Real Estate Economics 156 Foldvary

Real estate brokerage

Real estate brokers perform services like stock brokers.

They are both intermediaries and are paid for by commissions.

But there is much more complexity.

Brokers match buyers and sellers.

They help customers with the paper work.

Principal-agent relationship.

The principal employs the agent and authorizes him to act on the principal's behalf.

The agent has a fiduciary duty; he is legally obliged to act in the best interests of the principal.

This does not apply to stock brokers,

but it does apply to financial managers.

The r.e. broker in turn is the principal in relation to his sales associate, who is a subagent to the broker's principal.

Listing agreement: contract between the seller and the broker.

The contract sets an offer price and commission.

Authorizes the broker to search for a buyer.

The contract has a time limit.

Marketing: signs, ads, open house, listings in networks, booklets.

The broker filters the buyers for interest and financial capacity.

When there is an interested and qualified buyer, then the agent negotiates with the potential buyer.

The broker in such a case is employed by the seller and represents his interests.

Buyers may use a broker to represent them.

Brokers then draw up the sales contract and help with the closing.

A license from the state is required in order to be a r.e. broker.

There is an educational requirement and one must pass a written test.

There are often several brokers in a transaction.

The listing broker lists the property for sale, in a contract with the seller.

There can be another broker, the selling broker, who searches for or deals with buyers.

There can also be a buyer's broker.

When there is one broker for buyer and seller, he is a dual agent,

with fiduciary duties to both parties.

There are various types of listings.

An open listing authorizes the broker to find a buyer, but the seller might also find a buyer.

Open means not exclusive.

The seller could use another broker.

A broker only gets a commission if he finds the buyer.

In the exclusive-agency listing, the seller may not use another broker,

but may sell the property directly.

In the exclusive-right-to-sell listing, the broker gets a commission even if the sellers don't use his services to sell the property.

The broker will have an incentive to use the MLS, multiple-listing service, which provides the most exposure.

Under California law, the seller is responsible for disclosing information about the property, such as a leaking roof.

The broker also assumes this responsibilty.

Seller and brokers also have to follow laws prohibiting non-discrimination.

Many brokers work for or with large real estate firms.

There are also franchise chains, with the individual firms independently owned.

A broker can work with a firm, having an office at its place of business, and a business card showing the affiliation.

The broker pays a desk fee to the firm and a share of the commission.

The total real estate commission has usually been six percent.

For large commercial properties, the commission rate is less,

and there are also discount brokers.

The rate is subject to negotiation.

But the rates tend to be uniform,

and have not been lowered much even as real estate prices have risen.

            There are over 127,000 people holding a real estate broker license in California, and over 321,900 people holding a real estate salesperson license.

            Half-million people with California real estate licenses are employed in real estate careers,

            For a real estate salesperson license, three real estate courses, as specified by the Department of Real Estate, must be completed either before taking the examination or within 18 months afterwards.

            The California real estate education prelicensure requirements may be met by three semester-units or four quarter-units at college level from an accredited school or college, or from a private real estate school approved by the Department of Real Estate.

            Applicants for the real estate broker license need a minimum of two full years, full time, during the last five years as a real estate salesperson.

            Eight approved college-level courses are required for those applying for a broker license in California.

            Dual agency is allowed in Calif. In representing both Seller and Buyer, the agent may not, without the express permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered

            The National Association of Realtors (NAR), whose members are known as "REALTORS" is North America's largest trade association, representing over 1 million members

 NAR also functions as a Self Regulatory Organization for real estate brokerage.

NAR governs the hundreds of local Multiple Listing Services (MLSs)

In 2005, NAR had the largest Political Action Committee in the United States.

Multiple Listing Service (MLS) (also Multiple Listing System or Multiple Listings Service) is a database that allows a broker representing a seller to share information about the property for sale widely with brokers representing potential buyers.

The purpose of the MLS to is enable a more efficient marketplace to occur between brokers by distributing information.

When a real estate agent is introduced to a potential home buyer, the agent can search the MLS system to retrieve information about homes for sale in that area.

The MLS permits that agent to view information about homes represented by OTHER brokers, just as a securities broker can see the price of stock put up for sale by other brokers through the securities exchanges.

The MLS is an exchange for real estate, just as the New York Stock Exchange and NASDAQ are exchanges for securities, but the MLS is not an open exchange or a public exchange.

Unlike securities exchanges, which have government oversight (the Securities and Exchange Commission), the MLSs are governed by private entities and the rules are set by those private entities with no state or federal oversight.

The MLS typically combines the listings for all available properties that are represented by a broker that is a member of the MLS. Membership to the MLS is generally considered to be essential to the practice of real estate brokerage -- a broker that is not a member cannot put information into the MLS or access information submitted by other brokers.

Most MLSs restrict membership and access to real estate agents who are 1) licensed by the state (or province), and 2) members of the trade association (e.g., the National Association of Realtors or Canadian Real Estate Association). Generally, a person selling his or her own home (i.e., for sale by owner) cannot put a listing for their home directly into the MLS. Similarly, a properly licensed broker that chooses to neither join the trade association nor operate a business within the associations's rules, cannot join the MLS.

In general, MLSs are private entities that set their own rules for membership, access, and sharing of information. An MLS may be owned and operated by a real estate company, a real estate board, or a trade association.

In general, the public cannot gain access to the MLS. Individual brokers who are members of the MLS may provide information to potential buyers in different ways -- providing specific listings on paper in an office is customary. An agent may also email or fax listings. However, real estate brokers sometimes use their websites to permit potential buyers to see MLS data, and is the subject of significant controversy.

The U.S. Department of Justice filed an antitrust lawsuit in September 2005 against the National Association of Realtors over the NAR's policy that restricts brokers from establishing websites that show home sellers information that is in the MLS. The DOJ's antitrust claims also include NAR rules that exclude discount brokers from membership in MLSs.

In the San Francisco Bay Area, 5% (total) and even occasional 4% commissions are becoming more common on properties over $700,000; 6% is rare on houses over $1,000,000. That's a pretty big chunk of the market in several counties here. So there's some price fall.

With home sales slowing, what is happening to brokers?

Two arguments on commissions:

1. Marketing expertise has become more important.

2. Costs become more important

With greater competition, there are two variables:

1. Service. Brokers are enhancing their services.

New Internet features. Video tours.

Web sites that enable sellers to find out how many people have looked at their houses.

How often visitors enter their lisiting.

How many similar houses have been sold and listed.

More sellers are doing a for sale by owner.

Web sites that help:

They team up with HomeDepot and other companies.

There are increasing numbers of discount brokers or pay fees for specific services.

More sellers are using discount brokers, but for less service.

Multiple Listing Service for a flat fee, with owner doing the marketing (showing the house).

Recently 70% have used a full-price broker, down from 74% in 2002.