Agents involved in the transaction may be required to  split their shares of the commission with their brokers. Participating brokers use an  MLS to “list” the homes they have for sale, providing other brokers with  detailed information on the properties, including how much of the  commission will be shared with the buyer’s agent. Various Factors Can Influence the Extent of Price Competition in Real Estate Brokerage

A number of factors can influence the degree of price competition in the  real estate brokerage industry. Some economists have observed that  brokers typically compete more on nonprice factors, such as service  quality, than on price. Evidence from academic literature and industry  participants with whom we spoke highlighted several potential causes of  this apparent lack of price competition. Thus, with the increase in housing prices, the  brokerage fee for selling a median-priced home increased even as the  commission rate fell. Traditional Brokers’ Resistance to Nontraditional Brokerage Models

Traditional brokers may discourage price competition by resisting  cooperation with brokers and firms whose business models depart from  charging conventional commission rates, according to several industry  analysts and participants we spoke with. Some State Laws and Regulations Can Affect Price Competition

Although state laws and regulations related to real estate licensing can  protect consumers, DOJ and FTC have expressed concerns that some of  these laws and regulations may also unnecessarily hinder competition  among brokers and limit consumer choice. Antirebate Provisions

At least 14 states appear to prohibit, by law or regulation, real estate  brokers from giving consumers rebates on commissions or to place  restrictions on this practice. The  Internet also has fostered the creation or expansion of a number of  Internet-oriented firms that provide real estate brokerage or related  services, including discount brokers and broker referral services. The Internet Facilitates Alternative Service and Pricing Options

Although Internet-oriented brokerages and related firms represent only a  small portion of the real estate brokerage market at present, the Internet  has made different service and pricing options more widely available to  consumers. Alternative listing Web sites offer alternatives to the MLS, allowing  sellers who want to sell their homes themselves to advertise their  properties to buyers and giving buyers another source of information on  homes for sale. Wider Use of the Internet in Real Estate Brokerage Will Depend on the Availability of Listing Information and Other Factors

Several factors could limit the extent to which the Internet is used in real  estate transactions. Few State-Chartered Banks Appear to Engage in Real Estate Brokerage

Our review of certain state statutes and regulations showed that  approximately 30 states may potentially authorize state-chartered banks or  their operating subsidiaries to engage in some real estate brokerage  activities. However, we also found that because only a small number of  banks in these states appeared to have taken advantage of this authority,  the effect on competition and consumers was likely minimal. They noted that real estate  brokerage is not typically part of a bank’s business model, and that banks in  small communities may be reluctant to compete with local real estate  brokers that may be clients of the banks. “Competition and Efficiency in Transacting: The Case of  Residential Real Estate Brokerage.” AREUEA Journal, vol. “International Residential Real Estate  Brokerage Fees and Implications for the US Brokerage Industry.”   International Real Estate Review, vol. Federal Trade Commission. The Residential Real Estate Brokerage  Industry, vol.
Why GAO Did This Study

Consumers paid an estimated $61 billion in residential real estate brokerage fees in 2004. Because commission rates have remained relatively uniform--regardless of market conditions, home prices, or the effort required to sell a home--some economists have questioned the extent of price competition in the residential real estate brokerage industry. Further, while the Internet offers time and cost savings to the process of searching for homes, Internet-oriented brokerage firms account for only a small share of the brokerage market. Finally, there has been ongoing debate about the potential competitive effects of bank involvement in real estate brokerage. GAO was asked to discuss (1) factors affecting price competition in the residential real estate brokerage industry, (2) the status of the use of the Internet in residential real estate brokerage and potential barriers to its increased use, and (3) the effect on competition and consumers of residential real estate brokerage by state-chartered banks in states that permit this practice.

What GAO Found

The residential real estate brokerage industry has competitive attributes, but its competition appears to be based more on nonprice variables--such as quality, reputation, or level of service--than on brokerage fees, according to a review of the academic literature and interviews with industry analysts and participants. One potential cause of the industry's apparent lack of price variation is the use of multiple listing services (MLS), which facilitates cooperation among brokers in a way that can benefit consumers but may also discourage participating brokers from deviating from conventional commission rates. For instance, an MLS listing gives brokers information on the commission that will be paid to the broker who brings the buyer to that property. This practice potentially creates a disincentive for home sellers or their brokers to offer less than the prevailing rate, since buyers' brokers may show high-commission properties first. Some state laws and regulations may also affect price competition, such as those prohibiting brokers from giving clients rebates on commissions. Although such laws and regulations can protect consumers, the Department of Justice and the Federal Trade Commission have argued that they may also unnecessarily limit competition and reduce consumers' choices. The Internet has changed the way consumers look for real estate and has facilitated the creation and expansion of alternatives to traditional brokers. A variety of Web sites allows consumers to access property information that once was available only by contacting brokers directly. The Internet also has fostered the growth of nontraditional residential real estate brokerage models, including discount brokers and broker referral services. However, industry participants and analysts cited several obstacles to more widespread use of the Internet in real estate transactions, including restrictions on listing information on Web sites, some traditional brokers' resistance to cooperating with nontraditional firms, and certain state laws and regulations. Although about 30 states potentially authorize state-chartered banks or their operating subsidiaries to engage in some form of residential real estate brokerage, few banks in these states appear to have done so. GAO's contacts with seven banks engaged in brokerage in two states found that they were located in small communities with few other brokerage options, and that their brokerage services did not differ significantly from those of other local real estate brokers. In general, because residential real estate brokerage by state-chartered banks appears to be so limited, its effect on competition and consumers has likely been minimal.