Check out our latest feature on PropertyShark…
When the average American homebuyer or seller decides that it’s time to enter the real estate market, timing is everything. The real estate game is fickle, and a change of a single variable could shift the entire market.
The year 2018, for example, started off with a bang. It was a definite seller’s market, pairing historically low mortgage rates with soaring house prices. By year’s end, buyers took the lead as price growth slowed and interest rates rose to their highest points. What these ebbs and flows have had little effect on, though, is the commission rates paid to the real estate professionals who execute a sale.
Standard practice within the residential real estate industry is a commission-based compensation structure. This is paid by the seller to their real estate broker who, in turn, often splits the fee with the buyer’s broker. There are no federal or state laws that set commission rates. And, while brokers compete to secure property listings, they also regularly cooperate to match sellers with buyers and ultimately close a deal and get paid. The nature of the job requires competitors to work together.
This dual dynamic of cooperation and competition creates an enticing environment where buyer- and seller-brokers would benefit from cooperative behavior and conduct – such as fixing commission percentage rates geographically or pre-determining commission splits. While seemingly mutually beneficial, it’s also a violation of the federal antitrust laws banning anti-competitive behavior and carrying severe penalties – both civil and criminal.
Most likely, this is common knowledge to the average real estate professional, who would laugh if someone handed them an agreement to fix prices or commissions. Violations of the antitrust act may come in this form, but they could also be inferred from anything as seemingly minor as a mundane comment on a fellow broker’s Instagram post.
Social media has become an intricate component to many real estate professionals’ marketing tactics. The days of expensive mailers and print ads are fading into the background. Now, a broker or agent – with the simple click of a button – can post a listing picture on Instagram and potentially reach a very large audience, all for free. Every real estate professional should be wary of the obvious risk of material misrepresentation. A post on social media or even a comment could potentially be considered a direct antitrust violation.
It’s critical to remember that violations of antitrust laws do not require the plaintiff to prove intent. Moreover, the agreement element necessary for an antitrust violation does not require that the agreement to cooperate be documented in any way – be it written or oral. All that is required as proof of cooperation is the promotion of an idea by one competitor and subsequent action by other competitors.
An innocent discussion on social media between brokers – which may casually reference commission rates, or their firm’s unique services or even their opinions about other industry members – can turn into an illegal act quite quickly. If antitrust regulators or a plaintiff’s attorney can show that one broker promoted anti-competitive thought that brought about an action from a competitor, they prove a violation. In fact, price-fixing and other antitrust conspiracies are rarely proven by direct evidence of an agreement to cooperate. Rather, proof is usually drawn from inference from actions.
To avoid antitrust vulnerability, go beyond the obvious precaution of abstaining from discussing commission rates and fees with other brokers.
For example, more often than not, clients push back on commission percentage rates when listing a property. A broker or agent may think that responses like the following will convince their seller that the percentage rate is sound:
- “This is the industry standard that every other firm charges.”
- “Your house will be more desirable to buyer-brokers if the commission is X%.”
But, these are actually inferences of a conspiracy to cooperate and may amount to a violation of the law.
Brokers and salespersons must learn to explain and defend rates and other competitive firm business decisions in terms that are consistent with competition. If questioned on a commission rate, a real estate professional should point out the value-add by emphasizing the services the client will receive in exchange for the fee charge. The agent should emphasize how these services will most likely lead to a sale at a fair price quickly. A seller’s dream of a quick and painless transaction can save them much more than the commission.
Along with well-crafted firm policies, real estate professionals can minimize their exposure to antitrust liability through common sense. Focus on the value-add of your services and firm – instead of what competitors are or are not doing.
Lastly, when it comes to discussing the compensation component of a listing, adhere to the adage “less is more,” and focus on closing the deal.