This article delves into the history and evolution of industry-wide anti-trust violations and corruption which interferes with a freely-operating real estate market and competition amongst brokers and agents for the public good.
Competition vs. price fixing
In 1955, a group of California residential MLS brokers agreed the fee to be charged a seller on all home sales was to be 6% of the price paid by a buyer. This 6% rate of compensation met little resistance from anyone for the next 20 years, even though the price fixing scheme of “same-percentage, same-split” arrangements had already been ruled a violation of federal antitrust laws.
However, the unionized residential MLS brokers did not comply with court orders. To enforce the price fixing 6%/50:50 fee split, the residential brokers used the MLS they controlled to require brokers who published listing information on the MLS to include the total fee agreed to by the seller (and it was to be 6%), with a share (3%) to be retained by the listing broker and a share (3%) to be paid to the buyer’s broker.
In this fashion, the seller’s broker submitting a listing to the MLS was policed by all other brokers and agents for conformance to the 6%/50:50 policy of fixed fees and sharing. If a seller’s agent did not comply, all the other (fee-fixing) MLS brokers and their agents were instructed by the trade union to either refuse to deal with the nonconforming office or to unilaterally refuse to share fees (50:50) on the sale of their listings with the offending, nonconforming listing broker.
More financially persuasive, the residential broker’s trade union arbitration board would (and did) enforce the 6%/50:50 rule. Thus, after a short period of fellow-broker inflicted financial injury, the fee-cutting (and successfully competitive) listing office would eventually capitulate to the 6%/50:50 routine or go out of business. [People v. National Association of Realtors (1981) 120 CA3d 459]
Enforcement by residential brokers of the 6%/50:50 rule was made possible through binding arbitration. The local trade union owned or controlled the MLS and compulsory membership in one (the trade association with its binding arbitration agreement) was then a requisite to admission to the MLS. Thus, if a broker using the MLS violated its price-fixing policies regarding fees, the trade association became the instrumentality used by conforming brokers to enforce the patently illegal price fixing activity (by a money award in arbitration, followed by a automatic court-ordered judgment for enforcement against the competitive fee-cutting, discount broker).
In California, MLS subscribers no longer need to become members of a trade association in order to post listings and access the MLS database, even if the MLS is owned by the association. Thus, the MLS subscriber avoids the suppressive instrumentality of trade association membership. [Marin County Board of Realtors, Inc. v. Palsson (1976) 16 C3d 920]
MLS fees fixed and competition banned
Consider a group of local real estate trade associations who each operate their own multiple listing service (MLS). Each association provides their own MLS support services to their subscribers. They also set the price for these support services independently, based on cost. Some are efficient and very successful at providing these services, incurring less than $10 in total costs per subscriber monthly. Others are inefficient and incur costs of $50 per subscriber monthly to provide their MLS support services.
The associations then form a separate corporation in which they are shareholders in order to create and operate a county-wide MLS. Each association is independently contracted by the corporation to provide MLS support services for the subscribers to the new regional MLS.
To assure the continued financial viability of those associations with disproportionately higher operating costs for their inefficient servicing of their MLS subscribers, the associations collaborate to set the minimum fee all associations will charge at $25 per subscriber monthly. The less efficient associations are paid a fixed monthly cash subsidy on top of the support services fee since they are providing these services at a loss. With the fee fixed for services, the efficient associations agree not to charge less and compete to deprive the less efficient associations of subscribers.
However, the question arises, when competitive organizations join together to eliminate their separate MLS database operations in favor of a single county-wide MLS which is more effective (greater regional coverage) and efficient (reduced need of brokers to subscribe to two or more MLS database services), can they then collude to set the fee charged for the MLS services each will provide, and ban any discounting or rebates by the efficient and more competitively operated associations?
The simple answer is no. Price fixing is illegal!
The fee which reimbursed the associations for the cost of their MLS support services cannot be legally set by agreement between the competing associations, especially when the larger, more efficient associations received millions of dollars in excess MLS support services fees over the actual cost they incurred to provide those services. This arrangement provided the large associations with huge financial rewards at the improper expense of their subscribers. [Freeman v. San Diego Association of Realtors (9th Cir. 2003) 322 F3d 1133]
It was the likelihood that some of the associations would go out of business under an efficient county-wide MLS which led to the price being fixed at a supracompetitive and illegal level in the first place, and led to the banning of competitive pricing by each association for providing the MLS subscriber services the brokers need by agreeing to no discounts or rebates to their broker- subscribers (which would have reflected the actual costs of an association).
However, if competition or economic darwinism had been properly allowed to occur, by the process of creative destruction, the more efficient associations would have brought about the demise of the less productive associations to the benefit of all of the MLS users.
Duplicate charges for services
Real estate sales transactions are increasingly subject to duplicate charges imposed on both buyers and sellers by brokers, lenders, escrow agencies and title companies during periods of rising property values. Duplicate charges for integral services, called kickbacks or hidden costs based on who ultimately receives them, are redundant and constantly experienced by the buying and selling public.
Public policy and sound economics suggest that duplicate charges are improper and make the real estate market more inefficient. They usually result from the systematic elimination of more competent and less costly competition. Kickbacks to listing and selling brokers (and builders), which are a violation of the federal Real Estate Settlement Procedures Act (RESPA) laws, are openly undertaken by some mortgage banks, to say nothing about the conduct of the largest title insurance companies, in an illegal effort to garner a larger share of the available business.
Kickbacks are a corrupting business policy. Legitimate operators find it difficult to compete with fraud without also stooping to the same fraudulent actions to meet the corrupt competition. Kickbacks, in the form of referral fees or other indirect financial benefits used to steer or capture business, interfere with the availability of lower rates and fewer charges. The buyer is referred to the lender (or title company) providing the kickback and away from the legitimate non-participating competition who will not take part in the consumer fraud.
All brokers and sales agents when acting in the capacity of a licensee are prohibited from accepting a referral fee for referring parties involved in the transaction they are negotiating. Referral fees from escrow companies, escrow officers, pest control operators, security providers and title insurance companies are prohibited by state law. Legislation does not, but should, prohibit referral fees from lenders or anyone else who renders services as a third-party in a real estate related transaction in which a broker is collecting a fee for acting on behalf of a principal. [Calif. Business & Professions Code §10177.4]
Real estate agents who are employed by a broker (which they must be to act as a licensee) face a similar prohibition in real estate transactions. Agents acting under their licensee are prohibited from accepting a fee or other benefit from any person other than their employing broker, or from themselves paying a fee to any other broker or agent without first directing the payment through their employing broker. [Bus & P C §10137]
For example, a licensee, be he a broker or agent, refers a prospective client to another agent under an agreement to split the fee 50:50 between the other agent and the referring licensee. While the broker’s agent can agree to do so, unless prohibited by his employing broker the agent is acting on behalf of his broker. Thus, the agent must direct his employing broker to make the payment of the referral fee to the other agent’s broker out of the funds earned by the agent as a result of the referral. The agent may not first receive the fee due him from his broker and then pay the referral fee directly to the referring licensee.
Most importantly, the employing broker or his agent must advise their client of the dollar amount of any referral fee or benefit they receive from any provider of services relating to the real estate transaction the agent is participating in. If the fee or benefit received as compensation for the referral is not disclosed, this non-disclosure is punishable by suspension or revocation of the employing broker’s or his agent’s license, or both. [Bus & P C §10176(g)]