Feds Want Real Estate Customers to use Discount Brokers

I saw the article below in today’s Wall Street Journal. I’ve also seen expanded, much longer versions of the same story from different news outlets the past two days, but this one keeps it short and to the point. The Federal Government, to put it simply, wants you to use Discount Brokers. Since that particular business model has achieved moderate acceptance, but failed to gain notable market share, the government wants to change laws to give the Discount Brokerage model a better chance to succeed. That’s how I interpret the actions and rhetoric of the U.S. Justice Department.

The government is saying, arrogantly, the only reason more consumers don’t use Discount Brokers is because the public is “confused”. From the article below is this quote “consumers don’t have enough understanding of the fee structures in the industry and don’t realize that they have negotiating power over fees“. Really? Hmmm. I’ve lost plenty of listing opportunities to Discount Brokers, which is OK. It’s my fault for not doing a better job of selling the value of my service. When I managed properties full time, I lost plenty of potential property management accounts to Property Managers who offered cheaper fees and less service. I never had a problem with that either. And the Volvo dealer doesn’t lose sleep when someone buys a $9,000 entry level car from a competitor.

I have nothing against the limited service or “discount” real estate business model. I even know a few discount agents who seem to have their systems pretty well worked out, and I think there are probably more than a few happy customers who went that route. Other discounters I have encountered have no system at all, except that the Buyer agent has to run the entire deal since the Discount Agent is absent from the transaction. Mainly, I think Discount Brokers should have to win market share the same as everyone else, without government assistance. To me, what the Justice Department is demanding is somewhat of an Affirmative Action program for Discount Brokers. Jeez, give me a break.

This is a tough issue for me to write about. As a full service Realtor, it might appear I am simply protecting my own interests when I say that the Government doesn’t have the first clue about what it’s doing nor how the real estate business operates. I’d like to see just one or two of those Department of Justice “consumer advocate” attorneys go undercover as a Realtor for two years. Then they can publish a report about how easy it was for them to enter the business and succeed as a Realtor by competing solely on discounted fees. Then I’d also want to see interviews from every client and agent with whom they came into contact and hear how it went.

Finally, I’d want to see how much money the DOJ test agents earned in their two year undercover stint to prove Realtors are overpaid. 37% of Realtors with less than 2 years experience earn less than $13,000 per year. Maybe the DOJ people can be in the middle 1/3 and earn $25,000 instead. Most new agents don’t even last 2 years in the business. Practicing real estate successfully is certainly not the cake walk the media and government make it out to be. In the long term, the consumer benefits more from having access to experienced agents who know the job than they would having government imposed lower commissions.

Sylvia has survived 20 years now in the real estate business in Austin, and I’ve lasted 17 years. I’ve seen all sorts of different business models come and go, including “Salaried Realtors”, “Internet Only” companies, “Fee for Service”, “Flat Fee”, etc., yet, if you want an experienced, full service agent who provides a full and complete set of services, the great majority of buyers and sellers still turn to the more expensive, experienced agents versus the bargain agents.

So, if you’re one of those full service customers, take comfort in knowing that the Justice Department of the U.S. has declared you to be a “confused” person who doesn’t know how to negotiate. Furthermore, your confusion is the result of a Realtor conspiracy to cause Discount Brokers to fail. What other explanation is there for the fact that you didn’t hire one when you last bought or sold your home? Why does the most well branded Discount Broker in Austin, despite massive ad campaigns, still have less than a 1% market share? I’m not really sure, but I doubt it’s because 99% of Buyers and Sellers are “confused”.

Here is the story:

New Look at Real-Estate Laws
May 9, 2007; Page D3

Federal authorities urged state lawmakers to consider repealing laws that harm competition among real-estate brokers.

The call came as part of a series of recommendations aimed at providing property buyers with greater information about the industry.

In a report released by the Justice Department’s antitrust division and the Federal Trade Commission, the agencies said efforts are needed to ensure brokers act in a manner fair to consumers. They pledged to continue monitoring the conduct of real-estate-broker associations, especially when they act in concert, and to bring enforcement action when necessary.

The report said the federal government will try to inform state lawmakers and industry regulators about the effects of state and local laws or regulations on competition. And it urged state legislatures to consider repealing laws that limit choice and reduce the ability of new entrants in the real-estate industry to compete.

The report concluded that consumers don’t have enough understanding of the fee structures in the industry and don’t realize that they have negotiating power over fees.

3 thoughts on “Feds Want Real Estate Customers to use Discount Brokers”

  1. I just printed out this report. So far the only complaints I see are about the MLS and steering. Steering is already a big no-no….I’m anxious to get into the meat and potatoes of it. Should be interesting. I understand this report is based on a workshop conducted in 2005, still – funny how this is coming out at this time.

  2. Put all arguments aside, the consumers are interested in one thing: how to get the best possible service with the lowest possible cost. In other words, sellers want to make more money on the house they are selling, buyers want to be able to buy the most house from their money. The 6% looks rather odd and easy to be spotted in this market economy where everything can be negotiated and the price of commodity and service are always going lower…

    What got me interested is that why the NAR is not able to lobby the business friendly Bush administration to actually give them more breathing room like what the NRA did. I mean, c’mon, some 30+ students got slaughtered on VT campus and the DOJ, congress, white house are not going to make a fart about it.

    My impression is that while NAR is a very powerful lobby, it lacks a universal appeal. Even the most market friendly right wing politicians love make a bit more on their mansion and give less than 6% to his buddy Realtor. Maybe the Realtor associations should make an rule to give percentage cut to lawmakers. Too bad that the 6% rule was not written in the 2nd Amendment.

  3. Hi Sina,

    > My impression is that while NAR is a very powerful lobby

    NAR is a strong lobby, but does not have nearly the kind of influence over how it’s members vote as the NRA (National Rifle Association) does. NRA people are members because of a specific interest in guns, gun laws and/or the broader concept of personal freedom and adherence to the Constitution. When NRA wants to scare the crap out of a politician, they can wave a pretty big stick with their get-out-the-vote mechanisms because of the shared beliefs of its members.

    Realtors on the other hand are an extremely mixed group of people of all political stripes and demographics. We are also a very transient group. NAR embership is not nearly as static as a group such as the NRA where you have many lifelong members. We have a lot of churn as newbie flunk out of the business in large numbers every year. Realtors are not united under broad political causes or issues but are more of a self interest lobby, opposing laws that hurt the real estate industry or its consumers. NAR nor my local Realtor Board have no influence at all over who I vote for.

    The fact of the matter is real estate is an extremely competitive industry but the DOJ thinks it’s not. They think it’s not because they think Discount Brokers should be doing better, therefore something dubious must be at hand. Faulty logic.


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