Professional classical musicians typically have a lot of education and training. Most have master’s degrees, and many have doctorates. They are the original “gig economy.” Many are over 30 years old before they land a professional orchestra position or full-time teaching job which provides them with a living wage. Even then, the musicians must absorb their own costs for an instrument, repairs, and supplies like strings, reeds, and rosin.
As a result, most professional classical musicians do at least some private teaching on the side. If they are only teaching part-time, they may not set up a studio of their own. Instead, they may pay a music store for studio space and referrals. In exchange the music stores advertise lessons using in-store posters, newspaper ads, and flyers distributed to local schools.
Depending upon the services provided, the musician may take home less than half of what the student pays the music store. Many music teachers’ take-home hourly rate is not high given their education and experience.
It would not be surprising if music teachers decided it was good to band together to negotiate better terms from the stores. They might even refuse to work at any music store unless it signed a contract guaranteeing that the musician would receive a minimum percentage of students’ lesson fees.
Music stores may depend upon students not only to help pay the rent but also to bring music students into the store to buy supplies. Therefore, they likely would enter into the requested teacher fees. But it would be the students who likely would pay for that extra amount through increased lesson fees paid to the stores.
Students have alternatives to lessons at music stores. Some teachers have their own studios. Others teach at music schools. Still others may go to students’ homes. And, those other teachers and music schools can purchase ads and distribute flyers, just like the music store does.
However, the situation is different with real estate. For home sales, multiple listing services (MLS) are the main source of information about properties listed for sale. And, buyers cannot access MLS listings on their own, because MLS limits most access to licensed real estate brokers and agents. Although sellers can try to sell their own homes, they cannot replicate the advertising brokers can provide due to their clients through access to MLS.
Types of Real Estate Broker Arrangements
In most states, real estate brokers have one of three roles in a transaction:
Seller’s Broker: A seller’s broker enters into a brokerage or listing agreement with the seller. The broker lists the property for sale and shows it to prospective buyers. A seller’s broker has a duty of loyalty to the seller.
Buyer’s Broker: A buyer’s broker looks for properties that meet the buyer’s specifications and owes a duty of loyalty to the buyer. The buyer’s broker may enter into a commission agreement with the buyer, but often, there is no written agreement. The buyer’s broker usually expects to be paid by the seller.
Transaction Broker/Dual Agency: The obligations of a transaction broker or dual agent varies from state to state. Generally, a transaction broker or broker who represents both buyer and seller has an obligation of honesty and to be fair to both parties but does not have a duty of loyalty to either of them. This broker frequently will have a written brokerage agreement with the seller. Sometimes, the broker will ask the seller to consent in advance to the dual agency arrangement. Other times, the dual agency concern arises after the seller’s broker identifies a buyer represented by the same broker as a prospective purchaser. A transaction broker or dual agent usually is paid by the seller.
Despite their different roles, these real estate brokers all usually expect to be paid by the seller. There is a practical reason why sellers usually pay the broker; buyers usually make a significant cash outlay when they purchase real estate, and they may be unable or unwilling to bring additional cash to the closing to pay a broker. But sellers receive cash at closing, and it is easy for the broker to receive its payment out of the closing proceeds before the seller every receives the funds.
Another perspective is that no matter what the parties say, the buyer always pays all broker commissions. That’s because the broker commissions supposedly paid by the seller are buried in the purchase price. Sellers are focused on how much cash they receive at closing more than on who pays for what. Therefore, sellers who don’t have brokers often accept lower sale prices than those who do. Although buyers are cash-strapped, most obtain a mortgage for 80% or more of the purchase price, so the mortgage lender funds 80% or more of the broker commission at closing.
Broker Payment Arrangements
No one wants to work for free. Therefore, buyer’s brokers may not be incentivized to show real estate to their clients unless they know they will be paid by the seller. To address this, many seller brokerage agreements include provisions where the seller agrees to pay an additional percentage to compensate a buyer’s broker. As indicated above, some seller brokerage agreements even provide that the seller agrees in advance for dual agency or for the broker to be a transaction broker.
Although these practices vary from state to state and sometimes, city to city, sellers who do not carefully read their brokerage agreements might have an unpleasant surprise. Either they find that the broker they thought was looking out for them is representing the seller also. Or, they see an additional buyer’s broker fee on their settlement statement.
Antitrust Concerns in the Real Estate Industry
United States antitrust laws date to the late 19th century when Congress adopted the Sherman Act. Although the original purpose of antitrust laws was to prevent large manufacturing conglomerates which grew out of the Industrial Revolution from engaging in restraint of trade
Antitrust law is a complicated area, and a detailed explanation is beyond the scope of this article. However, US antitrust laws generally focus on maintaining a free market and preventing anti-competitive behavior.
Classic antitrust violations include boycotts, price-fixing, agreements allocating territories among companies which otherwise would be competitors and requiring customers to buy an item they do not want (frequently at an inflated price) to get an item they need. For many years, antitrust cases focused on large monopolies such as railways, Standard Oil, and AT&T (back when it controlled all telephone services). However, other businesses and even nonprofit organizations can run afoul of antitrust laws, also if they share pricing information, set minimum prices, or map out territories.
In June 2018, Federal Trade Commission (FTC) Chairman Joseph J. Simons discussed this in his opening remarks at a FTC workshop on “Competition in Resident Real Estate Brokerage”:
From an antitrust point of view, individual agents and brokers are competitors in the market for providing residential real estate brokerage services to consumers. So, when they act together, they must comply with antitrust rules relating to competitors.
Although the focus of this workshop was residential brokers, the same can be said of commercial brokers.
Moehrl v. The National Association of Realtors
Earlier this year, in Moehrl v. The National Association of Realtors (NAR), several home seller plaintiffs claimed that NAR and four of the largest national real estate broker franchisors conspired to violate antitrust laws by “conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay an inflated amount in violation of federal antitrust law.”
The plaintiffs claim that NAR and the broker franchisor defendants had market power, because they controlled the residential real estate market through their control over MLS. The sellers claim that defendants used their market power through MLS to require brokers listing properties on MLS to follow mandatory NAR multiple listing rules, including a requirement that the seller pay the buyer’s broker commission.
The crux of the plaintiffs’ antitrust claim is that but for this multiple listing rule, buyers’ brokers’ commissions and who pays those commissions would be negotiable. And if the amount and payment of commissions were negotiated, the sellers have paid less or would not have paid buyers’ brokers’ commissions.
It’s very early in the Moehrl case, but NAR has moved to dismiss the case, and the defendants are likely to vigorously defend the plaintiffs’ allegations. In July 2018, Katie Johnson, General Counsel for NAR responded to Chairman Simmon’s June 2018 remarks with a letter, which vigorously defended the MLS system and stated that having sellers pay for buyer’ brokers’ commissions creates efficiencies in the real estate marketplace.
Antitrust Concerns in an Changing Real Estate Marketplace
Traveling music teachers and home studios encourage competition with music stores and schools. Likewise, competition for real estate brokerage clients has been increasing, as new business models enter the market.
Until recently, a real estate broker license was required to market or seller real estate for other party. Although owners could try to sell properties themselves, their advertising was limited to yard signs and newspaper ads. Owners found it hard to compete with MLS listings. Plus, many buyers were working with brokers, who had no incentive to show a for-sale-by-owner property for which the broker would not receive a commission.
Fee-for-service brokers offer limited services for a reduced fee, and sometimes for a flat fee, which can be thousands of dollars less than the traditional six percent fee. Online sites such as Redfin, have driven down commission rates. And now, one company is offering to use a proprietary algorithm to direct market sellers’ homes to prospective buyers.
For the time being, there still are major players in the real estate industry, both locally and nationally. Those major players have at least some market power. The Moehrl case serves as a reminder to real estate brokers and agents that antitrust laws still apply to them. Therefore, brokers and agents should continue to be on the lookout for arrangements which might be considered contracts in restraint or trade, price-fixing, or other antitrust violations.
© 2019 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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