This article presents the role multiple listing services (MLS) have had, and continue to have, on the residential brokerage community.
An industry-wide misconception
In everyday practice, sales agents who work with buyers on behalf of their brokers are commonly referred to as “buyer’s agents” or “selling agents.” However, in legal terms, it is the brokers employed by the buyers who are the real buyer’s agents. [Calif. Civil Code §2079.13(n); see first tuesday Form 305 §3]
Historically, and incorrectly, the broker and his agent who represented a buyer in a sales transaction were also referred to as subagents within the residential multiple listing service (MLS) brokerage community. The misnomer was a product of the pre-1980s MLS environment, which held that all brokers (and their agents) who were members of a trade union’s MLS were automatically “seller’s agents.”
The basis for the rationale rested on the premise that the sole purpose of the MLS was to locate a buyer for those sellers whose properties were posted in the MLS. Thus, all MLS members were said to be working either as the listing agent or a “subagent” of the seller, employed to sell the property listed in the MLS.
Therefore, the MLS member who produced the buyer was viewed as having been appointed by the listing agent to act on behalf of the seller by virtue of the MLS membership and the authority granted by a subagency provision in the listing agreement of the day. Thus, the buyer of a property published in the MLS was without representation since no member of a trade union MLS could theoretically represent a buyer.
The MLS subagency concept was perpetuated by peer pressure amongst MLS residential brokers to conform to “industry trade standards.” Thus, buyers were unable to employ brokers who were MLS members, a situation which often led to an undisclosed dual agency by their agent.
However, the MLS subagency approach to marketing real estate had begun to wane by the early 1980s. By then, brokers who sought to openly represent the best interests of buyers began to classify themselves as single-agency brokers. In fact, this single-agency activity was the predecessor of today’s openly acknowledged buyer’s agent.
The cooperating broker’s subagency dilemma
Two decades later, the buyer’s broker and the broker’s agents still sometimes improperly refer to themselves as the cooperating office or cooperating agents in a sales transaction. The term “cooperating” arose out of the old MLS subagency concept whereby the listing broker shared the fee paid by the seller with the buyer’s broker, which is still authorized by the broker cooperation clause in listing agreements today. [See first tuesday 102 §4.2]
Originally, under the old MLS application of subagency, the existence of the cooperation clause was essential to the receipt of fees by those brokers and sales agents who “produced” a buyer since the agent was without a retainer agreement with the buyer and had to get “cooperation” under a fee-sharing arrangement with the seller’s broker in order to get paid.
MLS brokers under the MLS subagency theory were not employed to act as an agent for a buyer. The purchase agreement forms used were devoid of fee arrangement provisions in the buyer’s offer. Yet, a fee provision in the offer is needed to provide the buyer’s broker with the ability to independently set his fee and, if accepted or some other arrangement is concluded, enforce collection of the fee.
All MLS subagency arrangements came to a stop by the mid-1980s when the real estate agency law was enacted and buyer’s listings began to be used.
Under a buyer’s listing, MLS brokers and their agents could now effectively act on behalf of buyers without negotiating a fee-sharing arrangement with the seller’s broker, who is the adversary of the buyer and the buyer’s broker. As a result, buyer’s agents began to set the amount of the fee they were to receive (paid by sellers) without the listing agents dictating, managing or controlling negotiations over the amount of the fee buyers were willing to allow their agents to receive.
Selling agent or buying agent
The term “selling agent” also has its roots in the old subagent/cooperating agent MLS environment. At the time, listings published in MLS books were reviewed by members with the intent of “helping to sell” the properties to buyers.
Thus, the nonlisting broker/agent, under prior MLS logic, was the one “selling the property” to a prospective buyer “produced” by the selling agent. However, the buyer’s agent was, and still is, selling nothing at all. A selling agent acting on behalf of a buyer is locating property and representing his buyer in the purchase of real estate as a “buying agent.”
Today, the term “selling agent” has been codified in real estate agency law, as has the term “buyer’s agent.”
However, use of the term “selling agent” does not always mean the selling agent is the buyer’s broker.
For instance, the buyer’s agent is always defined as a selling agent. However, the selling agent is not always the equivalent of the buyer’s agent. The term selling agent is also legally defined to include a listing broker or his agent who is in direct contact with a buyer, whether or not the listing agent has obligated himself as a dual agent to act as the representative of the buyer.
Representing the buyer requires the agent to locate suitable property and to carefully and diligently advise the buyer on the nature of the property. Also, if an agent represents a buyer, he must seek the most advantageous price and terms available to the buyer when negotiating the acquisition of property.
Thus, when no other broker is involved in a sales transaction, the listing broker is also legally referred to as the selling agent, a situation referred to in practice as “double ending” the sale.
The listing broker who double ends a transaction is not the buyer’s agent at all. However, the listing agent may undertake the representation of the buyer to locate and advise on the acquisition of suitable property, in which case the broker is also a dual agent. A buyer’s agent absolutely represents the best interests of a buyer. This is not always so when classified as a selling agent.
In a real estate sales transaction, the agent identified and referred to as the buyer’s broker or buyer’s agent is known to all persons, be they judges, legislators, sellers, buyers, lenders, escrow officers or even fellow licensees, as the agent exclusively representing the buyer.
The title “buyer’s agent” is now, but has not always been, conceded by the real estate profession to be an appropriate reference to the buyer’s representative. However, the clarity and ease of its use is both undeniably generic and persuasive, and indicates the special agency duties owed by a buyer’s agent to the buyer in a sales transaction. This attitude is lost by use of the nebulous and multifaceted term, selling agent.
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.
