Real Estate Brokerage: Factors That May Affect Price Competition
Published: 2005-08-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Consumers paid an estimated $61 billion in residential real estate brokerage fees in 2004. Because commission rates have remained relatively uniform--regardless of market conditions, home prices, or the effort required to sell a home--some economists have questioned the extent of price competition in the residential real estate brokerage industry. Further, while the Internet offers time and cost savings to the process of searching for homes, Internet-oriented brokerage firms account for only a small share of the brokerage market. Finally, there has been ongoing debate about the potential competitive effects of bank involvement in real estate brokerage. GAO was asked to discuss (1) factors affecting price competition in the residential real estate brokerage industry, (2) the status of the use of the Internet in residential real estate brokerage and potential barriers to its increased use, and (3) the effect on competition and consumers of residential real estate brokerage by state-chartered banks in states that permit this practice.
section_title: What GAO Found
paragraphs: The residential real estate brokerage industry has competitive attributes, but its competition appears to be based more on nonprice variables--such as quality, reputation, or level of service--than on brokerage fees, according to a review of the academic literature and interviews with industry analysts and participants. One potential cause of the industry's apparent lack of price variation is the use of multiple listing services (MLS), which facilitates cooperation among brokers in a way that can benefit consumers but may also discourage participating brokers from deviating from conventional commission rates. For instance, an MLS listing gives brokers information on the commission that will be paid to the broker who brings the buyer to that property. This practice potentially creates a disincentive for home sellers or their brokers to offer less than the prevailing rate, since buyers' brokers may show high-commission properties first. Some state laws and regulations may also affect price competition, such as those prohibiting brokers from giving clients rebates on commissions. Although such laws and regulations can protect consumers, the Department of Justice and the Federal Trade Commission have argued that they may also unnecessarily limit competition and reduce consumers' choices. The Internet has changed the way consumers look for real estate and has facilitated the creation and expansion of alternatives to traditional brokers. A variety of Web sites allows consumers to access property information that once was available only by contacting brokers directly. The Internet also has fostered the growth of nontraditional residential real estate brokerage models, including discount brokers and broker referral services. However, industry participants and analysts cited several obstacles to more widespread use of the Internet in real estate transactions, including restrictions on listing information on Web sites, some traditional brokers' resistance to cooperating with nontraditional firms, and certain state laws and regulations. Although about 30 states potentially authorize state-chartered banks or their operating subsidiaries to engage in some form of residential real estate brokerage, few banks in these states appear to have done so. GAO's contacts with seven banks engaged in brokerage in two states found that they were located in small communities with few other brokerage options, and that their brokerage services did not differ significantly from those of other local real estate brokers. In general, because residential real estate brokerage by state-chartered banks appears to be so limited, its effect on competition and consumers has likely been minimal.

section_title: Letter
paragraphs: The fees paid for residential real estate brokerage—the bringing together of  buyers and sellers of homes and the provision of related services by  licensed brokers and agents—have increased as home prices have risen in  recent years, well beyond the rate of general price inflation. While  comprehensive data do not exist, REAL Trends, an industry source,  estimates that in 2004 consumers paid about $61 billion in real estate  brokerage fees related to home sales, up from approximately $43 billion in  2000. Payments to brokers are typically percentage commissions, or a  percentage of the sales price of the home. An observed tendency toward  uniform commission rates regardless of local market conditions has led  many economists and other observers to question the level of price  competition—rivalry among firms to attract clients on the basis of price— in the residential real estate brokerage industry.
The emergence of the Internet offers the potential to reduce costs by  generating efficiencies and new ways of doing business. While many  consumers now use the Internet to search for homes and related services,  such as mortgages, Internet-oriented brokerage firms still represent a small  share of the market. This has raised questions concerning potential  institutional, legal, and other barriers to greater “e-commerce” in real  estate. Additionally, there has been an ongoing debate on the potential  competitive effects of allowing federally chartered banks and financial  holding companies to engage in real estate brokerage. Because some states  already permit brokerage by state-chartered banks, the experience of those  states may help inform this debate.
You requested that we review issues related to price competition and the  use of information technology in the residential real estate brokerage  industry. This report discusses (1) factors affecting price competition in the  residential real estate brokerage industry, (2) the status of use of the  Internet in residential real estate brokerage and potential barriers to its  increased use, and (3) the effect on competition and consumers of  residential real estate brokerage by state-chartered banks in states that  permit this practice.
In addressing these topics, we reviewed academic literature on the  structure and competitiveness of the residential real estate brokerage  industry. (A bibliography of selected literature reviewed appears at the end  of this report.) We did not collect original data on residential real estate  brokerage fees or attempt to analyze the extent of price competition within  any specific market. We interviewed and obtained relevant documents  from industry analysts and officials of real estate brokerage and banking  trade associations, including the National Association of Realtors® (NAR);  national associations of state real estate and banking regulators; and the  Department of Housing and Urban Development, the Department of Justice  (DOJ), and the Federal Trade Commission (FTC). We also interviewed  officials of 10 residential real estate brokerage firms and franchisors,  including 2 companies with major national franchise operations, 1 full- service brokerage firm, 2 Internet-oriented full-service discount brokerage  firms, 2 companies that franchise limited-service discount brokerage  offices, and 3 Internet-oriented information and referral companies. The  brokerages and franchisors we spoke with included both small and large  firms, and these firms relied on the Internet to varying degrees. Because we  spoke to a limited number of brokerage firms and franchisors, their views  cannot be interpreted as being representative of all such firms. We also  reviewed the activities of two states, Iowa and Wisconsin, where some  banks are active in residential real estate brokerage. We spoke with these  states’ banking regulatory agencies and real estate trade associations, as  well as with seven banks in these states that engage in residential real  estate brokerage. The information on these seven banks is intended to be  illustrative and cannot be generalized to state-chartered banks nationwide.  We also reviewed relevant selected state laws and regulations and state and  federal court decisions. The scope of our work was limited to residential  real estate brokerage and did not address other aspects of real estate  transactions, such as mortgage financing, title search and insurance, or the  settlement process. We performed our work primarily in Boston,  Massachusetts; Chicago, Illinois; and Washington, D.C., between January  and July 2005. We performed our work in accordance with generally  accepted government auditing standards, except that we did not seek  agency comments on this report because we did not review agencies’  programs. However, we provided selected portions of a draft of this report  to DOJ and FTC for their technical comments, which we incorporated  where appropriate.
subsections: section_title: Background
paragraphs: Traditionally, real estate brokers have offered a full, “bundled” package of  services to sellers and buyers, including marketing the seller’s home or  assisting the buyer’s search, holding open houses for sellers and showing  homes to buyers, preparing offers and assisting in negotiations, and  coordinating the steps to close the transaction. Because real estate  transactions are complex and infrequent for most people, many consumers  benefit from a broker’s specialized knowledge of the process and of local  market conditions. Still, some consumers choose to complete real estate  transactions without a broker’s assistance, including those who sell their  properties on their own, or “for-sale-by-owner.”
For many years, the industry has used a commission-based pricing model,  with sellers paying a percentage of the sales price as a brokerage fee.  Brokers acting for sellers typically invite other brokers to cooperate in the  sale of the property and offer a portion of the total commission to whoever  produces the buyer. Agents involved in the transaction may be required to  split their shares of the commission with their brokers. Under this  approach, brokers and agents receive compensation only when sales are  completed. Common law has generally considered both brokers  cooperating in the sale of a home to have a fiduciary responsibility to  represent the seller’s interests, unless the buyer’s broker has specifically  agreed to represent the buyer’s interests.
In recent years, alternatives to this traditional full-service brokerage model  have become more common, although industry analysts and participants  told us that they still represent a small share of the overall market.  Discount full-service brokerages charge a lower commission than the  prevailing local rate, but offer a full package of services. Discount limited- service brokerages offer a limited package of services or allow clients to  choose from a menu of “unbundled” services and charge reduced fees on a  commission or fee-for-service basis.
Most local real estate markets have an MLS that pools information about  homes that area brokers have agreed to sell. Participating brokers use an  MLS to “list” the homes they have for sale, providing other brokers with  detailed information on the properties, including how much of the  commission will be shared with the buyer’s agent. An MLS serves as a  single, convenient source of information that provides maximum exposure  for sellers and facilitates the home search for buyers. Each MLS is a private  entity with its own membership requirements and operating policies and  procedures. According to NAR, approximately 900 MLSs nationwide are  affiliated with the trade association, whose more than 1 million members  represent approximately 60 percent of all active licensed real estate  brokers and agents. NAR has affiliations with 54 state and territorial  associations and more than 1,600 local associations. When one of these  local associations owns and operates an MLS, this NAR-affiliated MLS is  expected to follow NAR’s model guidelines for various operational and  governance issues, such as membership requirements and rules for  members’ access to and use of listing information. If a local association or  its MLS fails to comply with these guidelines, it can lose important  insurance coverage provided through NAR or have its charter membership  in NAR revoked. An MLS that is not affiliated with NAR is not bound by  these guidelines.
Individual states regulate real estate brokerage, establishing licensing and  other requirements for brokers and agents. Of the two categories of state- licensed real estate practitioners, brokers generally manage their own  offices, and agents, or salespeople, must work for licensed brokers. States  generally require brokers to meet more educational requirements than  agents, have more experience, or both. For the purposes of this report, we  generally refer to all licensed real estate practitioners as brokers.  Generally, a state commission, led by appointees who may have a  professional background in real estate, oversees implementation of and  compliance with state requirements and may respond to complaints about  brokers or agents or take disciplinary action. Federal agencies do not play  a day-to-day regulatory role in real estate brokerage, although DOJ and FTC  enforce compliance with federal antitrust laws in this market, as they do  for many other markets.
Banks may obtain charters at the federal or state level, and their activities  are subject to oversight by federal or state regulators. The Office of the  Comptroller of the Currency, which is a bureau within the Department of  the Treasury (Treasury), charters and regulates national banks. State- chartered banks are overseen by state regulators and, if they have federal  deposit insurance, a federal regulator. Many companies that own or  control banks are regulated by the Board of Governors of the Federal  Reserve System (Federal Reserve) as bank holding companies. Under the  1999 Gramm-Leach-Bliley Act (Pub. L. No. 106-102), bank holding  companies may qualify as financial holding companies and thereby engage  in a range of financial activities broader than those traditionally permitted  for bank holding companies, such as securities and insurance underwriting.
Some states permit state-chartered banks to engage in real estate  brokerage, but national banks and financial holding companies may not  engage in such activity. The Gramm-Leach-Bliley Act permits financial  holding companies and financial subsidiaries of national banks to engage in  activities that the Federal Reserve and the Treasury deem, through order or  regulation, to be financial in nature, incidental to such financial activity, or  both complementary to a financial activity and not posing substantial risk  to the safety and soundness of depository institutions or the financial  system generally. In late 2000, the Federal Reserve and the Treasury  released a proposed regulation to allow banking companies to enter real  estate brokerage under some circumstances. However, from fiscal years  2003 to 2005, amendments to appropriations laws precluded the Federal  Reserve and the Treasury from issuing such regulations. Legislation was  introduced in the 109th Congress to prohibit financial holding companies  and national banks from engaging in real estate brokerage activities.  Legislation was also introduced to permit such activity.
section_title: Various Factors Can Influence the Extent of Price Competition in Real Estate Brokerage
paragraphs: A number of factors can influence the degree of price competition in the  real estate brokerage industry. Some economists have observed that  brokers typically compete more on nonprice factors, such as service  quality, than on price. Evidence from academic literature and industry  participants with whom we spoke highlighted several potential causes of  this apparent lack of price competition. These potential causes include  broker cooperation, largely through MLSs, which can discourage brokers from competing with one another on price; resistance from traditional full- service brokers to brokers who offer discounted prices or limited services;  limited pressure from consumers for lower prices; and state antirebate and  minimum service laws and regulations, which some argue may limit pricing  and service options for consumers.
subsections: section_title: Real Estate Brokerage Is Characterized More by Nonprice Competition Than Price Competition
paragraphs: The real estate brokerage industry has a number of attributes that  economists normally associate with active price competition. Most notably,  the industry has a large number of brokerage firms and individual licensed  brokers and agents—approximately 98,000 active firms and 1.9 million  active brokers and agents in 2004, according to the Association of Real  Estate License Law Officials. Although some local markets are dominated  by 1 or a few large firms, market share in most localities is divided among  many small firms, according to industry analysts. In addition, the industry  has no significant barriers to entry, since obtaining a license to engage in  real estate brokerage is relatively easy and the capital requirements are  relatively small.
For discussions of nonprice competition among brokers, see J.H. Crockett, “Competition  and Efficiency in Transacting: The Case of Residential Real Estate Brokerage,” AREUEA  Journal, vol. 10, no. 2 (1982); D.R. Epley and W.E. Banks, “The Pricing of Real Estate  Brokerage for Services Actually Offered,” Real Estate Issues, vol. 10, no. 1 (1985); T.J.  Miceli, “The Welfare Effects of Non-Price Competition Among Real Estate Brokers,”  Journal of the American Real Estate and Urban Economics Association, vol. 20, no. 4  (1992); and G.K. Turnbull, “Real Estate Brokers, Nonprice Competition and the Housing  Market,” Real Estate Economics, vol. 24, no. 3 (1996).
Our review cites a number of academic studies that date back many years because, in large  part, there is not a large body of more recent research on the real estate brokerage industry.  However, we found that older research findings in this area have been consistent with more  recent studies, as well as with testimonial evidence we obtained in interviews with industry  analysts and market participants. For the most part, the economic literature and available  data related to real estate commissions cover existing home sales and not new construction. common rate within most markets, and they generally cited rates of 5  percent to 6 percent as typical now.
Some economists have cited certain advantages to the commission-based  model that is common in real estate brokerage, most notably that it  provides sellers’ brokers with an incentive to get the seller the highest  possible price. Moreover, uniformity in commission rates within a market  at a given time does not necessarily indicate a lack of price competition.  But some economists have noted that in a competitive marketplace, real  estate commission rates could reasonably be expected to vary across  markets or over time—that is, to be more sensitive to housing market  conditions than has been traditionally observed. For example,  commission rates within a market at a given time do not appear to vary  significantly on the basis of the price of the home. Thus, the brokerage fee,  in dollar terms, for selling a $300,000 home is typically about three times  the fee for selling a $100,000 home, although the time or effort required to  sell the two homes may not differ substantially. Similarly, commission  rates do not appear to have changed as much as might be expected in  response to rapidly rising home prices in recent years. Between 1998 and  2003, the national median sales price of existing homes, as reported by  NAR, increased 35 percent, while inflation over the same period was 10  percent, leaving an increase of some 25 percent in the inflation-adjusted  price of housing. According to REAL Trends, average commission rates fell  from an estimated 5.5 percent in 1998 to an estimated 5.1 percent in 2003, a decrease of about 7 percent. Thus, with the increase in housing prices, the  brokerage fee for selling a median-priced home increased even as the  commission rate fell.
Some economists have suggested that uniformity in commission rates can  lead brokers to compete on factors other than price in order to gain market  share. For example, brokers might hire more agents in an effort to win  more sellers’ listings. Brokers may also compete by spending more on  advertising or offering higher levels of service to attract clients. Although  some of these activities can benefit consumers, some economic literature  suggest that such actions lead to inefficiency because brokerage services  could be provided by fewer agents or at a lower cost. For example,  although advertising can be effective in providing buyers and sellers with  information about broker services, the consumer benefit from brokers’  expenditures on advertising or promotions aimed at acquiring listings may  be less than their cost to the broker.
To the extent that commission rates may have declined slightly in recent  years, the change may be the result in part of rapidly rising home prices,  which have generated higher brokerage industry revenues even with lower  commission rates. However, competition from increasing numbers of  discount, fee-for-service, and other nontraditional brokerage models may  have also contributed to the decline. These nontraditional models typically  offer lower fees, and although they currently represent only about 2  percent of the market, they may be putting some downward pressure on  the fees charged by traditional brokerages.
section_title: Certain Factors May Inhibit Price Competition within the Real Estate Brokerage Industry
paragraphs: Factors related to the cooperation among brokers facilitated by MLSs,  some brokers’ resistance to discounters, and consumer attitudes may  inhibit price competition within the real estate brokerage industry.
subsections: section_title: Cooperation Facilitated by Multiple Listing Services
paragraphs: While MLSs provide important benefits to consumers by aggregating data  on homes for sale and facilitating brokers’ efforts to bring buyers and  sellers together, the cooperative nature of the MLS system can also in effect  discourage brokers from competing with one another on price. Because  participating in an MLS in the areas where they exist is widely considered  essential to doing business, brokerage firms may have an incentive to adopt  practices that comply with MLS policies and customs. As previously noted,  MLSs facilitate cooperation in part by enabling brokers to share  information on the portion of the commission that sellers’ brokers are  offering to buyers’ brokers. In the past, some MLSs required participating  brokers to charge standard commission rates, but this practice ended after  the Supreme Court ruled, in 1950, that an agreement to fix minimum prices  was illegal under federal antitrust laws. Subsequently, some MLSs  adopted suggested fee schedules, but this too ended after DOJ brought a  series of antitrust actions in the 1970s alleging that this practice constituted price fixing. Today, MLSs no longer establish standard commission rates  or recommend how commissions should be divided among brokers. MLS  listings do show how much sellers’ brokers will pay other brokers for  cooperating in a sale, according to industry participants. When choosing  among comparable homes for sale, brokers have a greater incentive—all  else being equal—to first show prospective buyers homes that offer other  brokers the prevailing commission rate than homes that offer a lower rate.  Therefore, even without formal policies to maintain uniform rates,  individual brokers’ reliance on the cooperation of other brokers to bring  buyers to listed properties may help maintain a standard commission rate  within a local area, at least for buyers’ brokers.
section_title: Traditional Brokers’ Resistance to Nontraditional Brokerage Models
paragraphs: Traditional brokers may discourage price competition by resisting  cooperation with brokers and firms whose business models depart from  charging conventional commission rates, according to several industry  analysts and participants we spoke with. A discount broker may advertise a  lower commission rate to attract listings, but the broker’s success in selling  those homes, and in attracting additional listings in the future, depends in  part on other brokers’ willingness to cooperate (by showing the homes to  prospective buyers) in the sale of those listings. Some discount full-service  and discount limited-service brokerage firms we interviewed said that  other brokers had refused to show homes listed by discounters. In  addition, traditional brokers may in effect discourage discount brokers  from cooperating in the sale of their listings by offering discounters a lower  buyer’s broker commission than the prevailing rate offered to other  brokers. This practice can make it more difficult for discount brokers to  recruit new agents because they may earn more working for a broker who  receives the prevailing commission from other brokers. Some traditional  full-service brokers have argued that discount brokers often do less of the  work required to complete the transaction and, thus, deserve a smaller  portion of the seller’s commission. Representatives of discount brokerages  told us they believed that reduced commission offers are in effect  “punishment” for offering discounts to sellers and are intended as signals to  other brokers to conform to the typical pricing in their markets.
section_title: Limited Consumer Pressure
paragraphs: Pressure from consumers for lower brokerage fees appears to be limited,  although it may be increasing, according to our review of economics  literature and to several industry analysts and participants. Consumers may  accept a commission rate of about 6 percent as an expected cost of selling  a home, in part because that has been the accepted pricing model for so  long, and some consumers may not know that rates can be negotiated.  Buyers may also have little concern about commission rates because  sellers directly pay the commissions. Sellers may be reluctant to reduce the  portion of the commission offered to buyers’ brokers because doing so can  reduce the likelihood that their home will be shown. In addition, home  sellers who have earned large profits as housing prices have climbed in  recent years may have been less sensitive to the price of brokerage fees.  However, some brokers and industry analysts noted that the growth of  firms offering lower commissions or flat fees has made an increasing  number of consumers aware that there are alternatives to traditional  pricing structures and that commission rates are negotiable.
section_title: Some State Laws and Regulations Can Affect Price Competition
paragraphs: Although state laws and regulations related to real estate licensing can  protect consumers, DOJ and FTC have expressed concerns that some of  these laws and regulations may also unnecessarily hinder competition  among brokers and limit consumer choice.
subsections: section_title: Antirebate Provisions
paragraphs: At least 14 states appear to prohibit, by law or regulation, real estate  brokers from giving consumers rebates on commissions or to place  restrictions on this practice. Proponents say such laws and regulations  help ensure that consumers choose brokers on the basis of the quality of  service as well as price, rather than just on the rebate being offered.   Opponents of antirebate provisions argue that such restrictions serve only  to limit choices for consumers and to discourage price competition by  preventing brokers from offering discounts. Proponents also note that  offering a rebate is one of the few ways to reduce the effective price of  buyer brokerage services since commissions are typically paid wholly by  the seller. In March 2005, DOJ’s Antitrust Division filed suit against the  Kentucky Real Estate Commission, arguing that the commission’s  administrative regulation banning rebates violated federal antitrust laws. In  its complaint, DOJ argued that the regulation unreasonably restrained  competition to the detriment of consumers, making it more difficult for  them to obtain lower prices for brokerage services. In July 2005, DOJ and  the commission proposed a settlement agreement which, if approved by  the court, would require the commission to cease enforcing its regulation  prohibiting rebates and other inducements.
section_title: Minimum Service Standards
paragraphs: Ten states are considering or have passed legislation that requires brokers  to provide a minimum level of service when they represent consumers.   Such provisions generally require that when a broker agrees to act as a  consumer’s exclusive representative in a real estate transaction, the broker  must provide such services as assistance in delivering and assessing offers  and counteroffers, negotiating contracts, and answering questions related  to the purchase and sale process. Advocates of minimum service standards  argue that they protect consumers by ensuring that brokers provide a basic  level of assistance. Further, full-service brokers argue that such standards  prevent them from having to unfairly shoulder additional work when the  other party uses a limited-service broker. Opponents of these standards  argue that they restrict consumer choice and raise costs by impeding  brokerage models that offer limited services for a lower price. In April  and May 2005, DOJ wrote to state officials in Oklahoma, and DOJ and FTC  jointly wrote to officials in Alabama, Missouri, and Texas, discouraging  adoption of these states’ proposed minimum service laws and regulations.  The letters argued that the proposed standards in these states would likely  harm consumers by preventing brokers from offering certain limited- service options and therefore requiring some sellers to buy brokerage  services they would otherwise choose to perform themselves. They also cited a lack of evidence that consumers have been harmed by limited- service brokerage. Despite the concerns raised by DOJ and FTC, the  governors in all 4 states subsequently signed minimum service standards  into law.
Similarly, while state licensing rules for real estate brokers and agents may  ensure standards of quality that protect consumers, these rules may also  restrict consumers’ ability to choose among services and prices, ultimately  reducing competition. For example, in 2004, a federal district court found  unconstitutional a California real estate licensing law that required the  operator of a for-sale-by-owner Web site to obtain a brokerage license in  order to advertise property listings without providing any additional  brokerage services. The court found that the law impermissibly  differentiated between publications displaying the same basic content on  their Web sites, noting that newspapers were not required under the law to  obtain a brokerage license simply to display property listings on their Web  sites.
section_title: The Internet Has Increased Consumers’ Options, but Several Factors Could Limit Its Wider Use
paragraphs: The Internet has increased consumers’ access to information about  properties for sale and has facilitated new approaches to real estate  transactions. Many brokers post information on their Web sites—in varying  degrees of detail—on properties they have contracted to sell, enabling  consumers to obtain such information without consulting a broker. The  Internet also has fostered the creation or expansion of a number of  Internet-oriented firms that provide real estate brokerage or related  services, including discount brokers and broker referral services. Whether  the Internet will be more widely used in real estate brokerage depends in  part on the extent to which listing information is widely available. Like  discount brokerages, Internet-oriented brokerage firms, especially those  offering discounts, may also face resistance from traditional brokers and  may especially be affected by state laws that prohibit them from offering  rebates to consumers. In addition, certain factors—such as the lack of a  uniform sales contract—may inhibit the use of the Internet for  accomplishing the full range of activities needed for real estate  transactions.
subsections: section_title: The Internet Allows Consumers More Direct Access to Information
paragraphs: The Internet allows consumers direct access to listing information that has  traditionally been available only from brokers. Before the Internet was  widely used to advertise and display property listings, MLS data (which  comprise a vast majority of all listings) were compiled in an “MLS book”  that contained information on the properties listed for sale with MLS- member brokers in a given area. In order to view the listings, buyers  generally had to use a broker, who provided copies of listings that met the  buyer’s requirements via hard copy or fax. Today, information on properties  for sale—either listed on an MLS or independently, such as for-sale-by- owner properties—is routinely posted on Web sites, often with multiple  photographs or virtual tours. For example, NAR’s Realtor.com Web site  features more than 2 million properties listed with MLSs around the  country, and most brokers also maintain their own Web sites with  information on properties for sale in their area. Buyers may also search for  non-MLS listed properties on the Web sites of companies that help owners  market their properties themselves. Thus, the Internet has allowed buyers  to perform much of the search and evaluation process independently,  before contacting a broker.
Sellers of properties can also benefit from the Internet because it can give  their listings more exposure to buyers. For example, according to NAR,  Realtor.com—which provides information on approximately 95 percent of  all homes listed with MLSs around the country—had 6.2 million unique  visitors in February 2005. Sellers who choose to sell their homes without  the assistance of a broker can advertise their properties on a multitude of  “for-sale-by-owner” Web sites. Sellers may also use the Internet to research  suitable asking prices for their homes by comparing the attributes of their  houses with others listed in their area.
Despite more active participation of some buyers and sellers in the  transaction process, some industry analysts and participants noted that  because of the complexity of real estate transactions, some buyers and  sellers will always desire the assistance of a broker to help them navigate  the process. Unlike transactions that can now be completed entirely on  the Internet—such as purchasing airline tickets or trading securities—real  estate transactions are likely to continue to involve at least some in-person  services for the foreseeable future.
section_title: The Internet Facilitates Alternative Service and Pricing Options
paragraphs: Although Internet-oriented brokerages and related firms represent only a  small portion of the real estate brokerage market at present, the Internet  has made different service and pricing options more widely available to  consumers. Among these options are full-service and limited-service  discount brokerages, information and referral companies, and alternative  listing Web sites.
Full-service discount brokerages offer buyers and sellers full-service  real estate brokerage services—including listing properties in the MLS,  conducting open houses, negotiating contracts, and assisting with  closings—but advertise lower than traditional commissions, for  example between 3 percent and 4.5 percent. These types of brokerages  existed before widespread use of the Internet, but many have gained  exposure and become more viable as a result of the Internet. In addition,  by posting listings online, displaying photographs and virtual tours of  homes for sale, and communicating with buyers and sellers by e-mail,  some of these companies say that they have been able to cut brokerage  costs, allowing them to offer rebates to buyers or discounted  commissions to sellers.
Limited-service discount brokerages provide fewer services than full- service brokerages but also offer lower commission rates or offer their  services for flat fees. For example, some firms market a full array of  brokerage services for a reduced commission but do not list homes in  the MLS. Other firms charge a flat fee for marketing and advertising  homes and, for additional fees, will list a property in the MLS and show  the home to prospective buyers. Although these types of discount  brokers have existed since at least the 1970s, industry participants told  us that the Internet has allowed them to grow in number and size in  recent years, in part because they can market their services to a larger  population of buyers and sellers.
Information and referral companies, including some that are licensed  real estate brokers, provide resources for buyers and sellers—such as  home valuation tools and access to property listings—and make  referrals of those consumers to local brokers. Some of these  companies charge referral fees to brokers and then rebate a portion of  that fee back to buyers and sellers. It is through the Internet that these  companies are able to efficiently reach potential consumers and offer  those customers services and access to brokers.
Alternative listing Web sites offer alternatives to the MLS, allowing  sellers who want to sell their homes themselves to advertise their  properties to buyers and giving buyers another source of information on  homes for sale. These alternative listing sites include the Web sites of  local newspapers, Craig’s List, and “for-sale-by-owner” Web sites.  These services, which generally do not provide buyers and sellers with  the assistance of a licensed broker, are limited to providing consumers  with a venue for advertising homes and viewing properties for sale.
section_title: Wider Use of the Internet in Real Estate Brokerage Will Depend on the Availability of Listing Information and Other Factors
paragraphs: Several factors could limit the extent to which the Internet is used in real  estate transactions. A key factor is the extent to which information about  properties listed in an MLS is widely available. Currently, buyers may view  MLS-listed properties on many Web sites, including broker and MLS Web  sites and on Realtor.com. NAR has considered a policy on Virtual Office  Web sites (VOW) that would allow brokers to selectively exclude their MLS  listings from being displayed on certain other brokers’ Web sites and would  prohibit certain types of companies, such as information and referral  companies, from operating VOWs. Proponents of this policy argue that  listings are the work product, and thus the property, of the selling broker,  who should have control over how the listings are used. Proponents  maintain that brokers should be able to prevent certain companies—such  as information and referral companies—from using their listings simply to  earn referral fees. NAR and others have also argued that freely posting MLS  data—such as addresses, descriptions of properties, and property tax  information—on the Internet may compromise the security and privacy of  their clients.
Opponents of the VOW policy argue that it is anticompetitive because it  would unfairly limit Internet-oriented brokers’ ability to provide their  clients with access to MLS listings through their Web sites. They argue that  NAR already has policies on the appropriate distribution of MLS  information, and that their rules should treat information disseminated via  the Internet no differently than information distributed via traditional  bricks-and-mortar brokerages. They also note that measures can be taken  to address security and privacy concerns related to MLS listings on the  Internet, such as restricting the number of listings that result from an  online search. Some opponents also expressed concern that some Internet- oriented brokers would not be able to compete if—in a market dominated  by a single player—they were selectively excluded from displaying that  player’s listings.
Even with few restrictions on the availability of information about  properties for sale, Internet-oriented brokerage firms may face other  challenges. First, Internet-oriented brokers we spoke with described  resistance, similar to that previously described, involving some traditional  brokerages that refused to show the Internet-oriented brokerages’ listed  properties or offered them buyers’ brokers commissions that were less  than those offered to other brokers. However, the online availability of  listing information may discourage such behavior by enabling buyers to  more easily detect whether a broker is avoiding other brokers’ listings that  are of interest. Second, some Internet-oriented companies said that state  antirebate laws and regulations could affect them disproportionately, since  their model often was built around such rebates.
Finally, certain factors may inhibit the use of the Internet for accomplishing  the full range of activities needed for real estate transactions. For example,  some companies told us that they would like to make greater use of the  Internet to facilitate the execution of the contract used in the purchase and  sale of a property. However, they said that there is no single, uniform sales  contract for residential real estate, and state laws vary with respect to  which disclosures must accompany a sales contract. They also said that  state laws vary in their requirements for physical copies of signed  contracts, attorneys’ involvement in signing a contract, and the  circumstances under which a contract may be rescinded. As a result, it  would be difficult to develop an online platform that could be used  nationwide for residential real estate contracts. Further, industry  participants told us that no uniform technology currently exists to facilitate  the assistance that brokers often provide in other aspects of the real estate  transaction, such as coordinating inspections, appraisals, financing, title  searches, and settlements.
section_title: Few State-Chartered Banks Appear to Engage in Real Estate Brokerage
paragraphs: Our review of certain state statutes and regulations showed that  approximately 30 states may potentially authorize state-chartered banks or  their operating subsidiaries to engage in some real estate brokerage  activities. However, we also found that because only a small number of  banks in these states appeared to have taken advantage of this authority,  the effect on competition and consumers was likely minimal. We reviewed  the state statutes and regulations that NAR and the Conference of State  Bank Supervisors, using the broadest interpretations, identified as  potentially authorizing banks’ brokerage activity. While many of these laws  are ambiguous and subject to interpretation by state regulators, it appears  that at least 5 states and the District of Columbia provide relatively clear  authority for banks or their subsidiaries to engage in real estate brokerage.  An additional 8 states permit involvement in other real-estate-related  activities or in unspecified activities that might be approved by the state. At  least 7 states could potentially permit banks to conduct real estate  activities as an incidental power, an activity closely related to banking, or  an activity that is financial in nature. Many of the remaining states could  potentially allow state-chartered banks to conduct real estate activities to  the extent that national banks or other federal depository institutions are  allowed to do so.
The exact number of state-chartered banks that engage in real estate  brokerage is unknown because not all state regulators track such activity.  However, available data and interviews with real estate, banking, and state  regulatory officials suggest that such activity is very limited among the  approximately 5,700 state-chartered banks nationwide. In separate surveys  in 2001, NAR and the Conference of State Bank Supervisors identified only  eight states where state-chartered banks had engaged in at least some real  estate brokerage activity. More recent data were not available, but  regulators and industry officials told us that they doubted that this activity  had expanded significantly since 2001. They noted that real estate  brokerage is not typically part of a bank’s business model, and that banks in  small communities may be reluctant to compete with local real estate  brokers that may be clients of the banks.
We spoke with officials from banks engaged in real estate brokerage, bank  regulators, and real estate industry representatives in Iowa and  Wisconsin—two states identified as having the most banks involved in real  estate brokerage in 2001. The seven such banks we identified in these  states were all in small communities that had few or no other real estate  brokers, and some of these banks noted that their presence provided an  additional option for local residents. None of the banks we spoke with  offered brokerage services that were different than those offered by  traditional brokerages, and none offered discount brokerage services. Most  of the bank officials said that real estate brokerage was not a large portion  of their business. They said their primary goal was not to link brokerage  customers to the bank’s mortgage financing and added that most of their  brokerage customers in fact obtained their mortgages outside of the bank.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  report date. At that time, we will send copies to the Secretary of Housing  and Urban Development, the Attorney General, and the Chairman of the  Federal Trade Commission. We will make copies available to others upon  request. This report will also be available at no charge on GAO’s Web site at  http://www.gao.gov.
Please contact me at (202) 512-8678 or woodd@gao.gov if you or your staffs  have any questions about this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix I.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jason Bromberg, Assistant  Director; Tania Calhoun; Emily Chalmers; Evan Gilman; Christine Houle;  Austin Kelly; Cory Roman; and Julianne Stephens made key contributions  to this report.
section_title: Bibliography
paragraphs: This bibliography includes articles cited in our report and selected other  sources from our review of literature on the structure and competitiveness  of the residential real estate brokerage industry.
Anglin, P. and R. Arnott. “Are Brokers’ Commission Rates on Home Sales  Too High? A Conceptual Analysis.” Real Estate Economics, vol. 27, no. 4  (1999): 719-749.
Arnold, M.A. “The Principal-Agent Relationship in Real Estate Brokerage  Services.” Journal of the American Real Estate and Urban Economics  Association, vol. 20, no. 1 (1992): 89-106.
Bartlett, R. “Property Rights and the Pricing of Real Estate Brokerage.” The  Journal of Industrial Economics, vol. 30, no. 1 (1981): 79-94.
Benjamin, J.D., G.D. Jud and G.S. Sirmans. “Real Estate Brokerage and the  Housing Market: An Annotated Bibliography.” Journal of Real Estate  Research, vol. 20, no. 1/2 (2000): 217-278. ----- “What Do We Know about Real Estate Brokerage?” Journal of Real  Estate Research, vol. 20, no. 1/2 (2000): 5-30.
Carney, M. “Costs and Pricing of Home Brokerage Services.” AREUEA  Journal, vol. 10, no. 3 (1982): 331-354.
Crockett, J.H. “Competition and Efficiency in Transacting: The Case of  Residential Real Estate Brokerage.” AREUEA Journal, vol. 10, no. 2 (1982):  209-227.
Delcoure, N. and N.G. Miller. “International Residential Real Estate  Brokerage Fees and Implications for the US Brokerage Industry.”   International Real Estate Review, vol. 5, no. 1 (2002): 12-39.
Epley, D.R. and W.E. Banks. “The Pricing of Real Estate Brokerage for  Services Actually Offered.” Real Estate Issues, vol. 10, no. 1 (1985): 45-51.
Federal Trade Commission. The Residential Real Estate Brokerage  Industry, vol. 1 (Washington, D.C.: 1983).
Goolsby, W.C. and B.J. Childs. “Brokerage Firm Competition in Real Estate  Commission Rates.” The Journal of Real Estate Research, vol. 3, no. 2  (1988): 79-85.
Hsieh, C. and E. Moretti. “Can Free Entry Be Inefficient? Fixed  Commissions and Social Waste in the Real Estate Industry.” The Journal of  Political Economy, vol. 111, no. 5 (2003): 1076-1122.
Jud, G.D. and J. Frew. “Real Estate Brokers, Housing Prices, and the  Demand for Housing.” Urban Studies, vol. 23, no. 1 (1986): 21-31.
Knoll, M.S. “Uncertainty, Efficiency, and the Brokerage Industry.” Journal  of Law and Economics, vol. 31, no. 1 (1988): 249-263.
Larsen, J.E. and W.J. Park. “Non-Uniform Percentage Brokerage  Commissions and Real Estate Market Performance.” AREUEA Journal,  vol. 17, no. 4 (1989): 422-438.
Mantrala, S. and E. Zabel. “The Housing Market and Real Estate Brokers.”  Real Estate Economics, vol. 23, no. 2 (1995): 161-185.
Miceli, T.J. “The Multiple Listing Service, Commission Splits, and Broker  Effort.” AREUEA Journal, vol. 19, no. 4 (1991): 548-566. ----- “The Welfare Effects of Non-Price Competition Among Real Estate  Brokers.” Journal of the American Real Estate and Urban Economics  Association, vol. 20, no. 4 (1992): 519-532.
Miceli, T.J., K.A. Pancak, and C.F. Sirmans. “Restructuring Agency  Relationships in the Real Estate Brokerage Industry: An Economic  Analysis.” Journal of Real Estate Research, vol. 20, no. 1/2 (2000): 31-47.
Miller, N.G. and P.J. Shedd. “Do Antitrust Laws Apply to the Real Estate  Brokerage Industry?” American Business Law Journal, vol. 17, no. 3  (1979): 313-339.
Munneke, H.J. and A. Yavas. “Incentives and Performance in Real Estate  Brokerage.” Journal of Real Estate Finance and Economics, vol. 22, no. 1  (2001): 5-21.
Owen, B.M. “Kickbacks, Specialization, Price Fixing, and Efficiency in  Residential Real Estate Markets.” Stanford Law Review, vol. 29, no. 5  (1977): 931-967.
Schroeter, J.R. “Competition and Value-of-Service Pricing in the Residential  Real Estate Brokerage Market.” Quarterly Review of Economics and  Business, vol. 27, no. 1 (1987): 29-40.
Sirmans, C.F. and G.K. Turnbull. “Brokerage Pricing under Competition.”  Journal of Urban Economics, vol. 41, no. 1 (1997): 102-117.
Turnbull, G.K. “Real Estate Brokers, Nonprice Competition and the  Housing Market.” Real Estate Economics, vol. 24, no. 3 (1996): 293-316.
Yavas, A. “Matching of Buyers and Sellers by Brokers: A Comparison of  Alternative Commission Structures.”  Real Estate Economics, vol. 24, no. 1  (1996): 97-112.
Yinger, J. “A Search Model of Real Estate Broker Behavior.” The American  Economic Review, vol. 71, no. 4 (1981): 591-605.
Zumpano, L.V. and D.L. Hooks. “The Real Estate Brokerage Market: A  Critical Reevaluation.” AREUEA Journal, vol. 16, no. 1 (1988): 1-16.