Preview
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
EXHIBIT 43
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
F Consumer Federation of
1620 Eye Street, NW, Suite 200, Washington, DC 20006 www.consumerfed.org
HOW THE REAL ESTATE CARTEL HARMS CONSUMERS
CONSUMERS CAN PROTECT THEMSELVES
Stephen Brobeck and Patrick Woodall
June 2006
Introduction
Traditional real estate brokers perform a useful coñsumer service in
facilitating
"system"
sale of houses and land. Moreover, they have established a that is v
home buyers and sellers.
Unforhanately, these traditional brokers also act as a price-setting
cartel that
"fixed"
opportunities to charge a commission of either 6% or 7%, depending
"double-dip"
estate market. Furthermore, in order to increase the chances of the
the entire cc--dssion - often do not represent the
collecting they adequately
clients in
searchiñg for buyers or houses, or in
securing the best prices on these
for sellers, lowest for buyers.
"system,"
This report explains how consumers are disadvantaged by the current
serves the interests of traditional brokers, what reforms are necessary, and what
to protect themselves. It is based on information from dozens of real estate profess
hundreds of articles in journals, real estate publications, and the general press.
How Consumers Are Disadvantaged
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
Today, faced with more critical stories in the press, federal agency scrutiny, and home sellers who
think broker compensation is excessive, traditional brokers are struggling to maintain targeted
commission rates and the opportunity to collect this entire commission by serving as the sole
broker in the sale of a home. These related goals - the 6% or 7% commission and the
maintaining
"double-dip" -
chance of a ultimately explain almost all of a cockamamie brokerage system that
traditional brokers are trying to maintain, for example, through the passage of anti-competitive
anti-rebate and minimum service laws.
Can across-the-board 6% or 7% commissions be justified? We respond with a series of questions
that suggest there is not one shred of a justification for this fixed price.
• Do all brokers offer services of equal value? Should novice brokers who have just
exactly
received their license routinely charge the same prices of highly skilled brokers who have
been practicing for decades? Should listing brokers who just list houses on a multiple listing
service receive the same compensation as those who look aggressively for buyers? Should
buyer brokers who work hard to find the best house for a client receive the same
compensation as those who just show their own listings or those of their firm? Should these
brokers who persuade buyers to purchase their listings receive twice as much compensation as
those who split the commission with a second broker?
• Should facilitators (often called "transactional brokers"), who do not represent the financial
interests of either sellers or buyers, receive the same compensation as agents who agree to
serve the interests of either party?
• Are brokerage services on a sale of an $800,000 house worth four times as much as these
services on the sale of a $200,000 house?
"double-dipping"
• Are the services of brokers worth the money? Does a broker deserve, for
instance, $24,000 compensation on a sale of a $400,000 house? Are these services worth far
more than the value of many new cars or complex, technology-dependent surgery by highly
trained medical specialists?
• are comparable brokerage services offered in other developed countries
Why economically
much less expensively than in the United States? Why can brokers in those countries do well
by charging 2-4% commissions or much lower fixed fees?
A couple of industry reports suggest that the average commission paid is closer to 5%. But this is
because home sellers are beginning to negotiate price with traditional brokers, who frequently
agree to give up one percent of the commission on the sale of expensive houses. Regardless,
traditional brokers still work hard to maintain uniform 6% or 7% commissions.
2
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
Representation of Financial Interests: Do brokers represent the financial interests of their
clients? Do they seek to gain the highest price for sellers and the lowest price for buyers? Until
the early 1990s, there existed an almost universal sub agency system in which brokers, even those
working solely with buyers, were legally obligated to represent the interests of sellers.
When this sub agency system, in which brokers working with buyers were legally obligated to
pass on information disadvantageous to their clients to sellers, was exposed through press
coverage, it collapsed almost overnight. But traditional brokers then were confronted with the
challenge of representation in a double-dip situation. How could they be the sole broker involved
in a sale yet represent the financial interests of both seller and buyer?
In an effort to resolve this dilemma, traditional brokers used their huge influence with state real
estate commissions and legislatures to weaken the legal concept of broker representation to the
agents"
point where they now can frequently serve as "dual collecting an entire commission but
representing the financial interests of neither buyer nor seller. Dual agency, where real estate
- broker," "facilitator,"
salespeople go by different names in different states "transactional or
agent" -
"designated are most commonly used is a nonsensical concept since there is no way a
broker can represent the financial interests of both seller and buyer. To begin to understand the
complexity of what has happened to agency, see the excellent article by Ann Morales Olazábal in
the 2003 issue of the Harvard Journal on Legislation.
The result of the watering down of the concept of agency, in which brokers used to always
represent the financial interests of seller clients, is that many home sellers and buyers who think
they are receiving this representation in fact are not. That is especially the case with brokers who
listings" double-
are able to "sell their own or even those of their firm. Most home sellers, whose
"agent"
dipping brokers end up facilitating a sale, are probably not aware that their is not
representing their financial interests in this sale.
In a double-dip situation, buyers are naturally less likely to assume that the broker involved is
representing their financial interests. Yet some buyers, confused by the whole situation, disclose
potentially damaging information to brokers who in fact remain as fiduciary agents to their seller
clients.
Incomplete Search for Houses or Buyers: The preoccupation, even obsession, of many
traditional brokers with the double-dip also motivates many to try to limit property searches to
their own listings, or failing that, to those of their firms. In the first instance, they retain the entire
commission; in the second, they realize varying benefits, which range from financial
considerations to preferential treatment by the firm, that they do not receive if they deal with
brokers from other firms.
Typically, traditional brokers with buyer clients will try to promote their own listings. A decade
ago, this was much easier because most of these clients had not attempted their own internet search
3
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
of properties. But even today, most traditional brokers will still look for opportunities to sell their
own listings, thus getting the double-dip.
Traditional brokers with seller clients may not advertise properties fully in order to increase
chances of the double-dip. They may delay for a few days listing the property on the local
multiple listing service, giving them an opportunity to find a buyer who does not have their own
broker. They may also deny nontraditional brokers equal access to multiple service listings
out,"
through the practice of "opting in which they are aided and abetted by multiple listing
services usually controlled by traditional brokers. In particular, they may try to limit access to
their listings by internet-based or fee-only brokers.
How Brokers Try to Maintain Their Price-Setting Cartel
Traditional brokers have structured their industry and captured its regulation in ways that
maximize their chances of maintaining uniform 6% or 7% commissions in local markets. Five
factors are important here - seller-paid discrimination against
especially commissions,
nontraditional brokers and other service providers, control of listing services, lack of consumer
knowledge and flexibility, and regulation controlled by the industry.
Seller-Paid Commissions: In the current system, sellers usually ostensibly pay the full
commission. In reality, a portion of that commission is added to the sale price of the home so that
the seller and buyer both end up paying a portion of the commission. This system helps traditional
brokers maintain high commissions through the listing of commission splits.
Typically, on either a 5% or 6% commission, 3% will be offered to brokers with buyer clients, and
that commission split is disclosed to brokers on real estate firm and multiple listing service
databases. This listing of the 3% split, of which buyers are rarely aware, then acts as a powerful
force to discourage lower splits of 2% or even 1% because listing brokers, and their sellers, fear
that properties carrying these lower splits will not be shown. If sellers and buyers each separately
negotiated compensation with their brokers, uniform 5-6% commissions would quickly disappear.
Discrimination Against Nontraditional Brokers: Traditional brokers not only continue to
oppose separate buyer and seller compensation but also have vigorously promoted state anti-rebate
laws which prevent brokers working with buyers from rebating a portion of the 3% commission
split to their clients. Despite criticism and intervention by the U.S. Department of Justice (DOJ),
eleven states still maintain these anti-rebate statutes. As a result, discount brokers are prevented
from competing on the basis of price with other brokers who have buyer clients.
Largely because of recent DOJ initiatives, we are not aware of states beyond the eleven that seem
to be seriously considering passing anti-rebate laws. Moreover, West Virginia and South Carolina
have recently effectively rescinded their anti-rebate statutes. However, traditional brokers are now
pushing less controversial minimum service laws and regulations to discourage competition which
4
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
threatens 6-7% commissions. In their most blatant form, these laws mandate full-service
brokerage services, thus making it difficult for internet-based or other limited service firms to
function because of requirements such as the maintenance of local offices or the showing of
properties in person. Ten states have enacted minimum services laws or regulations which restrict
nontraditional brokers.
There are also many other more subtle forms of discrimination against exclusive buyer brokers,
"informal"
online brokers, and fee-only brokers. Most frequently, this discrimination takes the
form of traditional brokers discouraging clients from working with nontraditional brokers, their not
listings of these or their access to properties difficult for rebaters or fee-
showing brokers, making
brokers. This discrimination benefits clients - its objective is the maintenance of 6%
only rarely
or 7% commissions.
Listing Services: A key factor in traditional brokers being able to maintain high, fixed
commissions is their domination of home services - the web-based listings of
listing specifically
large firms and those of unregulated multiple listing services, which aggregate listings in an area.
Since these databases are the ones that include most listings - a website
only Realtor.com,
controlled traditional carries about four-fifths of these listings nationwide - most
by brokers,
sellers want their houses listed there. But it is this monopolization of listings that allows
traditional brokers to support 6-7% commissions and double-dipping.
Most importantly, most listings of the larger firms carry 5-7% commissions, typically with 3-3½%
commission splits. Yet, home buyers will not have access to this information about the splits, so
they cannot check to see whether their broker is steering them away from houses carrying lower
splits.
In addition, some multiple listing services segregate the home listings of nontraditional brokers so
that they receive second-class treatment. For example, they might display these listings at the
bottom or exclude them unless a hidden box is checked. For those who might think this a trivial
issue, remember the huge controversy about screen placement of flights which competed with
those of United and American in the dominant databases they maintained and were used by most
travel agents.
The control of all these dominant listing services by traditional brokers allows them to restrict full
access to those buyers who are clients of brokers. For example, usually a buyer cannot obtain
information about the original sales price, days on the market, and past sales of comparable houses
for listings in a firm's database, or the local multiple listing service, without first signing an
exclusive agreement (usually 2-4 months) with a broker from that firm. This control also permits
exclusion of listings by sellers trying to sell their homes themselves, sometimes even with advice
from a nontraditional broker.
Lack of Consumer Knowledge: Consumers purchase homes very infrequently, so do not have
much if any first-hand experience to help them utilize brokers wisely (or sell themselves).
5
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019
Moreover, this purchase involves much complexity relating to the saleability of the house, the
features of the and brokerage services. It is difficult even for well-
mortgage, ancillary services,
educated, sophisticated consumers to understand and make sensible decisions about all these
products and services.
First-time homeowners tend to know the least about these services and to be the most likely to
trust real estate brokers implicitly. But in some ways, the challenge facing existing homeowners
who are trying to sell and buy at the same time is much greater. These consumers, who are often
in the middle of a major life transition, are usually preoccupied with the timing of both sales.
They fear having either to pay off two mortgage loans or to arrange a transitional rent with the
prospect of two moves. These homeowners feel so dependent on brokers that they often are
insensitive to high, fixed commissions and other anti-competitive practices. All these factors help
explain why consumers do not express as much dissatisfaction with real estate brokers as, say,
used car dealers.
However, even fairly sophisticated consumers unworried about matching sale and purchase have
difficulty understanding brokerage services because of the abysmal
Preview
FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 EXHIBIT 43 FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 F Consumer Federation of 1620 Eye Street, NW, Suite 200, Washington, DC 20006 www.consumerfed.org HOW THE REAL ESTATE CARTEL HARMS CONSUMERS CONSUMERS CAN PROTECT THEMSELVES Stephen Brobeck and Patrick Woodall June 2006 Introduction Traditional real estate brokers perform a useful coñsumer service in facilitating "system" sale of houses and land. Moreover, they have established a that is v home buyers and sellers. Unforhanately, these traditional brokers also act as a price-setting cartel that "fixed" opportunities to charge a commission of either 6% or 7%, depending "double-dip" estate market. Furthermore, in order to increase the chances of the the entire cc--dssion - often do not represent the collecting they adequately clients in searchiñg for buyers or houses, or in securing the best prices on these for sellers, lowest for buyers. "system," This report explains how consumers are disadvantaged by the current serves the interests of traditional brokers, what reforms are necessary, and what to protect themselves. It is based on information from dozens of real estate profess hundreds of articles in journals, real estate publications, and the general press. How Consumers Are Disadvantaged FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 Today, faced with more critical stories in the press, federal agency scrutiny, and home sellers who think broker compensation is excessive, traditional brokers are struggling to maintain targeted commission rates and the opportunity to collect this entire commission by serving as the sole broker in the sale of a home. These related goals - the 6% or 7% commission and the maintaining "double-dip" - chance of a ultimately explain almost all of a cockamamie brokerage system that traditional brokers are trying to maintain, for example, through the passage of anti-competitive anti-rebate and minimum service laws. Can across-the-board 6% or 7% commissions be justified? We respond with a series of questions that suggest there is not one shred of a justification for this fixed price. • Do all brokers offer services of equal value? Should novice brokers who have just exactly received their license routinely charge the same prices of highly skilled brokers who have been practicing for decades? Should listing brokers who just list houses on a multiple listing service receive the same compensation as those who look aggressively for buyers? Should buyer brokers who work hard to find the best house for a client receive the same compensation as those who just show their own listings or those of their firm? Should these brokers who persuade buyers to purchase their listings receive twice as much compensation as those who split the commission with a second broker? • Should facilitators (often called "transactional brokers"), who do not represent the financial interests of either sellers or buyers, receive the same compensation as agents who agree to serve the interests of either party? • Are brokerage services on a sale of an $800,000 house worth four times as much as these services on the sale of a $200,000 house? "double-dipping" • Are the services of brokers worth the money? Does a broker deserve, for instance, $24,000 compensation on a sale of a $400,000 house? Are these services worth far more than the value of many new cars or complex, technology-dependent surgery by highly trained medical specialists? • are comparable brokerage services offered in other developed countries Why economically much less expensively than in the United States? Why can brokers in those countries do well by charging 2-4% commissions or much lower fixed fees? A couple of industry reports suggest that the average commission paid is closer to 5%. But this is because home sellers are beginning to negotiate price with traditional brokers, who frequently agree to give up one percent of the commission on the sale of expensive houses. Regardless, traditional brokers still work hard to maintain uniform 6% or 7% commissions. 2 FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 Representation of Financial Interests: Do brokers represent the financial interests of their clients? Do they seek to gain the highest price for sellers and the lowest price for buyers? Until the early 1990s, there existed an almost universal sub agency system in which brokers, even those working solely with buyers, were legally obligated to represent the interests of sellers. When this sub agency system, in which brokers working with buyers were legally obligated to pass on information disadvantageous to their clients to sellers, was exposed through press coverage, it collapsed almost overnight. But traditional brokers then were confronted with the challenge of representation in a double-dip situation. How could they be the sole broker involved in a sale yet represent the financial interests of both seller and buyer? In an effort to resolve this dilemma, traditional brokers used their huge influence with state real estate commissions and legislatures to weaken the legal concept of broker representation to the agents" point where they now can frequently serve as "dual collecting an entire commission but representing the financial interests of neither buyer nor seller. Dual agency, where real estate - broker," "facilitator," salespeople go by different names in different states "transactional or agent" - "designated are most commonly used is a nonsensical concept since there is no way a broker can represent the financial interests of both seller and buyer. To begin to understand the complexity of what has happened to agency, see the excellent article by Ann Morales Olazábal in the 2003 issue of the Harvard Journal on Legislation. The result of the watering down of the concept of agency, in which brokers used to always represent the financial interests of seller clients, is that many home sellers and buyers who think they are receiving this representation in fact are not. That is especially the case with brokers who listings" double- are able to "sell their own or even those of their firm. Most home sellers, whose "agent" dipping brokers end up facilitating a sale, are probably not aware that their is not representing their financial interests in this sale. In a double-dip situation, buyers are naturally less likely to assume that the broker involved is representing their financial interests. Yet some buyers, confused by the whole situation, disclose potentially damaging information to brokers who in fact remain as fiduciary agents to their seller clients. Incomplete Search for Houses or Buyers: The preoccupation, even obsession, of many traditional brokers with the double-dip also motivates many to try to limit property searches to their own listings, or failing that, to those of their firms. In the first instance, they retain the entire commission; in the second, they realize varying benefits, which range from financial considerations to preferential treatment by the firm, that they do not receive if they deal with brokers from other firms. Typically, traditional brokers with buyer clients will try to promote their own listings. A decade ago, this was much easier because most of these clients had not attempted their own internet search 3 FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 of properties. But even today, most traditional brokers will still look for opportunities to sell their own listings, thus getting the double-dip. Traditional brokers with seller clients may not advertise properties fully in order to increase chances of the double-dip. They may delay for a few days listing the property on the local multiple listing service, giving them an opportunity to find a buyer who does not have their own broker. They may also deny nontraditional brokers equal access to multiple service listings out," through the practice of "opting in which they are aided and abetted by multiple listing services usually controlled by traditional brokers. In particular, they may try to limit access to their listings by internet-based or fee-only brokers. How Brokers Try to Maintain Their Price-Setting Cartel Traditional brokers have structured their industry and captured its regulation in ways that maximize their chances of maintaining uniform 6% or 7% commissions in local markets. Five factors are important here - seller-paid discrimination against especially commissions, nontraditional brokers and other service providers, control of listing services, lack of consumer knowledge and flexibility, and regulation controlled by the industry. Seller-Paid Commissions: In the current system, sellers usually ostensibly pay the full commission. In reality, a portion of that commission is added to the sale price of the home so that the seller and buyer both end up paying a portion of the commission. This system helps traditional brokers maintain high commissions through the listing of commission splits. Typically, on either a 5% or 6% commission, 3% will be offered to brokers with buyer clients, and that commission split is disclosed to brokers on real estate firm and multiple listing service databases. This listing of the 3% split, of which buyers are rarely aware, then acts as a powerful force to discourage lower splits of 2% or even 1% because listing brokers, and their sellers, fear that properties carrying these lower splits will not be shown. If sellers and buyers each separately negotiated compensation with their brokers, uniform 5-6% commissions would quickly disappear. Discrimination Against Nontraditional Brokers: Traditional brokers not only continue to oppose separate buyer and seller compensation but also have vigorously promoted state anti-rebate laws which prevent brokers working with buyers from rebating a portion of the 3% commission split to their clients. Despite criticism and intervention by the U.S. Department of Justice (DOJ), eleven states still maintain these anti-rebate statutes. As a result, discount brokers are prevented from competing on the basis of price with other brokers who have buyer clients. Largely because of recent DOJ initiatives, we are not aware of states beyond the eleven that seem to be seriously considering passing anti-rebate laws. Moreover, West Virginia and South Carolina have recently effectively rescinded their anti-rebate statutes. However, traditional brokers are now pushing less controversial minimum service laws and regulations to discourage competition which 4 FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 threatens 6-7% commissions. In their most blatant form, these laws mandate full-service brokerage services, thus making it difficult for internet-based or other limited service firms to function because of requirements such as the maintenance of local offices or the showing of properties in person. Ten states have enacted minimum services laws or regulations which restrict nontraditional brokers. There are also many other more subtle forms of discrimination against exclusive buyer brokers, "informal" online brokers, and fee-only brokers. Most frequently, this discrimination takes the form of traditional brokers discouraging clients from working with nontraditional brokers, their not listings of these or their access to properties difficult for rebaters or fee- showing brokers, making brokers. This discrimination benefits clients - its objective is the maintenance of 6% only rarely or 7% commissions. Listing Services: A key factor in traditional brokers being able to maintain high, fixed commissions is their domination of home services - the web-based listings of listing specifically large firms and those of unregulated multiple listing services, which aggregate listings in an area. Since these databases are the ones that include most listings - a website only Realtor.com, controlled traditional carries about four-fifths of these listings nationwide - most by brokers, sellers want their houses listed there. But it is this monopolization of listings that allows traditional brokers to support 6-7% commissions and double-dipping. Most importantly, most listings of the larger firms carry 5-7% commissions, typically with 3-3½% commission splits. Yet, home buyers will not have access to this information about the splits, so they cannot check to see whether their broker is steering them away from houses carrying lower splits. In addition, some multiple listing services segregate the home listings of nontraditional brokers so that they receive second-class treatment. For example, they might display these listings at the bottom or exclude them unless a hidden box is checked. For those who might think this a trivial issue, remember the huge controversy about screen placement of flights which competed with those of United and American in the dominant databases they maintained and were used by most travel agents. The control of all these dominant listing services by traditional brokers allows them to restrict full access to those buyers who are clients of brokers. For example, usually a buyer cannot obtain information about the original sales price, days on the market, and past sales of comparable houses for listings in a firm's database, or the local multiple listing service, without first signing an exclusive agreement (usually 2-4 months) with a broker from that firm. This control also permits exclusion of listings by sellers trying to sell their homes themselves, sometimes even with advice from a nontraditional broker. Lack of Consumer Knowledge: Consumers purchase homes very infrequently, so do not have much if any first-hand experience to help them utilize brokers wisely (or sell themselves). 5 FILED: WESTCHESTER COUNTY CLERK 05/14/2019 05:40 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 434 RECEIVED NYSCEF: 05/14/2019 Moreover, this purchase involves much complexity relating to the saleability of the house, the features of the and brokerage services. It is difficult even for well- mortgage, ancillary services, educated, sophisticated consumers to understand and make sensible decisions about all these products and services. First-time homeowners tend to know the least about these services and to be the most likely to trust real estate brokers implicitly. But in some ways, the challenge facing existing homeowners who are trying to sell and buy at the same time is much greater. These consumers, who are often in the middle of a major life transition, are usually preoccupied with the timing of both sales. They fear having either to pay off two mortgage loans or to arrange a transitional rent with the prospect of two moves. These homeowners feel so dependent on brokers that they often are insensitive to high, fixed commissions and other anti-competitive practices. All these factors help explain why consumers do not express as much dissatisfaction with real estate brokers as, say, used car dealers. However, even fairly sophisticated consumers unworried about matching sale and purchase have difficulty understanding brokerage services because of the abysmal