Saturday
November 22, 2014

Industry Competition: The Rough and Tumble of Real Estate

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Industry Competition: The Rough and Tumble of Real Estate

Congressional subcommittee delivers sharp rebuff to NAR’s critics.

Glenn Kelman brought his antitrust complaint to the U.S. Congress, but he didn’t walk away with much satisfaction.

Kelman told members of the House Financial Services Subcommittee on Housing and Community Opportunity in late July that his Redfin Corp., which operates in Seattle and San Francisco, has been pilloried by colleagues in real estate.

Other brokerages, he said, aren’t eager to work with his sales associates because of his company’s Internet-based business model, in which buyers conduct their own searches, fill out offers online, and receive part of the commission rebated to them if they find a home on their own.

The hearing looked at the impact of the Internet on competition in residential real estate, and Kelman’s comments aimed to bolster U.S. Department of Justice and Federal Trade Commission charges that the industry is anticompetitive. But members of Congress—who also heard testimony from NATIONAL ASSOCIATION OF REALTORS® President-elect Pat Vredevoogd Combs among others—seemed to view the matter differently.

Combs rejected the notion of an industrywide conspiracy to block new models. “NAR welcomes all professionals engaged in various aspects of the real estate industry,” she said, “and our members represent almost every conceivable business model.”

Kelman argued that some state laws prohibit his company—which he wants to grow into a national presence—from offering his commission rebates or even, in states that have minimum service laws, from operating his business model. Minimum service laws typically require brokerages to communicate offers to their clients and stand ready to help answer questions.

“We will never compete in some states unless their minimum service laws are overturned,” Kelman said in testimony he submitted to the hearing.

But to many of the subcommittee members, Kelman’s complaint was a classic case of sour grapes, a call for help after being knocked about by the rough and tumble of competition.

“People talk . . . they threaten. So what? They haven’t stopped you,” said Rep. Maxine Waters, D-Calif., the subcommittee’s ranking minority member.

Geoffrey Lewis, senior vice president and chief legal officer for RE/MAX International, told committee members that when his company launched, it faced a similar tough competitive environment because of its 100 percent commission structure, which in the early 1970s was still new.

“It took more than 10 years for RE/MAX to establish its business model,” said Lewis. “While we recognize the Internet has accelerated the pace of change, new business models still take time to succeed. Those businesses that complain their success has been improperly hindered . . . suffer more from impatience than they do from any alleged unfair efforts to thwart them.”

Calls for federal role

Kelman asked the subcommittee to remove obstacles his company faces by passing legislation that would authorize the FTC to monitor and preempt state minimum service laws and address NAR rules on what brokerages can do with the listing data they receive from the MLS. Kelman said the association’s MLS rules are stacked against Internet brokers because of limits on what data fields can be displayed online—like how long a home has been on the market. Those limits, NAR says, apply to all business models equally and protect confidential information that’s meant for brokers’ eyes only.

Kelman’s call to preempt state minimum service laws didn’t come out of thin air; the DOJ and FTC have been advocating against the laws for the last two years, writing letters to lawmakers in Alabama, Michigan, and Oklahoma, among other states that have passed or considered the laws, urging them not to set minimum standards. In their advocacy, the DOJ and FTC don’t call for federal preemption of the laws; rather, they ask lawmakers not to pass them, saying minimum service laws restrain alternative models.

But Kelman thinks the federal agencies’ state-by-state advocacy efforts are inadequate. “If Congress doesn’t pass a law, the DOJ will turn its attention elsewhere,” he told the committee.

Research by the Consumer Federation of America was presented at the hearing to reinforce the case for federal action. The research asserts that real estate commissioners in the lion’s share of states disproportionately comprise real estate brokers and sales associates, reducing the likelihood of these agencies doing much against the wishes of the real estate industry.

“Nearly four-fifths of all commissioners earn a living through real estate transactions,” said Stephen Brobeck, CFA executive director.

Supporters of minimum service laws say those laws are necessary to protect consumers who want to pay for less service but don’t understand all the steps or appreciate how much work and risk is involved to get a deal to closing. Nor, they say, do minimum service laws force out alternative business models, since minimum service laws require that consumers receive only basic services such as answering questions and presenting contracts, not full service.

Despite a minimum service law in Texas, “my business still takes limited-service listings as part of our unbundled menu of service model,” said Aaron Farmer, broker-owner of Texas Discount Realty in Austin. Farmer, a critic of minimum service requirements, also testified at the hearing.

In opening remarks at the hearing, House Financial Services Committee Chairman Michael Oxley, R-Ohio, told members of Congress they should continue to look into real estate competition. But the calls for federal intervention landed with a thud among the subcommittee members.

Rep. Artur Davis, D-Ala., summed up the views of many Republicans and Democrats at the hearing when he said, “I don’t see the rationale for the federal government to weigh in on these issues.”

Still, DOJ and FTC representatives, who testified in a separate panel before the subcommittee, plan to keep pressing their case against minimum service laws. “When the commission is invited to comment on [state] legislation that impacts the industry, we will offer our views as to whether the proposed law appears to benefit or harm the consumer,” said Maureen Ohlhausen, director of the FTC’s Office of Policy Planning.

Agencies vow to keep up pressure

At the same time, the two agencies are maintaining their offensive against what they say are the industry’s anticompetitive policies on the display of MLS listings on broker Web sites.

Shortly before the hearing, FTC officials announced a settlement with the Austin (Texas) Board of REALTORS® to maintain Internet display policies that treat listings the same regardless of the type of listing agreement the broker uses.

The FTC claimed that a short-lived policy of the board in 2005, which removed exclusive-agency listings from the data feed the MLS sent to brokers for advertising on their Web sites, was discriminatory. Exclusive-agency listings allow sellers to sell their house themselves with no obligation to pay commission, a type of agreement favored by limited-service brokers.

David Foster, president and CEO of the Austin board, said the rule was put into place to protect its members, because the MLS was never intended to be an advertising vehicle for unrepresented sellers but to foster cooperation among brokers. But the FTC thought otherwise.

“[The Austin board’s] Web site rules create significant roadblocks for real estate brokers to offer consumers alternatives to full-service brokerage agreements,” Jeffrey Schmidt, director of the FTC’s Bureau of Competition, said in a statement announcing the enforcement action.

The agency is looking at the policies of other boards, and officials have said other claims could be brought against those boards in the near future. “We’re looking at a pipeline of cases,” Ohlhausen told reporters at the commission’s announcement of the Austin board settlement.

The aggressive way the FTC announced the settlement rankled Austin board officials, who say the policy—which the board on its own initiative terminated after only three months because members found it confusing—wasn’t discriminatory in intent.

“We feel the FTC misrepresented the purpose of the rule,” Foster said in a statement. The FTC “implies that we are guilty of wrongdoing, which the agreement expressly contradicts.”

The DOJ has been similarly aggressive in its lawsuit against NAR for the association’s policy allowing MLS members to opt out of having their listings displayed on competing brokers’ sites if they in turn don’t advertise others’ listings on their site.

The display opt-out is among provisions the DOJ says is discriminatory on the grounds that, if Internet-based brokerage models aren’t able to post all available inventory automatically for their online customers, they’ll be at a competitive disadvantage to brokerages that maintain a brick-and-mortar office.

A motion to dismiss the lawsuit, which NAR filed at the end of 2005—on the grounds that the policy is clearly competitive, among other things—is pending in Chicago federal court.

On a philosophical basis, NAR says brokers, in consultation with sellers, must be able to decide where a listing is displayed. For the federal government to step in with a mandate that all MLS data be accessible for display on any site, including sites of companies that don’t actually list or sell real estate, would break the bonds of trust that have made the MLS such a successful cooperative venture among competitors.

“Listings are the work product of brokers and their associates, and only brokers, in consultation with their clients, should decide how these listings will be used,” said NAR President-elect Combs in her testimony before the House subcommittee. “If the federal government were to compel brokers to allow the display of their listings anywhere on the Internet, the spirit of trust that animates the MLS would be broken, and brokers could and would leave it. The MLS isn’t a public utility but a cooperative venture among brokers whose associates work very hard to acquire the listings.”

As the question of broker control makes its way through the court system, many members of Congress have already made it clear they think real estate is as competitive as an industry can be.

“There are thousands of agents in dozens of brokerages in any local market,” said Rep. John Campbell, R-Calif. “It sounds like it’s as competitive as you can get.”

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