Editor’s note: Real estate commissions once again are at the center of debate after a recent “60 Minutes” segment on online discounters and a federal report on industry competition. In this three-part series, Inman News looks at recent research on commissions, the mystery around what agents and brokers can and cannot legally discuss, and how the new discount entrants are collaborating to add pressure to price. (Read Part 1, “Critics come down on commissions” and Part 3, “Discount brokerages band together.”)
When it comes to talk about compensation for real estate brokerage services, the quick responses seem almost like a reflex for many real estate professionals.
But these responses can in some cases oversimplify the actual laws and blur the boundaries between permitted and illegal discussions. And the Internet has added a new dimension to commission talk — the growing popularity of real estate blogs and other forms of user-generated content have created new forums for discussions among real estate professionals that could carry antitrust ramifications.
“Commissions are negotiable,” some real estate professionals will say when addressing the cost of real estate services. That can be true for some companies, but not for others such as flat-fee companies that offer services for a fixed price.
While it’s also common for real estate professionals to say, “There is no 6 percent rule” for real estate commissions — referring to critics’ charges that real estate commission rates have remained largely unchanged for decades — it’s OK for a given company to charge 6 percent of the home’s selling price and only 6 percent as long as that decision was made independently and not as the product of a price-fixing scheme among competitors.
“I can’t discuss commissions,” is another possible comment about industry commission practices. That can be true or false, depending on whom real estate professionals are talking to about commissions. Commission discussions with competitors can lead to illegal price-fixing, for example, though it’s OK for real estate professionals to discuss commissions with their clients or even with other real estate professionals who work in the same office.
To avoid implicating any antitrust laws, some real estate agents and boards try to avoid commission talk, said Robert Butters, a real estate lawyer for Arnstein & Lehr LLP in Chicago who is an antitrust expert. They believe, he said, that “the safer course of action is simply not to talk about it at all, as opposed to trying to distinguish between a conversation that wouldn’t suggest the existence of (an illegal commission agreement) between one that would.”
Some real estate professionals may shy away from advertising their prices because of antitrust fears, though Butters said that there is “absolutely nothing wrong” with advertising rates for real estate services, and this is “conduct that antitrust laws and federal agencies encourage.”
He also said, “You’re not obligated to negotiate your price, if you’re offering your product at the price you think is fair. Brokers have the right as the manager and responsible person for the company to set prices for the company, and agents can be given some discretion or no discretion or perhaps a lot of discretion.”
Likewise, two agents working at the same company could agree that they’re always going to charge the same minimum price for services — and this would not be an antitrust violation because the agents are working for the same company, he said.
If commission agreements are made by agents working at two offices that are each independently owned and operated but share a common brand affiliation, for example, that would be an illegal price-fixing agreement, Butters noted, though agreements between the managers of separate offices that are under a common corporate ownership can be permitted.
Real estate trade group events, in which numerous competitors gather for meetings, can be potentially dangerous territory for antitrust violations. Butters cited the example of an alleged price-fixing case in the 1970s in which a local Realtor association’s president said that he planned to raise his company’s commission rate to 7 percent. Several other companies in the area began charging a 7 percent commission, he said, and the government filed a lawsuit.
“Chatting with your competitors and telling competitors what you’re going to do, even if (you say), ‘I don’t care what the rest of you do,’ is just really dangerous stuff.”
Knowing what competitors charge is not in itself an antitrust violation, Butters said — it’s actions to equalize pricing among competitors that violate antitrust laws.
“Just discussing prices and trending in an aggregate sense is not a violation of anything,” he said, and it’s OK to publish that sort of information. In fact, multiple listing services allow participants to view compensation information for the buyer’s side of a transaction, which can be a rough gauge of the overall commission rate.
He said he is not surprised that agents without any legal experience will choose to steer clear of some permissible forms of commission talk. “The simpler thing is just don’t talk about it at all. You don’t get hurt if you don’t ever talk about it.”
There are very limited sources for industry data on real estate commissions. Real Trends, a real estate research and information company, publishes the results of an annual survey about commission data from high-volume U.S. real estate companies but no longer publicly reports this data.
Lawrence Yun, senior economist for the National Association of Realtors, spoke as an association researcher in 2005 at a government workshop on competition in the real estate industry about commission statistics. Yun said that the Realtor trade group asked him not to study and report specific statistics on real estate commissions because “we’ll get into trouble with antitrust.”
The association offers guidelines for compliance with antitrust laws at its Web site and also publishes antitrust handbooks for Realtors and its affiliated associations and boards.
Michael Erdman, a partner with Chicago law firm Teeple Leonard & Erdman, said he can understand why the real estate industry wants to play it safe with commission talk. “It’s a charged environment — a litigious society.”
Erdman said that online discussions at forums or blogs “could be dangerous,” especially if competitors with significant market power are participating in a commission discussion. “I don’t think there’s anything wrong with letting customers and prospective customers know what you charge. But when you start getting into conversations with competitors about what you currently charge or what you may be charging in the future … I think they need to think twice.”
Still, there is a lack of understanding about what is permissible under antitrust laws, he said, citing the example of a broker in the Midwest who asked him, “Is it even OK for me to disclose my prices?”
ActiveRain, an online community of real estate professionals that features publicly accessible blogs and other content, has discouraged price discussions at the site.
Caleb Mardini, a marketing officer for ActiveRain, has advised site participants about the consequences of engaging in real estate pricing talk at the site.
Mardini stated in a May 18 posting that he spoke with an antitrust official at the U.S. Federal Trade Commission who “stated it very clearly for me. Do not discuss prices with your competitors. Anything beyond that opens you up for an investigation for possible criminal conduct.
“Mr. Roach offered a second piece of advice. He said do not sit there quietly while such a (price) discussion is going on. Make a loud demonstration of stating that you will not be a part of this conversation and then leave. I’d like you to flag the (online) post and tell us why you did so that it can get taken care of … as soon as possible,” Mardini wrote.
He also stated, “The purpose of this is to protect the community. You may (have) these discussions offline legally or not. But this is a new medium where your discussions are recorded and public. You may not be accustomed to this but what you say is permanent record here.” The post had drawn about 80 comments by Tuesday.
Ardell DellaLoggia, owner-broker for Sound Realty in Kirkland, Wash., said she received a call from ActiveRain representatives regarding some commission-related articles she posted at that site. “Their lawyers have told them to discourage commission articles,” she said.
And while it’s OK for an individual real estate professional to post an article about commissions, it’s the comments by others that can become a problem, she said. “It’s like herding cats — you can never get everyone … to understand what they can and can’t do, so it’s impossible to control the conversation.”
DellaLoggia said that while some agents and brokers refrain from any talk about commissions, she believes it would be better if more agents did make public comments about commissions — without engaging in any illegal discussions.
“Not talking about it didn’t help the consumer. Not talking about it is creating the price-fixing,” she said.
While brokers can give guidance to agents about acceptable commission rates within a given office, DellaLoggia said she has been fortunate to have flexibility in the rates she can charge at the various companies where she has worked since she entered the business in 1990. “No one has ever told me that I can’t do what I’m going to do,” she said.
But it can be common for agents within the same office to keep quiet about what the broker has allowed them to charge, she said, and there can also be secrecy about the commission-splitting arrangement that each agent has with the broker, as these levels can vary based on an agent’s experience and transaction volume.
While some companies, such as flat-fee business models, aggressively advertise the rates that they charge for services, many agents at large real estate companies do not advertise their rates to the public. This may be because other agents in the same office might react negatively if a colleague is undercutting the rates that they charge, DellaLoggia said.
And while many agents are flexible on the rates that they charge, the feeling may be that discount is “a dirty word,” she said, and “if you’re going to charge less, don’t tell anyone — just do it quietly.”
DellaLoggia said she believes that commissions will move toward a model that better reflects the time and energy that agents put into each deal, so that “there’s a different fee charged if the buyer says, ‘I want to buy that house right there.'”
She added, “We should be talking about why is the guy who took two years of your time paying the same as the guy who took two minutes. Until the discussion gets there, there will never be an answer. Until somebody gets to the point of charging a fair price for the service you need, then we’re all just playing games.”
Because real estate professionals largely keep quiet about commissions, the public can be in the dark on the subject and only the savviest of consumers may be the ones who are truly getting the best deal on real estate services, she said.
Marty Van Diest, an associate broker for RE/MAX of Wasilla in Alaska, said that most of the RE/MAX companies he has worked for allow agents to set their own commission rate.
“Our company has no guidelines that way,” he said. “We can advertise our commissions if we want to. I used to post my commissions right on my Web site.”
The Web site outlined the services he performed for various percentage-based commissions, starting at 7 percent. The lower the rate, the fewer services he would perform for clients. “I didn’t have anybody question me about it and I did that for a long time.”
Quite a few of his clients chose the 5 percent service plan, he said. He took the information off of his Web site in December, though he said he is considering whether to put the rate information back up on his site.
“When a consumer wants me to lower my commission, I tell them that I’m willing to lower my commission as long as they’re willing to accept less service.”
He also said, “A lot of agents are uncomfortable talking about commissions because they feel like the public thinks they’re paid too much, or they feel like it’s a personal thing.” Similarly, workers in other professionals may not feel comfortable in openly discussing salary, he said.
Rather than referring to low-fee real estate services as “discount brokerage,” Van Diest said it would be better to call it “consumer choice,” and he said he believes that there will be a growing number of options for real estate services and pricing.
“I think that price advertising will probably increase,” he said, noting that and “I think there will be a point where many Realtors will go more into real estate consulting to help people in transactions for specific problems rather than just list their house and sell it.
“I don’t think consumers are there yet. What has to happen and will happen slowly (is that they) will realize that — just like they do with attorneys — ‘I don’t know how to represent myself … I need someone who has done this before. How they pay for that will change, too. It may be hourly, it may be a … contingency. It’s going to be a slow education of the public.”
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