I had the honor to speak on “Antitrust and Real Estate” to the Legal Affairs Forum of the California Association of Realtors at their meeting in downtown San Diego shortly before posting this article.
Putting aside the substance of the talk for a moment, I enjoyed the experience immensely because (1) the Realtors’ association was both welcoming and accommodating; (2) the audience was engaged, and asked questions such that we could delve into a little bit of advanced antitrust; and (3) my wife and I invest in real-estate, so the topic of real-estate investing is an interest of mine. Thank you to the California Association of Realtors for the invitation.
As we discussed at the conference, antitrust is especially relevant to real-estate professionals because (1) competitor brokers both compete and cooperate on a daily basis; (2) prices, and commission splits, are often announced and well-known; (3) there is a history of tension and battles between a traditional business model and new business models (this can create antitrust litigation in any market); (4) associations and cooperative Multiple-Listing Services (MLS) play large roles in the industry; (5) US antitrust enforcers, like the Department of Justice, have seriously scrutinized the real-estate industry.
If you are a real-estate investor, you might enjoy our new blog “Titles and Deeds.”
Here are five antitrust issues that real-estate professionals should understand:
1. Price-fixing is a per se antitrust violation.
Real-estate brokers typically—but not always—price their services based upon a percentage (known as a commission) of the sales price. At the same time, they usually offer a publicly-announced share of that commission to a broker that brings in a buyer. From my own experience in various real-estate markets, it appears that these commissions and offered-commission-splits are surprisingly similar—almost standard—within certain markets.
That is not to say that they are fixed; there are many reasons they could end up at the same level—conscious parallelism (advanced antitrust concept), similar cost structures, etc. But real-estate brokers should understand that any agreement, express or implied, with a competing brokerage to charge a certain commission, or offer the same commission splits, is a per se violation of the antitrust laws, with both criminal and civil consequences. Brokers should independently set their prices or risk antitrust liability. Of course, brokers negotiating a particular transaction must discuss pricing (for that transaction).
Finally, it might be tempting for a broker to respond to a customer inquiry about a commission that the price is standard or is what some real-estate association suggests they charge. That should not, however, be the response. Real-estate associations with even a modicum of antitrust counseling would never suggest a commission, and a broker should not suggest that prices are set collectively in any way.
Brokers should not agree to divide territories (and this is not limited to written agreements). So if there are two major brokerage firms in a smaller town divided by a river, they should not decide between them that one will take properties north of the river, while the other stays to the south. Any such agreement violates the antitrust laws.
Another type of per se violation is an agreement to allocate customers. This is how the Music Teachers National Association (MTNA) found themselves in hot water with the FTC. Brokers should not agree to stay away from each other’s clients or former clients. Poaching may seem impolite, but agreeing not to do it can violate the antitrust laws.
3. Bid-Rigging is a per se antitrust violation.
Real-estate properties, particularly foreclosures, are often sold via auction. These auctions are often local (within a county) with the same players as participants. Bidders should not make any agreements about their bids or lack of bids. In fact, it is best not to discuss this sensitive information with competitors at all.
4. Group Boycotts are per se antitrust violations.
Sensing a pattern yet? Over the years, lower-cost brokers and unique business models have entered most real-estate brokerage markets to challenge the traditional full-service brokerage model.
This sort of entry happens quite often in markets, and it is not uncommon for existing competitors—who are rather happy about the current or traditional state of the market—to react with anticompetitive conduct. Instead of competing better for customers, the initial market players will instead compete against the new entrants. This is a dangerous strategy that often leads to antitrust liability.
When two or more market participants agree—and remember an oral agreement can violate the antitrust laws—to refuse to do business with a new entrant, it can be a per se antitrust violation (Note that not all group boycotts are per se violations, but the exact contours of the doctrine are beyond the scope of this article).
You can see how this could easily happen in real estate. A discount broker might put a house on the market for a client, but two existing brokers, who agreed not to do business with that discount broker, refuse to show the house to their buyer clients, even though the house might be suitable and appropriately priced. That agreement could violate the antitrust laws.
5. Real-estate brokers constantly work collectively.
From active real estate and broker associations to collectively-run multiple-listing services, real-estate professionals, despite competing on a daily basis, work together all the time. This presents many opportunities for illegal collective activity.
Indeed, the case reports—as well as government antitrust investigations and consent decrees—are full of disputes about antitrust challenges to MLS policies. A multiple listing service serves the procompetitive function of centralizing the homes in a market for sale, along with relevant information about the properties and their asking prices and terms. This is great for buyers and sellers alike.
But the MLSs are often run collectively by local real-estate associations. If their access policies discriminate against certain brokers or individuals, they might invite antitrust scrutiny. The trials and tribulations of MLS policies and challenges are beyond the scope of this post, but anyone involved in running or organizing an MLS should seek antitrust counsel because it is very easy to cross the line into anticompetitive territory.
You can access the slideshow of the presentation, “Antitrust and Real Estate,” here.
Update: In a related post, I discuss the question “Do Real-Estate Brokers Violate the Antitrust Laws by Charging Identical Commissions?”
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