Protectionist. That’s the ugly word that comes to mind with respect to a new law in Tennessee that bans cash rebates to buyers and sellers in real estate transactions. Tennessee Gov. Phil Bredesen signed the ban into law this month at the behest of the Tennessee Association of Realtors and despite opposition from the U.S. Department of Justice.
The new law is but the latest salvo in an ongoing battle over real estate rebates in Tennessee and other states. While Tennessee’s new law attempts to sidestep the issue by placing a ban on only “cash rebates, cash gifts or cash prizes,” but not other inducements from the broker to the buyer, any sort of ban on rebates is all the same problematic since it serves only to protect entrenched industry interests at the expense of home buyers and new competitors.
What’s ridiculous about Tennessee’s approach is that a ban against cash rebates, gifts or prizes can’t possibly achieve any purpose as long as other noncash rebates, gifts and prizes are permitted. Why is cash verboten while large, expensive, noncash gifts presumably are allowed? In effect, buyers can’t receive cash back at closing, but they can be given use of a moving van, a new sofa or even, say, a luxury cruise or a new SUV? Where’s the sense in that? A limit on the amount of a rebate to, say, no more than 100 percent of the commission, would make more sense than a ban on a particular form of rebate.
The Justice Department has argued that Tennessee’s law protects real estate commissions from price competition and eliminates the pro-consumer benefits of actions taken by the state’s own real estate commission to settle the matter with the federal agency. As a DOJ litigator clearly explained in a letter to the governor, a ban on rebates eliminates home buyers’ only opportunity to negotiate the amount of the commission they indirectly pay for real estate services.
Real estate agents deserve an equitable opportunity to earn a fair market rate of compensation for their services. But a ban on rebates excludes the buyer from the negotiation that determines how much that fair market rate should be. In effect, only the seller negotiates the commission, which pays for services rendered to the buyer as well as the seller. Rebates give the buyer a say in those negotiations.
In theory, the buyer’s participation needn’t necessarily result in lower commissions. Yet either way, whatever happens in practice should be up to the agents who provide the services and the buyers who receive those services to decide without the interference of an anticompetitive state law. The state shouldn’t deny agents who want to rebate a portion of their commission to the buyer the right to do so.
As if that meddlesome outcome weren’t egregious enough, a cash rebate ban also seems purposefully designed to discourage price competition among brokerage companies since newer business models that capitalize on the opportunity to offer buyer rebates may choose not to offer services in states where those rebates are illegal. Again, that’s protectionist and anticompetitive on an even larger scale.
A spokesperson for the Tennessee Association of Realtors reportedly said that the new law simply affirms longstanding practices in the state. That may be the case, but the fact that such practices are longstanding doesn’t mean they benefit home buyers and sellers. Nor does it mean they’re not protectionist and anticompetitive, especially in an industry that has a well-known history of anticompetitive practices.
The Realtors’ opposition to rebates isn’t surprising since the ban restricts a form of price competition and supports the popular myth of a “level-playing field,” which again is an anticompetitive stance. This myth — that marketplace constraints should equalize all competitors — benefits the weakest business models at the expense of new approaches that may be a proverbial better mousetrap. Brokers who want to compete on price because they’re able to offer comparable services more efficiently than their competitors do shouldn’t be denied that opportunity.
Other states including West Virginia, South Dakota and Kentucky have seen the wisdom of the DOJ’s position on this issue and reversed anticompetitive rules that restricted real estate rebates. Tennessee should rethink this untenable position and follow suit.
Marcie Geffner is a real estate reporter in Los Angeles.
Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.