How Come We Still Pay This Man 6%?
Commissions haven't come down in 50 years. Regulators are finally asking why.
(MONEY Magazine) – Most real estate brokers charge sellers the same commissions that were being charged in the Eisenhower era. Oh, they'll tell you their rates are negotiable, but getting them to actually negotiate is easier said than done. Capitalism, though--meaning price competition in the form of commission discounts and rebates--may finally be coming to the real estate business, in part courtesy of the U.S. Justice Department.
In March, the department's antitrust division sued the Kentucky Real Estate Commission, alleging that the state's prohibition against agents offering rebates on their commissions violates antitrust laws. What happens there could affect how houses get sold around the country.
Kentucky is one of 11 states that ban rebates. Other states restrict what form rebates can take. (Some discounters offer things like frequent-flier miles or gift certificates.) The feds say Kentucky's rebate ban costs consumers perhaps "several thousand dollars" per transaction.
"We don't have the authority to change the law by ourselves," says Lee Harris, the commission's general counsel. "It's up to the legislature."
In its complaint, the Justice Department cited a survey by the Kentucky commission in which brokers were asked their reasons for supporting the rebate ban. "If we give rebates and inducements, it would get out of control, and all clients would be wanting something," responded one broker. Another commented, "I think this would just take money right out of our pocket." Heaven forbid.
» FIGHTING FEE-FOR-SERVICE Elsewhere, in April, the Justice Department sent a letter to Oklahoma lawmakers urging them to reject a bill that would make it illegal for brokers to offer consumers no-frills fee-for-service deals--such as entering a seller's home into the multiple-listing service, an electronic marketplace that can be accessed by all agents, for a flat fee. The Department of Justice and the Federal Trade Commission sent a similar letter to the Texas Real Estate Commission, which is considering its own fee-for-service ban.
Doug Miller, the legislator who introduced the Oklahoma bill and who is a real estate agent himself, believes brokers are shirking their responsibilities if all they're doing is putting a home on the MLS. He denies that his bill is an attempt to protect full-commission agents from competition. "Nobody wants to put the discounters or whatever you want to call them out of business," Miller says.
» TULSA BOYCOTT? Meanwhile, as we first reported in April on Money.com, the Justice Department's antitrust division is investigating the tactics that full-commission brokers in Tulsa have allegedly used against discounters. According to a copy of a Justice Department subpoena obtained by MONEY, investigators are seeking information on "possible anticompetitive conduct in the provision of real estate services in the Tulsa area." Investigators seem to be focusing on full-commission brokers' alleged refusal to show home-buying clients properties listed in the MLS by discount real estate agents. A Justice Department spokeswoman confirmed the existence of the investigation but declined to provide details. Al Unser, executive director of the Greater Tulsa Association of Realtors, says his group is cooperating.
Former Tulsa discount agent J.D. Smith believes many full-commission brokers wouldn't show his listings. He says he was interviewed twice by the feds. While Smith welcomes the investigation, he adds that it comes about a year too late for him. With his realty business on the brink of ruin, Smith recently abandoned discounting and went back to charging 6%. "In one week," Smith says, "I've had more showings and more offers from other realtors than I had in the previous two months."