FTC and DOJ officials urged against Realtor Protection Law

Governor Riley and Alabama legislators can't say they weren't warned that the new minimum services requirements for real estate brokers will stifle competition and harm consumers. In a letter to state Senators, officials from the U.S. Department of Justice and the Federal Trade Commission voiced their concerns over an earlier version of the bill that died in the regular session. Here are some excerpts from that letter.

If enacted, the bill will make it more difficult for real estate professionals to provide their customers with customized real estate brokerage services. Such a law likely will decrease competition among real estate professionals and result in Alabama home buyers and sellers paying higher real estate commissions. The Federal Trade Commission and the United States Department of Justice urge the Alabama Senate to reject the proposed legislation...

Traditionally, real estate professionals have performed virtually all services relating to the sale of a home. The key tasks involved in selling a house include marketing it, negotiating with potential buyers, and closing the transaction. Marketing includes listing the property in the local multiple listing service ("MLS"), placing advertisements in local media and on the Internet, and conducting open houses. When providing services relating to the task of contract negotiation, real estate professionals may provide advice on pricing, home inspections, or other contractual terms. For these efforts, the real estate professionals are typically paid a commission based on a percentage of the sales price of the home.

It is becoming increasingly common for home sellers to buy some, but not all, of the traditional brokerage services. For example, some sellers may want help advertising their homes, but want to negotiate the sales price themselves without having to pay a real estate professional. Such consumers may prefer to pay a real estate professional only for the service of listing their homes in the local MLS and placing other advertisements. Other consumers may find a buyer without assistance, but would like to hire a real estate professional to assist them with the negotiation of the sales price or with the paperwork required to close the transaction. The marketplace is evolving in response to these consumers who want to perform some of the steps involved in selling their homes on their own. Real estate professionals who are willing to provide only those services a home seller wants have emerged in Alabama and throughout the country. These "fee for service" or "menu-driven" business models are currently legal under Alabama law and typically enable consumers to save thousands of dollars because the consumers pay the real estate professional only for those services they want...

[Alabama's proposed law]...effectively prohibits a real estate professional from contracting with the customer only to place the property listing on the local MLS without also providing the negotiation services...

[The bill] is likely to deprive Alabama consumers of the benefits of robust competition between full-service brokers and fee-for-service brokers without providing any apparent benefits. [It] would eliminate certain fee-for-service brokerage arrangements as an option for Alabama consumers. Real estate professionals who agree to list property for sale would be forced to provide a state-mandated minimum service package that includes many duties associated with negotiating a property sales contract. Currently, one of the most popular fee-for-service arrangements is to purchase only the service of listing property on the MLS. This service gives home sellers access to an important marketing tool but is not resource intensive for the broker. Under the proposed legislation, Alabama home sellers will no longer have this option. The services enumerated by the statute require investments of time, effort and expertise by the real estate professional. If real estate professionals must, in effect, provide these services, they can be expected to charge for the services as well.

The proposed legislation, if enacted, is likely to reduce competition and harm Alabama consumers in two significant ways. First, consumers who want to perform for themselves some steps involved in negotiating home sales in Alabama will pay real estate professionals more than they do today. For example, based on an informal review of Alabama real estate professionals who offer fee-for-service pricing, an Alabama home seller may pay a broker from $300 to $500 only to list a house in the MLS, leaving other marketing and all negotiating to the seller. If a buyer pays $150,000 for that seller's house, a seller who contracted with a fee-for-service real estate professional for the $500 listing in the MLS, and agreed to pay a 3% commission to a buyer's real estate professional, would pay a total of $5,000. By contrast, if the same seller could only buy the traditional package for a typical 6% commission, to be split between the buyer and seller's broker, the seller would pay a total of $9,000 to sell the house. In this example...the Alabama home seller bought $4,000 more in real estate brokerage services than he or she may have needed or wanted.

The passage of [this bill] is likely to harm consumers in another way. Real estate professionals who offer fee-for-service provide a competitive constraint on the pricing of real estate professionals who offer only the full-service option. By limiting the availability of customized offerings, the passage of [the bill] will likely protect real estate professionals who choose to offer the full complement of services from having to compete with those who offer consumers more choices in the quantity and types of services. Because of this reduced competition, even those consumers who prefer to purchase the full range of services from traditional real estatre service professionals will likely pay higher prices.