely popular with consumers and

20even profitable before being acquired by Cendant -- no.

21Now, eRealty.com is a startup company that I

22became involved with in 1998 as an angel investor --

23don't try that at home -- and as a director of the

24company for six years. ERealty was a licensed

25brokerage. They were part of the club, Bob Hahn called

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1it, right, a licensed brokerage that's in the club,

2playing by the rules. They had licensed agents, also

3club members, and they used innovative technology.

4Their mission was to better serve internet-savvy home

5buyers with the convenience of online search, something

6we called incubation, which was to monitor and then

7quickly report the instant any listing came up that fit

8a profile that you pre-established with eRealty, and

9then communicate instantly through email or any device

10you needed and assist you through the scheduling of

11appointments and the whole scheduling of the transaction

12all the way through to close, as Ms. Whatley has talked


14So, while the MLS, as I've learned today, was

15really designed for cooperation and compensation, as a

16business-to-business exchange, a member of the club, a

17duly admitted member of the club, like eRealty, used it

18for even more, took it a step beyond that and used the

19power of the information in there to better serve

20consumers. Now, eRealty also took listings before and

21after, and eRealty was giving a 1 percent rebate back to

22the buyer, trying to realize the efficiencies that they

23could on technology and to attract customers to the


25Now, eRealty built their systems from the ground

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1up according to a proven MLS market exchange. They were

2very careful to grant data access to only bona fide

3buyers who got into the site via password, and in the

4heady "dot com" days of 1998, I'll tell you, eRealty

5looked like a slam dunk success, but the doors started

6slamming shut on eRealty because established brokerages

7and NAR used their local associations to block, exclude

8and to punish eRealty. They kicked them out of the

9club, as it were.

10Now, everyone has heard enough today on laws

11prohibiting rebates, and that immediately slammed the

12door on certain states for eRealty, but in 2000, the

13 Austin, Texas Board of Realtors try to cut off eRealty's

14access to MLS data, and they sued eRealty for what they

15called copyright infringement, which was based on a

16local rule passed there in Austin less than 30 days

17prior to the lawsuit, the eRealty rule. eRealty

18countersued for antitrust violations, as I think Geoff

19just mentioned, tells the government to stay away. If

20you're a real player, you will pony up, hire your own

21lawyers and go to court, and at eRealty, we did that.

22Now, Judge Nowlin, thankfully, he concluded

23right away that the way that eRealty happened to deliver

24listings to its bona fide buyers could not be treated

25any differently than the way other brokers delivered

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1their listings, whether by fax, hand, hard copy paper or

2by email, and that made it very expedient that the

3Austin Board of Realtors would settle that case, because

4the Judge painted clearly that they could not

5discriminate just based on the way that eRealty was

6delivering information.

7Now, Winston Churchill once said, "There's

8nothing quite so exhilarating as to be shot at without

9effect," and initially, we felt pretty exhilarated at

10eRealty, but now five years later, five years after the

11Austin case, MLSers are still discriminating against

12brokers who serve their customers through innovative or

13browser-based technologies. Geoff and Alex both said

14that they are perplexed about the anti-competitive

15concerns that have been talked about today. I would

16counsel you to read the lawsuit.

17The lawsuit itself is very clear, shows the

18circular arguments that are being employed today. The

19circular argument says that there's so much competition

20and alternative business models that we don't need a

21lawsuit, but at the same time, the lawsuit seeks to stop

22brand new NAR rules which would stop some of those new

23business models from even coming into existence. You

24see, the circular argument there just doesn't make any

25sense, but all this is probably getting too much into

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1the weeds. Let's see if I can step it up a level.

2There's plenty of real estate experts and legal

3experts in the room today, but even regular people know

4something about buying and selling homes. By

5definition, and as Tom Early described, you have your

6first experience in real estate as a buyer, not a

7seller, and you don't even understand at that point as a

8buyer where this commission money flow is going, and

9when you sold your first home, did you really compare

10listings from multiple listing agents? Not likely.

11 You were anxious to get rid of that starter home

12or condominium and move up, and the dollars involved in

13a starter home, first-time seller, are unlikely to

14justify a broker beauty contest or haggling over a

15commission rate. But I will say to you that there are

16some important and unstoppable changes that have

17occurred since you bought and then sold that first home,

18changes in two ways, the demographics and the dollars


20The demographics, pretty obvious, a generation

21of Americans are now comfortably and constantly

22connected to the internet and to Ecommerce. They

23instinctively start with the internet before they search

24to buy anything. They do extensive research online. It

25makes them easier to serve even if they did the search

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1and went into a traditional real estate agent.

2Now, they expect systems, servers, to do the

3grunt work of searching for homes, gathering data on

4schools and neighborhoods, monitoring new listings, and

5then reporting whenever a listing fits their profile;

6scheduling appointments, as I said earlier, to help them

7see the home.

8Now, let me turn to the dollars involved. As

9sellers and buyers move up the price ladder, we become

10acutely aware of what commissions are costing. Around

11here in Washington, a townhouse, a $500,000 townhouse,

12is $30,000 worth of commission. That's real money,

13especially when you are trying to use whatever you can

14to move up to the next home.

15Now, consumers around here especially know that

16home prices have doubled in the last five years, and

17we're all pretty sure that the level of effort needed to

18sell that home has not doubled. So, sellers will expect

19greater competition among listing agents, including

20discounting a commission at times and new business


22Now, this rising generation of buyers and

23sellers, they're going to expect internet technology to

24both improve service and to drive efficiencies that

25eventually, we're told by the economists, driving

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1efficiencies eventually leads to lower prices, but the

2court will have to be the one to determine whether NAR

3is guilty of antitrust violations, but the court of

4consumer expectations with this rising generation is

5starting to pay attention, and here's what they see.

6When consumers see Geoff's white paper, and I

7encourage them to do so, they will be absolutely

8insulted by the argument that prices have come down.

9It's the same thing we hear with property taxes. The

10property tax rate has declined, but every year you're

11paying more. I don't think we're so gullible that we

12believe that that is a price cut of any kind.

13I think consumers will think that it's

14inexcusable that their own listing agent won't show

15their home to buyers who go to real estate web sites. I

16think the rising generation of home buyers would be

17perplexed to learn that they can't receive commission

18rebates from buyer brokers who have figured out how to

19serve them more efficiently, and again, because realtors

20have tremendous power in the state legislatures.

21Now, brokers running these virtual broker web

22sites, brokers like eRealty, had their club keys taken

23away and their data feeds downgraded, which made it

24impossible to maintain portfolios of homes in order to

25serve their buyers better. And then web-savvy home

Page 188

1shoppers on the buy side will be suspicious that big

2franchise brokers want to restrict the co-branding

3relationships with favorite internet destinations, like

4a Yahoo, an MSN, an eBay or a LendingTree.

5Now, I think that will consumers really buy,

6will they really buy what the realtors are saying as

7justification for all of these barriers, justification

8of consumer protection? Are consumers harmed by limited

9service and discount brokers? There's no more

10credibility to that than when stockbrokers told us all

11that investors shouldn't be allowed to use discount

12stock trades.

13Will consumers really believe realtors when they

14give us rhetoric about personal security fears, when

15home listings can be viewed online by people everywhere,

16that that's really a serious security risk, to have your

17home on the market and to have others know about it?

18You better take down those yard signs and cancel those


20The court of public opinion, regardless of what

21this court does, but the court of public opinion is

22smart enough to know when consumer protection is really

23being used to justify competition prevention, and it's

24true that some big brokers are actually gearing up to

25serve information-driven consumers with better tools for

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1search, monitoring and scheduling, but we've heard today

2that the biggest franchisors will allow the use of the

3MLS only on their own terms, that B2B club of theirs,

4that says it's really only about -- what, everyone? --

5cooperation and compensation if and when they're ready.

6After all, they have paid a lot, a lot of these

7franchisors, they have paid a lot to acquire brokerages

8around the country, traditional brokerages with gold

9plated Rolodexes of relationships with traditional

10customers, and they want to preserve the profitability

11of that traditional business model against pressures

12that might come from new competitors, but the tactics

13that the large franchisors are employing to restrict

14competition are truly doomed to fail.

15The Department of Justice, the FTC, competition

16advocates and new business model businesses and

17consumers are all sending a very clear signal to the

18realtors. When it comes to information technology, we

19expect more services, a broader range of information and

20choices, and we expect to pay less, not more.

21So, nobody expected Cendant and NAR to be so

22bold, actually, in their response to the Justice

23Department's two-year investigation. I don't think they

24were all paying attention ten years ago in this town to

25what happened in the antitrust trial against Microsoft,

Page 190

1because one of the tactics you would not want to do is

2you wouldn't want to moon the giant like that by

3releasing new rules despite a two-year investigation

4cautioning you against the new rules.

5So, I probably would just close with a quote

6from W. C. Fields that I think seems targeted at NAR and

7the big franchises with respect to both looking at a

8lawsuit and looking at what's coming in the marketplace

9with the new generation. W. C. Fields said that, "There

10comes a time in the affairs of man when he must take

11that bull by the tail and see what's coming."

12Thank you.


14MS. QUINN: Well, I think our speakers have

15certainly laid the groundwork for some good questions,

16but before we begin, Cathy, I know you're not

17representing NAR here today, but many of the comments

18were directed toward NAR and Cendant, and I wanted to

19know if either one of you wanted to lead off with any

20comments or responses.

21MR. PERRIELLO: Cathy, do you want to --

22MS. WHATLEY: Well, certainly from the extent

23that the National Association of Realtors is very much

24into cooperation, and we are in the representation of

25consumer business, I would say that I think that a

Page 191

1number of the comments that were stated by Steve were

2unfounded in my mind. I'll allow, you know, more of

3that to come as conversations come out, but I think he

4is totally off base in a number of his comments.

5MR. PERRIELLO: I would have to agree, Lee. I

6appreciate a lot of what Steve said, but our beliefs and

7my remarks were all about choice. We welcome the

8competition in the market. We encourage the competition

9in the market. And I believe that at the end of the

10day, the results will speak for themselves. This is all

11about the broker, the agent who gets results, who

12provides good service, offers it at a fair and

13reasonable price. Those are the people that will stay

14in business.

15I don't see where limiting consumer choice,

16that's never been our position. Our position has been

17the opposite, to give consumers as much choice as

18possible and let the chips fall where they may.

19MS. QUINN: Anyone else want to join the debate?


21MR. EARLY: Opening my brokerage in 1989 as an

22exclusive buyer broker, being one of the first people in

23the country, I have to take exception with those who say

24that NAR is looking for choice and is open to choice and

25is open to competition. I got my brains beat out for

Page 192

1the first three years as an exclusive buyer's agent. We

2were introducing a brand new concept to the industry,

3the representation of a buyer into an industry that had

4represented sellers 100 percent of the time at all

5times. We were not welcomed.

6We were -- I can't put it any better way -- we

7were beat up. We were beat up by the local

8associations, we were beat up by our state associations,

9we were beat up by NAR, and it took a fight, and I mean

10a fight, to survive within my industry that I'd been a

11member of for 24 years.

12I am a realtor. I deserve the same respect for

13my business model, the same disclosure of my business

14model, as every other business model that is now

15acceptable within the real estate industry. Today, we

16have in the State of Ohio, the first state after 11

17years of hard work, have been recognized as an agency

18option as an exclusive buyer broker in the State of

19Ohio. Two months after we were recognized as an agency

20option, Ohio came out with its new agency disclosure

21form, and we're not listed on it as an agency option.

22I'm sorry, but you know, it's nice to say we're

23all playing nice, but the facts are we're not all

24playing nice.

25MS. QUINN: Anyone else? Steve?

Page 193

1MR. DelBIANCO: With respect to choice, it's

2true, you can have your data any way you want unless NAR

3says you can't have it that way, and the choice about

4business models, I read Geoff's white paper, it's

5excellent. The choice about business models is that

6RE/MAX chose a different business model. They really

7did. No more splits with the agents. They were going

8to charge a fixed fee. And Geoff's own paper talks

9about the fact that he was discriminated against, and

10the other realtors punished him for that.

11And what did he do? They sued. They sued the

12other realtors and were able to stop the

13anti-competitive practices so that RE/MAX is a

14phenomenally successful brokerage to this day. So,

15choices, perhaps they're there, but to exercise the

16choice that one has to endure the arrows of any pioneer

17and perhaps endure what it takes to bring lawsuits

18against anti-competitive tactics.

19MS. QUINN: Well, I've gotten several questions

20that we can move on from here just a little bit, which

21is we recognize some of the problems with the system,

22and the questioners are concerned about what should come

23next, and does it still make sense for the buyer and

24seller's agents to be paid through the seller rather

25than separately arranged or negotiated by the buyer and

Page 194

1the seller? In other words, the buyer hires his agent

2and pays it, the seller hires her agent and pays it.

3MR. HENDERSON: Sure, I can speak to that, and

4perhaps Tom, I think, would have some ideas on that.

5MS. QUINN: Okay.

6MR. HENDERSON: That might make sense. Some

7consumers might wish to do that, and we should free them

8up and free brokers to serve that demand without

9restrictions through state law, state regulation or MLS

10rules that might say, no, in order to join the MLS, you

11have to do business this way, which is what we see in

12other areas of business. So, I mean, I think the

13concept is let the market work. Let consumers demand

14that and allow brokers to provide it.

15MS. QUINN: Anyone else?

16MR. PERRIELLO: Lee, if I could add to that, I

17think we also need to take a look at, in the

18circumstance we just described, is there's competition

19out there between brokers, but there's also competition

20that no one ever talks about, which is competition

21between sellers, and if I have my house on the market, I

22may be willing to pay a good portion of my equity to a

23buyer's broker to come in to attract more traffic to my

24property, where someone else won't. So, in many cases,

25it's really the owner of the property that's really

Page 195

1making the decisions in many cases, not just the broker.

2When I listed my house a year ago to move, I

3talked to my listing agent about the strategy of what

4she would retain and what we would offer to a buyer's

5broker in the market. She didn't say, "Here's what I'm

6going to give." We talked about that as a strategy.

7Now, I may have said -- the market was very active at

8that point. I may have said, if there were a lot of

9properties on the market, "Heck, I'll offer 4 percent or

105 percent to the buyer's broker to make my property

11stand out," and that's how I think this business works.

12We need to have that flexibility in there. It's not

13just the brokers who are competing or the agents. It's

14many times the seller having to make decisions about

15what will make my house more attractive.

16MR. EARLY: Well, you have the opposite that

17takes place, that hurts people more than the scenario

18you just gave of offering more of a carrot to the

19buyer's agent. You have the opposite taking place in

20hot seller markets where there is no offer of

21compensation being made, there's a reduced offer of

22compensation being made, and basically we have a listing

23agent telling us what we're worth.

24Keep your co-op. We don't want it. Set your

25fee with your client for the services you provide to

Page 196

1your client. Leave my fee alone. I will work that out

2with my client. I can't stress that strongly enough. I

3don't need your co-op. I don't need you telling me I'm

4worth 2 and a half percent. I don't need you to telling

5me I'm worth 3 percent. I don't need you telling me

6what I'm worth at all. That's between me and my client.

7If NAR were to put the power of NAR behind that

8it has and go to the banking industry and ask for a

9separation of the fees on the closing statement, on the

10HUD-1, it would happen tomorrow, not a doubt in my mind

11about that. It would happen tomorrow.

12 MS. QUINN: Cathy, do you want to respond?

13MS. WHATLEY: Yes, I would. In all honesty, in

14my day-to-day activities, Tom, you can have that

15discussion with your buyer, and you do, and if the

16compensation that's offered in the MLS is not to your

17liking, you structure something differently with your

18customer and your client. I have the capability to do

19that every day in my marketplace, but there are a lot of

20buyers who do not have excess cash. The customers that

21you're working with have limited down payment, they have

22limited cash with which to then turn around and also

23compensate in a cash format their real estate

24professional who's assisting them. So, any way that you

25want to structure it, it's there today.

Page 197

1What the MLS does is at least tells me from the

2business activity side of what compensation is available

3to me, and if that's acceptable to me before I ever go

4out and show the property, then fine, that's what I

5presume to accept. If that is not acceptable to me, if

6it's too high, I can give some of it back to the buyer.

7If it's too low and I've already set some arrangement

8with the buyer, the buyer knows what the expectations

9are in their environment. So, you know, I have that

10ability today, and I'm really challenged to find out

11what you believe is not necessarily available to

12everyone to negotiate in that world.

13MR. EARLY: That's a direct question to me and

14I'll answer it. You said the buyer has to come up with

15the cash to pay the difference. If I'm only being

16offered 2 percent in a normal 3 percent co-op market,

17I'm 1 percent short if I'm charging my client in my

18contract 3. My buyer has to come up with cash. If NAR

19were to put, as I said, if NAR were to put the power of

20NAR behind the banking industry and work with the

21industry and separate the fees, we wouldn't have that

22problem. My buyer would be able to finance 100 percent

23of his fees due to my brokerage in his contract, just as

24he's always done.

25MS. WHATLEY: Well, and he can do that today as

Page 198

1long as it will meet the appraisal issue.

2 MR. EARLY: He cannot do it today -- well, he

3can do it today, but you've got a problem in putting it

4on the buyer's side of the transaction when it's a buyer

5brokerage fee.

6 MS. QUINN: Another issue came up that I thought

7 was very interesting, Alex, it was something that you

8brought up. I've bought and sold about four houses

9during my lifetime, and I can never remember either my

10agent telling me what the other agent was getting or the

11other agent telling me, you know, as the buyer what the

12seller's agent was getting, and the last one was five

13years ago, but now it seems to be an important issue.

14What is the benefit to the buyer, for instance,

15 to know what the seller's getting or the seller to know

16what the buyer's agent's getting?

17MR. PERRIELLO: Now, what I was saying was at

18the time of the listing, to have the discussion with the

19owner of the property, with the seller, as to the fees

20that you're going to charge for your services and what

21percentage of the total fee will be given to a buyer's

22agent that brings a buyer to the transaction.

23Earlier today, it sounded as though that was an

24automatic decision made solely by the broker with no

25client input, and from what I hear from agents, I know

Page 199

1when I was an agent back in the seventies and eighties,

2I always had that conversation with my client, just to

3say here's what I charge, here's what I think we should

4charge or what you should allot for a buyer's agent

5coming to the property.

6In many markets, when I was in a market that was

7very, very slow, it was not uncommon to actually have a

8disproportionate share go to the buyer, because you may

9have 50 or 60 listings in a portfolio and no one to buy

10them. So, at that point, if it was say a 6 percent

11commission, I might take 2 percent and offer 4 percent

12to the buyer's agent to make that house more attractive.

13Well, that's all marketing. That's all

14strategizing with the seller who you're being hired by

15to market your house effectively, and that conversation

16should take place.

17MS. QUINN: Anyone else?


19MR. DelBIANCO: Yes, Lee, you did ask the

20question just before that, what should come next, right?

21MS. QUINN: Yes.

22MR. DelBIANCO: If you don't mind, I'd like to

23try to address that. I really believe that NAR should

24simply rescind the new rules that were proposed, the

25rules that are the subject of the case, just tear them

Page 200

1up, settle the case, and it will all be over, and we can

2all get back to work, back to work on innovation,

3efficiency and competition within the MLS.

4Let's keep it a club for licensed members. I

5think it's a great innovation. It's a superb tool for

6broker-to-broker cooperation, compensation, and it can

7be an incredible tool for consumers. So, we need to

8allow new equipment and new wardrobes to be worn on the

9club's golf course, and I think the consumers, they will

10choose professional realtors who are empowered with new

11technology, and if we let innovation increase, I believe

12we'll see commissions come down.

13MS. WHATLEY: Lee, if I could also add something

14that hasn't been at all addressed today which is an area

15of additional competition options for the buyer. If

16you're in a seller's market, you probably don't have

17much leverage, but in a buyer's market, oftentimes

18you'll have the seller paying some buyer closing costs

19or you will have the seller who is doing some type of

20compensation toward allowances of things that need to be

21done on the home. Those are all, again, types of

22opportunities where the buyer is being engaged and is

23receiving a benefit of the competition that's driven by

24supply and demand.

25You're focusing a lot on the brokerage world,

Page 201

1but there are a lot of things within the transaction

2itself that bring capabilities for the buyer to have a

3strength in a buyer's market, but in a seller's market,

4when you have no inventory and you have one house

5available and 40 customers who are wanting it, I mean,

6your capabilities of negotiating are extremely limited,

7and so it's a function of supply and demand.

8A lot of what's being raised here now are

9honestly, in my mind, based upon the fact that we have

10had an extremely limited supply of inventory, and that's

11going to be sustained. I don't see that changing over a

12period of time. While the market may have somewhat

13leveled out in some areas, in other areas, it is still a

14very strong seller's market, and in those types of

15dynamics, there are huge opportunities for competition

16to play out in the marketplace.

17Whether that's through the exclusive buyer

18agency relationships where you are bringing that

19strength to the buyer, to say, you know, your best

20opportunity to be able to secure that one home when

21you're one of 40 is to have my representation, because I

22know exactly what it is I'm doing, or whether that's

23through an online environment where they have the

24capability to capture that, it's still there. It's

25still a work in progress, and you know, I'm just not

Page 202

1being tasked by my customer buyers or my customer

2sellers to say this is a huge issue to them. They know

3that they've got options out there, and they are looking

4at them, and then they're making the decision that they

5think is in the right interests for their personal


7MS. QUINN: Tom?

8MR. EARLY: When you're in a hot seller's market

9like New England, and I'll just take northern New

10Jersey, and you've got the three major brokers in that

11market taking what they're calling exclusive listings,

12they're advising their sellers not to put the home into

13 the MLS, it's not necessary to put your home into the

14MLS, we have 40 buyers lined up at our back door of our

15brokerage, and we don't need the cooperation of other

16brokers in order to get your home sold.

17What happened to the sharing of the MLS

18information from broker to broker? It's not convenient

19today. We've got our own buyers today. Now, next

20month, when things cool off a little bit and the buyer

21 market comes back in and the inventory's up and

22everybody's happy, then we'll start putting our listings

23back into the MLS again. We'll start letting you,

24fellow brokers of ours, our brothers in arms, start

25showing our properties again and start selling our

Page 203

1properties again.

2These are the kinds of things that we write

3letters to NAR, and we get back responses that say,

4"They're operating within the rules of the MLS. There's

5nothing we can do about it." That's not good enough,

6folks. I mean, that's just not good enough. No one can

7say that a seller is not better off with full exposure

8of their property. You just can't make that statement

9and make it stick. The more buyers that know the home's

10for sale, the better off the seller is going to be when

11it comes to the offer he finally gets.

12MR. PERRIELLO: Lee, can I respond?

13MS. QUINN: Alex.

14MR. PERRIELLO: You mentioned northern New

15Jersey, which is near and dear to my heart since I live

16there, but I did do some research on The Garden State

17MLS, and I found some very interesting things. You

18know, all of the conversation is about what an agent

19gets paid and not how an agent gets paid, and I think

20that part of the conversation needs to come forward.

21You know, when a person lists their house, the

22agent, the listing agent, the listing broker, then

23assumes all of the costs, all of the responsibility to

24market that house with the expectation that at some

25point in the future, that house is going to sell, and

Page 204

1what you hear about all the time is the house that sells

2in one day for an exorbitant price and the agent didn't

3work real hard.

4So, what I did, I just looked at some Garden

5State MLS statistics for the last four years, and I

6think it's very interesting. 2004 was a record year for

7home sales in New Jersey. They had a record amount of

8listings put in the MLS, over 52,000. What's really

9interesting is that the market time was 82 days. During

10the hottest real estate market in New Jersey, it was 82

11days, and that's just from the time the property was

12listed until the time there was a contract on it, and as

13Cathy said, you need to add another 30, maybe 45 days to

14that. So, we're talking about a third of the year.

15What's interesting is although 2004 was a record

16year, only 66 percent of the listings that went into

17that MLS actually sold. So, I think that just

18demonstrates that the agent and the broker take all the

19 risks with the hope of a payday down the road. It's

20almost a third of a year process, and there's a

21one-third likelihood that you are never going to see a

22payday, the house won't sell, it will either expire or

23the person will take it off the market. So, I think

24there's that risk/reward factor that people have to take

25into consideration as to how this business is conducted.

Page 205

1MR. LEWIS: Yeah, Lee, I would like to agree

2with Cathy's point that I think we need an historical

3perspective, and we are an incredibly buoyant seller's

4market with particularly hot spots around the country,

5be it, you know, Florida, Southern California, Phoenix,

6Las Vegas, and some of the issues that we're talking

7about are really a result of it being a seller's market

8and buyers not having a lot of power.

9Five years from now, we can be sitting here

10looking at the opposite situation, and a lot of the

11business models that I think are arising, it remains to

12be seen whether those are going to survive long-term.

13If you think back to the "dot com" boom, it seems like

14there were internet stockbrokers popping up left and

15right, and everybody was on the internet day trading,

16and you don't see that today. I mean, that came to a

17crash in 2000, and now there's more equilibrium.

18Some of the stronger, better new business models

19have survived; many have not. In looking at solutions

20and in looking at choices, I think we need to be looking

21at it from more of a market equilibrium perspective and

22not be too much influenced by what's happening in some

23parts of the country today.

24MS. QUINN: Thank you.


Page 206

1MR. DelBIANCO: From what Cathy and Alex were

2saying, I had to check the name of this conference, and

3I had to check the panel title again. This isn't about

4competition between home buyers to buy a home. It's

5about competition amongst real estate agents

6representing buyers and sellers and what they charge and

7 what they do to provide the services. Thankfully, Geoff

8brought us back home again.

9Let's focus harder on the market. The market in

10definition here is not the market of home buyers and

11sellers. It's the market of realtors and real estate

12professionals providing services to home sellers and

13buyers, and you know, it's almost as if, like she said,

14it's a chicken and egg problem between do we allow the

15innovation and will that generate competition or do we

16need to have competition first that will generate the

17"dot com" style innovation?

18I'm an IT guy, I'm a huge believer in what IT

19can do, and so it's really not a chicken and egg

20problem. It's more like don't be chicken, give us the

21eggs, and we will bring home the bacon. Let us

22innovate, and within the club, within the MLS, we will

23make it more productive, more competitive, and five

24years from today, you'll be glad that you went that way.

25MR. HENDERSON: Is there another question?

Page 207

1MS. QUINN: Yes, actually, I am getting a lot of

2questions about the MLS, and basically I am going to

3paraphrase a little bit.

4Why does it matter if the listing agent owns the

5listing once the agent chooses to contribute the listing

6to the MLS? Doesn't that listing fall under the rules

7for what a joint venture of competitors can control

8about members' business?

9And the other one is pretty much on the same

10theme, after saying that there's an NAR rule that

11brokers should not discourage exclusive agency listings,

12yet many MLSs do not send EA listings to REALTOR.com,

13thereby pressuring sellers indirectly to list only in an

14exclusive right to sell capacity.

15So, what are some of the approaches that we

16should take toward the MLS?

17MR. HENDERSON: I'd like to take a stab at that.

18MS. QUINN: Not "we" as a government; just "we"

19as consumers.

20MR. HENDERSON: You know, one of the interesting

21things, you know, earlier in the day, we heard a lot

22about fiduciary duty, particularly with regard to

23minimum service brokerages and the need to emphasize

24that the agent is, in fact, an agent and is working on

25behalf of the consumer. One question is, with regard to

Page 208

1both opting out, you know, letting brokers prevent

2listings from being displayed on internet sites as

3opposed to being printed out, and with regard to

4preventing new kinds of brokers from joining the MLS, I

5would ask the brokerages who are fighting for those

6policies, how does that help your seller?

7I mean, if the purpose of putting the listing

8into the MLS is to recruit other brokers who represent

9buyers so the home sells, whose interests are being

10served by opting out and whose interests are being

11served by erecting barriers so that new kinds of brokers

12can't play?

13MS. QUINN: I have one on the other side, too.

14MR. HENDERSON: I guess you would call that a

15rhetorical question if no one answers. I thought there

16might be an answer by somebody fighting for those rules,

17and clearly there is not.

18MR. EARLY: Well, Phil, I'll say something to

19that. It has to do with the in-house transaction; it

20has to do with doubling your income on the sale of a

21property. I mean, we've skirted around this all day

22long. We've never talked about the double-dip or the

23dual agency or the double income. I haven't heard it

24mentioned once in the entire day. Take the in-house

25transaction, double-dip transaction off of the table as

Page 209

1a problem in our industry, and we have no problems. We

2have no problems.

3We start providing fiduciary level services to

4both buyers and sellers if we take that in-house

5double-dip transaction off the table as a problem.

6We're not going to do that.

7MS. WHATLEY: I would like to at least try to

8respond to the question. Again, the Multiple Listing

9Service is open to every realtor member. You have

10access to that information today. The minute you join,

11you have access to that information. It is yours to

12use, it is yours to then communicate to your buyer or

13your seller in the best avenue that you find helpful to


15It is different when you have other avenues that

16you are providing that information in terms of

17advertising or marketing, and there are some limitations

18on those uses that are different, but today, you could

19sit right here, if we had our laptop computer and we

20opened it up and we had a wireless, we could go right

21into the MLS. You could have access to every bit.

22If you and I were competing brokers in the same

23marketplace where we both belonged to the same MLS, we'd

24open up the same thing and we'd see the same thing. We

25would see exactly the same information, and you could on

Page 210

1the internet communicate that then to your customer, and

2I could either do that online, I could fax it to my

3customer, or I could pick up the phone and call them.

4We have the same information available to us.

5MR. HENDERSON: Maybe I don't understand how

6opt-out works then. I thought if I'm using the internet

7that not all listings would be available if some brokers

8had opted out.

9MS. WHATLEY: Well, in the IDX world, the

10internet data exchange world, which has been operating

11now for four or five years and has been hugely

12successful, the rules of engagement of IDX have been

13that it was a blanket opt-out and a reciprocal response

14to you. So, in the event that I didn't want my listings

15being able to be shown by other brokers, they couldn't

16be shown by any other brokers, but vice versa, then I

17couldn't show any of theirs. So, there was a huge

18penalty to me if I felt like that was where I had to go,

19and it has been highly successful.

20Most real estate companies, most real estate

21agents, have access to IDX sites right on their own web

22sites, and so, you know, to say that that's somehow

23limiting your ability to share information with the

24consumer, what you see in the MLS is more detailed

25information, but again, you have access to that, and you

Page 211

1can provide that to the consumer just like I can in

2whatever avenue or vein you might elect to do that.

3MR. PERRIELLO: Yeah, I would agree, Cathy. We

4opened up our national web sites to our brokers where

5IDX was available, and we would link to their local web

6sites so the consumer could see all of the listings in

7the market from one of the brand web sites. The brokers

8were standing in line to sign up for that, because they

9had all of the brokers' listings in their market, it was

10on their local site, and now they had the option to put

11it on their national site.

12I think the issue of the opt-out is we believe

13the listing is the work product of the broker, and there

14should be some protection. We believe that if a listing

15shows up someplace that you really find objectionable,

16that you would have the right to say, "You know, I think

17I'll just keep my listings to myself." Would you ever

18do it? Probably not, because your competitors would eat

19you alive if you made that decision, because they would

20use that against you. They'd say, "Well, you don't want

21to list with them because they don't share their

22listings with anyone."

23So, the competitive pressure will keep everyone

24sharing listings, but it's giving that broker that

25failsafe, if you will, if they wanted to use it, and I

Page 212

1think that with the new policy, the ILD policy, adding

2that feature where the customer makes the final choice I

3think is an excellent feature, because then it takes it

4out of the broker's hands into the customer's, and to

5say to the seller, "Do you agree with this? If you do,

6fine. If not, you can opt in." I think that's a good

7feature and a good resolution to it.

8MS. QUINN: Go ahead, Steve.

9MR. DelBIANCO: Just hit reverse on the tape to

10about 45 minutes ago when Cathy told us that the

11advertising data that she just finished bragging about

12is really stale. Real time data is much better, and you

13 can only get that from your broker. Only your broker

14can get it to you. The advertising data isn't really

15the right data. That's the same thing.

16Now, hit the reverse button again, go back six

17weeks. Six weeks ago, NAR was putting forth a policy of

18selective opt-out under pressure from the largest

19franchises to do selective opt-out, which was

20deliberately aimed to be able to punish a broker who has

21somehow gone outside the rules by not only using it for

22cooperation and compensation, but maybe even showing

23those listings as a way to attract customers.

24So, selective opt-out is something that's -- is

25it really off the table? It's certainly not out of the

Page 213

1minds of NAR, but it's off the table now because --

2 because of what? Not because of competitive pressure

3that Alex just described. It's off the table now

4because the Justice Department for two years has been

5saying it's against the law. So, we need the kind of

6antitrust enforcement that we have in this case to keep

7the MLS system from running afoul of antitrust laws.

8MR. EARLY: Well, not to say that it's not

9forgotten, but part of the new ILD rules stipulate that

10you must make an offer of compensation and accept offers

11of compensation. EBAs, exclusive buyer agents, do not

12list properties. We do not put homes in MLSs. We do

13not make offers of compensation. Who's that rule aimed

14at? I wonder.

15I mean, that's a very serious question. I do

16wonder, did somebody just happen to write those words

17down, or did somebody think about them before they were

18written down? My organization, the National Association

19of Exclusive Buyer Agents, does not make offers of

20compensation, but according to the new ILD rules, you

21have to make offers of compensation in order to be a

22member of your MLS, to participate.

23 MS. QUINN: Anything else?

24Well, we have a question from the audience that

25says what, if anything, precludes proponents of new

Page 214

1business models from cooperating to form their own

2accumulation of listings? Isn't that competition? How

3would you respond to that audience member?

4MR. HENDERSON: I can take a quick stab at it.

5The marketplace, which is, you know, in the securities

6world, it's NASDAQ, the New York Stock Exchange, in the

7real estate world, it's the MLSs, is useful for brokers

8who represent buyers because it is a cooperative entity.

9It can see what's for sale. It's useful for sellers

10because they know buyers are using it. And there's a

11critical mass concept that's very important to allowing

12marketplaces to work.

13If a new entrant, you know, if I go start

14Henderson Brokerage here in Washington, D.C., I could

15join the MLS and, you know, touching on Alex's comment,

16ownership of listings, no broker objects to me printing

17out their listings all day long, and they don't invoke

18ownership rights to say I can't give a piece of paper

19with a listing to a potential buyer, nor do they invoke

20advertising rights, say, "No, you can't give that piece

21of paper to a potential buyer."

22The objection is that it's on the internet. And

23so our position is that competition is good, just like

24with the rebates, you want to allow brokers to use

25different tools, to use available technology, to serve

Page 215

1buyers, to serve sellers. The same concept applies in

2other areas of the industry. Let's allow brokers to use

3technology and available tools to compete.

4MS. QUINN: Steve?

5 MR. DelBIANCO: I think the question was does

6anything preclude competition other than, you know,

7outside of the MLS, and I think we just heard a good

8answer from Philip that it's hard because of network

9effects, but there's also a catch in that if alternative

10business model like FSBO, FSBO.com, well, they were

11hauled into court in California because that alternative

12model was treated as what? It was treated as

13advertising if you believe the California Board of

14Realtors, and they wanted them shut down because they

15weren't acting like a realtor.

16So, the alternative business models often find

17themselves getting trapped and captured by the laws

18designed to govern the conduct of realtors, and another

19alternative, say eBay for instance, if eBay is listing

20homes for sale as an alternative, then they shouldn't be

21forced to become licensed brokers in certain states, and

22yet you see complaints all the time from realtors

23telling the state licensing board, "You guys have homes

24for sale online. They need to be licensed."

25So, again, it's all about don't preclude

Page 216

1competition, but by golly, the first time it shows up,

2regulate it.

3MS. QUINN: Anyone else?

4(No response.)

5 MS. QUINN: Well, I think we're almost out of

6time. I would like to thank the panel for being so good

7to come and spend their time with us today and for all

8the work and effort that they've put into their talks

9and their responses. So, let's give them a hand.


11(A brief recess was taken.)

12DR. SALINGER: Well, good afternoon. My name is

13Michael Salinger. I'm Director of the Bureau of

14Economics here at the FTC.

15Although it may not be a sound economic

16proposition, I am a strong believer in saving the best

17until last, and from my perspective, which I realize may

18not be shared by everyone in the room, our session this

19afternoon, because it focuses on economic analysis, is

20the one that I've been looking forward to most. Now,

21whether or not you share my enjoyment of economic

22analysis, sound public policy must ultimately rest on

23it. Particularly in an industry where most people have

24some experience but only a few episodes of it, we cannot

25let anecdotes win the day. Policy must be based on a

Page 217

1systematic review of the evidence based on a coherent

2 analytical framework.

3We're fortunate today to have two outstanding

4 economists as panelists to help us in that effort.

5Dr. Lawrence Yun is the Managing Director of

6Quantitative Research at the National Association of

7Realtors, where he manages the Statistics and

8Forecasting Groups of the Research Division. He writes

9regular columns on real estate market trends, creates

10NAR's forecasts, and participates in many economic

11forecasting panels, including Blue Chip and the Harvard

12University Industrial Economist Council.

13Dr. Yun has been quoted on the real estate

14market and the economy in the media, including The Wall

15Street Journal, The New York Times, and The Washington

16Post. He has also appeared on CNBC and Bloomberg TV.

17Dr. Yun received his undergraduate degree from Purdue

18University and his Ph.D. from the University of Maryland

19at College Park.

20Chang-Tai Hsieh is Associate Professor of

21Economics at the University of California, Berkeley.

22Previously he was Assistant Professor in the Department

23of Economics at the Woodrow Wilson School at Princeton.

24Professor Hsieh has published many papers in major

25 economic journals, including, "Can Free Entry Be

Page 218

1Inefficient? Fixed Commissions and Social Waste in the

2Real Estate Industry," in the October 2003 Journal of

3Political Economy.

4He is currently a Faculty Research Fellow for

5the National Bureau of Economic Research, Co-chair for

6The World Bank Research Department Advisory Committee,

7and a Visiting Scholar at the Federal Reserve Bank of

8San Francisco. Professor Hsieh graduated from the

9University of California, Berkeley, with a Ph.D. in

10Economics in 1998.

11As Dr. Yun works for the National Association of

12Realtors and Dr. Hsieh's article refers to social waste

13in the real estate industry, I have no doubt that we are

14in for a lively session.

15I will ask Dr. Yun to start us off.

16DR. YUN: Thank you very much.

17As the introduction made it clear, my day-to-day

18activity usually centers around sort of forecasts of the

19economy in the housing market, Friday's release of the

20PD will show some growth rate of close to 4 percent, but

21today's discussion is not about that but about a topic

22that I studied intensively while in graduate school.

23My graduate school specialty was in industrial

24organization, which is the study of the competitiveness

25of the industry, and I am very happy to have taken on

Page 219

1this topic to sort of refresh some of the things that I

2learned at graduate school and sort of apply it.

3The traditional graduate school study examining

4the industry will look at the structure of the industry,

5that is to say, is it a monopoly, oligopoly, perfectly

6competitive industry? Based upon the structure, then we

7will look for some conduct activity. Is there a lot of

8collusion involved, or is it fairly -- are prices

9determined through competitive pressures? And then

10finally, we will look at the performance. What is the

11bottom line? Is it good for society? Is it good for

12consumers? Is it good for workers? So, all these

13aspects I will be covering.

14Some of the data, because we're the last panel,

15has been earlier discussed, and I will quickly go over

16it, but I will try to frame it from more of an

17economist's perspective.

18From the consumer's point of view, they have a

19wide choice. Not only can they think about

20 for-sale-by-owner, which one million home sellers do

21each year, but they can choose a discount brokerage, or

22some people call them more of a minimum service

23brokerage, a traditional brokerage. There's a wide

24 availability of information available. So, from the

25consumer side, it appears fairly competitive, a wide

Page 220

1range of choices.

2From the supplier point of view, let's look at

3the figures. Currently, 1.25 million realtor members;

42.53 million service providers who have licenses; 98,000

5active firms in over 200,000 local offices; and again,

6choice available for consumer is for-sale-by-owner,

7which is over one million per year.

8There's very low entry barrier. Last year, we

9had an increase in membership, but the increase was not

10due to just straight increase. There were many people

11who dropped out. In fact, 253,000 entered the market,

12became realtor members, and 127,000 dropped out,

13indicating that the market is fairly dynamic, that

14there's free entry, free exit. Just as the perfectly

15competitive model would predict in Economics 101,

16through this process, one would get a sort of

17economically efficient outcome that maximizes consumer

18surcharge. And also again, on the information side,

19information is everywhere.

20Let's look at the past housing cycles. There

21was a recession back in the early 1980s. Paul Volcker,

22Chairman of the Federal Reserve, his goal, cut back on

23inflation. The way to do that, drastically increase

24interest rates. Average interest rates, mortgage rates,

25at 18 percent at one point. During that time, home

Page 221

1sales declined by 50 percent. So, if you were a realtor

2in the business, you lost half of your business.

3Similarly, in the recession of the 1990s, less

4severe, but nonetheless, a housing cycle. Now, this

5time around, thanks to the generation of low mortgage

6rates, we have record home sales, record home price

7growth, and not surprisingly, record increase in

8membership. The realtor membership is following the

9market trends.

10This is the sales activity, again, one can see

11back in the early 1980s, a drastic decline in sales,

12some decline in 1990s. The real price growth, so this

13would be the home price growth after subtracting away

14the Consumer Price Inflation, a few years were negative.

15Those years that are negative one can correlate with the

16next chart that shows that when the real home price

17growth was negative, that membership generally declined.

18 There was no enthusiasm for people to want to become a

19realtor. But given the current record home price

20growth, not surprisingly, we are having a record

21increase in membership.

22In studying the industry structure, economists

23here at FTC, as well as in DOJ, they would generally

24look towards the concentration ratio to see whether the

25industry is concentrated and can exert some market

Page 222

1power, if they can collude. This is the concentration

2ratio among the firms in the real estate industry, real

3estate brokerage firms.

4This is the hard data, but I would caution that

5this data may not be as meaningful for the real estate

6brokerage compared to other industries. The key reason

7is that agents are independent contractors. An agent

8working at Century 21 would be competing with another

9agent working at Century 21. Cendant, they have

10different branches, Coldwell Banker, Century 21. It's

11my understanding that these two brands will be competing

12within the Cendant branch. So, even though by overall

13company this is the market share, I would say from the

14market outcome point of view, consumer choice point of

15view, the real concentration is the 2.5 million real

16estate licensees.

17So, in other words, one can think of how many

18businesses are out there? There are 2.5 million

19independent real estate agents having their own business

20model, how much effort to put into advertising, how much

21effort to place a phone call, and so many, many

22different business model that each real estate agent

23would be conducting.

24This is the market structural size, so this is

25the number of sales force, one to five or six to ten.

Page 223

1So, back in 1983, 51 percent of the offices had one to

2five agents. By 1999, one to five agents, small

3companies, 60 percent were of small companies. So, very

4large, 50-plus agent office is a very rare situation in

5 the real estate brokerage industry. In 2004, we don't

6have the exact comparable data, but nonetheless, we

7slice it differently, we find that 96 percent of the

8offices have ten or fewer agents.

9Now, the question is raised, how can a small

10size firm survive over time? Well, there's a study by

11Zumpano, a professor at University of Alabama, he did

12some cost measurements, and from this cost measurement,

13he found that the industry is of constant economies of

14scale. That, in plain language, is there's no benefit

15of being big. Big or small, you are on equal footing

16from the cost point of view.

17One can also turn to Stigler's Survival Test.

18Stigler is named after George Stigler, a Nobel Prize

19winner in economics, which he said basically the firms

20are able to survive best by systemic demonstration that

21the market is efficient based upon how the results are

22shown. So, the results are showing that small firms can

23survive, which means that there is really no economies

24 of scale.

25Now we have seen that small firms are able to

Page 224

1survive. How is that? Well, the Multiple Listing

2Service, the great Multiple Listing Service, is putting

3everyone on equal footing. If you want to start a

4business and assume that you don't have any access to

5 Multiple Listing Service, it's very difficult to obtain

6clients, but Multiple Listing Service allows, whether

7large or small firms, on equal footing, equal

8information, and small firms can survive over time.

9Furthermore, agents, as mentioned, are

10independent contractors, and they are providing

11person-to-person, case-by-case service that requires

12highest level of trust. Just think of legal advice. Is

13a legal advice a commodity or a service? Estate

14planning advice, tax advice. And what are the fees

15associated with that? Has the internet impacted their

16fees? And are the real estate brokers, real estate

17agents, when they are providing service, is it a

18one-second transaction, or is it a three-month

19home-buying process or home-selling process?

20I would contend that it is a professional

21service that requires a lengthy amount of time, and not

22only that, requires many, many paperwork. I was a

23first-time home buyer several years back, and I have a

24Ph.D. in economics. I didn't realize how daunting the

25home-buying process could be. But we believe that, you

Page 225

1know, real estate service is not a commodity, and hence,

2we really don't see why the internet would necessarily

3bring a drastic decline in prices as one would purchase

4an airline ticket or purchasing an item in stock.

5Are we producing a perfectly competitive

6outcome? In Econ 101, perfectly competitive market

7structure would say that there is no excessive economic

8profit. Any abnormal profit will induce new entry, and

9the profit will be eaten away. The realtor income,

10$52,000 in 2002, that's the median, and again, as

11someone alluded to earlier, that is before business

12costs, before health insurance costs and other fees.

13The real median income has fallen. That's not

14surprising. The number of new agents entering the

15market in the past couple of years has outpaced the home

16sales growth and even the home price growth. So, given

17the fact that the realtor membership has increased far

18more than actual home sales, it's not surprising that

19the median income has fallen.

20Also, the commission rates, often mentioned

21source REALTrends, 5.5 percent to 5.1 percent decline.

22I would question the reliability of the data. Now, I'm

23not really questioning the reliability, but at the same

24time, because NAR has been -- well, when I first came to

25NAR, they said, "One thing you should never do is study

Page 226

1commissions," and I think the reason for that is in

2honor of the latest Nobel Prize winner in economics,

3Thomas Schelling, which say basically in large

4organizations, coming out with some kind of figure

5represent a focal point for others to collude. So,

6whatever figure NAR come out with, maybe other people

7will sort of use that as a collusion point.

8So, we cannot study commissions, but I'm not

9sure how the commission studies are conducted. Does it

10include the costs that realtors provide in terms of free

11moving trucks, closing cost assistance, commission

12rebates? We are hearing, particularly in hot markets,

13California, South Florida and elsewhere, that realtors

14are going to extra lengths, extra financial inducement

15to provide service to their clients, whether buyer or


17Let's look at some other desirable performance

18measures. Now, I have developed these performance

19measures in light of the fact that we have been hearing,

20by some well-renowned economist which I respect

21personally, have even suggested that possibly banks

22entering into the real estate brokerage industry will

23better provide the performance measures.

24One, economic mobility. While home sales is

25very dynamic, one of the most dynamic in the world in

Page 227

1the U.S., I think that's a good proxy to represent that

2there is a lot of economic mobility in the United

3States, and I think that's a good thing. In Japan,

4there's very, very little mobility. In fact, most of

5the home sales are new home sales, not existing home


7Historical experience of seeking a government

8bailout. In the real estate business, none. Bad times,

9as the chart earlier illustrated, were self-correcting

10through realtors exiting the market.

11Taxpayer risk, none. Let me just quote you one

12recent study by the FDIC concerning the concentration of

13the banks. Again, this relates to some people noting

14that perhaps banks entering into the real estate

15business would be good.

16"FDIC research economists stated that because of

17mega-mergers that had been occurring in the financial

18services industry, a failure of a single mega-bank could

19overwhelm the insurance system at the expense of

20taxpayers and expose taxpayers to huge potential

21liability." The top five bank financial service

22companies own more than 50 percent of the market

23control, and I'm not sure we want to move a real estate

24industry which currently is highly, fiercely

25competitive, into a very concentrated industry.

Page 228

1What about other measures? Social promotion of

2self-reliance and entrepreneurship, I think most

3Americans would agree that self-reliance and

4entrepreneurship is a good thing. Every single agent

5pretty much are independent contractors.

6Fifty-five percent of the realtor members are

7women. Some people -- I mean, people may disagree, but

8some people consider some more participation among sort

9of more diverse populations as a good thing.

10Flexible hours. Work stoppage through labor

11strikes, none. They're all independent contractors.

12Data mining, what is data mining? Well, Oracle,

13SEBOL (phonetic) systems and other very sophisticated

14artificial intelligence designs, things of that nature,

15they sell their software to banking companies and credit

16card companies. What is the purpose of that? They data

17mine, which is to say they want to see the consumer

18buying habits. Based upon that, they can price

19discriminate. They know that certain people are willing

20to pay slightly higher price for the same service and so

21on. So, providing home transaction over to the banking

22industry would expose even more potential for data

23mining and price discrimination and extraction of

24consumer surplus.

25And also, currently, real estate is all local,

Page 229

1local, local, local. If we move it into the banking

2industry, there's a potential that certainly there could

3be some international regulatory jurisdiction. Then we

4would have I guess an even stronger regulatory power

5than FTC or DOJ.

6Now, just the issue of Multiple Listing Service,

7again, economist's point of view, what is the purpose?

8Why was it designed? It helps with home sales

9transactions, facilitates home sales transactions, easy

10information availability. It was designed through a

11cooperative arrangement by the brokers to, again,

12facilitate transactions.

13It's available to all realtor members and many

14non-realtor members. I forgot to insert that other

15word, "non-realtor members," many non-realtor members.

16It depends upon the ownership structure of the MLS.

17Every MLS is slightly different in terms of ownership

18structure, but it is pretty much available to many, many

19real estate licensees, whether realtors or non-realtors.

20 Over half a million dollars have been invested,

21at least only strictly on REALTY.com. Who paid for

22that? Actually, I don't know. Maybe realtors, they are

23paying fee to advertise their space, but irrespective of

24who paid the half million dollars, the industry is

25proactive in bringing consumer friendly results.

Page 230

1Government did not dictate, "Hey, realtor organization,

2you should have some kind of computer web site that's

3consumer friendly." No one dictated that to us. It was

4the market response. It was a proactive response to

5bring consumer friendly results.

6MLS was never set up to solicit clients. So, if

7the brokers who are using Multiple Listing Service to

8facilitate home transactions, but they see another

9entity entering the system, in a sense, not directly

10sell the homes but in a sense to solicit clients, and if

11that is permitted, you can just anticipate just normal

12human business reaction, "I don't want to participate in

13 that system."

14Well, is it a public utility? Well, let's

15consider it, as one person alluded to earlier about the

16used car and putting it in front of a used car sales

17parking lot. Getting a beer at a stadium, $5, you know,

18just down the street one can get it for $1 or $2. Why

19don't we make it consumer friendly for stadium

20participants? Let's open the stadium as a public

21utility and allow all the street vendors to come in to

22the stadium and sell their beer for $1. That's consumer


24Shopping malls, heck, got a lot of flea market

25vendors out there who can sell it for lower price. Open

Page 231

1up the shopping mall, hopefully all these flea market

2vendors will enter and let the consumers benefit. I

3hear that the pharmaceutical drugs from Canada and

4Mexico are a little cheaper. What would CVS, Walgreen's

5react to that if they allow that to be a public utility

6so that consumers would benefit?

7Sure, consumers can benefit over the short term,

8but we know the long-term consequences of allowing as a

9public utility. The providers of the system, whether

10Multiple Listing Service, stadium, shopping malls, they

11would have no incentive to provide that.

12I would say just economic principles, we have

13heard very good arguments back and forth among many

14panelists, but when in doubt, I would say we would trust

15market outcomes based upon massive free entry and exit.

16Market not subjected to profit in the long run,

17and I just inserted that because Dennis Mueller was my

18dissertation advisor, and that's the topic that I

19studied, which basically states that large companies,

20like the banks, they can be inefficient but yet survive

21because they have market power, despite the economies of

22scale, they are able to survive by setting up barriers

23to entry. And certainly the real estate profession is

24not subjected to that.

25Private ownership. Private ownership always

Page 232

1seems to work. Any time there is a little interference

2in the private ownership, unintended consequences

3sometimes occur. As one Swedish economist mentioned,

4"There's two ways to destroy a city: One is through a

5bombing; one is to just set a rent control and just wait

630 years." The same thing.

7MLS participants, they are private

8organizations. They are making business decisions on

9 private matters. We open up to the public, perhaps in

10the short run, it benefits the consumers, but perhaps

11over the long run, there may be some unintended


13And also, regarding minimum level service and

14commission rebates, economists can debate all the pros

15and cons related to it, but we would just, as the NAR,

16just defer to the democratic process. We enjoy the

17discussion, and I think sort of through the discussion,

18persuasion of consumers, perhaps through that process,

19that democratic process works in terms of whether it is

20consumer friendly or puts the consumer more at risk.

21That's the end of my presentation. Thank you.


23DR. HSIEH: Well, as you can all see, I don't

24believe in using new technologies, and in my field, we

25take pride in using slides.

Page 233

1So, let me talk about what we think or what I

2see as being the consequences or the nature of

3competition in the real estate industry, and what you

4are going to see at the end of my talk is that the

5argument that I am going to make is basically the same

6argument that Mr. Lewis of RE/MAX in the previous panel

7made, but I'm going to give it a very different spin.

8So, what do we mean by the "Tragedy of the

9Commission," and for those of you who have taken an Econ

10101 class, I'm basically making an allusion to the

11tragedy of economics. So, what is it that is puzzling?

12What was it that got us started in this, because if you

13 note, I am not a person who specializes in real estate,

14but what got me really interested in this is that the

15real puzzle in the real estate business is why does

16there seem to be this relatively fixed commission


18Now, we don't have a very good story for why

19this commission structure looks like it's relatively

20fixed, or at least it doesn't seem to vary that much. I

21mean, it could be the case that, you know, it could be

22the stories that were told in the previous panels about

23actions by the local real estate boards against firms

24like eRealty.com or in the place where I live, in the

25San Francisco Bay area, the major internet broker is

Page 234

1ZipRealty, but what's puzzling about this is what this

2means is that as long as this commission rate is

3relatively fixed, or it doesn't vary that much, what

4this means is that the amount that a consumer pays rises

5one to one, it rises proportionately, with the value of

6the house.

7I mean, it may go down a little bit because of

8higher rebates if you're selling a more expensive house

9or you may get a free moving truck, but you know, all of

10that is minor compared to, you know, how much additional

11money you are going to pay. In the neighborhood where I

12live, the median price of a home is $1.2 million, and as

13far as I can tell, the commission rate is still at 6

14percent. Some brokers might offer you 5, but 5 or 6

15percent of 1.2 mill is a chunk of change. It's a lot of


17The point is that, and this is something that a

18lot of people have alluded to already, it's highly

19unlikely that the amount of time, that the amount of

20effort that a broker has to put into selling a house or

21in trying to incentivise a buyer to buy a house is going

22to rise linearly with the amount of the cost of these


24Now, you know, this might seem like a great deal

25for brokers. It might seem the case that brokers who

Page 235

1operate in my area are going to earn extraordinary

2profits, because in one given transaction, they can walk

3away with $35,000, right? But that's actually not the

4right way to think about it, and this is something,

5again, that a lot of other people have alluded to,

6because there's relatively free entry into the

7profession and into the real estate brokerage business,

8and basically what that does is that it basically

9dilutes the profits for everybody, and at the end of the

10day, realtors don't make any more money in the San

11Francisco Bay area than in a city like Pittsburgh, but

12people like me, we're paying much, much more for these

13services than somebody that lives in the City of

14 Pittsburgh.

15So, let me illustrate the story that I'm telling

16by just telling you a tale of two cities. So, let me

17tell you, and I guess I'll say a little bit more about

18this, but the data that we use is basically the data

19from the Centennial Housing and Population Census. We

20did this work in 1998 and '99, so we had access to the

21data from the 1980 and 1990 population censuses.

22But let's think about two cities, and we picked

23these two cities, Boston and Minneapolis, because they

24look quite similar among a bunch of dimensions. They

25are cities of roughly similar size, cities have similar

Page 236

1demographics, cities have similar racial composition,

2they -- but the thing that strikes out, that really

3jumps out at you when you want to think about Boston

4versus Minneapolis, and this is data for 1990, is that

5housing in Boston is a lot more expensive than what it

6is in Minneapolis. It costs twice as much, and

7obviously if you look an analysis, my guess is that it's

8going to be much, much higher, because there's been a

9real housing boom in the Boston area.

10Now, this would seem to imply that as long as

11the commission structure is relatively fixed, what this

12would seem to imply is that a realtor in Boston is going

13to make much more, is going to make twice as much as a

14realtor in Minneapolis, because if you sell a house in

15Boston, you get twice as much than a realtor that sells

16a similar house in Minneapolis, but you know, again, but

17that's not the end of the story.

18I mean, if that were the end of the story, then

19it would be like a story that you see in a lot of other

20industries. Some people pay more for a service, and

21other people gain from the service. So, you know, so

22then the commission structure would just be a transfer

23from consumers to the realtors, some people are worse

24off, some people are better off, but at least some

25people are happier as a result of the higher commission,

Page 237

1but the tragedy of this business is that that's actually

2not the right story, because what happens, and again,

3for those of you who are in this field, there are many,

4many more realtors in Boston than there are in

5 Minneapolis.

6So, at the end of the day, what happens, an

7average realtor in Boston just sells less. An average

8realtor in Boston sells 3.3 houses per year, which is

9about one-half of what an average realtor in

10Minneapolis sells. Again, all of this data comes from

11the U.S. Housing and Population Census.

12Now, one can argue that, well, this is not

13really the right comparison, because Boston is

14different. Houses are different in Boston. It just

15takes a lot more work to match buyers and sellers in

16Boston than it does in Minneapolis. It could be the

17case that, you know, people whose predecessors came from

18Ireland are just more difficult to deal with than those

19who came from Sweden, that could be the story, but you

20know, this has not always been the case, because if you

21just look back ten years, if you look at Boston versus

22Minneapolis in 1980, the productivity, houses sold per

23agent, in Boston was almost exactly the same as that in

24Minneapolis. They were almost exactly the same, and

25clearly we know what happened, you know, what happened.

Page 238

1There was a housing boom in Boston, but there

2was not a housing boom in Minneapolis. So, what

3happened over the ten-year period from 1980 to 1990 is

4that you saw massive entry of realtors into the real

5estate brokerage business, which made it much more

6difficult for everybody else to find a business, and

7what that did is that it just drove down profits for

8everybody, so that at the end of the day, the average

9income of a broker in Boston in 1990 is exactly the same

10as what it was in 1980, and it's exactly the same as

11what an average broker earns in the City of Minneapolis,

12despite the fact that a homeowner in Boston pays twice

13as much, and this is what we call the tragedy of the

14commission, that basically this is a case in which

15somebody is paying more, us consumers, yet nobody is

16better off. The money is just waste. The amount of

17additional profits, the amount of the higher cost, is

18not benefiting anyone, and I'll try to document that

19more precisely in the few minutes that I have left.

20So, basically what we've documented is that this

21is exactly the pattern, when you look across all of the

22cities in the U.S., that if you look across the

23approximately 300 metropolitan areas of the U.S. and if

24you look at changes from 1980 to 1990 and you look at

25cities where housing prices have gone up relative to the

Page 239

1cities where housing prices have gone up by less, what

2you're going to see is that in places where housing

3prices have gone up by more, what you see are three


5What you see are more real estate agents, and

6let me just show you what the data looks like. So, this

7is just a scatter plot. It's a scatter plot, and what's

8on the Y axis is basically the change from 1980 to 1990

9in the number of realtors relative to the number of

10workers in the city, and what's on the X axis is the

11change in the average price of housing, and we normalize

12the price of housing by the average wage in the city, so

13to try to account for differences in the costs of doing

14business, and basically the slope looks very -- the

15scales are somewhat different, but the slope is very

16close to one.

17What does that mean? It means that every one

18percentage point increase in the housing prices

19increases the number of realtors by about almost one

20percentage point. Now, if you think that the demand for

21these services, the amount of buying and selling that

22homeowners want to do in a city, is not going to rise

23that much with an increase in the price of housing in

24the city, it's clear what this is going to mean, right?

25It's clear what this is going to mean.

Page 240

1It's going to mean that the number of

2transactions, the number of sales by a typical agent, is

3going to fall. It is going to fall. So, the second

4thing that you're going to see is that as housing prices

5go up, number of sales per agent falls. In other words,

6think about it as over-capacity, over-capacity of

7industry. So, let me show you the evidence of lower


9So, what's on the Y axis this time is a number

10of -- is a change -- again, all this is is the 1980 and

111990 -- anyway, it's the number of houses sold in a city

12relative to the number of hours worked by a realtor.

13You could also do it relative to the number of realtors,

14but it's not going to make that much difference. We did

15hours worked to try to account for the fact that there

16may be changes in the amount of hours worked by


18And again, the slope looks like this. It's very

19close to one. So, a 1 percent increase in price would

20translate into a fall in sales per hour's work or sales

21by almost one percentage point. So, the bottom line is

22that in places where housing prices have gone up,

23nothing happens to wages. So, basically what's here,

24what's on the Y axis, is the wage of the realtor or the

25income of the realtor as reported in the Census,

Page 241

1relative to what we constructed as the alternative wage

2of the broker, where basically we look at the

3demographic characteristics of brokers, and we make an

4estimate of how much they could earn if they did

5something else with their time, and it looks incredibly

6flat. And again, this is something that a lot of the

7people here have already alluded to. Wages are no

8higher in places where housing prices have gone up. So,

9realtors are no better off despite the fact that

10consumers are paying a lot more for those services.

11 Now, what could be some of the problems with

12this analysis? Well, the natural problem with this

13analysis is that, well, it could be the case that, you

14 know, a broker in Boston just has to work a lot more to

15try to match buyers and sellers. It just takes a lot

16more time to, you know, to show the houses, or after an

17offer has been made, to get to closing, as a former

18panelist talked of, but you know, there are a couple of

19things to remember.

20One is that remember that what we're doing is

21that we're comparing the same city, that is, we are not

22comparing Boston with Pittsburgh. What we are doing is

23we're comparing changes in Pittsburgh with changes in

24Boston. So, we're talking about the same city, the same

25houses, the same houses.

Page 242

1Another way in which you could try to get at

2this is you could try to get direct measures of the

3amount of time that realtors actually have to put in to

4actually try to sell houses. So, we tried to put

5together a little bit of that data, so we looked at

6three measures, and so what's in this top panel is

7basically time on the market, time on the market against

8the price of housing, and this is something that I guess

9we all know, that in places where housing prices have

10gone up, time on the market falls. So, it's not the

11case that the listings stay on the market for a longer

12period of time.

13Again, the unit of observation here is a city.

14So, each circle represents a city, and then the size

15of -- I guess I should have said the size of the circle

16relates to the size of city. If you look at data on the

17point of view of buyers, so this is data from the

18buyer's side, this is the average number of houses that

19buyers look at in different cities, and the line looks

20roughly flat, so that's this panel here. Now, it

21doesn't seem to be the case that in higher cost cities

22that buyers look at more houses in the process of

23searching for a house.

24Lastly, this last part -- I think the last thing

25is actually data from the National Association of

Page 243

1Realtors, but this is the number of months that home

2buyers search for a house in different cities, and

3again, the line looks flat, the line does. So, it's not

4the case that in higher cost cities that home buyers are

5actually spending more time trying to find a house.

6So, the question then is, what is it that

7realtors are doing? You know, what is it that realtors

8are doing differently in Boston than in Minneapolis or

9what is it that realtors in Boston in 1990 were doing

10differently than they were doing back in 1980? And here

11I guess our story is that, well, you know, why don't we

12think about two things that realtors do.

13The first thing that they do, and it's an

14incredibly valuable service, is that they match buyers

15and sellers. That's an incredible value. But the other

16thing, which I'm sure that all of you know, is that they

17spend a lot of their time doing prospecting. They spend

18a lot of their time prospecting. You know, they go from

19door to door, they leave notepads with their pictures on

20them. In the neighborhood where I live, I have a lot of

21realtors living free pumpkins on my door step. You

22know, they call on FSBOs. They service their farm. I'm

23sure you all know what I mean.

24I guess our claim is that the second type of

25activities, prospecting, is really of little value to us

Page 244

1consumers. What we value is the services that a realtor

2usually provides in getting the right price for the

3house and in negotiating the offer and in getting to

4closing, all of the things that the previous panelists

5talked about. That's of real value to us.

6But these things, the prospecting, is of little

7value, are things of little value to us, and our claim

8 is that the amount of time and the amount of money that

9a realtor spends on the second type of activity

10increases when housing prices go up. So, the answer to

11the question I asked a minute ago, what are realtors

12doing with their time? They are doing most of the time,

13doing this, the prospecting part, and less of the time

14doing this, the actual matching of buyers and sellers.

15So, to end the story, what is the bottom line?

16What is the bottom line of the story? Well, let me ask

17you, how much is the waste? How much is the social

18waste? Well, here it's hard to give a precise answer,

19because it depends on what you take as your benchmark;

20that is, you know, how much time should it take for a

21realtor to do things that are of value to us, to us as


23So, if you take your benchmark city as Athens,

24Georgia, that is, you know, what do I mean by a

25benchmark city? If you make the assumption that all the

Page 245

1all of the time that realtors in Athens, Georgia are

2putting in is actually of real use to us, that it's of

3real social value to us, and brokers in all of the other

4cities in the U.S. aren't as productive as brokers in

5Athens, Georgia, if you were to take that, the waste,

6the amount of time and effort that is put into

7prospecting, that amounts to $8.2 billion in 1990, which

8are half of the revenues of the real estate brokerage

9business in that year.

10Our data from the Census suggests that earnings

11of brokers in 1990 are about $16 billion, and this

12figure, I think if you sort of look at it more recently

13for 2000, which we have not done, my guess is that it

14probably would be higher then. So, you know, $8 billion

15is, you know, is a lot of money.

16 So, in a sense, again, this is what we call the

17tragedy of the commission. It's basically efforts to

18protect the price, you know, efforts to try to deal with

19discount brokers such as eRealty.com, efforts to deal

20with, you know, again, in my area, with ZipRealty. All

21of those efforts are ultimately self-defeating, because

22they don't benefit from it. I mean, that is the tragedy

23of the business.

24If I want to take the analogy that Mr. Yun gave

25about the baseball vendors in the stadium, Mr. Yun just

Page 246

1gave one part of the story, and it's the first step in

2the analysis, but the right way to try to think about

3what's going on in the real estate brokerage business is

4that basically there is free entry into becoming a

5vendor in a baseball stadium. So, therefore, price is

6still -- essentially, if you want to think of it an

7analogy, what's going on in the real estate business is

8that prices of hotdogs in the stadium are still fixed

9at, you know, 10 bucks, beer is still fixed at 20 bucks,

10but instead what you have is for every person who's

11watching a game in the stadium, there are two vendors,

12and that's, of course, an exaggeration, but that's one

13way to look at it, because there basically is free

14entry, and basically the people who are watching the

15game and buying hotdogs and beer, they are paying more,

16and it's not clear what they are getting out of it.

17So, I think that what we should be trying to do

18is to think about ways where we could try to create

19structures or laws that would try to channel competition

20in the real estate brokerage business, because it's

21clear there's an enormous amount of competition in the

22real estate brokerage business, but what we should try

23to do is think of ways in which competition translates

24into lower prices, higher quality of service, not into

25this kind of waste.

Page 247

1Thank you.


3DR. SALINGER: We originally had three speakers

4scheduled for today, and one of them had to drop out. I

5was originally on tap just as the moderator, for which

6the two requirements are that you have a suit and a

7watch, but since the one speaker dropped out, I'm going

8to take a somewhat more active role and discuss a little

9bit what we just heard.

10I'm going to try to stir up the pot a bit, as if

11these gentlemen haven't done enough already to stir up

12the pot, but given that I'm going to try to do that, I

13should issue our standard disclaimer, which is that

14anything I say today reflects my views and doesn't

15reflect the views of the Federal Trade Commission or any

16of the Commissioners.

17When I was a staff economist at the FTC 20 years

18ago, literally my first assignment was to analyze the

19persistence of 6 percent commission rates on residential

20real estate transactions in the wake of what at the time

21seemed like dramatically increased prices of real

22estate. Unlike Rip Van Winkle, I am finding the world

23peculiarly unchanged after 20 years. But of course, the

24world has changed quite a bit.

25Technology has developed so that it should be

Page 248

1easier and less expensive to make information about

2properties for sale available to would-be buyers. Many

3types of transactions are done differently and at less

4expense than used to be the case, and prices of real

5estate, particularly in some urban areas, have continued

6to increase. So, as Dr. Hsieh and I'm sure many people

7today have pointed out, the puzzle is why the percentage

8commission has been so stubbornly persistent.

9We've seen this pattern in industries before.

10This is not a unique case. I thought I'd talk a little

11bit about where else we've seen this pattern. One of

12them is airlines.

13Prior to airline deregulation, the Civil

14Aeronautics Board regulated the price of airline

15service, and it regulated entry. Even though it

16regulated entry, it didn't regulate the quantity of

17service. So, if you had the authority to fly a

18particular route, then you could put as many planes on

19that route as you wanted. So, what happened?

20Well, one thing that happened was that prices

21were really high, and they were particularly high on

22long distance routes. Just to take one example, in

231977, which is at the end of the regulatory period, the

24average discounted round-trip fare from Los Angeles to

25Washington was $333 in 1977 dollars; that would be $779

Page 249

1in today's dollars. Last week on Travelocity, you could

2buy a ticket for $183. Now, that's not quite a fair

3comparison, because that was the best price we could

4find, so it's not the average, but still, the average

5price on that route has surely come down dramatically.

6Now, even though prices were high and

7particularly high on these long routes, it didn't help

8the airlines any. A striking feature of that experience

9was that even though we were regulating minimum prices,

10the airlines weren't making any money. Why was that?

11Well, the airlines learned that when passengers

12called up an airline to make a reservation, they would

13call up the airline that had the most frequent flights.

14That created an incentive to fly as many planes as you

15could on that route, and what we saw was that load

16factors were lower than they had to be.

17I have fond memories of flying in that era when

18you would get on a plane, and you would find that you

19could stretch out across three empty seats. That hasn't

20happened to me in a while, and I suspect it hasn't

21happened to you.

22Now, airlines aren't the only example of this

23phenomena. Another is stock brokerage. We used to

24regulate the minimum price per share that would be

25charged for stock brokerage, and the consequence of that

Page 250

1was that there was a lot of service competition to try

2to get those rents that were built into the regulated


4The results that Professor Hsieh has reported to

5us today fit those patterns quite closely. Prices

6apparently above competitive levels and free entry

7combine to cause excessive entry and excess capacity.

8Remarkably, in the real estate industry, productivity

9seems to have declined.

10There was an article in The Times on Saturday

11about the steel industry. It made the point that it

12used to take nine hours of time to produce a ton of

13steel, and now that's down to two or three hours, and if

14you just look across the economy, we've seen dramatic

15improvements in productivity, but apparently not in the

16real estate industry.

17Now, the most striking, I think, features of

18Professor Hsieh's results are the comparison across

19urban areas and the comparison of the productivity of

20real estate agents in areas depending on whether there

21are high real estate prices or low real estate prices

22and whether or not the prices have gone up.

23Another feature of Professor Hsieh's results

24that are reminiscent of the airline industry are that

25the productivity is particularly low in those areas

Page 251

1where the prices seem to be high. In the airlines, we

2would see lower load factors on the long distance

3routes, where with the real estate industry, we're

4seeing less productivity in the high price areas.

5Dr. Yun has been very kind to be on our panel

6today, and I don't want to appear to be an ungracious

7host, but it would be naive for an NAR economist to come

8to this conference and not expect to get some tough

9questions, and indeed, I would expect that he or I would

10welcome the opportunity to answer the questions. So,

11I'll put it to you directly.

12In the airlines, we deregulated the prices and

13eliminated restrictions on entry, and prices came down

14dramatically. Now, true, some aspects of quality have

15dropped. Airline food is not as good as it used to be,

16but even accounting for that, the economists who have

17looked at this have concluded that we are by far better

18off with the lower prices than we were with the higher

19service levels designed to attract people to pay the

20higher prices.

21If we were to figure out a way to bring more

22price competition to the current commission structure --

23and I should hasten to add that I'm having my un-Rip Van

24Winkle type feelings, because it has not proven so

25simple to do so -- why wouldn't we expect to see a

Page 252

1similar phenomenon with real estate brokerage? Why

2wouldn't we expect prices in general to come down? Why

3wouldn't we expect them particularly to come down in

4areas with high real estate prices? And why wouldn't

5those developments, on balance, be beneficial?

6DR. YUN: Thank you for the question.

7First, I think the question is premised on the

8fact or the belief that somehow the prices, commission,

9is regulated. As everyone was saying, it is perfectly


11Also, I would recommend to Professor Hsieh, he

12talked about 5 or 6 percent in California. Put up a

13sign saying "I am only willing to pay 4 percent" and see

14how many realtors you get. Prices are negotiable


16Also, I would say that industry has

17fundamentally shifted. In prior years where the

18Multiple Service Listing information was held more by

19brokers and less on the consumer side, where the brokers

20had more leverage -- we are talking about 1990 data on

21Census -- currently, the Multiple Listing Service data

22is available to all consumers. It was brought out

23through the system that we currently have. It is a

24private market system. There was an incentive by some

25entrepreneurs to create certain internet friendly

Page 253

1system, so the information is widely available.

2I would say that the real estate section of the

3advertisements in The Washington Post, living here, ten

4years ago, I would not have seen any prominent ad of 4

5and a half percent commission. We see that currently

6widespread. Others say they are not a discounter, but

7nonetheless, they offer a much higher level of service.

8So, commission ranges all over the place, and

9also, again, questioning the 5.1 percent, again, all the

10realtors, number one complaint that I hear from

11realtors, is there's too much competition -- sort of

12following Professor Hsieh's story -- too much

13competition, but at the same time, you know, one can say

14there's too much excessive waste of resources.

15In tournament games, people want to be sports

16stars, but only few people can become sports stars, yet

17millions of youngsters spend a lot of time and resources

18in the process. So, one can say that's a wasted energy,

19so that all those youngsters should stop playing sports.

20You know, we don't do that.

21In the little document written by Thomas

22Jefferson which says that every person has the right to

23life, liberty and the pursuit of happiness, he did not

24say happiness, he said pursuit of happiness. Sure, some

25realtors go into the market, face bad business decisions

Page 254

1and exit, but that's their right, that's their decision

2to enter and exit.

3Again, I would say the market has changed

4fundamentally, and I think there's more room for

5negotiation today than before, and certainly information

6is widely available. It's certainly not regulated.

7 DR. SALINGER: Okay, well, we have gotten a

8number of questions from the audience, and one of them

9relates to your point when you say that this isn't a

10regulated price, it's a market price, and that's

11certainly the case. So, this is a question for

12Dr. Hsieh.

13Do you have any theory for if the commission

14rate that we're observing is not a competitive rate,

15given how structurally competitive the market appears to

16be, do you have an explanation for why the rate


18DR. HSIEH: That's a great question, and I

19really don't have the answer. I don't have the answer

20 for that question. I mean, as Dr. Yun said, it could

21very well be the case that if you look at the data now,

22commission rates have fallen a little bit, but still, I

23think it's a little bit disingenuous to say that

24commissions have fallen in a place like Bethesda, where

25housing prices have tripled in the last 15 years. So,

Page 255

1commission rates falling from 6 to 5.1, you know, you

2are still paying more than twice as much for selling

3exactly the same house, and again, it's not clear what

4you are getting for the service.

5Now, the direct answer to your question, I mean,

6I really don't have an answer to the question. I mean,

7it's something that has puzzled me a lot, and I'm sure

8that it's puzzled Michael as well, because I recommend

9that all of you go read the two volumes of the FTC

10Report on the Real Estate Industry that was published in

111982, because a lot of the same issues are there, are

12there in that 1982 staff report.

13I guess if you were to push me to try to give

14some guesses on why it's the case, I mean, I think it's

15basically a story of about principals, the homeowners,

16who are weak, who are weak and that, you know, that

17 basically it's the most important financial transaction

18of their life. They don't have any experience or most

19people don't have a whole lot of experience in doing


21So, it's a case that's just ripe for the typical

22principal/agent problems, and if you want to think about

23other features of the real estate business, it seems

24that a lot of other things seem to be consistent with

25this story. For example, something that I haven't

Page 256

1talked about, forget about the debate about whether

2commissions should be 6 percent or 2 percent, which is

3what it is in the U.K., but one interesting thing to

4think about is why is the commission rate a fixed

5percent of the total value of the house.

6The reason I ask this question is suppose that

7you have a house that will sell for approximately half a

8million dollars, give or take $30,000 either way. You

9could list the house for $400,000, and you could give

10the house away. If the house was worth about $500,000,

11if you list the house, you would be willing to sell it

12for $400,000, you know, you have got buyers flocking to

13you. You don't need an agent for that.

14But then the question is, so, basically, what is

15the marginal value of the agent? The marginal value of

16the agent is basically gets you prices that are higher

17than $500,000. So, in other words, the point of this is

18that the optimal commission structure, if the interest

19of the seller is really the interest that you have in

20mind, should be one in which you get nothing if you sell

21the house for under $450,000, but for every dollar that

22you sell above that amount, you get 50 cents on that, so

23that this would more closely align the incentives of the

24 broker with that of the seller, yet this is not the


Page 257

1But this is the case if you want to look at

2other things, because this is roughly the way in which

3car salesmen are compensated, that, you know, that if

4you sell a car at a very low price, you get nothing from

5the owner of the car dealership, and it seems that the

6difference is that the agent that the car salesman is

7dealing with sells hundreds of cars every month. So, he

8has an interest or she has an interest to set the

9optimal structure, the optimal compensation structure

10for the agent, but that's not the case with the

11homeowner, because they are doing this for the first

12time or they are doing this two or three times. It's

13just not worth their time to try to negotiate the

14optimal commission. I think it's really a story about

15agents which are weak.

16DR. SALINGER: Well, I was about to ask a

17question that was appropriate for both panelists, but it

18turns out you have just posed the question, so I'm going

19to turn it to Dr. Yun, but I'll elaborate on it a little

20 bit.

21Why do we see the commission structure that we

22see? Professor Hsieh has suggested that maybe we should

23expect to see contracts with higher powered incentives.

24The question here is what if we had salaried agents, and

25in your comments, you said, well, the real estate

Page 258

1transaction is different from, say, selling stocks or

2airline tickets because it's not a homogeneous

3transaction, but the typical real estate transaction has

4a lawyer doing some work on it, and that piece of it is

5not necessarily as homogeneous as stock brokerage or the

6sorts of things that you see done on the internet, and

7those are typically compensated by the hour. So, how do

8you explain the percentage rate?

9DR. YUN: I think the percentage rate occur due

10to sort of the historical patterns. I mean, in the

11prior years, when brokers had a lot of power and more

12information, in fact, they actually told agents, our

13companies charge this percent, or perhaps sort of the

14wiggle room of the commission negotiation is only this,

15but now, I am hearing from so-called full-time brokerage

16services, Long & Foster, Weichert, I asked the agent,

17"Is the commission negotiable or how much does the

18broker influence your commission?" And they said, "It's

19pretty much my decision, and if I want to set it for

20$2,000, $20,000, it's, again, mostly my decision."

21Of course, they have to get the approval from

22the brokers, but it's not necessarily the percent now.

23I think in today's market, people can actually talk

24about the actual fixed dollars, and one thing that has

25not been really discussed is that people are unhappy

Page 259

1with 5 percent, 6 percent? Who are these people?

2According to our survey, it's the people who want to do

3for-sale-by-owner. That market is available, it has

4always been available, yet people continue to seek the

5professional service of the realtor agents.

6DR. SALINGER: Well, when you talk about there

7are negotiations going on, and maybe the 6 percent isn't

8like the gravitational constant. It would be really

9helpful to know exactly what the distribution of the

10commissions are, and I know you mentioned in your talk

11that NAR is reluctant to do this because, I mean, the

12explanation was you can sometimes get into antitrust

13problems if you do that, and yet there are standards by

14which trade associations collect data on the market, and

15given that it seems like perhaps there are some

16antitrust problems already that are being driven by this

17presumption that the percentage rate is sticky, why

18haven't you done and why haven't you made public the

19results of a sufficiently systematic survey that would

20tell us what the distribution is?

21DR. YUN: If there is a research within our

22department on the commission, I would like to know. I

23don't know. We have not conducted internal surveys.

24Some brokers have actually asked us, well, why don't you

25conduct possibly -- not even the actual percent

Page 260

1distribution, but just the question, has the commission

2increased, commission declined? And the people that I

3report to say, "No, don't touch commissions. We could

4get into trouble with antitrust." So, I really don't

5know the answer to it.

6And just from the market experience, you know,

7one can see the advertisements in the newspapers,

8there's an opportunity for for-sale-by-owner,

9commission, talk to your realtors, ask them, "Is it

10negotiable? Are you willing to do it for 5 and a half

11 percent instead of 6 percent?" See what his answer is.

12DR. SALINGER: I think we have time for one more

13question, because I want to give you equal time.

14You mentioned that commissions were 2 percent in

15England. What do you know about any differences in how

16the market works there, how is it that somehow the

17industry works with such a much lower commission


19DR. HSIEH: The only thing that I know about the

20U.K. case, I haven't spent much time looking at this,

21but the only thing that seems to be different from the

22U.K. and the U.S. is that the legal work seems to be

23separate in the U.K., whereas some of the legal work

24might be done by realtors in the U.S., although when I

25bought a house, I had to hire a lawyer to do a lot of

Page 261

1the legal work, or in some places, you can use a title

2company to do a lot of the legal work.

3But I guess let me just try to not answer your

4question, but I think that it seems clear, I mean, it

5seems clear, and especially from thinking about what

6we're discussing today, and if you go back to the FTC

7report from more than 20 years ago, things really have

8not changed that much. So, it just seems to me that we

9have to stop thinking about other things, other things.

10I'm reminded of the case of discount brokerage

11where the mergers in the internet might do it, might do

12it eventually, but you might get a case where you start

13to think about things like, you know, why not think

14about separating the MLS part of the business from the

15brokerage part of the business, because it seems that a

16lot of this is really just the access to data, the

17access to information, and there's no reason why they

18have to be part of the same thing.

19Now, I'm sure that some people are going to kick

20and scream, but that seems like, you know, if we could

21think about radical solutions for IBM back in the 1970s,

22then it seems that we could start to think outside the

23box to try to think about ways to bring more value to


25DR. SALINGER: All right. Well, thank you to

Page 262

1everyone who has stuck it out for this long and also

2thank you to our panelists for a very lively discussion.


4MS. OHLHAUSEN: Before I introduce our closing

5speakers, I just wanted to reiterate what I mentioned

6this morning, which is that the record for the workshop

7will be open another month, until November 25th, so as

8 you can see, there are a lot of issues that were raised

9today, and if people want to follow up on them or if you

10feel there were issues that were not raised that you

11want to bring to our attention, I definitely urge you to

12file comments on the FTC web site and the USDOJ web

13 site.

14Now, it's my pleasure to introduce our two

15closing speakers. First, we are going to hear from

16Susan Creighton, who's the Director of the Bureau of

17Competition at the Federal Trade Commission, and she

18will be followed by J. Robert Kramer, Junior, Director

19of Operations from the Antitrust Division at the

20Department of Justice.


22MS. CREIGHTON: Good afternoon. On behalf of

23the FTC, I wanted to thank you for joining us today. As

24you heard from Professor Hsieh, the FTC has been very

25active in this area for a number of years now, and this

Page 263

1workshop is one manifestation of our long-term interest.

2I want to thank you for contributing to the panels

3today, as well as for all of your comments, both those

4that have already been submitted and those that may be

5submitted in the future. I am sure they will contribute

6considerably to our understanding going forward of the

7many important issues in this policy debate.

8Coming from an enforcer's perspective, I believe

9that the single overarching story line of our program

10for many years probably has been this: From time to

11time conventional, full-price brokers have taken

12collective action to disadvantage innovative,

13reduced-service, lower-priced brokers. The particular

14actions that they have taken have changed over time, but

15the same intent resurfaces. And we've engaged in an

16ongoing process of identifying and preventing those


18Dating back to the late 1980s and early 1990s,

19we brought cases involving local MLSs that were refusing

20to list houses that were being sold under "exclusive

21agency" contracts, or were treating such listings on

22disadvantageous terms. The underlying MLS rules were a

23form of private agreement, and we thought the agreements

24were anti-competitive on that particular point. We

25obtained a number of consents against that

Page 264

1discriminatory treatment.

2Since that time, the FTC has continued to be

3active in enforcement in the real estate area, in the

4area of enforcement. In the last ten years, between

51995 and 2005, we have conducted a total of 22 real

6estate related matters. These include a mix of

7investigations, cases, advisory opinions and advocacies,

8but most were investigations. Not all investigations

9led to filed cases, of course, but some did.

10In 1995, for example, we obtained a consent

11order from the Port Washington Real Estate Board. That

12order prohibited restrictions on the use of exclusive

13agency listings, restrictions on holding open houses or

14using "for sale" signs, restrictions on advertising free

15services such as free appraisals, and similar matters.

16So, we've maintained a continuous monitoring presence in

17the industry.

18More recently, efforts to burden reduced-service

19brokers have broadened from MLS rules to state

20governmental action. There's nothing improper about an

21industry advocating restrictive policies to the

22government, of course. However, such policies aren't

23always in the public interest either. When asked for

24their views, the antitrust agencies have sometimes

25pointed out what we see as the public cost of these

Page 265


2Earlier this year, for example, the FTC and the

3DOJ jointly sent advocacy letters to the governors or

4real estate commissions of three states, Texas, Missouri

5and Alabama. The letters urged those jurisdictions not

6to adopt proposed "minimum service" rules. State

7authorities haven't been as responsive to our advocacy

8letters as we might wish, but that's another story.

9Just last week, we sent a fourth letter to Michigan, and

10perhaps now our fortunes will turn.

11Our current law enforcement investigations,

12unlike our advocacy letters, are, of course, not public;

13however, I think it's safe to say that we are continuing

14to look for possible anti-competitive agreements. In

15particular, we're looking for agreements that are

16intended to exclude new entry by brokerage firms that

17use new, more responsive, lower-cost business models.

18Problematic agreements could take any of several

19forms, but two clear areas of focus include MLS rules

20that put cut-rate brokers at some unwarranted

21disadvantage in their listings, and conduct aimed at

22improperly punishing or deterring advertisements that

23inform the public of the availability of reduced-cost


25 Now, let me end these short remarks by

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1emphasizing that we recognize that most real estate

2brokers are not engaged in illegal agreements, and we

3applaud the essential and highly valuable services that

4they provide. We offer our own services in helping them

5devise new means of selling houses that respond to

6consumer demands and also avoid antitrust entanglements.

7That seems to be one of the benefits of exercises such

8as this workshop, and we will continue to look forward

9towards working with you on this.

10Let me invite my colleague, Bob Kramer, who's

11the Director of Operations at the Antitrust Division of

12the Department of Justice, to the podium.

13MR. KRAMER: Thank you, Susan.

14I can be brief, in part because Susan really

15fully and adequately covered the collective advocacy

16that our agencies do in the real estate industry, and I

17would like to emphasize that it is a collective activity

18that we cooperate with each other on, and I'll shy away

19from discussion of cases, because we are in litigation

20right now, and that wouldn't really be appropriate.

21So, on the Department's behalf, I would like to

22thank the industry participants, the scholars, the

23consumer representatives and the regulators who took the

24time to be here today on the panels and to share their

25 perspectives with us. Their ideas about and analyses of

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1competition in the real estate industry sparked vigorous

2discussions that we've heard today. I had a great time

3sitting here today and listening to the panels. I found

4it highly instructive.

5I'd also like to thank you in the audience for

6your active participation. I'd like to thank the FTC

7for helping in sponsoring this event and for the use of

8this conference facility. As the Acting Assistant

9Attorney General stated this morning, although the

10Department of Justice and the FTC have taken positions

11on some of the issues discussed today, the purpose of

12this workshop is to involve others in the debate by

13providing a forum in which interested parties can

14discuss these issues with differing points of view. As

15the large turnout and the lively audience participation

16have demonstrated, I think we have succeeded in

17promoting dialogue about competition in an industry so

18very important to American consumers.

19Thank you for coming. Have a safe trip back.


21(Whereupon, at 5:09 p.m., the workshop was





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1C E R T I F I C A T I O N O F R E P O R T E R




5DATE: OCTOBER 25, 2005

6I HEREBY CERTIFY that the transcript contained

7 herein is a full and accurate transcript of the notes

8taken by me at the hearing on the above cause before the

9FEDERAL TRADE COMMISSION to the best of my knowledge and



12DATED: 11/8/05






18C E R T I F I C A T I O N O F P R O O F R E A D E R

19I HEREBY CERTIFY that I proofread the transcript

20for accuracy in spelling, hyphenation, punctuation and





Updated June 25, 2015

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