Realtor Community Under Investigation by the Feds by Attorney William Bronchick

Until recently, the only option a seller had to engage a real estate broker was to pay a fixed-rate commission. Well, not really... commission are not fixed by law, they are fixed by custom. Or, are they really fixed at all? That's the question the Justice Department is looking into.

Price fixing has been illegal in the United States for a long time. But, as a customary fashion, an industry often ends up looking like a "fix" because all the players want to look competitive. Hence, the "standard" 6% listing fee. Until recently, virtually every real estate broker quoted 6%, and if a broker advertised less than 6%, the community was in shock and often shunned him.

Buyer's agency is also something relatively new, that is, an agent who represents the buyer. If the buyer's agent brings a buyer to the table and the property is listed by a different agent, then the 6% commission is split, generally 50/50 or something like 2.8% to the buyer's agent and 3.2% to the listing agent. Since most buyers are procured by the buyer's agent, the listing agent's role has been greatly diminished in recent years.

So, one day sellers started asked the question, "what do I need a listing agent for?" The answer to that question is simple... you need to get your property on the Multiple Listing Service (MLS), otherwise you aren't likely to get it sold. After all, most buyer's agents look to the MLS for properties for their clients.

Many listing agents smartened up by offering a limited-service product for less. The flat-fee broker simply places your property on the MLS for a flat fee, rather than a percentage of the sales price. In some markets, some agents are doing it for as little as $250. The buyer's agent still gets 2.8% for bringing the buyer to the table, but the seller must coordinate the showings with the buyer's agent, review the purchase offer and complete the sale without the assistance of the listing agent. The fact is, most real estate investors are (or should be) savvy enough to use do all of these tasks without the assistance of an agent.

SIDE NOTE: AGENT VS. BROKER VS. REALTOR. In most states, one must be licensed as a broker to list property.  An agent works under a licensed broker. A realtor is a broker or agent who is a member of the National Association of Realtors. Most agents and brokers are Realtors, as well as members of a local board. Throughout this article, I use the term "broker", "realtor" and "agent" synonymously.

So, what's the problem? If you want full service, you pay 3.2%, and if you want no service, you pay just a few hundred bucks and do the work yourself. Sounds much like the stock brokerage industry, doesn't it?

Well, it seems that the "gold old boy" network doesn't much like the discounters. I don't blame them, because it hurts their business. But price fixing is illegal, isn't it? That's what the Justice Department is looking into. According to CNN Money, a federal investigation alleges that full service agents in Tulsa Oklahoma engaged in "boycotting", that is, refusing to show their buyers properties that were listed by discount listing agents. The Attorney General has also sent letters to lawmakers in Oklahoma and Texas, urging them to reject proposals that would effectively prohibit brokers from engaging in discount fee services. These propsed laws require brokers to provide certain services that discount brokers would normally forego.

The Realtor community claims that the public is being protected by requiring agents to provide these services because the consumer might make costly mistakes doing it on this own. Sounds reasonable, but why do the Feds allow discount stock brokers? The answer, to me, is simple: don't treat consumers like babies, let them make their own decisions. Sure, many consumers will screw it up, but that's their choice. The state bars, backed by lawyers, tried to outlaw software programs, do-it-yourself kits and legal form publishers, but the consumers won the battle. In reality, the consumer is more likely to make mistakes doing their own legal documents, but that's their choice. A smart consumer who does not feel comfortable preparing his own living trust will pay a lawyer to do it.

Personally, I'm all for the discount listing services, especially for investors who know what they are doing. If a homeowner does not feel comfortable using a flat-fee, no service broker, they are free to pay the full commission to get the full service.