Good reasons to hate realtors

[kurt]

This is a recent article from the New Republic; I thought everyone here would enjoy it.

Realtors v. The Internet HOME PAGE by Clay Risen

The Washington, D.C., headquarters of the National Association of Realtors (NAR) sits on a narrow, triangular plot at the intersection of New Jersey Avenue and First Street, just a few blocks northwest of the Capitol.

Completed in October, the twelve-story tower is wrapped in a curtain of blue-green glass; standing across the street, one notices less the building than the sharpness with which it reflects its surroundings. And it is so narrow that, looking back at it from the intersection of New Jersey and Massachusetts Avenues, a few blocks north, one barely notices anything at all. It practically disappears--hidden in plain sight.

The same could be said for NAR itself. On one level, the Association's Washington presence is enormous. It is the second-largest political donor of all time, behind the American Federation of State, County and Municipal Employees, but well ahead of such better-known campaign heavyweights as the trial lawyers, the Teamsters, and the National Education Association.

But, unlike other lobbies, which work to ensure friendly legislation, NAR focuses its Washington efforts on ensuring that no federal legislation affecting its members passes in the first place--and that what regulation exists occurs at the state level, where local realtors exercise significant control over real estate commissions.

By and large, rules governing the real estate industry are set by the Association itself. There is no real estate equivalent of the Securities and Exchange Commission (SEC). Instead, there is only NAR--lobbyist and rule making body all in one.

NAR was founded in 1908 to crack down on fraudulent brokers by creating a standardized set of industry rules. But, over the years, it has evolved from consumer advocate to status quo bulwark, the first line of defense for an enormously profitable commission structure that nets realtors more than $60 billion a year from residential sales. Thanks to NAR, the way homes are bought and sold in the United States has changed little since the Eisenhower administration.

But, today, realtors face a new challenge: the Internet. In the late '90s, the Web radically transformed one sector of the economy after another, from travel to stocks, shifting control from the middlemen to consumers. But, in part because of NAR's power, real estate has been a holdout.

In recent years, however, the old system, in which realtors tightly controlled home listings, searches, and buying, has been confronted by a series of alternative models embodied by such companies as eRealty, ZipRealty, and Lending Tree. Experts predict that these new Internet-based business models could cut commission costs in half, saving consumers $30 billion per year.

But the counterattack has been as swift as it was predictable: Under industry pressure, NAR has developed a series of rules designed, at least implicitly, to shut newcomers out of the market and make sure the Internet reinforces, rather than undermines, the status quo.

NAR has beaten back similar challenges in the past. But, this time, its efforts have begun raising eyebrows in Washington. The Justice Department has three separate actions underway; meanwhile, Representative Mike Oxley, the Republican chair of the Financial Services Committee, has requested a Government Accountability Office (GAO) report on real estate practices, hinting that he would hold hearings after its completion.

Taken together, the possibility for federal intervention in the real estate market has never been higher. The last major unregulated market in the United States may soon come to an end--and that's good news for business and consumers.

According to the traditional model, if you want to sell your home, you go to a realtor, who takes down information about the house and posts it to the region's Multiple Listing Service (MLS), a compendium of local homes for sale, paid for and maintained by participating local realtors (there are about 800 MLSs nationwide). Buyers, through their own realtors, can then peruse the MLS.

When a sale is closed, typically the seller pays his realtor a fixed percentage--usually 6 percent--that the seller's realtor then splits with the buyer's realtor. It's an innovative scheme, and one that has worked well since it emerged in its modern form after World War II. "Can you think of any other industry where individual owners share inventory in order to sell more?" asks Blanche Evans, a columnist for Realty Times.

But the flip side to this cooperation is a system of casual collusion; realtors who offer

lower commissions often find their houses passed over by other realtors, blackballed for violating the real estate omerta. "The upside is they agree, but the downside is also that they agree," says Brad Inman, a real estate journalist and editor of Inman News, another real estate news service. "[The MLS makes] it harder for innovative, alternative business models to crack the code."

In pre-Internet days, the MLS was a thick book updated regularly, but today, it is an electronic database. This has led some entrepreneurs to challenge the system, figuring that, instead of spending time sitting down with each client to search the MLS, they could just give them access to it directly through a website. That way the buyer could have more control over what they see, while realtors, needing less time for each client, could handle more of them.

In fact, with drastically lower costs per transaction, such online operations could even offer discounted commissions--as low as 3 percent total (for a savings of about $4,500 on a $150,000 home). The logical conclusion is the Virtual Office Website (VOW), in which buyers and sellers are matched online.

"We're a real estate firm," says Eric Danziger, the president and CEO of one such firm, ZipRealty. "But we're as different from traditional real estate in terms of how we operate as Amazon was from Borders and Barnes and Noble."

Some firms also offer à la carte options, in which consumers can pick and choose which services they would like a realtor to provide; the fewer the services, the cheaper the bill. A variation on the Internet real estate model is LendingTree: Similar to its system for matching customers looking for loans with lenders online, in 2000, LendingTree set up a website where prospective buyers and sellers register an online profile -- location, price, number of bedrooms, and so on -- after which buyers can peruse the MLS; meanwhile, LendingTree sends the profile to its network of realtors, who then bid for each customer's business. LendingTree gets a referral fee, part of which it uses to cover a rebate that it sends its customers (usually about $2,000).

At the root of these new models is not just an operational transformation, but a paradigmatic one as well. For almost 100 years, the industry has looked at listings--the basic unit of all real estate transactions--as the product of the realtors themselves. "The sellers don't own their listings," says NAR's vice president for public relations, Steve Cook. "The data did not exist before the broker."

According to NAR, that makes the MLS--and regulation of it--a business-to-business issue, in which consumer concerns matter little, if at all. "You do not get to walk into Neiman Marcus and try on dresses in the stockroom," Evans says. "The MLS is the stockroom. The rest is presentation."

But the Internet, by giving consumers easy access to information, changes that calculation radically. In a 2003 paper they wrote on the real estate market for the Progressive Policy Institute (PPI), policy analysts Shane Ham and Robert Atkinson argued that the Internet should "enable buyers and sellers to make choices for themselves instead of having those choices dictated to them by powerful forces in the industry."

Those powerful forces are, namely, Cendant and re/max, two companies that together control roughly 40 percent of the national real estate market and can therefore exert tremendous pressure on MLSs, state real estate boards, and NAR (re/max is a household name, but Cendant is better known through its many subsidiaries, which include both Century 21 and Coldwell Banker).

In February 2003, Cendant released a white paper calling for immediate action against the wave of VOWs, and, in particular, such network-based models as LendingTree. Soon after, NAR finalized a set of VOW rules that, among other things, gave companies like Cendant and re/max enormous power to retaliate against rebellious brokerages.

The centerpiece of the new regulations is something known as an "opt-out" rule: Broker A may now ban Broker B from displaying A's listings on B's website, even though those listings are in the MLS. Cook admits that the opt-out rule was included as a concession to the two industry heavyweights. "Cendant and re/max said they would not cooperate without broker opt-out. In a sense, we had the concern that the whole MLS was at risk, that they would create their own database," he says.

The old-line brokerages are fighting back at the state level as well, where they have enormous influence. "Many of the state commissioners are de facto appointees of the real estate board," Inman says. Twelve states have already passed laws banning rebates, even though they are allowed in similar industries. And several states are contemplating rules that require brokers to be full-service operations, effectively outlawing the à la carte options in which many online brokers specialize.

The NAR argues that VOWs are too small a portion of the market to merit government concern. But that's circular reasoning -- VOWs are a small part of the equation not because they aren't viable models, but because NAR has created an unfriendly market environment. "In this case, the competitor writes the rules," says Atkinson, director of the Technology and New Economy Project at PPI, "so it's very risky for these start-ups, because the people who control their fate are their competitors."

Washington is starting to agree. In March, the Justice Department sued the Kentucky Real Estate Commission over its rebate ban, and, on April 8, it warned the Oklahoma legislature not to pass a bill restricting à la carte brokerages. This is on top of an ongoing investigation into industry competition nationwide.

The attention is leading some experts to wonder whether real estate shouldn't have an SEC-like oversight agency. Indeed, combined with GAO's upcoming report and possible congressional hearings, these actions point out that, by trying to stamp out Internet competition, NAR may have jeopardized its once-unassailable control over its industry -- and made radical change more, not less, likely.

Calling for an SEC-like oversight body for real estate may be a bit premature; the Justice Department may yet find that it has the power to rein in the industry itself. But what is clear is that the feds need to recognize the difficulty that innovative models have entering the real estate market. "Absent smart, new public policies, e-transformation of the real estate industry will be extremely slow, costing consumers hundreds of billions of dollars," wrote Ham and Atkinson.

If federal regulation does emerge, real estate could go through a change much like the airline industry in the 1980s and '90s--a massive shakeup that led to the emergence of the discount airline sector and a steep drop in ticket prices. In that case, it was deregulation, not increased oversight, that made the difference. But, in both cases, federal action was necessary to eliminate the anti-competitive practices of a few industry heavyweights.

It's an analogy not lost on those challenging the Cendant-re/max behemoth. "The big brands in real estate that dominate the market, I often refer to them as Eastern Airlines and PanAm," says ZipRealty's Danziger. "Both were dominant. No one would have dreamt that they could go away. But they didn't listen to the customer. That's possible in real estate as well. Either do a better job or lose out." And, either way, thanks to increased federal attention, consumers should win.

[rlskfoster]

Down here in Texas the Real Estate Commission was fixing to vote to prohibit the discount brokerages. It was, at least as i understand it, because sellers were asking buyers agents questions and this is considered conflict. The vote was stopped because the federal trade commission and another federal agency stepped in and voiced concerns. The Texas real estate Commission blinked and i think they tabled the proposal. In any case it appears the industry could be changing and hopefully for the better.

Paul, your in Austin, did you here more about it than the small blurb I read in the Fort Worth star-Telegram?

Buster

[hausdok]

Hi,

I saw a similar article the other day in the Seattle paper about the AG's efforts to rein in the real estate folks. My thought at the time - Home Inspectors should all begin writing to the AG to voice concerns over the way many of those in real estate have been trying to hamstring and control home inspectors for the past 25 years.

ONE TEAM - ONE FIGHT!!!

Mike

[rlskfoster]

here is another flaw in Texas as I see it. We as Inspectors are governed by the Texas real Estate Commission. They pick the board and approve any changes to the way we operate. I have used this in the past when a real estate agent complained about a report. I am writing up what the Texas real estate commission has mandated that I write up. You guys run the whole thing. Conversation sorta stalled after that. Go figure.

This is, in my opinion, the fox guarding the hen house.

Is it like this elsewhere?

Buster