Antitrust victims: consumers, innovators, traditional industry suffer

May 11, 2005

Behind the charges of real estate antitrust

By Jessica Swesey
Inman News

Editor's note: The U.S. Justice Department is clearly determined to take on the Realtor community, stepping up its activity relating to alleged antitrust practices within the real estate industry. The DOJ is preparing to sue the National Association of Realtors over policies the federal agency believes will illegally restrict competition and harm online competitors, the Wall Street Journal reported today, citing lawyers close to the case. And the DOJ has been warning states not to pass policies that would curb limited-service or discount brokerage. In this special three-part report, we analyze what's happening beneath the antitrust debates. (See Antitrust victims: consumers, innovators, old industry suffer and Trustbusters surround industry.)

For more than two years, Aaron Farmer, a discount real estate broker in Texas, has fought attempts to pass a state real estate rule that he and others say would limit competition among real estate brokers and harm their business models.

He is just one of the victims in the path of antitrust claims, which have swarmed the real estate industry in recent weeks.

The rule Farmer has fought would mandate a minimum level of services all brokers must provide consumers in a real estate transaction, and it has caught the attention of the U.S. Justice Department's Antitrust Division. The DOJ says the rule would restrict competition and harm consumers, and has urged legislators in Texas and Oklahoma not to pass these so-called limited-service rules, which are spreading through the country. Illinois already passed a similar rule in August, and several other states are considering similar legislation.

At the heart of the antitrust claims is a classic debate of old versus new, in which large corporations that are firmly rooted in tradition are pitted against smaller newbies that are competing with alternative business models and lower pricing.

The real estate industry hasn't changed significantly since the advent of the multiple listing service 100 years ago. But now the Internet has spurred challenges to the status quo, and many traditional players are resisting the change. Underneath the antitrust accusations is a great divide between old and new. Federal agencies seem to be warning the traditional industry that it can't keep pushing back new competition forever.

At some point the resistance becomes anticompetitive, and the victims are consumers, innovators and the old industry alike.

In each state, the debate is similar: Realtor associations back some form of legislation they say would protect consumers by ensuring a minimum standard in situations where the broker charges a smaller fee but doesn't give the same representation as a traditional broker. Opponents – usually brokers with a limited-service model – counter that the laws are anticompetitive because they can reduce the variety of real estate business models available to consumers.

Consumers would suffer because they would have fewer options for real estate brokerage services, and would end up paying higher fees because of limits on competition, according to the DOJ and the Federal Trade Commission.

In an April letter to the Texas Real Estate Commission, the agencies argued that the proposed minimum-service rule "would force home sellers who prefer to market their house and to negotiate a transaction on their own in exchange for lower brokerage fees to purchase extra services, which necessarily raises the price of brokerage."

Not everyone wants to pay full commission to have a Realtor sell their home, and not everyone wants to brave the challenges of a full-blown for-sale-by-owner situation. Limited-service brokers have entered the market, offering these in-between home sellers the option of listing their home in the MLS while performing much of the home sale themselves, and without having to pay for full broker representation.

The DOJ and the FTC also say that consumers who prefer full-service brokerage would end up paying higher prices because of the impact of limiting overall competition. Limited-service brokers "are likely to provide a competitive constraint" on full-service brokerage pricing, the agencies stated in the letter.

Full-service brokers going after consumers who may consider using limited-service brokerage, would need to offer lower commissions or increase the service quality to win their business, the agencies noted. If limited service brokers are eliminated as a choice, "some consumers who prefer (full-service brokers) are likely to pay higher prices for real estate brokerage," they wrote.

Limited-service and discount brokers who compete on price also are victims of antitrust because they will have to eliminate one of their service offerings, which may have previously differentiated them from the rest of the heap.

In Oklahoma, Steven and Debbie Sizemore, who own The Real Estate Place, are fighting proposed minimum-service legislation in their state.

"Right now (consumers) have the opportunity to do some of the services on their own if they choose, which saves them money," Steven Sizemore said in a March interview with Inman News. "This law that's going to be passed will do away with that."

Consumers will no longer be able to pick and choose, he said, because brokers will be required to perform some services that consumers previously could do themselves.

Sizemore's brokerage offers a menu of unbundled services to choose from for a flat fee, or full-service plans for a 4.5 percent or 6 percent commission. While Sizemore said he'd like it if home sellers chose the more costly, full-service offering, the reality is that many of them select the unbundled services option.

Farmer, broker/owner of Texas Discount Realty, which offers a menu of real estate services at different prices, said most of his customers have been signing up for an additional level of service in anticipation of the new minimum service rule in his state.

"Most have been going forward with the level of service that would comply with the rule," he said, adding that the next level service they would be required to purchase means they would have to pay more money in the transaction.

The traditional full-service industry also is hurt from antitrust because it wipes out the opportunity to partner with some of these new business models. Some full-service brokerage companies might find value in offering an unbundled, limited-service option.

HomeServices of Iowa recently opened a flat-fee brokerage, EquiSave, to target a portion of the market they previously were missing out on. That type of innovation is vulnerable in the face of regulatory attempts to shut off similar business models.

Also, the traditional industry suffers in the end because consumers become aware of attempts to limit their choices, which leaves a bad taste in their mouth. They may end up viewing traditional companies as anti-consumer.

Copyright 2005 Inman News

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