At its most basic, real estate brokerage is about matching a home seller with a home buyer. As one panelist, who represents a major brokerage franchise, remarked, a home seller wants to “negotiate the best possible price in the quickest possible time.” Brokers reduce the transaction costs of matching buyers and sellers and also provide their clients with ancillary services related to the transaction.
Although there is no legal empediment to consumers buying and selling homes on their own, the majority of consumers choose to work with a real estate broker. For example, a recent National Association of Realtors (“NAR”) survey found that 84 percent of consumers employ a real estate broker to help them sell their home, and the vast majority of these home sellers appear to be contracting with real estate brokers to provide assistance on all aspects of the transaction. Another NAR survey found that nine out of ten buyers use a real estate professional during their home searches. The Internet also appears to be playing an increasingly important role in the real estate transaction. For example, NAR data show that the Internet was second only to real estate agents as the most commonly used information source for buyers.
1. Description of Real Estate Brokers and Agents
Although the terms may vary by state,there are two principal categories of real estate brokerage professionals: “agents” and “brokers.” Generally speaking, agents work directly with consumers and brokers supervise agents. Typically, agents solicit listings, work with homeowners to sell their homes, and show buyers homes that are likely to match their preferences. Instead of working with customers directly, brokers often provide agents with branding, advertising, and other services that help the agents complete transactions. In terms of branding, the broker may invest in and create a brand or affiliate with a national or regional franchisor that provided a brand with certain reputational value and an advertising campaign. As for services, brokers may provide agents with computers, website hosting, office space, training, and marketing.
States require real estate brokers and agents to be licensed. These licensing statutes form the framework for state regulation and oversight of the profession by establising requirements for license (Such as minimum age, education, and experience) and various requirements and prohibitions regarding business practices and conduct. State commissions, frequently composed of real estate brokers, oversee drafting and and compliance with these laws and regulations.
Brokers and agents (hereinafter, “brokers”) usually are more informed about the local real estate market and the process of real estate transaction than most home buyers and sellers. This informational advantage derives from two sources. First, only brokers have direct access to the MLS, which is a local or regional joint venture of real estate brokers who pool and disseminate information on homes available for sale in their particular geographic areas. The MLS provides information both on the homes currently for sale in a particular geographic area and past sales data, which typically are used in determining a home’s listing price or a buyer’s offer price. Second, most brokers have been involved in many more real estate transactions than their clients. This experience builds expertise in gauging market conditions and knowledge of the details involved in completing a real estate transaction.
2. The Seller’s Agreement with the Listing Broker
The typical real estate transaction involves several steps. First, if the seller chooses to hire a real estate broker rather than selling the home on his or her own, the seller contracts with a “listing broker.” A home seller may consider any number of brokers before choosing one with whom to list the home,but NAR ‘s 2006 industry survey notes that the majority of sellers contact only one listing broker. Once the seller has selected a listing broker, they enter into a contractual relationship called a “listing agreement” by which the broker agrees to market and sell the home in exchange for a set fee, typically in the form of a percentage commission. The commission “rate” is the percentage of the home sales price that the broker retains as a commission. Commission “fees” are the total dollar amount paid by consumers for real estate brokerage services.This contract often specifies the commission the homeowner will pay the listing broker if the home is sold within a specified period of time, how the home is to be listed in the MLS, and, as discussed below, the share of the commission to be offered by the listing broker to a so-called “cooperating broker,” who works with the buyer. The listing broker typically markets the home, both within his or her brokerage firm and to other brokers, in the community, by uploading the listing data, including the offer of compensation to cooperating brokers, who in turn can inform potential buyers of the listing.
There are three principal types of listing agreements. In the most common of the three, an “exclusive right to sell” conract, the listing broker receives a payment if the home is sold during the listing period, regardless of who finds a buyer for the home. In an “exclusive agency” agreement, the listing broker receives payment if any broker finds the buyer, but does not receive payment if the seller finds the buyer. In an “open listing,” a broker has a nonexclusive right to sell the home and receive payment , but other brokers or the seller may also sell the home without any payment to the listing broker.
3. The Buyer’s Relationship with the Cooperating Broker
The broker who works with the buyer is often referred to as the “cooperating broker” or “buyer’s broker.” Cooperating brokers typically attempt to find housing from the available stock that match buyers’ preferences, show prospective buyers homes for sale, provide them information about comparable home sales that have occurred in the area, assist prospective buyers in becoming pre-qualified for a certain level of financing, advise them on making offers, and assist in closing the transaction. Buyers typically do not pay their brokers directly. Rather, listing brokers compensate cooperating brokers according to the terms stated in the MLS listing, which usually specifies an unconditional offer of compensation to any broker that is the “procuring cause” of the sale. For example, a listing broker who charges a 6 percent commission may offer to compensate a cooperating broker with 3 percent, half of the listing broker’s commission. As one panelist reported, it is common for a listing broker to offer 50 percent of his or her commission to a broker who provides a buyer who closes on the home, although this percentage may vary according to market conditions; in slow markets, a listing broker may offer higher compensation to attract scarce buyers, and this may be reversed in a hot market. Differences in offers of compensation may also arise based on local norms for historical reasons. The legal relationship between the buyer and the cooperating broker varies from state to state and has changed over time. Until the 1990s it was common for the cooperating broker to be a sub-agent of the listing broker, working on the seller’s behalf. during the 1990s, most states revised their laws to allow buyer representation, and at the same time NAR revised its policies, eliminating seller-sub-agency as a condition of participation in the MLS. Today, after a decade of agency law reform across the country, it is more common for the cooperating broker to owe fiduciary duties solely to the buyer. In some states, however, a cooperating broker may be a “transaction” broker who has limited fiduciary duties to both the buyer and seller and whose role is to assure that the transaction proceeds smoothly. In all states, brokers are required to disclose to buyers the type of relationship that exists so buyers know whom the cooperating broker represents, although the timing of this disclosure varies by state.
4. The Buyer’s Offer, Contingencies, and Closing in a Typical Transaction
Once a buyer makes an offer on a home, the listing broker may help the seller evaluate offers and formulate counter offers and may negotiate directly with the buyer or buyer’s broker. If the seller accepts the offer,the home is “under contract,” and, pursuant to contracts containing typical contingencies, several things must occur during a stated time period before the transaction closes, such as home inspections, appraisals, securing buyer financing, assuring the title to the home is clear, and conducting necessary repairs. Both listing and cooperating brokers typically work together to assure that all contingencies are satisfied, allowing the closing to occur as scheduled. As one Broker-panelist explained, in addition to real estate brokers, many other actors are necessary to assure a successful closing, including the mortgage lender, the insurance agent, the home inspector, the termite inspector, the surveyor, the appraiser, the closing attorney (in some staes), the title company, and the escrow agent. According to this panelist, the seller’s broker and the buyer’s broker “will work together to make sure that all parts of the transaction are facilitated appropriately,” including “working through the transaction itself, meeting the home inspector, helping the seller and/or the buyer understand what the results of the inspection were, overseeing repairs, making sure that things that are necessarily time-sensitive get responded to in a time-sensitive manner.”
Once all contingencies have been satisfied, the parties proceed to closing, where they exchange purchase money and title to the home. One panelist noted that, in her experience as a broker, lenders’ increased use of technology has streamlined the mortgage process, causing the average time from contract to closing to fall from forty-five to sixty days, to thirty days. The HUD-1 form required by the Real Estate Settlement Protection Act (“RESPA”) is a centerpiece of the closing and requires a detailed listing of the flow of funds from buyer to seller and the use of funds, including selling and buying expenses associated with the transaction and the amount of commission paid to each broker. Although they typically do not play an active role at this stage, brokers often accompany their clients to the closing. The brokers are paid their commission at closing.
B. The Multiple Listing Service
Access to the MLS is one of the most important services that real estate brokers traditionally have offered. The 1983 FTC Report traces the evolution of the exchange of home information by brokers, from the weekly in-person “exchanges” of the Nineteenth Century to the formation of the modern MLS. The MLS has evolved still further since 1983, reflecting the rapid pace of technological developments during this period. The following two sections describe the present-day MLS and discuss its importance to home sellers, buyers, and brokers.
1. Description of the MLS
The MLS is a local or regional joint venture of real estate brokers, typically operated by a local group of brokers affiliated with NAR, who pool and disseminate information on homes available for sale in their particular geographic areas. The MLS combines its members’ home listings information into a database, usually in electronic form. The MLS then makes these data available to all brokers who are members of the MLS. By listing inf information on a home in the MLS, a broker can market it to a large set of potential buyers. A cooperating broker likewise can search the MLS to provide a home buyer with information about all the listed homes in the area that match the buyer’s housing needs.
MLS’s are the primary source of home listings information because they contain real time information on virtually every home listed for sale in a given area, except FSBO homes. Most MLSs require that a member broker, upon acceptance of a listing, enter the listing into the MLS database within a short period of time, twenty-four to seventy-two hours. Although the specific data fields on each listing are determined by the individual MLS, they typically include detailed descriptions of the homes for sale, the asking price, the offer of compensation that will be paid to a cooperating broker who finds a suitable buyer, and the name of the listing broker. The MLS allows broker-members to search and filter homes based on detailed criteria, including property and neighborhood information, offers made on the home, prior sales history, and days on the market. In addition to the database of currently available homes, an MLS maintains a database of homes sold through the MLS. Brokers can use this database to provide their clients with information on sales of comparable homes so that the clients can more accurately value their homes or determine the amount to bid on a home.
The MLS also operates an arbitration mechanism to resolve compensation disputes between listing and cooperating brokers. For example, if a cooperating broker secures a buyer for a transaction and can establish through arbitration that he or she was the “procuring cause” of the sale, then the listing broker is liable for the cooperative compensation.
One panelist who is a real estate broker and past president of NAR described the MLS as “a broker-to-broker information exchange that provides an opportunity for cooperation and compensation.” Another panelist, however, described the MLS as a “club” that can limit membership and access to MLH listings to firms that conduct business in a particular manner, thereby limiting consumer choice. This panelist, an economist, stressed that when competitors cooperate, as in an MLS, the rules governing that cooperation and the conditions under which the cooperation occurs must be examined closely.
2. Why the MLS is Important to Sellers, Buyers, and Brokers
As the primary source of information about homes currently for sale and the prices at which other, comparable homes have been sold, the MLS is an extraordinarily important resource for sellers, buyers and brokers. Home sellers benefit from exposure of their listings to a wide audience of potential buyers, increasing the probability of selling their homes quickly and at an optimal price for those sellers. In addition, sellers, through their brokers, can use the MLS information on comparable homes to decide whether to sell their homes and, if so, at what price. According to NAR’s 2006 survey of home buyers and sellers, 88 percent of sellers reported that their home was listed in the MLS. Buyers also benefit from the MLS because they can go to a single source (that is, a single broker) for information regarding the vast majority of homes for sale within a given area, instead of visiting multiple brokerages to obtain such information. Access to the largest number of potentially appropriate homes for sale allows buyers to maximize their chances of finding a home that most closely matches their desired characteristics.
MLSs are so important to the operation of real estate markets that, as a practical matter, any broker who wishes to compete effectively in a market must participate in the local MLS. As previously noted, brokers using the MLS reduce the costs of matching buyers and sellers and can market their service to a larger set of potential clients. Further, by stating up-front the compensation being offered to a cooperating broker, the MLS can reduce the costs associated with listing brokers having to negotiate separately with each potential cooperating broker. As a result, the use of an MLS can substantially reduce transaction costs.
The efficiencies associated with use of an MLS in the real estate industry are well documented in the real estate, legal and economic literature and in court decisions. In the seminal case, United States v. Realty Multi-List, Inc. the Fifth Circuit described the various benefits offered by an MLS. First, the MLS reduces the “obstacles brokers must face in adjusting supply to demand: market imperfections are overcome in that information and communication barriers are reduced, along with the easing of the built-in geographical barrier confronting the buyer-seller relationship. Moreover, a realistic price structure is engendered. In effect, real estate becomes by virtue of the multiple listing service, a more liquid commodity. Second, sellers benefit from wider exposure of their listings, while buyers benefit from reduced search costs. Finally, the court noted that “the broker is particularly benefited by having immediate access to a large number of listings and at the same time by being furnished with a method for quickly and expansively exposing his own listings to a broader market.”
Due to these significant efficiencies and pro-competitive features, the Fifth Circuit held that the alleged MLS-related restrictions at issue should not be condemned as per se illegal. At the same time, the Court held that the efficiencies and benefits flowing from the MLS, combined with other factors, resulted in the MLS having market power in a relevant antitrust market, thereby simplifying the rule of reason inquiry concerning the legality of restrictions imposed by MLS and its members.
C. Nontraditional Business Models
Although the data show that most consumers currently contract with a broker that supplies the full range of services traditionally offered by brokers, many consumers prefer to use brokers whose business models are alternatives to the traditional one. Some consumers may also choose to work with non-brokers who offer services that will facilitate the marketing and sale of their homes. The growing popularity of some of these new business models is likely linked to consumers’ increasing use of, and comfort with, the Internet. In this Section we discuss the following non-traditional business models: (1) full-service discount brokers; (2) fee-for service brokers; (3) VOW brokers; (4) websites that provide advertising and other assistance to sellers who choose not to use a broker; and (5) referral networks.
1. Full-Service Discount Brokers
Discount brokers offer buyers and sellers full-service real estate brokerage services at a price lower than the prevailing commission fees. For example, a discount broker may offer all of the services provided by a traditional broker for a 3 or 4 percent commission in an area where 6 to 7 percent is the prevailing rate. In addition, in states that do not prohibit them, brokers may offer rebates (i.e. cash payments) and inducements, such as gift certificates, coupons, vouchers, and discounted or free services relating to buying and selling a home, to buyers and sellers. These are incentives that typically are offered by cooperating brokers to home buyers to encourage them to use the brokers’ services. For example, 1% Realty offers buyers a rebate of approximately 1 percent of the purchase price in states that have not prohibited rebates. Brokers sometimes also pay rebates to home sellers. For example, home sellers who are referred by one broker to another broker sometimes receive rebates. Additionally, some listing brokers pay their clients secret rebates rather than offering a lower listing commission in order to disguise discounting.
Rebates are an important form of price competition under the traditional structure of real estate transactions because the seller and seller’s broker, not the buyer’s broker, determine the amount of the buyer’s broker’s commission via the listing agreement. Without rebates, if the buyer’s broker were simply to reduce his or her commission, the savings would go to the seller’s broker, not to the home buyer.As one panelist explained: the mechanics of the typical real estate transaction make it difficult for a buyer’s broker to reduce the price of his or her services because the “custom of the industry” is for the listing broker to split his or her commission with the buyer’s broker. Rebates, therefore, can be powerful tools for price competition between brokers. An by returning money to home buyers, rebates can also benefit home sellers, because buyers will have more to spend on the home as opposed to commission payments.
2. Fee-For-Service Brokers
Fee-For-Service Brokers – sometimes also referred to as “flat-fee” brokers or “limited-service” brokers represent a departure from traditional full-service brokers who typically charge a commission based on the sales price in return for a bundle of services. Fee-for-service brokers offer home sellers the option to purchase less than the full bundle of services traditional brokers provide. Different fee-for-service brokers may offer different arrays of services, and home sellers can pick and choose the services they wish to procure from the provider or providers of their choice. Most fee-for-service brokers offer sellers two or more service packages, and many offer an additional itemized list of optional services. This business model is likely to benefit consumers who do not want to forgo broker assistance completely but who feel comfortable handling many aspects of the transaction without such assistance.
Fee-for-service brokers often offer an MLS-only package, which allows consumers, who are not permitted by MLS rules to list their homes in the MLS on their own, to list their homes in the MLS by contracting with a broker who is a member of the local MLS. For a flat fee (e.g., $500), the broker would list the home in the local MLS and make an offer of compensation in the MLS to other brokers who may cooperate in the sale of the home. The broker typically would retain the flat fee whether or not the home ultimately sells. If a cooperating broker ultimately secures a buyer for the home, he or she would receive the cooperating commission. A seller who finds a buyer without the help of a cooperative broker, however, would not pay this compensation.
MLS-only packages offered by fee-for-service brokers typically include other services provided via the MLS. These include advertising the seller’s listing on Internet websites that home buyers search directly (e.g., Realtor.com) and on other MLS members’ websites. Additionally, fee-for-service brokers typically provide the client additional selling aids, such as yard signs, online advertisements, and a lock-box to allow buyer’s agents to show the home when the seller is not present.
In addition to the MLS-only package, many fee-for-service brokers offer other services. The Agencies review of fee-for-service broker websites indicates that most offer at least two tiers of service and the complete array of traditional services at a reduced commission. Thus, consumers who purchase the MLS-only package, but later feel they need more assistance with their transaction, typically can obtain it from their broker for an additional fee. For example, one Workshop participant who operates a flat-fee brokerage stated that about 30 percent of his clients who sign up for a flat-fee listing eventually purchase additional brokerage services. This panelist’s website offers the flat-fee listing at $595, but also offers two other packages:” which costs an additional$1,500 and includes negotiation and post-contractual assistance, and full-service brokerage for a discounted percentage fee. Further, many fee-for-service brokers allow their clients to cancel their listing agreement at any time, leaving consumers free to pursue other brokerage or non-brokerage options if they become dissatisfied with the broker’s service.
Although many brokers who specialize in the fee-for-service option are not affiliated with major national brokerage chains, some brokers who are affiliated with such chains offer fee-for-service or flat fee brokerage options. Although brokers using these models have existed since the 1970s, industry participants told GAO that the Internet has allowed such brokerages to grow in numbers and size in recent years, in part because they can market their services to a larger population of buyers and sellers.
3. Virtual Office Website Brokers
VOWs are Internet websites through which brokers offer brokerage services online to their registered clients. The unique feature of VOW operators is that these brokers offer their clients the ability to search online the same MLS information that other brokers provide to their clients through other delivery methods, such as hand delivery, mail, fax, or email. Under NAR rules, VOWs may provide clients with more MLS information than can be provided by publicly accessible broker websites that are governed by NARs Internet Data Exchange (“IDX”) policy, discussed in Chapter 11.
Acess to the VOW and its listings search features is limited to prospective buyers or sellers who have entered into an agreement with the VOW operator that includes a terms-of-use agreement. The VOW permits clients to search the database at their leisure until they are ready to contact their broker for assistance in viewing the home, making an offer, etc. While many buyers may see this as a benefit that allows them greater control over their home-buying process, brokers may also benefit. For example, brokers may reduce the time they spend servicing each customer face-to-face because customers conduct a portion of the time-consuming listings searches on their own. Although brokers offering VOWs differ from other brokerages in their innovative uses of the Internet, in other respects they operate like other brokers. VOW brokerages typically maintain physical offices in the markets in which they operate, staff those offices with licensed brokers who participate in their local MLSs, and represent both buyers and sellers.
One panelist who worked with eRealty, an early discount broker that operated a VOW, described aspects of its business model. eRealty was a licensed brokerage and employed licensed agents. It provided the ability to search MLS data online to bonafide buyers who had registered for a password, monitored the MLS, and reported to its clients when any listing came up that fit a profile that the client had pre-established. In this way, the VOW model allows consumers to substitute their search effort for that of a broker:
The e-Realty model—allows the client to initially bypass the Realtor by becoming a client of
e-Realty and conducting his own search—Therefore e-Realty can often charge a lower commission than traditional Realtors since there has been no time expended searching
through the MLS.
eRealty also would “communicate instantly through email or any device [clients] needed to assist [them] with scheduling of appointments and the whole scheduling of the transaction all the way through to close.” eRealty gave a 1 percent rebate to buyers and also took listings from home sellers.
The panelist emphasized that this business model took the MLS “a step beyond” cooperation and compensation in a business-to-business exchange and used the “power of the information in [the MLS] to better serve consumers. As he explained, consumers “expect systems, servers, to do the grunt work of searching for homes, gathering data on schools and neighborhoods, monitoring new listings, and the reporting whenever a listing fits their profile, [and] scheduling appointments–to help them see the home.”
4. Websites that Provide Advertising and Other Services to FSBO Sellers
Some consumers choose to sell their homes without any assistance from a real estate broker. These sellers are referred to as “for-sale-by-owners” or “FSBOs,” and they market their homes themselves by placing ads in local media, posting signs, and conducting their own open houses. MLSs do not allow FBSO homes to be listed in the local MLS because a listing broker member is not involved. FSBOs often offer payment to a broker representing a buyer.
Several companies offer services to help FSBO sellers. For example, there are several websites devoted to advertising FSBO homes. One Workshop panelist representing a major FSBO website explained that his company allows home sellers to post color photos, virtual tours, and 3,000-word descriptions that are searchable by potential home buyers. According to this panelist, the industry average price for this service is a flat fee of approximately $300. These websites often will also provide potential home buyers with general information on neighborhoods, such as demographics, crime rates, and school quality. Further, many provide links to ancillary service providers, such as title insurance companies, escrow services, and home inspectors, and also provide sample forms related to real estate transactions, such as sample purchase or lease agreements.
5. Broker Referral Networks
Some national Internet websites aggregate some of the MLS data from across the country and allow potential home buyers to search the databases. After the potential buyer has searched the information online and is ready to visit homes in a particular area, the website refers him or her to a local broker. This broker pays a referral fee – typically a portion of the commission – to the referral website that aggregated the MLS data. The referral website may then rebate a portion of its referral fee to the consumer, if state law or regulations do not prohibit rebates. Other referral websites do not display aggregated listings, but use Internet marketing to advertise their referral services and rebates to consumers. One panelist represented RealEstate.com, a business that uses the Internet to build a network of local brokers and agents. Participating brokers and agents pay a cooperative brokerage fee to the company for referrals, and RealEsate.com cultivates buyers by using online tools and information and, where permitted, by offering the buyer a rebate. The buyers are then referred to the local broker for further assistance. As this panelist noted, the Internet and the new business models are “about unleashing brokers to have the ability to use new methods and tools to expand, to succeed in this market that is competitive.”
6. Consumers’ Use of Nontraditional Models and FSBOs
According to NAR’s 2006 Profile of Home Buyers and Sellers, 83 percent of home sellers who retained a broker used one who provided the traditional “full” array of services; 8 percent hired a broker who listed the seller’s home in the MLS and performed few, if any, additional services; and 9 percent hired a broker to provide a broader array of services, but short of full-service.
NAR data show that the number of FSBOs – consumers who sell their homes without the assistance of a real estate professional – has been declining, NAR’s 2006 Survey estimated that FSBOs account for about 12 percent of home sellers, with an additional 5 percent of sellers first trying the FSBO route, but then retaining a broker to complete the sale. NAR’s 2005 data estimated FSBOs at approximately 13 to 14 percent, and noted that this number has been steady since 2001, and is lower than it was for the 1990s: 10 percent in 1991; 17 percent in 1993; 15 percent in 1995; 18 percent in 1997; and 16 percent in 1999.
11.The Internet’s Role In Real Estate Brokerage
The Internet has had a significant impact on the real estate industry, leading to a diversification of business models to serve consumers. Some have suggested, however, that the industry has not yet experienced the sort of sweeping benefits to consumers in the form of cost savings and service enhancements that have been seen in other industries from the use of the Internet and other technology. This Chapter examines how the Internet has increased consumer access to information about real estate and how this increased access has in turn affected consumer behavior. This Chapter also discusses the Internet as a means of providing real estate brokerage and related services to consumers. Finally, this Chapter addresses gaps in consumer knowledge that may exist despite the extensive information now available on the Internet.
A. Increased Consumer Access to Real Estate-Related Information
By reducing the cost of transmitting and searching information, the Internet has enabled consumers more easily to educate themselves about all facets of home buying and selling. For example, before the introduction of the Internet, consumers had to learn about homes for sale through real estate brokers, or through various offline marketing vehicles, such as yard signs, newspaper advertisements, or real estate magazines. These techniques are still important and commonly used, but consumers have access to listing information from a variety of online sources as well. Many brokers market listings online through their own websites and give their MLSs permission to place their listings on Realtor.com. Consumers can view these listings before contacting or forming a relationship with a particular broker. The source of listings for many of these advertising websites is the MLS. In accordance with NAR rules, the MLSs create an “Internet Data Exchange (“IDX”), a datafeed that participating brokers may use for their individual advertising websites. Broker IDX websites enable home sellers to get greater exposure for their listings, and enable home buyers to search listings, both on national IDX websites (e.g., Remax.com), and on broker websites focused in a local area. According to a NAR survey of home buyers and sellers, broker IDX websites were among the top three most popular websites searched by buyers, with 40% of buyers conducting their home searches on these websites. In addition, many MLSs contribute ther IDX datafeed to some of the most popular publicly accessible websites like Realtor.com, a national website that NAR owns.
Although these IDX websites, as explained more fully below, provide critically important avenues for brokers to advertise their listings to potential buyers and their agents, these websites are not a substitute for the MLS. In contrast to VOWs and to brokers’ “brick and mortar” offices, websites that rely on an ID datafeed contain less information than the actual MLS database, and that information may be out of date. If a broker opts to not participate in the IDX, which NAR’s rules allow, none of the broker’s listings are included on the IDX datafeed. Therefore, ID datafeeds may contain listings on fewer than all of the homes listed for sale in the MLS’s area. IDX datafeeds can also be less complete than the full MLS listings database because each MLS determines which datafields to include in the ID datafeed. For example, it is not uncommon for MLSs to withhold the home address, a critical piece of information for brokerage clients, from the IDX datafeed. Some MLSs also withhold such datafields as the detailed description of the home or the property disclosures. Finally, ID-based websites often will be missing some homes that recently have been listed for sale and include some that are no longe for sale because there often is a delay between an update of MLS data and when those changes are reflected in the IDX datafeed.
Panelists representing traditional brokers acknowledged that the listings information provided via an IDX datafeed is limited. For example, one panelist explained that “what you see in the MLS is more detailed information [than is displayed on IDX websites], but again, [brokers] have access to that [information in the MLS], and [brokers] can provide that to the consumer.” The same panelist elaborated on the advantages of MLS data:
Anyone who is a member of the realtor organization, whether they are a discount broker,
a limited service broker or a full-service broker, have their listings in the Multiple
Listing Service, and in that broker-to-broker cooperative environment, that is real time
information for me to be able to deliver to my customer or client, the buyer, and real
time is important, especially if you happen to be in a seller’s market, because the
advertising vehicles [i.e. IDX websites] that are out there on the internet are not real
time, and by the time even that a consumer might be able to see something online, it
could be gone.
As this panelist explained, access to full MLS, rather than limited IDX data feeds, is “extremely valuable” because it allows agents to tell consumers “the minute that something is listed,” ‘Let me tell you, there was a new listing that just popped up, it’s matched your criteria, I think we ought to go out and look at it.”
In addition to listing information derived from MLSs, consumers also can view homes for sale on third-party advertising websites such as Craigslist.com, and on a variety of websites that promote homes that are for-sale-by-owner. Further, the Internet helps consumers to educate themselves about other areas of home buying and selling. For example, consumers can use the Internet to research brokers, mortgage and lending options, and recent home sales an home valuations in their community. Consumers also can find information about schools, crime, and other variables related to home purchase decisions through a host of online sources, including websites hosted by their municipalities.
Several Workshop panelists and commenters remarked on how the Internet has expanded the amount of information available to consumers, making them more knowledgeable as they enter into real estate transactions.One commenter concluded: “Today’s sellers and buyers are more educated and more knowledgeable thanks almost entirely to the growth of the [internet.” A panelist described the Internet as ‘a very highly effective marketing tool as well as a tremendous information resource and communication tool.” Another commenter observed:
More individuals are researching available properties for sale.Buyers can themselves
gather key bits of information about property location, flood history, contact status,
room dimensions, etc. Sellers are better able to determine comparable price for similar
houses, helping them to gauge the appropriateness of a listing price suggested by an
agent.
One panelist opined that “a generation of Americans are now comfortably and connected to the Internet and to eCommerce. They instinctively start with the Internet before they search to buy anything. They do extensive research online.”
Industry-produced data appear to support this view. A recent NAR survey of home sellers and buyers concluded that ” the most significant trend in the home search process is the increasing importance of the Internet as a source of information about homes and the characteristics of different communities.” among the evidence supporting this conclusion is the finding that in 2006, 80 percent of home buyers used the Internet during their home searches (up from 71 percent in 2003). In addition, in 2005 and 2006, 24 percent of recent home buyers first found the home that they purchased on the Internet – up from only 2 percent in 1997. Conversely, the number of buyers reporting real estate agents as the first source of such information has decreased from 50 percent in 1997 to 36 percent in 2005 and 2006. among the most popular websites used by home buyers in their searches were Realtor.com (52 percent of respondents), MLS websites (53 percent),and real estate company websites (41 percent). Features ranked as most useful among home buyers searching for a home on the Internet were photos (identified as very useful by 83 percent of home buyers), detailed property information (81 percent), and virtual tours (60 percent.). Brokers surveyed by NAR cite the Internet more frequently than any other method, including yard signs, as a way to market homes.
B. The Internet’s Effect on the Real Estate Industry
By placing more information in the hands of consumers, the Internet has facilitated the growth of nontraditional business models – such as fee-for-service brokers, VOWs and broker referral networks – that allow consumers opportunities to substitute their efforts for those of the broker, in manuy cases in return for lower fees. These lower fees reflect the lower cost of serving consumers who are “easier to serve” because they perform substantial online research themselves. According to one commenter, “With individuals assuming more of the responsibility to gather and assess information, less time and effort is required by real estate agents in assessing market conditions (for sellers) and in identifying and showing houses [(for buyers)]. The cost of an agent’s service, therefore, should go down reflecting this shift in burden.”
Consumers differ in their willingness, ability and opportunity to use the Internet to perform functions traditionally provided by brokers. While many consumers may be willing to perform search tasks themselves, they may be more likely to continue to rely on brokers for assistance related to the transaction process because it involves expertise derived from broker experience. For buyers, this may mean performing much of their early search by themselves online and contracting a broker only after they have become familiar with market offerings and are ready to start placing offers on homes. For sellers, this may mean setting their own sales price and relying on the wide online exposure of MLS listings rather than broker effort to market their home, and hiring an agent only to list their home in the MLS and for assistance in closing the transaction.
While the Internet clearly has had a significant impact on the real estate industry, one Workshop panelist, an economist, opined that the real estate brokerage industry has not experienced the types of technology gains benefiting consumers that have been seen in other service industries, such as making airline and other travel reservations and buying and selling stock. Several factors may be limiting wider use of the Internet.The resistance of some traditional brokers to dealing with firms that more fully or innovatively use the Internet is ope factor that could limit realization of the Internet’s full potential. Restrictions on the availability of real estate listing information can also limit the economic benefits that Internet use provides.
C. Gaps in Consumer Knowledge
Even with the significant amount of information currently available on the Internet, there may be gaps in knowledge by some consumers in several important areas that may result in real estate brokerage markets functioning less efficiently. First, it appears that many consumers are not fully apprised of their marketplace options. For example, the most recent NAR survey of home sellers and buyers found that the majority of home sellers contact only one listing agent before hiring one to assist with the sale of their home. Further, there is evidence that some consumers of brokerage services are not necessarily aware that commission rates are negotiable. This may be especially true of buyers who pay for their brokers’ services indirectly via the purchase price of the home. Although some Workshop comments suggest that consumers’ awareness of their ability to negotiate over the price and terms of brokerage services is increasing, perhaps due to the increasing numbers of discount brokers that have entered the industry over the past few years, some consumers do not negotiate over commission rates.
Second, consumers may be unaware of the possibility that their brokers may have conflicting interests that lead them not to provide the consumer with the best possible advice. As discussed in more detail in Chapter lV, brokers have certain incentives to “steer” consumers toward those homes that offer the highest cooperating broker commission payment and away from homes listed by brokers known to charge home sellers discounted commission rates. In this manner, brokers can take advantage of their superior knowledge of market conditions by steering clients away from home listings that otherwise match the criteria identified by consumers, but provide lower financial gains for the broker than other homes.
Home buyers’ increasing use of the Internet may limit brokers’ ability to steer buyers away from discounters’ listings without their knowledge. As noted above, 80 percent of consumers use the Internet to search for homes in 2006. To the extent that consumers have greater knowledge of the stock of housing for sale than they used to, brokers will be less able to exclude a particular listing from home buyers’ searches without their knowledge. If a home buyer finds a discounter’s listing on his or her own that appears to be a good match, a broker likely will either have to show the home buyer the discounter’s listing or explain why he or she will not.
In addition, consumers also may be unaware that when they pay their broker a commission based solely on a percentage of the sales price at closing (as most do today), the broker’s financial incentives are not necessarily aligned with the consumer’s. On the sell side of the transaction, the consumer’s interest is to sell the home at the highest possible price. Even though an agent’s commission increases with the price of the home, he or she likely retains no more than 1 to 2 percent of the sales price (after paying the cooperating broker and the agent’s brokerage firm). Therefore, the agent may be less willing than the consumer to take the risks associated with getting a higher sales price, such as waiting for what might be a better offer and perhaps having to do additional work. Likewise on the buy side of the transaction, the broker may be less interested than the consumer in negotiating the lowest possible sales price because a lower sales price translates into a lower commission for the broker, likely requires additional work, and may increase the risk that the transaction falls through with no commission paid to the broker. Consumers may be unaware of these potential conflicts of interest. Some commentators have posited that alternative payment structures may better align consumer and broker interests.