Home buyers will still be able to request a concession from sellers that includes funds to help cover buyer agent compensation, but this will be after they have had the opportunity to comparison shop and negotiate buyer agent rates.  The settlement will also encourage more sellers to negotiate the compensation of their listing agents.

Required buyer agent contracts will demand that buyer agents discuss their compensation with their buyer clients.  These discussions alone will tend to lower buyer agent compensation.  But as CFA’s February 15, 2024 report on these contracts explained, they have been written mainly by attorneys for state Realtor associations for the benefit of agents and brokers, and contain many anti-consumer features.

The residential real estate marketplace will take some time, perhaps several years, to fully process the implications of this settlement.  But over time more agents will feel free to offer different types of compensation, and more consumers will comparison shop and negotiate commissions in a more transparent marketplace.

The industry has raised concerns about first-time home buyers.  They will have the opportunity to request a concession from home sellers that helps cover buyer agent compensation.  But the real solution is for the industry to work to remove regulatory barriers that make it difficult for buyers to include this compensation in their mortgages.  We are fairly confident that the industry will pursue this issue in part to preserve buyer brokerage.  Without the option, more buyers will contact listing agents, losing fiduciary representation though also potentially lowering their costs.

The post CFA COMMENT ON THE SETTLEMENT OF MAJOR LAWSUITS BY THE NATIONAL ASSOCIATION OF REALTORS appeared first on Consumer Federation of America.

Citing research from the Consumer Federation of America (CFA) and other sources, the DOJ opinion rejected a proposed settlement, calling the proposal neither fair, reasonable, or adequate.  “It makes insignificant and largely cosmetic changes to the [MLS] Rule, while perpetuating the existing structure that drives supra-competitive commissions.  There is no reason to believe that the settlement will reduce broker commissions for the class.”

“This DOJ opinion virtually guarantees that buyers will eventually be able to negotiate buyer agent commissions that are currently fixed through industry collusion,” said Stephen Brobeck, a CFA senior fellow.  “It is also likely that there will be greater variation of agent compensation depending on factors such as agent experience and time spent on the sale,” he added.

The DOJ opinion represents a major watershed in efforts, over the past 80 years, to introduce more price competition in agent and broker compensation.  These efforts include:

• DOJ litigation begun in the 1940s against industry adoption of “standard rates of commissions” with a notable U.S. Supreme Court decision in 1950 favoring DOJ.
• A massive 1983 report by the Federal Trade Commission that explained and documented how the industry uses informal collusion, and coupled rates, to set these rates.
• A 2006 congressional hearing at which DOJ, FTC, Redfin and CFA criticized industry price-fixing.
• A 2018 DOJ-FTC public workshop at which several participants, including industry members, criticized industry price-fixing.
• A 2019 lawsuit (Moehrl v. NAR et al.) filed in Chicago by some of the largest, most successful class action firms in the country, quickly followed by a similar lawsuit (Sitzer v. NAR et al.) filed in Kansas City.
• An October 2023 jury decision in the Sitzer lawsuit that found the industry guilty of price-fixing and awarded damages that could exceed $5 billion.
• More than 20 recent class action lawsuits filed representing sellers or buyers that are increasing current and potential legal costs, jeopardizing not only NAR, MLSs, and big companies but also all residential brokers.

“The industry will be foolish if they do not seek to consolidate the lawsuits, agree to pay affordable damages, and decouple seller and buyer agent compensation,” noted CFA’s Brobeck.

DOJ does not envision a compensation system in which buyers must come up with additional cash to pay their agents.  The agency agrees that sellers could provide dollar concessions to be used for this compensation and other buyer expenses.  However, DOJ stressed that buyers must have the ability to negotiate these commissions then decide what, if any, concessions to seek from sellers.  Similarly, sellers would have the ability to decide whether to offer any concessions and, if so, their amount.

Some of the details of this decoupled system need to be worked out.  “It is critically important that buyers negotiate buyer agent commissions before their agents search for properties,” said CFA’s Brobeck.  “Otherwise, buyer agents could steer buyers to properties with the highest dollar concessions and potential agent compensation,” he added.

It is also important that buyer agents be prohibited from being compensated by both buyer and seller, a practice the NAR Code of Ethics disapproves of.  Otherwise, buyer and listing agents could easily collude to maintain existing commission levels.

It appears that the DOJ opinion was influenced by separate proposals made by CFA and by a group of attorneys representing major multiple listing services, both of which are cited in footnotes.  CFA supports the MLS proposal but only as a package deal.  “By eliminating one or two key requirements, the proposal would allow the existing collusive system to continue,” said CFA’s Brobeck.

CFA emphasizes that it is not easy to completely eliminate price-fixing.   “Significant asymmetries between consumers and agents provide opportunities for continued price-fixing within a decoupled system,” said CFA’s Brobeck.  “Agents could tell buyer and seller clients that 2.5-3.0 percent rates [5-6% total] were normal, and agents could refuse to negotiate these rates, as many listing agents currently do [around three-quarters, CFA research has found].”

“To ensure significant price competition, both buyers and sellers would need to discuss and try to negotiate compensation of their agents,” Brobeck said.  “Even then, rates would be unlikely to fall immediately, yet over time could decline to an average of 3-4 percent level, saving consumers an estimated $20-$30 billion annually, with much greater variation in types of compensation and rates charged by different agents.  No longer would inexperienced agents be able to charge the same rates as highly competent agents with years of experience,” he added.

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“Through lax hiring and training, many companies sponsor agents that have too little knowledge and experience to adequately serve consumers,” said Stephen Brobeck, a CFA senior fellow and the report’s author.  “Home buyers and sellers benefit from considering recent sales experience and customer evaluations before hiring an agent,” he added.

The CFA report examined the annual number of home sales of 2,000 randomly selected agents working for major companies in four diverse urban areas – Central Pennsylvania, Orlando (FL), Tucson (AZ), and Minneapolis (MN).  This research revealed that nearly half of the agents (49%) sold only one or no homes the previous year and that nearly three-quarters of the agents (70%) sold five or fewer homes. [2]

“The residential real estate industry is truly a part-time industry with most agents working sporadically and holding another job, often full-time,” said CFA’s Brobeck.  “There is no other financial services industry or profession where part-time, marginal workers are so ubiquitous,” he added.

Despite the agent glut, most major companies continuously advertise sales positions.  On one major employment website, in five of six urban areas at least one sales position was advertised by all but one of six major companies.  This continuous hiring reflects four main factors:

• A high agent turnover rate opens up job positions that companies feel must be filled.
• Newly recruited agents bring with them new clients, often friends and family members.
• These agents pay fees – ranging from $50 to $400 monthly — that help companies cover overhead expenses.
• Since most agents are independent contractors not employees, firms have limited liability for the conduct of these agents.

This limited liability diminishes the incentive of companies to adequately train, mentor, and oversee the new agents.  Nearly all national and large regional companies offer training in the practicalities of selling property, but these courses are usually online and not required.  Mentoring programs are infrequent, and those brokers with responsibility for new agents often are given too many agents and too few incentives to adequately oversee.  As a result, notes the report: “The large majority of new licensees apparently are not required to take courses, participate in company training programs, seek a mentor, or receive active broker supervision.”

Moreover, most states do not require more active supervision of new than experienced agents.  Only seven states require stricter supervision, and only three (Colorado, Illinois, Montana) define what this supervision entails.

“Consumers do not benefit from the failure of companies to adequately train and oversee new agents,” said CFA’s Brobeck.  “Incompetent agents impose costs on consumers ranging from missed sales opportunities to disadvantageous sale prices to problematic homes,” he added.

State governments, the industry, and consumers can address these agent inadequacies.

• State governments can require agents to take post-license courses on the practicalities of selling property (7 states do).  They also can require companies to more closely supervise new agents (7 states do).
• The residential real estate industry needs to set higher standards for training and overseeing new agents.  These standards would increase agent competence, help ensure a smoother sales process, and enhance the reputation of the industry as well as benefiting consumers.
• CFA urges home sellers and buyers to research the recent sales experience and customer reviews of agents before hiring one.  The most useful sources of this information are Zillow and Realtor.com.  “Researching agents will not only benefit individual buyers and sellers but also help ensure a more competitive marketplace where competent agents are more likely to succeed,” CFA’s Brobeck notes.

^[1] Stephen Brobeck, A Surfeit of Real Estate Agents: Industry and Consumer Impacts (July 2023) and A Surfeit of Real Estate Agents 2: Is Entry Too Easy? (October 2023).

^[2] The National Association of Realtors projects only 4.1 million sales of existing homes this year.  Between 2007 and 2022, except in 2021 (6.1 sales) these annual sales ranged between 4.1 million and 5.6 million, so that while 2023 sales are low, they are still within the range of the past 15 years.

The post NEARLY HALF OF REAL ESTATE AGENTS SOLD NO OR ONE HOUSE THIS PAST YEAR appeared first on Consumer Federation of America.

Despite the oversupply, major firms continue to recruit new agents, often failing to provide sufficient training and mentorship. This results in a majority of agents selling few or no properties yearly and a prevalence of inexperienced agents in the market. The report suggests that this system persists due to factors like high agent turnover, new agents bringing in clients from their personal networks, and firms benefiting from fees paid by these agents. The lack of effective training and mentorship underscores the need for improved industry standards and consumer awareness when selecting agents.

The post A Surfeit of Real Estate Agents 3: Abundant Jobs, Inadequate Mentorship, and Few Sales appeared first on Consumer Federation of America.

On Monday October 31, a Kansas City jury determined that major real estate industry players had conspired to set prices and awarded $1.78 billion to plaintiffs in this class action lawsuit (Sitzer/Burnett vs. National Association of Realtors et al.), with the possibility of additional treble damages.  Stephen Brobeck, a CFA senior fellow, made the following statement about the decision:

“The speed of the decision and size of the award reveal that jury members believe the industry has restricted price competition to ensure near-uniform five to six percent commission rates.  The extent of injunctive relief decided by the court will strongly influence whether a price competitive system develops that lowers consumer costs and increases quality of services.  We hope that the court will sever the ties between listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.”

The post JURY AWARDS $1.78 BILLION TO CONSUMERS WHO ARE VICTIMS OF REAL ESTATE INDUSTRY PRICE-SETTING appeared first on Consumer Federation of America.

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The report shows that it is much less demanding to earn a real estate sales license – which takes a state median of nine weeks at a state median cost of $600 – than earning a license to practice almost all other financial services occupations, which normally require a college degree as well as special training.  It is even easier to earn a real estate sales license than to practice many manual occupations, from plumbing to hairdressing, which usually require an apprenticeship of more than 1,000 hours as well as coursework.

“There is widespread agreement that required state courses and exams do not adequately prepare licensees to sell real estate,” said Stephen Brobeck, a CFA Senior Fellow and author of the report.  “I recently earned a real estate sales license and am neither qualified nor capable of facilitating home sales on my own.”

In some states, though, it is more difficult to obtain a license than in others.  For example, four states require only 40 hours of coursework, taking as little as two weeks to complete, while three other states require at least 150 hours of coursework.  Further, a dozen states require final course exams to be proctored, while the remaining states effectively allow open-book exams.  The report cites some evidence that states with the least coursework also have the highest agent densities, though it notes that the relationship between median home sale prices and agent densities is even stronger.

The report discusses numerous ways that regulators could toughen entry requirements.  Some, such as increasing hours of coursework or requiring proctored course exams, would often require legislative approval.  Yet, other measures, including working with testing companies (PSI and Pearson VUE) to strengthen state license exams, could usually be implemented by the regulators themselves.  Almost all states require only a passing score of 70 or 75 percent, and the exams often include questions that could be answered correctly without any course knowledge.

“Regulators could easily work with the testing companies to include more relevant and challenging questions on the state exams,” noted CFA’s Brobeck.

The report supplements a report issued in July 2023 that documents the surfeit of agents and related costs both to the industry and to consumers.  The new report drew most information from the websites of state regulators, from related state laws, and from the personal experience of the author, who recently earned a D.C. real estate sales license.

The post Easy Coursework and State License Exams Allow a Surplus of Real Estate Agents appeared first on Consumer Federation of America.

The report shows that it is much less demanding to earn a real estate sales license – which takes a state median of nine weeks at a state median cost of $600 – than earning a license to practice almost all other financial services occupations, which normally require a college degree as well as special training.  It is even easier to earn a real estate sales license than to practice many manual occupations, from plumbing to hairdressing, which usually require an apprenticeship of more than 1,000 hours as well as coursework.

The post A Surfeit of Real Estate Agents 2: Is Entry Too Easy appeared first on Consumer Federation of America.

Life Hack for Saving Time: Pass the FTC’s Auto Dealer Rule

Department of Labor ERISA Council Must Protect Retirees and Workers Pensions

CFA Report Shows That Real Estate Agent Glut Harms Both Industry and Consumers

Tips for Saving Money on Your Auto Insurance

By: Michael Delong, Research and Advocacy Associate

Auto insurance is an interesting product: we are all required to have it if we own a car, but we hope never to have to use it, and we try not to think about it. But as insurance premiums continue to skyrocket, it has probably been on your mind more.  Even though we can face stiff penalties for driving without insurance, many drivers struggle to keep up with the rate increases.  In addition to the price pain, the insurance product itself can be kind of bewildering:  what are all these different “coverages,” which do I need, and (of course) why do they cost so much?

Consumer Federation of America (CFA) and America Saves are here to help. At its most basic, auto insurance covers damage or injury you cause to another car or person while you are driving.  Depending upon your state and the coverage you choose, your insurance policy may also cover your medical bills or damage to your car when you cause a crash, when you are hit by an uninsured driver, or when your car is stolen or crushed by a tree branch.

Every state except New Hampshire requires drivers to have auto insurance—and New Hampshire still requires financial responsibility if you cause an accident, so the overwhelming majority of people there have auto insurance. If you do not have auto insurance, you are breaking the law. And if you are caught you may be fined, have your license suspended and have to pay a fee to recover it, and possibly even face jail time.

Over the next several weeks CFA and America Saves are partnering on a series of articles on auto insurance—how to save money, what consumers should know, and several myths about auto insurance. Please note that these tips are general in nature and may not reflect every reader’s personal needs and situation; you should consult financial advisors and insurance professionals as you make decisions.

You can save money on your auto insurance with these tips:

1. Shop around—and shop around using multiple options. Auto insurers use a variety of driving and non-driving socio-economic rating factors to set your premiums. Driving-related factors include your driver safety record, the number of miles driven, and whether you have been in any accidents or filed any claims. Non-driving related factors include your gender and marital status, your credit score, your education level, your job or occupation, whether and how much insurance you’ve had in the past, and whether you own a home or rent. Insurers also place a lot of emphasis on where you live, often based on your ZIP code and even on which block you live in your neighborhood.

Each auto insurer calculates these factors and their impact on your premium in different ways – some rely heavily on your credit history and never consider your job title or educational history, while others may weigh several aspects of socio-economic status when calculating your premium. It is well worth your time to sit down and get quotes from different insurance companies. If one company charges you $120 per month and you find another company that only charges you $90 per month, that $30 savings per month will add up to $360 saved per year.

Consumers can compare quotes in several different ways:

• Online: You can go to different auto insurer websites, fill out your information, and get the quotes, and you can use comparison websites such as the Zebra, Bankrate, or ValuePenguin. These websites enable you to compare a few quotes more quickly and easily. It is important to note that these companies do not scan the whole market for you, and they get paid by insurance companies.
• Through an agency. You can contact licensed insurance agents to get additional quotes and guidance about insurance generally. There are some agents – known as “exclusive” or “captive” agents who only sell one insurance brand and may have deep knowledge about the offerings of their company. Others, known as “independent” agents and brokers, can scan several insurers’ offerings for you, including some that may not be available online.

We recommend that people shop around through each of these methods to get the best set of options and find the best price.  One note, some insurance sellers, known as “brokers” may charge an additional “broker fee” if you work with them. Unless you have a particularly unique situation – such as a very bad driving record or a very expensive or custom vehicle – we recommend against purchasing auto insurance from brokers who charge a fee.

     2. Consider whether you still need comprehensive and collision coverage. These options on an insurance policy will pay to repair or replace your car if it is damaged by you (such as accidentally crashing into a pole while parking), some natural event like a falling tree branch, or if it is stolen. If you have a car loan or lease your vehicle, these coverages are required, but if you own your car outright, they are optional. “Comp and Collision” are particularly helpful if your car value is still pretty high, but if your car is not worth much anymore, it may be time to consider dropping Comp and Collision. Since these coverages usually come with a deductible – typically $500 – that you have to pay first before any insurance payments kicks in, it may be better to try and set aside a little money each month just in case you damage the vehicle, rather than pay hundreds of dollars in premiums each year for a car worth only a few thousand dollars. As a thumbnail rule, if your car value is less than ten times what you pay for Comp and Collision, you might consider dropping it. That is, if your car is worth $10,000, it might not be worth it to spend more than $1,000 a year on Comp and Collision; if it’s only worth $3,000, think twice about a policy costing more than $300 for those coverages.

     3. Check your credit score for errors and try to improve it as well. We hate to make this recommendation, because it is ridiculous that this should impact your insurance premium. But, until politicians stand up to insurance companies and stop this practice (it is already prohibited in California, Hawaii, and Massachusetts), it is one of the biggest drivers of your auto insurance premium. Our research indicates that consumers with a perfect driving record and poor credit scores pay on average at least twice as much for auto insurance compared to consumers with a poor driving record and excellent credit scores.

The first thing you can do is examine your credit report for errors, which are unfortunately quite common, and demand that any errors be corrected. You can get a copy of your credit report at this link. If you find errors, contact your insurer and demand that they re-run your “credit-based insurance score,” re-price your policy if appropriate, and refund any excess they charged by using a faulty score. Over time, you can work on improving your credit score by following the credit score improvement strategies described here.

CFA is fighting to ban auto insurers from charging consumers more based on their credit; if you are interested in learning more or getting involved, email us at mdelong@consumerfed.org.

     4. Make sure your insurer knows how much you drive. Many companies charge lower prices to low-mileage drivers. If you are driving less (because you are working from home, out-of-work, or retired) than you used to, you may be paying more than you should. Find out how many annual miles the insurer is estimating for you when they set your premium and correct them if they are rating you based on out-of-date information.

     5. Improve your driving by taking a driving improvement course. Auto insurance companies charge far higher premiums if they believe you are a risky driver, since that increases the chances of your being in a crash and the insurance company having to pay a claim. If your driving record is checkered or you would like to save on your insurance, some auto insurers will offer you a discount if you take a defensive driving course. Check with your insurance company or agent to see if you qualify for a discount if you take this course, some of which can even be taken online.

     6. Pay your auto insurance premium in full instead of monthly. If you’re struggling to cover the cost of insurance, then you are probably paying in installments. It may be hard to imagine paying it all at once, but it’s worth calling your company and asking how much you would save if you did. With some companies it can be 5-8% or even as much as 12%. If you are on a six-month policy (where the pay-in-full amount is much less than an annual policy), and you pay a significant installment fee, consider paying all at once.

     7. Look for additional discounts. Many auto insurers offer further discounts if you meet certain conditions. Possible benefits include: discounts for having a paperless policy, a student discount, a discount if your car gets an anti-theft device, an automatic payments discount, or a discount for veterans/members of the military.

Auto insurance is required in most states, and it is also a crucial tool for financial security and economic mobility (as well as actual mobility in most places). Some of the reasons for high prices have to do with unfairness in the marketplace and company greed – CFA is working on improving laws and regulations to better protect consumers from these problems – but being a savvy insurance shopper and consumer can help. We hope that this will help you save on your auto insurance.

Life Hack for Saving Time: Pass the FTC’s Auto Dealer Rule

By: Erin Witte, Director of Consumer Protection

The Federal Trade Commission sells its Motor Vehicle Dealer Rule short when it estimates that consumers will only save $30 billion over ten years. The $30 billion number is the dollar equivalent of the time savings (on average: 3 hours per transaction) for consumers because the rule would prohibit dealers from advertising deals that are not available, and from wasting consumers’ time by making them call or physically go to a dealership to haggle over the price of the car. It is hard to imagine that anyone will be unhappy about having to spend less time at a car dealership – $30 billion is just icing on the cake.

But time savings, significant as they are, are only one small fraction of the ways consumers would save money with this rule. Dealers would not be able to sell worthless add-on products or deceive consumers into buying them. If the FTC’s cases against Passport and Napleton are any indicator, the cost savings here will well exceed the $30 billion estimate. Napleton alone allegedly charged over $70 million in deceptive and unauthorized add-ons. With over 45,000 dealers in the U.S. generating hundreds of thousands of complaints to government regulators, it is safe to assume that Napleton and Passport are not simply “bad apples.” Implementing safeguards to help prevent these and other deplorable practices will only put more money back in consumers’ pockets, stimulate competition, and make the process of buying a car slightly less painful.

Enter the lobbying powerhouse National Automobile Dealers Association (NADA), smelling blood in the water for dealers’ substantial profits, and predictably dipping into its well-funded coffers to generate a fearmongering survey and report about the FTC’s rule. Before asking a single question, the survey spends three pages striking fear in the hearts of dealers about expanded liability, exposure to significant monetary penalties, and “increase[d] consumer confusion and frustration.” It is no surprise that this “representative sample” of 40 dealers (out of “roughly 60,” handpicked by NADA) who managed to fully complete the survey (and “nearly fifteen” who were interviewed) want us to believe that the rule will cost consumers more than it saves. This simply is not true.

Perhaps it’s time we asked the people who rely on and pay increasingly high amounts for cars what they would like to see. Thousands of consumers responded to the FTC’s rulemaking, sharing horror stories and pleading for its passage. The least we can give them is a measly 3 hours and $30 billion back.

Department of Labor ERISA Council Must Protect Retirees and Workers Pensions

By: Micah Hauptman, Director of Investor Protection

On July 18^th, CFA’s Director of Investor Protection Micah Hauptman testified before the Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans, known as the ERISA Advisory Council. The purpose of the hearing was to help the Department determine whether it should update its longstanding guidance for pension plan fiduciaries in order to ensure that their decisions to transfer worker and retiree pensions to annuity providers are in the sole interests of workers and retirees.

Hauptman stated that in recent years many of the largest companies in the U.S. have transferred their pension obligations to insurance companies that provide annuities to workers and retirees. When companies do this, they shift risks onto insurance companies that, if not carefully controlled for, could undermine insurance companies’ abilities to fully pay those annuities to workers and retirees.

At the same time, insurance companies’ business models are evolving in ways that may increase risks for insurers, Hauptman stated. For example, private equity firms have become increasingly involved in insurance markets, introducing new sources of risk, complexity, and opacity to insurers’ businesses — risks that may undermine insurance companies’ ability to pay annuities to workers and retirees.

While state-based insurance guarantees may offer a partial backstop against the risk that insurance companies may not pay their annuity obligations, those guarantees are not as robust as the insurance guarantees that are provided under federal law by the Pension Benefit Guaranty Corporation (PBGC), Hauptman stated. Thus, the workers and retirees whose pensions are transferred to annuities are at risk of losing valuable benefits if the insurance company providing their annuity were to fail.

Given these heightened risks to workers and retirees arising from pension risk transfers to annuity providers, Hauptman urged the Department to preserve the protections in the current guidance for pension plan fiduciaries and offered several suggestions for the Department to consider to strengthen the guidance so as to ensure that any pension risk transfer arrangements do not leave workers or retirees worse off than they would be if they stayed in the defined benefit pension.  These included:

• Preserving the requirement for fiduciaries to select the safest annuity available;
• Requiring fiduciaries to select annuities that are independently reinsured; and
• Not permitting fiduciaries to satisfy their obligations by providing disclosures about the risks associated with the transfer or by accepting written representations by an insurance company that it is complying with state insurance laws.

Hauptman reminded the Department that workers and retirees have earned their pensions and depend on them for a secure retirement. Accordingly, the Department must ensure that those benefits and the protections afforded to workers and retirees are not compromised.

CFA Report Shows That Real Estate Agent Glut Harms Both Industry and Consumers

Earlier this month CFA released a new report – “A Surfeit of Real Estate Agents: Industry and Consumer Impacts” – revealing with industry data that there are too many residential real estate agents compared to the amount of homes available for sale. The report also found that this imbalance burdens consumers with higher commission costs and leaves them vulnerable to inexperienced real estate agents.

There are more than 1.5 million residential agents who belong to the National Association of Realtors and compete for home sales, with costs totaling between $5 to $6 million annually. The costs include:

• economic inefficiencies including an inordinate time spent by agents finding clients,
• relatively low incomes of many full-time agents,
• frustration by these agents and by many consumers who must deal with inexperienced agents,
• reinforcement of relatively high and uniform commission rates, and
• damage to the reputation of the industry.

“A large majority of practicing real estate agents have recently received their license or work part-time,” said Stephen Brobeck, a senior fellow at CFA and author of the report. “These agents usually charge the same commission rates as experienced, full-time agents yet in general offer worse service and deprive experienced agents of needed clients.”

Marginal agents with fewer than five sales a year receive an estimated 25-30 percent of commission income. The report found that the median net income of all sales agents was approximately $25,000, and the median net income of sales agents with less than two years of experience was $7,800. For all brokers and associate brokers, the net median income was $57,100.

“Without 5-6 percent commission rates, even fewer agents would survive financially in today’s marketplace,” said Brobeck.  “Ironically, relatively high rates attract new entrants into the industry, increasing competition for clients and reducing individual income for all.”

A future CFA report will explore the ease with which people can obtain a real estate license compared to the difficulty for most licensees to learn how to succeed as realtors.

“To protect consumers and experienced realtors, the industry should discourage unqualified and insufficiently committed people from obtaining a license,” said Brobeck. “The industry should prioritize making it easier for capable, hard-working licensees to succeed. We look forward to expanding on this suggestion in a future report.”

The post CFAnews Update – July 27, 2023 appeared first on Consumer Federation of America.

Those costs include:

• economic inefficiencies including an inordinate time spent by agents finding clients,
• relatively low incomes of many full-time agents,
• frustration by these agents and by many consumers who must deal with inexperienced agents,
• reinforcement of relatively high and uniform commission rates, and
• damage to the reputation of the industry.

“A large majority of practicing real estate agents have recently received their license or work part-time,” said Stephen Brobeck, a senior fellow at CFA. “These agents usually charge the same commission rates as experienced, full-time agents yet in general offer worse service and deprive experienced agents of needed clients.”

In examining home sales in three cities– Jacksonville (FL), Minneapolis (MN), and Albuquerque (NM) — the study found that marginal agents (with five or fewer sales a year) received an estimated 25-30 percent of commission income.  According to data collected by the industry from Realtors in 2021:

• the median net income of all sales agents was $25,000,
• the median net income of sales agents with less than two years experience was $7,800, and,
• the median net income of all brokers and associate brokers was $57,100.

The report documents complaints by many experienced, full-time agents of the incompetence and/or inattention of other agents that also harm consumers.  And it emphasizes that because of the “surfeit of agents,” real estate agents and brokers feel financial and/or peer pressure to keep commission rates relatively high.

“Without 5-6 percent rates, even fewer agents would survive financially in today’s marketplace,” said Brobeck.  “Ironically, relatively high rates attract new entrants into the industry, increasing competition for clients and reducing individual income for all.”

The report raises the question of whether the industry should make greater efforts to ensure the competence and commitment of new agents.  Such efforts could include more stringent entry requirements and required mentoring of new agents.  A future CFA report will address in depth these two issues.

The post Too Many Real Estate Agents For Too Few Home Sales: New CFA Report Documents the Costs to Industry and to Consumers appeared first on Consumer Federation of America.

The post A Surfeit of Real Estate Agents: Industry and Consumer Impacts appeared first on Consumer Federation of America.

In her decision, Judge Andrea Wood recognized that over $10 billion dollars in actual damages related to home sales between 2015 and 2020 is at stake. If trebled, this would total over $40 billion. Some of the largest and most successful class action law firms, including Cohen Milstein, are representing plaintiffs.

Plaintiffs are asking not only for class damages but also for injunctive relief from the “blanket unilateral offer of compensation” from home sellers and their listing agents to buyer agents that is required by multiple listing services (MLSs).  NAR makes the rules governing hundreds of local MLSs.

“This case, which involves widespread industry collusion to set broker commissions, does not pit liberals against conservatives,” said Stephen Brobeck, a Senior Fellow and real estate expert for Consumer Federation of America. “Both have criticized the industry practice. If the court grants plaintiffs injunctive relief, we estimate that consumers should save $20-$30 billion annually in lower commissions, which are likely to decline from the current 5-6 percent level to 3-4 percent.  This prediction is based on commission levels in countries used by plaintiffs as yardsticks – United Kingdom, Australia, and the Netherlands – and, as our research as shown, in the New York City area outside of Manhattan.”

While Moehrl v. NAR is the largest class action litigation challenging mandatory buyer broker commission offers on MLS listings, it is not the only one.  Last year, the lawsuit, Sitzer v. NAR et al., filed against the industry in a federal district court in Western Missouri was granted class certification.

“Our view is that the industry will fight hard to retain mandatory offers but is slowly realizing that the practice is unsustainable in a competitive, capitalist economy,” said Brobeck. “We believe that embracing price competition will only help the most competent and dedicated real estate agents and brokers. Today, real estate agents are usually paid the same commission rates regardless of their experience and competence.”

The post U.S. District Court Grants Class Certification in Largest, Most Significant Lawsuit Against the Residential Real Estate Industry appeared first on Consumer Federation of America.

“The court’s decision will limit DOJ’s ability to investigate anti-competitive industry policies costing consumers billions of dollars annually.  These policies are related to the inability of home buyers to negotiate buyer agent commissions that are directly paid by listing agents and their seller clients.  Multiple listing services require listing agents to offer non-negotiable commissions to buyer agents in MLS home listings, which helps explain why research has shown that commissions are high and relatively uniform.  The reform of this anti-competitive policy must now come from courts in Illinois and Missouri that are deciding class action lawsuits against NAR and many large real estate firms.”

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“The prominent publication of buyer agent commissions can help home buyers avoid well-documented steering by some agents away from low-commission homes to high-commission ones,” noted Stephen Brobeck, a CFA senior fellow and long-time researcher of residential brokerage policies and practices.  “Steered consumers may not be shown homes they would have preferred and end up paying higher commissions that are effectively added to the sale price of homes,” he added.

CFA recommends that on homes that interest them, home buyers always note the commission rate offered by the listing agent to buyer agents, then check to see whether their agent discourages them from visiting low-commission homes.  CFA also recommends that, if the rate is relatively high, buyers inquire as to whether a portion of it can be “rebated” to them.

Published buyer agent rates can also benefit home sellers by giving them information about typical rates usually paid to buyer agents in their area.  Today, because multiple listing services (MLSs) require listing agents to offer compensation to buyer agents, home sellers directly pay the commissions of both their agent and the buyer agent.

The report found that many large firms – including Berkshire Hathaway, Sotheby’s, Compass, Howard Hanna, Long & Foster, Crye-Leike, Century 21, and Realty One – never or rarely publish buyer agent rates.  It also learned that Zillow, Keller Williams, and Better Homes and Gardens prominently publish buyer agent rates on many of the homes for sale that they list on their websites.

Redfin, however, prominently publishes buyer rates on a large majority of the homes listed on local multiple listing services (MLSs).  “Home buyers who cannot find buyer agent rates on the website of their buyer agent can usually find these rates on the Redfin website,” CFA’s Brobeck noted.

The report emphasized that, while published buyer agent commission rates can benefit consumers, they are unlikely to increase price competition because buyers remain unable to negotiate these rates.  Two major lawsuits – Sitzer v. NAR and Moehrl v. NAR – have challenged the tying (or coupling) of listing agent and buyer agent commission.  “Untying commissions would allow buyers to negotiate rates, encourage sellers to do the same, and provide new opportunities for discount brokers to market their services,” said CFA’s Brobeck.  Research has found that commissions in the U.S. tend to be relatively high (internationally) and uniform (locally).

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“At $72,000, total agent compensation on a $1.2 million Manhattan condo is likely to be three times higher than total agent compensation of $24,000 on a $800,000 condo sold in parts of Brooklyn,” noted Stephen Brobeck, a CFA senior fellow.  Earlier research by CFA and others has shown that in almost all other cities, rates are highly uniform, typically ranging between 5 and 6%.

The report is based on an analysis of more than 2,000 recent home sales in Manhattan, Brooklyn, Queens, and Hempstead, Long Island; using published sources, and interviews with NYC real estate experts, brokers, and agents.

The most important reason for the differences in commission rates was the multiple listing service (MLS) through which the sale was made.

• The Real Estate Board of New York (REBNY) established the norm of 5-6% rates in part by requiring listing brokers to offer and provide equal compensation to buyer brokers.
• The Brooklyn MLS does not require listing brokers to offer any compensation to buyer brokers (and 10% do not). Most rates are 3 or 4%.  An increasing number of 2% rates partly reflect double-ending (listing agent worked with both seller and buyer).
• The OneKey MLS, affiliated with the National Association of Realtors, operates throughout much of the city under NAR rules and requires listing agents to offer non-negotiable compensation to buyer agents, yet this fee can be lower than that of the listing agent.

Typical buy-side (buyer agent) rates in OneKey MLS sales lie between rates in REBNY and Brooklyn MLS sales.  “It appears that Brooklyn MLS rates have put downward pressure on all commission rates in New York City except those charged on REBNY sales,” noted Brobeck.   The report also analyzes the impact on rates of double-ending, home prices, type of home, service quality, and consumer expectations.

CFA urges New York consumers, especially those served by REBNY in Manhattan and brownstone Brooklyn, to insist on lower rates.  “In most instances, those selling homes in Manhattan are being ripped off by high commission rates,” said Brobeck.  “On the sale of a $1 million condo, agents rarely deserve $60,000 in compensation, the price of two new economy cars or one expensive one,” he added.

Contact: Stephen Brobeck, sbrobeck@consumerfed.org

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The report was based on a comparison of housing prices and buyer broker commission rates in 17,805 recent sales in 35 cities.

• In ten cities, the rates were so uniform that meaningful comparisons could not be made.
• In five cities, rates were fairly similar for all housing price categories.
• In eight cities, higher-priced homes tended to carry higher commission rates than did lower-priced homes.
• In only eight cities did higher-priced homes tend to carry lower commission rates.

These findings not only differ from research findings of 20-30 years ago – the most recent comparison of prices and rates – but also defy common sense.  “At the same commission rate, brokers selling a million-dollar home receive ten times the compensation of those selling a $100,000 property,” said CFA’s Brobeck.  “One would expect that commissions on expensive homes would be discounted.  Yet that usually is not the case for buy-side commissions.  In some cities, those selling high-priced homes pay higher commission rates,” he added.

Some brokers have argued that selling a high-priced home  takes more time and skill to sell than a modestly-priced one.  The report suggests that this difference may exist for the sale of multi-million dollar homes.  But the report also cites other brokers who say it takes no more effort to sell a $600,000-$800,000 home than a $200,00-$400,000 house.  As one broker put it:  “Generally speaking, an $800,000 house is no more work than a $300,000 house.”

The report explains this inequity largely in terms of historic industry practices perpetuated by anti-competitive industry rules.  Throughout the 20^th century, industry leaders worked to establish uniform, fixed-rate commissions.  The U.S. Department Of Justice (DOJ) thwarted industry efforts to establish, first, rate schedules, then, recommended rates.  But as the landmark 1983 Federal Trade Commission report on the industry concluded:  “We have no evidence that efforts at stopping these per se unlawful conspiracies produce significant change in rates.”  In the 1950s, the five-percent commission was nearly uniform across the country.  Today, most commission rates range between five and six percent, with a striking degree of rate uniformity in most cities.

The 1983 FTC report noted that “the brokerage system is, by its very nature, self-enforcing.”  Key to the self-enforcement of rate-related norms has been the requirement that all properties for sale listed on local multiple listings services (MLSs) carry a mandatory offer of buyer broker compensation.  These offers almost always take the form of a percentage commission and are non-negotiable.  Since buyer brokers are ostensibly compensated by sellers, these brokers have no need to even discuss, let alone negotiate their compensation with buyer clients.

Sellers, on the other hand, are cautioned by their agents that lowering the buy-side commission rate risks buyer agents not showing their property.  Research has documented the steering of clients away from low commission properties to higher commission ones.  Many sellers are also told by their agents that their home will be priced to include the buyer agent commission.

The report also suggests reasons that most sellers of million-dollar homes do not negotiate lower rates for the commissions paid to their listing agents.  These factors include:

• Limited seller information about agent compensation, as documented by consumer surveys and by research on the lack of information on rates provided by agents and firms.
• Preoccupation of sellers, especially those trying to match the sale of one home with the purchase of another, with sale price and timing.
• Concern that trying to negotiate a lower commission rate will result in less than optimal agent service.
• Unwillingness of most listing agents to negotiate lower commissions – about three-quarters of agents in an earlier CFA survey.

“The typical commission on a million-dollar home would purchase not one, but two new cars,” noted CFA’s Brobeck.  “Yet, especially in a housing market with inflated prices, 5-6 percent rates also discourage first-time homeownership since purchasers typically pay about half this rate through higher sale prices,” he added.

The report suggests that uncoupling listing agent and buyer agent commission rates would significantly increase rate competition and eventually lower fees paid by both sellers and buyers.  Uncoupling would also begin to align rates more closely with agent quality of service.  Today, there is little relationship between rates and agent service.

Several class-action antitrust lawsuits are challenging the coupling of listing and buyer agent rates, DOJ is investigating the issue, and both conservative (CATO) and liberal (Brookings) think tanks have published reports critical of coupled rates.

Despite the constraints of the current compensation system, CFA urges sellers and buyers to discuss and negotiate this compensation with their agent.  Sellers can discuss price-rate trade-offs, the feasibility of lowering the buy-side rate, and the willingness of the listing agent to lower their commission.  In those 41 states (and the District of Columbia) that permit agent rebates, buyers can inquire of their agents whether they are willing to rebate a portion of their commission.

The post New Real Estate Research Shows No Consistent Relationship Between Home Prices and Commission Rates appeared first on Consumer Federation of America.

The report was based on a comparison of housing prices and buyer broker commission rates in 17,805 recent sales in 35 cities.

• In ten cities, the rates were so uniform that meaningful comparisons could not be made.
• In five cities, rates were fairly similar for all housing price categories.
• In eight cities, higher-priced homes tended to carry higher commission rates than did lower-priced homes.
• In only eight cities did higher-priced homes tend to carry lower commission rates.

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• In each of 10 cities, at least 87 percent of the home sales had identical commission rates.
• In each of 18 cities, at least 70 percent of the sales had identical commission rates.
• In each of 24 cities, at least 88 percent of the sales had commission rates between 2.5 and 3.0 percent.

The post Real Estate Commission Rates in 35 Cities: Uniformity and Variability appeared first on Consumer Federation of America.

• In each of 10 cities, at least 87 percent of the home sales had identical commission rates.
• In each of 18 cities, at least 70 percent of the sales had identical commission rates.
• In each of 24 cities, at least 88 percent of the sales had commission rates between 2.5 and 3.0 percent.

“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” noted Stephen Brobeck, a CFA senior fellow and the report’s author.  “An industry rule requiring listing agents to set buyer agent rates prevents home buyers from negotiating these rates,” he added.

While nine states prohibit buyer rebates, in the rest of the country buyers can ask their agents for a rebate of a portion of the buyer agent commission.  However, the study also found that few consumers request a rebate and even fewer buyers receive one.  In a March 2022 online survey commissioned by CFA, Ipsos, an international research and marketing firm, asked a representative sample of 1040 consumers who had purchased a home through a real estate agent:  “Did you seek a portion of the commission your agent was paid?”  Seventeen percent said they had sought a “rebate,” but only seven percent said they had received one.  For those respondents who had purchased a home in the past five years, 29 percent said they had sought a rebate, but only six percent said they had received one.

In November 2021, CFA released a report on the uniformity of buy-side rates in 21 eastern cities.  The new report adds 14 western cities to the sample, revealing that buy-side rates are lower on the east and west coasts than in the large middle portion of the country.  Thirteen of 14 coastal cities (including Bakersfield-CA, Las Vegas, and Phoenix) had median rates of 2.5 percent or lower (all but Miami) while 17 of 21 interior cities had rates above 2.5 percent (all but Chicago, New Orleans, Birmingham-AL, and McAllen-TX).

In 33 of the 35 cities, real estate agents made available MLS information on home sales.  In Portland (OR) and Washington, buy-side rates were found on Redfin home listings.

Industry Norms and MLS Rule Help Explain Rate Uniformity

The report noted that there is no law or explicit industry rule requiring, or even recommending, specific buy-side rates, which raises the question:  How could individual home sale decisions result in buy-side rates that are so often identical in individual markets?  The report’s answer is that the MLS rule requiring sellers to set buyer agent rates allows realtors to informally establish rate norms, which keeps rates high and preserves the possibility of big paydays.

“To a large extent prices are uniform because realtors want to preserve $50,000 commissions on the sale of million dollar homes and $25,000 paydays on the sale of $500 thousand dollar ones,” he said.  “It is not at all clear why the work of a realtor, especially if they double-dip, should cost more than the price of a car or an expensive medical procedure,” he added.

The report found that those cities with the highest rates had the most uniform rates.  In those cities where at least 70 percent of the rates were identical, in 13 of 18 (72%), the median commission was greater than 2.5 percent.  And in those cities with identical rates below 70 percent, in 13 of 17 (76%) the median commission rate was 2.5 percent or lower.  “The association of high rates with high-rate uniformity suggests that industry norms are stronger in some cities than in others,” noted CFA’s Brobeck.

The report also contained more evidence that, in some cities, buy-side commission rates are transitioning from 3.0 to 2.5 percent.  While noting that this transition represents a longer trend from the 1990s related to rising home prices, the report also suggests that in a strong seller’s market, listing agents feel that they can reduce buy-side rates without jeopardizing sales.  As a Redfin market manager explained:  “Sellers know their home is a hot commodity and will likely attract multiple offers no matter what, so they’ve started offering the buyer agents a 2% or 2.5% fee instead of 3%.  Why would you offer 3% when you know you could offer less and sell your home for the same price?”

“Some of the softening of buy-side rates may reflect buyer and buyer agent panic in a market with far fewer listings,” noted Brobeck.  “It is unlikely that listing agents are reducing their commissions and in some cases, may even be increasing them, but this question cannot be easily answered since there is no publicly available source of data on listing agent rates,” he added.

Untying Listing and Buyer Agent Rates Would Promote Significant Rate Competition

In a free-market economy, it is anomalous that the residential real estate industry denies home buyers the ability to negotiate commissions paid to buyer agents.  This denial is now the subject of major class action litigation, investigation by the U.S. Department of Justice, and complaints from a wide range of industry critics, both liberal and conservative.  The focus of these challenges has been the untying (or uncoupling) of commission rates, so that buy-side rates are not set by sellers and their listing agents, but by buyer agents subject to negotiation with their clients.  This untying of commission rates would:

• Unleash discount brokers who have been shackled by the necessity of offering buyer brokers the typical rate (or rates) paid in their MLS area.
• Provide buyers the opportunity to discuss and negotiate commissions paid to their agents.
• Encourage more sellers to try negotiating commissions paid to their listing agents.

“Untying rates not only would eventually reduce commissions by an estimated 20 to 30 billion dollars a year but would also much more closely align agent service with agent compensation,” said Brobeck.  “Today, it is difficult to see much of a relationship between agent quality of service and agent compensation,” he added.

Tips for Home Buyers

Pay attention to buy-side rates offered to buyer agents.  Now that the industry allows publication of buy-side rates on home listings, these rates are increasingly accessible to consumers, most often on Redfin and Zillow website listings.  If your agent is reluctant to show you a home, it may be because the offered buyer agent rate is relatively low.  If so, press your agent to show you the property, or alternatively, find an agent who will not “steer” you away from low-commission rate homes.

Ask your agent if they will rebate a portion of their commission to you.  Nine states  – AL, AK, IA, KS, MS, MO, OK, OR, TN – prohibit these rebates, and most agents in the remaining 41 states and DC are unwilling to provide rebates.  However, a few agents advertise their willingness to do so, other agents will do so if asked, and the more home buyers request rebates the more willing the entire industry will be to provide them.

Contact: Stephen Brobeck, sbrobeck@consumerfed.org

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We agree with Cara Ameer that Florida transaction brokers are committed to serve their customers, provide useful services, and deserve to be paid adequately for these services.  Yet, Ameer did not address the two central questions raised by our report.

First, why aren’t transaction brokers required to disclose this role upfront to their customers?  There are important differences between transactional and fiduciary relationships that are clearly spelled out in Florida law.  Why are only fiduciary agents (and non-agents) required to disclose their role?  Transactional brokers in all other states are required to make this disclosure.

Second, why shouldn’t there be differences in compensation received by transactional and fiduciary agents?  Legally, transaction brokers have fewer responsibilities and less liability than do fiduciary agents.  As Florida brokers explained to us, to give just one example, it is virtually impossible for an aggrieved Florida consumer to successfully sue a negligent or dishonest transaction broker.  CFA believes that differences in compensation should be determined by a free, price-competitive marketplace.

As our report explains, the sharp legal differences between transactional and fiduciary brokerage are commonly ignored by transaction brokers.  In violation of Florida law, many brokers give advice about home sale price and conditions that can potentially disadvantage the other party in the sale.  While this advice may well help their own customers, it is given illegally.

So why not re-establish the 1998 law that required upfront disclosure of transaction brokerage?  And if agents want to fully represent customers, why can’t they agree to serve as fiduciaries (“single agents”)?  According to data from the Jacksonville Multiple Listing Service (MLS), one-fifth of listing agents still do.

[1] Watchdog Report Misrepresents Transaction Brokerage, Florida Broker Says Consumer Watchdog View Of Compensation ‘Has No Basis’

Contact: Stephen Brobeck, sbrobeck@consumerfed.org

The post Realtor Critic of CFA Report Ignores the Two Central Issues appeared first on Consumer Federation of America.

• greatly limits broker responsibilities and liability,
• is not disclosed and therefore is not understood by most consumers,
• consequently exposes consumers to risks related to the sale price – and for buyers, quality – of the property,
• greatly limits consumers in obtaining redress if treated unfairly,
• despite less responsibility and liability, charges customers the same commission rate charged by fiduciary agents, and
• appears to survive in part because many transactional brokers break the law by providing some of the representation required of fiduciary agents.

The post Does Transaction Brokerage in Florida Serve the Interest of Home Buyers and Sellers? appeared first on Consumer Federation of America.

• greatly limits broker responsibilities and liability,
• is not disclosed and therefore is not understood by most consumers,
• consequently exposes consumers to risks related to the sale price – and for buyers, quality – of the property,
• greatly limits consumers in obtaining redress if treated unfairly,
• despite less responsibility and liability, charges customers the same commission rate charged by fiduciary agents, and
• appears to survive in part because many transactional brokers break the law by providing some of the representation required of fiduciary agents.

Transaction brokerage under various names is practiced in 17 states, but only in Florida is it not disclosed to customers.  “Florida law helps perpetuate the erroneous, widespread belief that most transaction brokers work as totally loyal representatives not just as facilitators,” said Stephen Brobeck, a CFA senior fellow and the report’s author.

The report quotes Florida agents who acknowledge that Florida consumers “generally assume that their brokers are working exclusively for them.”   This assumption is supported by a survey, commissioned by CFA and undertaken by IPSOS, an international research and marketing firm.  In December 2021, the firm asked a representative sample of 286 Florida consumers online which interests most agents usually represent.  Only 35 percent responded (to a multiple choice question) that most agents “legally represent the interests of neither buyer nor seller but just facilitate the sale.”

Yet, most agents in Florida sales work as transaction brokers, not as single agents.  That dominance of transaction brokerage is widely recognized, as the report shows.  And it is supported by the fact that 76 percent of the listing agents, in 500 recent consecutive home sales in Jacksonville, indicated that they were serving as transaction agents.  Only 20 percent reported that they were serving as single agents (fiduciaries).

Why Florida Does Not Require Disclosure of Transaction Brokerage

The report reveals that a Florida law enacted in 1998 did require this disclosure, yet a decade later, the law was quietly amended to establish transaction brokerage as the default agent role with no disclosure required.  The report explains the attraction of the new law to the real estate industry in terms of three factors:

• Agents usually find it easier and quicker to make home sales as a transaction agent rather than as a single agent (fiduciary). Florida transaction agents are not required to obtain cumbersome disclosures nor are they required to disclose the absence of total agent loyalty.
• Transaction brokerage facilitates double-dipping (or double-ending) where one firm or agent works with both seller and buyer, retaining the entire commission. For firms, it is much simpler and less risky for all their agents to function as transaction agents, allowing these agents to work with each other having fewer conflicts and hurdles to overcome.  For individual listing agents, who also find a buyer, there is no need to persuade the seller to allow the agent to change their status from fiduciary to facilitator.
• Most importantly, transaction brokerage greatly limits the legal liability of agents and brokers. As the report explains, attorneys are reluctant to sue transaction brokers because as one expert noted:  “The extra step of proving ‘implied’ agency just isn’t worthwhile for them to pursue.”

How Lack of Disclosure Creates Significant Risks for Consumers

Florida law does not require “loyalty,” complete “confidentiality,” obedience,” and “full disclosure” from transaction brokers, only from single agents.  Florida home sellers and buyers who think their agent is their loyal representative are exposed to numerous risks related to the quality and/or price of the property sold.

• Legal restrictions providing information and advice: Transaction brokers cannot legally provide their customers with any information or advice that could potentially harm the other party in the sale.  Florida law specifically prohibits these brokers from disclosing that the seller will accept a price less than the listed one, that the buyer will pay a price greater than that submitted in a written offer, or the motivation of either party for selling or buying.  These restrictions make it illegal for transaction brokers to effectively negotiate the price and terms on a home sale on behalf of their customers.
• Risks when the other party to the sale is represented by a fidicuary: Customers of transaction brokers who obey the law are at a great disadvantage when doing business with the clients of fiduciaries.
• Severely limited legal remedies when wronged: As noted above, customers of transaction brokers will even have difficulty securing the services of an attorney.

To an extent, some of these risks are mitigated by illegal agent practices.  The report cites evidence of transaction brokers acting somewhat like fiduciaries, especially when the other party is represented by a single agent.  As one real estate attorney noted:  “It is extremely difficult not to interject your advice in a transaction.”

Consumers Are Overcharged for Transaction Broker Services

Transaction brokers should be receiving lower compensation than single agents because these brokers have fewer legal responsibilities and less liability.  In the past the industry expressed fears that transaction brokers would not be able to charge commissions as high as those charged by fiduciary agents.  However, CFA researched 2,000 recent sales in Florida – 500 consecutive sales in Jacksonville, Orlando, Naples, and Miami – and found that in 98 percent of these sales, the same compensation was offered transaction agents (facilitators) as single agents (fiduciaries).  In a large majority of these sales, the buyer commission rate was either 2.5 percent or 3.0 percent.  (Multiple listing service rules require that sellers offer buyer agents a set commission then pay it after the sale.  Typically, all or most of this commission is added to the sale price of the house.)

“Real estate agents who are fiduciaries have received much criticism recently that their rates are too high,” noted CFA’s Brobeck.  “However, they are far more deserving of these rates than are agents who are facilitators,” he added.

Florida Consumers Should Be Told the Truth About Transaction Brokerage

The report notes that transaction brokerage can benefit some consumers if it is effectively disclosed, drives down transaction costs considerably, and these cost savings are shared with consumers.  If a transaction broker is a facilitator, it makes little sense for two transaction brokers to be involved in a sale, greatly increasing transaction costs.

However, transaction brokerage in Florida bears no resemblance to this ideal system.  Said CFA’s Brobeck:  “Florida consumers should be told the truth about the State’s transaction brokerage.  The Florida legislature should re-establish the disclosure provisions of the 1998 legislation.  And the State’s Department of Real Estate should take responsibility for informing  consumers about the different roles of real estate agents.”

CFA recommends that Florida home buyers and sellers discuss the role of their agent before signing any agreement to work with that agent.  CFA also recommends that if buyers or sellers choose to work with a transaction broker, they hire an attorney to ensure that their interests are protected.

Contact: Stephen Brobeck, sbrobeck@consumerfed.org

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