Home : Blogs : Gabriel Silverstein, SIOR : Angelic Real Estate Blog

It's not just the DOJ that will sue you for Price Fixing...it's your Competition

scales of justice There is a great fear of even discussing commissions in open forums, locally or nationally, in the brokerage/agency side of the real estate industry. The fear that is spread is largely that the Department of Justice (DOJ) will come after real estate agents participating in such a forum/discussion for collusion or price fixing, particularly if they use certain words, like "standard" when describing commissions. In Rockford, Illinois recently, a lawsuit was filed against the Rockford Area Association of Realtors, the Illinois Association of Realtors, six Rockford area real estate brokerage firms and seven individual real estate agents. All are named in a single suit about price fixing in which Greg Hackman, broker and formerly sponsor to multiple sales agents in an office of his name, alleges anti-competitive, price fixing actions on the part of the defendants.

I don't really care to rehash the article that you can read for yourself on the suit, but instead point out that it isn't just the government that can sue based on the same principals of the Sherman Anti Trust Act's anti-competitive behavior prohibitions. In this case the plaintiff was offering 5% commissions to clients when most other firms in the market charged around 7% and the other firms supposedly then refused to show his firm's listings or allow his clients to see their listings. Not a very good job of playing nice in the sandbox if it's true.

I subscribe to a forum or two of real estate professionals, and it's so cliché to avoid to us the term "standard" commission or similar terminology that it bugs me. The word on it's own should not be taboo. Now I can't speak as lawyer here, but from what I remember in my business law classes, there are four things required for a lawsuit to be successful (remember, in this country, anybody can sue anybody else for anything regardless of the merit of the suit, winning somewhat more often requires certain legal proofs).

Duty - the defendant has to have a duty towards those that are allegedly hurt by the defendant's actions
Breach - the defendant has to have breached that duty or a law (which is by itself a duty we all must uphold)
Causation - the defendant's breach must have caused (be directly linked to)...
Damages - there has to be some measurable negative fallout of the defendant's actions

All four, not one or more, are required to be found guilty or to lose such a lawsuit. In the history of REALTORS and other real estate agents being sued for such practices, again as noted by the article, there are very few instances of the plaintiff being able to prove the guilt of the defendant(s) and tie that guilt conclusively to the alleged damages as the cause of those damages. There are situations, mind you, where damages do not have to be proven, however, for civil penalties to be handed out (like fines, etc.) but generally these are far less the concern than an full-on lawsuit for price-fixing.

There are two points in writing this blog (at least!). Firstly, the DOJ is probably (likely) not the one that is most likely to sue someone for price fixing behavior - long before they figure such a thing out and do something, someone in the private sector is likely to take notice and have an issue - and get a lawyer. Secondly, while this runs completely contrary to what the industry says to all its members, discussion about what commission practices are in any given area is not in and of itself in any way collusive, price fixing, illegal behavior. It becomes so only when the discussion leads to something that tangibly, negatively affects the consumers of this country. That, of course, is what happens if everyone decides that based on a discussion or correspondence with others to all collectively charge a certain amount or not less than a certain amount. Note that technically it is a violation of the law to all agree to lower fees at the same time, but since there are no damages (to consumers - there certainly might be to the industry professionals/firms!), by requirement #4, there is no prosecutable violation.

The flip side of this, and the irony of it all, is that the same system that purports to prosecute real estate practitioners for discussions using words like "standard commissions" and the like requires the same real estate professionals, in case of a commissionable procuring cause situation, to prove what the prevailing commission in a market is (notice that I didn't say standard just to play coy, but is there a difference?!). Doing so establishes for the court what the practitioner is owed in the case of the dispute. If it couldn't be established what the going market rate is, a court couldn't award damage awards, because it woudn't know how to calculate them.

Clearly in most markets there is a standard, typical, prevailing, going or otherwise termed commission that is the generally accepted norm for a given set of services provided by a real estate licensee representing a consumer, at least within a general price range for the real estate considered. There shouldn't be anything wrong with talking about that, only with using such talk to manipulate a consumer to thinking that rate is not negotiable on a case-by-case basis (which by law of course it is), or of course, if you're Greg Hackman, refusing to act according to the Code of Ethics and legal fiduciary responsibilities all agents have, regardless of the compensation your competition charges its clients. For all that, most practitioners will tell you they are not (at least under the COE) required to show any listing that does not offer a co-op commission percentage to their liking, though I don't believe that anyone can hide behind the COE or any legal defense to not show the listings of their seller clients to a "discounter", or anyone else.

Posted by Gabriel Silverstein, SIOR on 12/30/2006 12:21 AM

Comments (23)

opinions, realtor stuff

23 Comments on It's not just the DOJ that will sue you for Price Fixing...it's your Competition

DEC

2006

I have nothing to add, Gabriel. There is an "average" commission rate, and there has been for years. That commission is negotiable. The baseline can be set by the consumer to the known "average". You articulate that point well.

One aspect of the news article is the "acceptance" of the 50/50 split. I'm going to say it again. THERE IS NO 50/50 SPLIT.

Mr. Hackman attempted to market his services by offering a lower commission. Nothing wrong with that. However, HE crossed the line when he expected all of the agents in his market to help him by agreeing to a commission split that could have offered them less in the co-op than they had agreed to accept in their representation agreement with their buyers.

This is about competition. Mr. Hackman chose to NOT compete with other brokers for buyers for his listings. He chose, rather, to expect that they would subsidize his business by lowering their fees to match what he wished to offer.

If a broker charges 3 or 3 1/2% to their buyer-clients and Mr. Hackman's listings are only offering 2.5% on his listings, the agents are not boycotting him. They are merely exercising control over their own business by not showing his listing to their buyer-clients when selling Hackman's listing would mean in increase in closing costs to the buyer-clients.

Mr. Hackman can charge what he wishes. But, he can't control the income/business of other agents and brokers. He isn't competing for buyer showings. He's expecting other brokers and agents to subsidize his practice. It didn't happen.

If, on the other hand, Mr. Hackman had taken the 5% lisitngs and offered 3 or 3 1/2% as a co-op to attract buyer's agents to his listings, he wouldn't be in the fix he's in today.

In order to attract showings to your listings, you need to offer a competitive co-op. Mr. Hackman did not. It was HE that tried to fix the commissions of other agents and brokers.

Mr. Hackman could learn something from companies that offer low fees, but offer competitive co-ops.

I expect that the lawsuit will go nowhere.

Lenn - I am a great fan of yours both from Active Rain and the Internet Crusade listserv. I greatly appreciate your insights, thoughts and really suberb knowledge of this business and your sharing that with the rest of us.

This particular response has me a bit confused. I was under the impression that we are obligated to consider our clients first. I thought that meant that if a home comes on the market and is in the buyers price, area, etc and it is in their best interests that we show it to them regardless of co-broke. I understand that Mr. Hackman was probably not smart in how he handled his co-brokes but how do you justify not showing a home to a client if it is for them?

What am I missing?

I have always maintained that we are under no obligation to let our competitors put us out of business. We represent buyers under a buyer's agency agreement that provides for a minimum fee in which case, if there is a house that is offered that MAY meet the buyer's criteria, but, the co-op is less than the fee that our buyer's agreed to pay, we have several alternatives.

1. Contact the listing broker to find out if they will agree to a higher co-op for this one buyer.

2. The buyer agrees and UNDERSTANDS that they will be responsbile for the difference between the co-op and the fee to which they agreed due at settlement.

3. The buyer agrees that they don't wish to consider that listing.

4. If the buyer still wishes to see that listing, we will immediately release them from the BA Agreement.

Neither the COE nor State regulations require us to be charity cases.

I can't find words in the COE such as "regardless of the co-broke".

Lenn

Gabriel: Sorry for using your blog to respond to Ms. Bernstein but there was no e-mail link there for her.

Lenn, I'm glad you used the blog for the back and forth because frankly, that last paragraph didn't pull out this issue too strongly but it is one that I think is relevant. There have been countless statements made her on AR (and on RealTalk where of course you are a great and prominent voice) and it is generally the concensus of the real estate agent world that neither the law nor the COE (nor the buyers agency agreemend) prohibit "selective" showings of those only with more desireable co-op commission offers.

In the commecial world, I have never not shown a place based on the commission offered being too low, HOWEVER, as you suggest, our exclusive buyer/tenant agency language provides we get a full prevailing "market" commission, with the buyer/tenant's backing, and I am one of the few I know that has actually gone to a tenant and been paid this money because I showed them I wasn't being appropriately compensated to do a better deal for them in a better space for them. They were happy to pay in every instance, though in the commercial world, it is almost taboo to bring up fees (I guess many people are afraid that they are supposed to be a hidden secret becaues they can get very large). That relates more to tenant representation that investment buyer representation, as investment buyers are more often keen on what their broker is paid, since they often have to pay that out of their pocket.

I agree completely with this premise from Lenn's first comment - Mr. Hackman had a right to be treated fairly (i.e. to be allowed to show his buyer clients the listings of other agents, whether he was offering those buyer clients rebates - which it didn't suggest in the article - or otherwise). He does not have the right that I know of by law or the COE, to "force" buyer agents from other companies to show his listings. Of course, proving the first as a violation if the other agents did that is easier and should equitably result in damages. The second issue probably has little if any basis.

Putting ourselves in the shoes, though, of those other agents that wanted to run him out of town, it may be fine not to show his listings because the co-op split offered was too low, but I don't think they have any legal basis to refuse to let him show their listings. It is a violation of their fiduciary responsibility towards their listed sellers, a violation I think of the COE (I'm not pulling it out to cite where) and a legal violation that probably on that note alone constitutes anti-trust-like behavior.

Gabriel, Thank you for this post. I always say it is better to be safe than sorry- regardless of how absurd the semantic rules are. I guess my neck of the woods (Colorado Springs) is more "tight lipped" regarding what is acceptable and what is not, regarding generalizing the co-brokes.
Lenn- Thank you for laying that out. I always make that point with people that I talk to about this, but you said it in great, simple terms.

Does the DOJ "sue" for price fixing or do they file a criminal complaint - complete with the potential for loss of license and jail time?

Hey Gabriel, Very good post and topic. I agree with you that Realtors are way to cautious when it comes to discussing commissions. As long as we are not conspiring with others, to not do business with another company, because we don't like their compensation plan, then we are OK. With the key phrase being "conspiring with others". As an individual company or Agent I can certainly decide not to show listings where I am not being compensated fairly based on my business plan. However, as Lenn pointed out this needs to be discussed with the Buyer prior to agreeing to work for them. The Buyer needs to be informed so they can make the decision on whether to hire me or not. The way I see it the buyer has 3 choices. 1. agree to not look at those properties 2. agree to pay me the difference 3. work with anther Realtor. But the Buyer should be given the opportunity to make this decision.

Now not allowing another Realtor to show my listings, because I don't like the way they do their business, is harming my Seller and is against our COE and I would imagine illegal as well, based on agency laws. Unless of course, my client, the Seller, has instructed me to do so. But I don't think that would ever happen.

50/50 splits are just something that many, many, Realtors don't get. My commission is between me and my Seller. What co-broke we decide to offer is also between my Seller and I. Frankly, it is no one else's business. I rarely offer 50/50 splits and I can't tell you how many times I have had Brokers call me and threaten me, once they see the HUD. Foolishness. Of course I have never had one call when I am offering them more, which I also do, quite a bit. Go figure

Tony - I'm not completely sure, but I think they sue. I do not believe this is a criminal complaint situation. It is not a misdemeanor or felony, it is a civil (tort) offense.

BB - isn't it funny how everyone counts other people's money?! They accepted the offered co-op split when they made the deal, what does it matter how much you made (or didn't)? Like you noted, you never heard anyone gripe that you got paid less than them when you offered a > 50/50 split, and my hunch is they never offered to go back to 50/50 to make it up to you! That, in part, is where I think the allegedly guilty parties in this story went wrong. They effectively boycotted this guy's buyer clients (which is a specifically noted anticompetitive behavior under the Sherman Antitrust Act). That was, in a way, also counting someone else's money (and not even on that deal, but elsewhere in his business model). If they were smart they would have just let him flounder and have much higher DOM stats, etc. and the "market" (that is, sellers) would eventually tell him that they loved his discount, but only if it was coming all off his side and not impacting his ability to generate buyer traffic.

Great topic!

I never have discussions about commissions in any form with Realtors from other companies. I guess that is from my corporate up bringing where I was not even allowed to be the same elevator with my competitor. I think that cases like this are great for us to know about, so as to know how to avoid repeating others mistakes.

Aloha to all and have a Hauoli Makahiki Hou (Happy New Year in Hawaiian)

Great post. I give the buyer the option to look at the property with the low commission, however In my state I can have it written into the contract that I am looking to the seller to make up the difference. As a buyer's agent you can ignore the commission agreement made between the seller and listing agent. In the present market condition a seller would gladly pay. The buyer could also make up the difference and some gladly pay.

I guess (and in a way Bryant made this point already differently) if these other firms/agents had proper buyer agreements in place they shouldn't have ever had an issue. Obviously the guy that's suing thinks they did this not for that reason, but to drive him out of being a discounter in their market, and thereby to illegally/unethically keep that area's prevailing commission rate higher.

Great issue and post. Here in Marin, "Standard" is now 5%, as home prices have gone up so much, but we are seeing a lot more 6% splits now. I also have a listing right now where I'm offering 3% to the selling agent, and we're making 2.5%, as in incentive to make the property notable in a slow market niche. My client will need to buy when he sells, so we'll do alright and still, hopefully, sell his property quickly.

Our standard line when asked about commissions is, "All commissions and fees are negotiable. You can pay me 7% if you want." It usually gets a laugh, and breaks the ice for an intelligent discussion about commission.

I like how Lenn exhibited pass-through economics with her example. I'd like to throw some of the DOJ lawyers in a room with her for about 12 hours. The attorneys would emerge with a whole lot more knowledge of economics.

Gabriel - I addressed only the comment made by someone that that think that we have some sort of duty to show all homes irrespective of the co-op offered, to which I disagree totally, as long as I have a written agency agreement with my buyer wherein they have agreed to my minimum fee for specific services.

That said, I do not believe that other agents in that market place have the right to deny the plaintiff in that lawsuit access to their listings.

Further, I'll be interested to see if Mr. Hackman can produce evidence that other agents denied him access to their lisitngs. Or, if Mr. Hackman is simply practically out of business because he is wedded to the 50/50 split and while he sells his services and competes by offering low listing fees and expects other agents to play along with him.

It's the dang 50/50 thing that I have a problem with in this matter. He's charging a specific fee to sell his listing services and, rather than paying a co-op that will promote showings of his seller/client's homes for sale, he sticks to the sad 50/50 nonsense and now he's about out of business.

My instincts tell me that there is a lot more to this story than is revealed in his complaint. Plaintiff lawyers have an addiction to hyperbole.

All he had to do, if he wanted to compete for business with the 5% fee is to co-op 3- 3/12 and keep 1 1/2.

Lenn

Lenn, I totally agree with all that and to the extent he's out of business because he was stupid is his own fault. I think that part of the arguement is of no effect, therefore the only legs his case has is if he was denied access to show other company's/agents' listings (the old "black listing" of someone), and IF that has merit, I hope he wins on THAT point, because that is inexcusable.

After all the talk I've participated in about 50/50 splits vs otherwise, I just now recalled both of the two agents I personally used for a project (before I knew that the MLS can't require a 50/50 split) telling me specifically that a 50/50 split was required by the MLS. This was before I knew better. I had asked about giving an extra 0.5% to the buyer's broker/agent to get more attention for a place we had listed. Both agents told me that if I wanted the buyer's agent to see 3.0% co-op I had to do a 6.0% total commission and that I could not do a 5.5% with a 2.5%/3.0% differential split. This was not so long ago (last spring) and with two of the largest downtown Chicago residential firms...hmmm...

Wow Gabriel, It doesn't surprise me at all that they would think a 50/50 split is required. But I'm sure that's something Sherman would be interested in.

DEC

2006

"Tonights the night the world begins again..."

While these are not my words, they are the words of an amazing rock song that conveys my wish to you on this eve of a New Year.

Happy New Years!

Listen here: Windows or Quick Time

I have seen some "funny" splits in my day. My discussion with sellers when it comes to commission is very short and to the point. My company charges six percent for residential listings and eight for vacant land. I don't use any words like "Standard or Negotiable". When it comes down to cooperative splits I go 50/50. I can read a HUD and so can a lot of other Realtors. I want my relationship to be the best it can be with buyers' agents. This also bolsters the listings standing in competition with other houses. The duty is to get the listing sold and do your best for the client. Agents that look to short change their peers only damage their reputations, and shorten their careers.

I somewhat agree with Brian B... and I read this but I want to comment more. SO I will do this next year, as I am heading out now.

Happy New Year....

JAN

2007

Craig, video/audio guru, thanks for the wishes - I, too, hope you have a great 2007.

Andrew, I haven't heard much about listing agents taking > 50%, but there are a lot of them that often give more than 50% to the buyer's broker. To those agents, it's good business to help move their listings. There are actually many markets around the country where this is the generally accepted market practice, where buyer's agents get as much as 2/3 of the fee. However, if a listing agent gets a high enough fee that they can effectively sell the listing by offering less than 50% of the fee to the buyer's agent, I see no right for the buyer's agent to gripe at the closing table - they were fine with the fee when the agreed to it, they shouldn't count other people's money when they find out they didn't get 50%.

Jeff, come back, please, it's 2007 now!

JAN

2007

Lenn-

Yes, there is much more to this story.

To see the actual lawsuit that was filed:

http://www.rrstar.com/assets/pdf/D1541431215.PDF

This is not all about price fixing. It's also about accusations that the defendents "disparaged" Hackman Realtors and "had its reputation smeared and tarnished throughout the Rockford area."

I could add some more comments if anyone is interested.

JAN

2007

D.O., I sense you are a local Rockford REALTOR. I think we all see this as something with less merit than the headline gives it, but of course, I am curious, please share more!

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?