THE RESIDENTIAL REAL ESTATE BROKERAGE INDUSTRY: A PROPOSAL FOR REFORM
| Date | 01 September 1992 |
| Author | STEPHEN L. POE,MICHAEL K. BRASWELL |
| DOI | http://doi.org/10.1111/j.1744-1714.1992.tb00661.x |
| Published date | 01 September 1992 |
THE RESIDENTIAL REAL ESTATE BROKERAGE
INDUSTRY: A PROPOSAL FOR REFORM
**MICHAEL
K.
BRAS
WELL
*STEPHEN
L.
POE
INTRODUCTION
Sixty years ago the predominant form
of
legal relationship between
a seller
of
residential real estate and a professional real estate broker
was created by an open listing agreement.' In an open listing, the
seller may use any number of brokers, with the commission going
only to the broker who procures a buyer on the seller's terms, while
the seller retains the right to sell the property himself without
paying a commission? This relationship was beneficial to the seller
*
Assistant Professor of Business Law, University of North Texas.
**
Assistant Professor of Business Law, University
of
North Texas.
FEDERAL
TRADE COMMISSION STAFF REPORT, THE RESIDENTIAL REAL ESTATE BRO-
KERAGE
INDUSTRY 30 (1983) [hereinafter FTC REPORT]. The listing agreement contains
the contractual obligations
of
the seller and listing broker.
See infra
notes 17-28 and
accompanying text.
The three most commonly used types of listing agreements are the open listing,
the exclusive agency, and the exclusive right to sell.
In
an exclusive agency listing,
only one broker is employed to sell the property, but the seller retains the right
to
sell the property himself. In an exclusive right to sell listing, the listing broker will
receive a commission regardless of who sells the property during the listing period.
See
William C. Erxleben,
In Search
of
Price and Service Competition
in
Residential
Real Estate Brokerage: Breaking the Curtei,
56 WASH. L. REV. 179,
181
n.9 (19811 (citing
B. BECKER, ECONOMIC ASPECTS
OF
REAL
ESTATE
BROKERAGE 11-12 (1972)).
See
also,
Paula C. Murray,
The Real Estate Broker and the Buyer: Negligence and the Duty to
Investigate,
32
VILL.
L.
REV. 939, 940 n.4 (1987) (citing
7
RICHARD R.
POWELL
&
PATRICK
J.
ROHAN,
POWELL
ON
REAL
PROPERTY
5
938.16 (1984)).
In
1950, fifty percent
of
brokerage offices still accepted both exclusive and open
listings, although not accepted by the MLS.
See
FTC REPORT,
supra
note
1,
at 109
(citing M. Lee, Director Visalia MLS, Chairman, Farm Land Division, California Real
Estate Association in CALIF. REAL EST. REV. (Sept. 1952) at 22).
272
I
Vol.
30
I
American Business Law Journal
because it encouraged competition among the brokers and also al-
lowed the seller to continue to make efforts to sell his own property.
The open listing still is the dominant listing agreement in today’s
commercial market,3 but under pressure from a network of national
and state trade associations4 the legal relationship between seller
and broker in the residential real
estate
market has changed dras-
tically.
Under state regulation5 the residential real
estate
brokerage in-
dustry now operates within
a
framework designed to favor brokers
at the expense of both buyers and sellers. The framework includes
an “Exclusive Right To Sell Listing”6 coupled with
a
“Multiple Listing
Service” (MLS).’
A
1983
Federal Trade Commission staff report
provides:
Today brokerage structures
and
practices
are
often
viewed
as
the
only
possible
system
of
brokerage. However,
they
have
evolved
over
many
years
in
response to
specific
problems
and
needs
of
the
industry. These structures and practices were
not
implemented
arbitrarily,
nor
were
they
imposed
by
an outside force. They were,
for
the
most
part, developed and instituted by the industry members
themselves.*
The framework of the exclusive right to sell listing and MLS is
governed primarily
by
agency and contract law, together with
reg-
ulation and licensing by a state real
estate
commission? The frame-
s
See
FTC REPORT,
supra
note
1,
at
30.
See
infra
notes
28, 216-35
and accompanying text. The principal trade association
is
the National Association of Realtors (NAR) and its affiliated state and local
associations.
See
FTC REPORT,
supra
note
1,
at
80.
Open listings presented certain
problems to brokers: competition among listing brokers, competition with sellers, and
duplication of effort by brokers. Exclusive listings and the
MLS
“solved” the problem
of
competition among brokers and commission reductions to induce listings.
See
id.
at
110.
State regulation is primarily licensing laws which were originated by the NAR.
See,
FTC REPORT,
supra
note
1,
at
86.
See
supra
note
2.
’
The multiple listing service
(MLS)
is a system whereby listings are pooled and
distributed to all member brokers.
It
is a clearinghouse for market information.
See
infva
notes
17-28, 172-77. 187-231,
and accompanying text.
”
FTC REPORT,
supra
note
1,
at
84.
See
Stortroen v. Beneficial Fin. Co.,
736
P.2d
391, 395-96
(Colo.
1987).
The duties
of the real estate broker
to
the buyer and seller are governed by
state
law. The basic
framework is the real estate licensing law, sometimes with regulations. Detail
is
supplied by cases interpreting that law and state agency law. Real estate agents are
also subject to general statutes, such as those governing unfair and deceptive trade
practices, and the common law concerning fraud, misrepresentation, and negligence.
The real estate broker is treated in every state as an agent.
See
FTC REPORT,
supra
note
1,
at
173-75.
1992
I
Real Estate
I
273
work, with inherent conflicts of interest, has created much confusion
for the parties involved and has made the application of agency law
and its fiduciary principles difficult.1° The confusion surrounding the
framework has contributed to breaches of fiduciary duties such
as
dual agency without proper disclosures.” Under state regulation
dominated by members of the brokerage industry,12 the consuming
public has been underprotected. Most buyers and sellers are unaware
of the true legal relationship between them and the brokers under
the MLS structure. The sellers do not understand the listing agree-
ments and the consent to subagency. Sellers do not know there are
options other than the exclusive right to sell listing. Most consumers
do not know that the commission is negotiable. Sellers are not
informed of the potential liability for the conduct of agents and
subagents. The buyer does not know that secrets revealed may be
divulged by
the
broker under the legal duty owed to the seller.
Consumers are also not aware of the vulnerability of the sales
contract to rescission because of the broker’s conduct. Consumers
should be entitled to make an informed decision when it comes to
what is probably one of the largest financial transactions in their
lives, and the current framework does not provide for
it.
The current framework has also had significant economic effects
on the efficient operation of the residential real estate market. The
market structure that has been created and the practices that have
evolved under it have limited competition, harming both consumers
and discount broker~.’~ The primary economic result of this anticom-
petitive framework is a commission structure that keeps rates arti-
ficially high.14
lo
The appropriateness of “agency law” and the reality
of
the relationship has been
questioned in numerous articles.
See, e.g.,
Barry
A.
Currier,
Finding the Broker’s Place
in
the Typical Residential Real Estate Transaction,
33
U.
FLA. L. REV. 655, 674 (Fall,
1981); Matthew
M.
Collette, Note,
Sub-Agency
in
Residential Real Estate Brokerage:
A
Proposal to End the Struggle with Reality,
61
S.
CAL.
L.
REV. 399, 401-03 (1988); Robert
E. Kroll, Comment,
Dual Agency
in
Residential Real Estate Brokerage: Conflict
oj
Interest and Interests
in
Conflict,
12 GOLDEN GATE
U.
L.
REV. 379, 386 n.41 (1982).
For a discussion
of
dual agency and other abuses of fiduciary duty, see
infra
notes 58-81 and accompanying text.
lZ
See
Arthur
D.
Austin,
Real Estate Boards and Multiple Listing Systems
as
Restraints
of
Trade,
70
COLUM.
L. REV. 1325, 1363 (1970); Steve Katz,
Restraint
of
Trade: Let the Broker Beware!,
87 CASE
&
COM. 11, 21 (MaylJune 1982); Erxleben,
supra
note 2 at 192; FTC REPORT,
supra
note 1, at 102.
Is
See
infra
notes 156-250 and accompanying text.
The current rates are typically either six
or
seven percent.
It
has been suggested
that a competitive rate would be closer to two percent. Foreign rates are also in the
two percent range.
See
Elizabeth Lesly,
The Stupidity
of
Free-Market Chic
.
. .
in
Real
Estate,
WASH.
MONTHLY
34, 39 (November 1990).
See
also
Thomas J. Miceli,
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