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Real Estate System Criticized

Consumer Group Alleges Anticompetitive Practices
By Kirstin Downey
Washington Post Staff WriterTuesday, June 20, 2006; Page D03

A national consumer advocacy group yesterday condemned real estate trade groups as a "cartel" that sets prices and blocks competition to maintain its traditional commission structure and to keep discount firms from gaining market share.

The commission system is "cockamamie," said Stephen Brobeck, executive director of the Consumer Federation of America. Even some inexperienced real estate agents are charging a 7 percent sales commission, he said -- an amount he likened to the cost of a new car. And he questioned why the brokerage fee on an $800,000 houses is four times higher than that for a $200,000 house, saying the work involved is basically equal.

The District-based federation applauded efforts by government antitrust regulators to put pressure on the trade groups to change the way they do business, but Brobeck said no one had yet found the "magic bullet" to reduce costs. He said consumers have been left on their own and urged home buyers and sellers to negotiate over the sales commissions they are charged and make sure it is clear who is representing whom, what each agent will be paid and for what services.

Thomas M. Stevens, a local real estate broker who is president of the National Association of Realtors, fired back within hours, saying the Consumer Federation is ill-informed and incorrect.
"It's clear and evident that they don't understand the real estate business," Stevens said. "Real estate is probably one of the most competitive industries out there."

Stevens said real estate agents put themselves at financial risk showing clients from house to house and advertising homes for sale in hopes a transaction will be completed. He said that more than 2 million people in the United States hold real estate licenses and that the work has grown only more competitive and difficult with the real estate slowdown of recent months.

The federation's report came as the Michigan legislature prepares to enact rules sought by the state real estate industry to define the responsibilities of agents in ways that critics say would favor traditional firms and make it more difficult for discount and Internet-based firms to compete. The Realtor association in Michigan says the rule change is needed because some of the new firms are offering consumers poor service, leaving traditional real estate agents scrambling to keep deals together.

In October, federal antitrust regulators at the Justice Department and the Federal Trade Commission wrote to Michigan legislators urging them to shelve the proposed rule. The agencies said it "would reduce consumer choice and cause Michigan consumers to pay more for real estate brokerage services," according to a Justice Department statement.

Lawyer Robert Campau, vice president of public policy and legal affairs at the Michigan Association of Realtors, said that the industry welcomes the new business models but that roles need to be more clearly defined.

"What the Michigan legislation attempts to do is to make clear what people are contracting for, against the backdrop of statute already existing in Michigan," Campau said. He said that about 100 Michigan state legislators voted for the industry-backed bill and that fewer than five voted against it. He expects similar, "fairly overwhelming" support when the state Senate considers the measure in the next few days.

Federal regulators have sought to influence the debate in other states, too. In West Virginia last month, the state Real Estate Commission rescinded a rule prohibiting rebates and other discounts to consumers, after receiving a warning letter from the Justice Department. South Dakota and Kentucky also rescinded similar rules last year. But in Alabama and Texas, legislation sought by the traditional real estate firms flew to passage almost unanimously.
The Justice Department has sued the National Association of Realtors, alleging its Internet multiple listing service policy prevents nontraditional brokers from gaining equal access to sales listing information. The trade group said it has changed its policies and is seeking to have a judge dismiss the lawsuit.

"Both sides looked for common grounds to settle, but it didn't get very far," said Stevens of the National Association of Realtors. "If the judge doesn't dismiss the case, it'll go to trial."