Flat-fee MLS

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Flat Fee MLS generally refers to the practice in the real estate industry of a seller entering into an "à la carte service agreement" with a real estate broker who accepts a flat fee rather than a percentage of the sale price for the listing side of the transaction. The buyer's broker is still typically offered a percentage though that could be a flat fee as well. A Flat Fee MLS brokerage typically unbundles the services a traditional real estate brokerage offers and lists the property for sale in the local Multiple Listing Service (MLS) à la carte without requiring the seller to use its services for valuation assistance, negotiating, transaction management and showing accompaniment.

The real estate brokerage industry is evolving to accommodate modern consumer demands. The Department of Justice, in a letter to Governor Matt Blunt of Missouri dated 23 May 2005[1] provides a summary of these changes. The reference cited for this excerpt is a letter written by the DOJ to encourage Governor Blunt to veto a bill that, according to the DOJ, would have reduced consumer's options and increased the cost of selling real estate in Missouri. The excerpt follows:

"Traditionally, real estate professionals have performed virtually all services relating to the sale of a home. The key tasks involved in selling a house include marketing it, negotiating with potential buyers, and closing the transaction. Marketing includes listing the property in the local multiple listing service ("MLS"), placing advertisements in local media and on the Internet, and conducting open houses. Contract negotiation services might include providing advice on pricing, home inspections, or other contractual terms. For these efforts, the real estate professionals are typically paid a commission based on a percentage of the sales price of the home.

"It is becoming increasingly common for home sellers to buy some, but not all, of the traditional brokerage services. For example, some sellers might want help advertising their homes, but want to negotiate the sales price themselves. Such consumers might prefer to pay a real estate professional only for the service of listing their homes in the local MLS and placing other advertisements. Other consumers might find a buyer without assistance, but would like to hire a real estate professional to assist them with the negotiation of the sales price or with the paperwork required to close the transaction. The marketplace is evolving in response to these consumers. Real estate professionals who are willing to provide only those services a home seller wants have emerged in Missouri and throughout the country. These "fee-for-service" or "menu-driven" business models are currently legal under Missouri law and typically enable consumers to save thousands of dollars because the consumers pay only for those services they want."

In a flat fee MLS listing, the listing agreement between the real estate broker and the property owner typically requires the broker to enter the property into the MLS and provide other contracted services, with the broker acting as what the traditional industry has coined a "limited service broker". However, the flat fee industry prefers the term à la carte broker because the services are not limited. Instead freedom of choice is expanded to allow sellers to pick from a menu of services. For example if a seller opts to purchase marketing in an MLS, and other distribution channels only, that does not imply that the listing broker would not have negotiated or offered more services if the seller wanted to pay for those services. In fact many flat fee brokers offer upgraded packages that sellers often contract for. Consequently, the services is not limited but instead custom crafted to the needs and wants of the seller.

Currently there are numerous descriptions used to describe reduced fee and discounted real estate services, some of which are not based on providing limited services. The Department of Justice uses terms such as "nontraditional", "Fee-For-Service", and "menu driven",[2] which are in contrast to "traditional" real estate service(s) offered by a licensed real estate broker to a seller of real estate. It is important that the consumer understand there is not currently any standard terminology for nontraditional real estate services though à la carte is probably the best description.

Within the nontraditional real estate services market, there are multiple programs offered to sellers that share the common objective of saving the consumer money by reducing the overall expense of selling real estate. A "nontraditional service" does not automatically entail "limited service". For instance, some full-service brokers list properties under a full-service agreement but charge a "flat rate" that is not a percentage of the sales price. This full-service option usually is a discounted full-service listing, but it is different from the "Flat Fee" MLS service which is the subject of this discussion. Until the industry evolves and adopts a standard practice of terminology, both consumers and real estate brokers will continue to experience some confusion over the terminology describing the services being offered. In all circumstances, the consumer should thoroughly understand the services being provided and the manner of compensation for those services.

The flat fee MLS service is radically different from traditional real estate brokerage services. Because every State requires a listing agreement between a real estate broker and property owner, the rapid explosion of flat fee service providers has created a gap in the States developing laws governing flat fee services provided by real estate broker. In most real estate board / MLS systems, there are generally two types of listing agreements, although some Boards allow others. The first and most common is called an "Exclusive Right to Sell" listing, in which the seller will not only pay a commission if their property is sold through their listing broker or another MLS broker (buyers broker), but also if the seller finds their own buyer. In an "Exclusive Right to Sell" listing, the listing broker gets the commission specified in the listing agreement regardless of who actually finds the buyer. The second type of listing agreement is called an "Exclusive Agency" listing agreement. This "Exclusive Agency" is one form of agreement that can be used to allow the seller to market their property "By Owner" and pay zero commission if they are successful in finding their own buyer. It is this "Exclusive Agency" listing agreement that forms the basis for many flat fee service provider's listing agreements. In essence, Flat Fee MLS listings are a logical progression of reduced-cost selling alternatives to property owners who are comfortable with managing part or all of the selling process, who believe the MLS will effectively "advertise" their property, and who are willing to pay a buyer's broker a commission.

Listing fees for "flat fee MLS" services cover a wide range, but generally include two components: the flat fee paid to the listing broker, and the commission the property owner agrees to pay a Buyer's Broker (if there is one). The commission which is normally paid to the "listing" broker is replaced by payment of the flat fee.

Variations and types of limited service[edit]

The term "flat fee MLS" is used to describe the services and fee structures of real estate brokers and brokers who offer real estate services on a "limited service" or an "a la carte" basis rather than as part of a bundled suite of services provided in the traditional, full-service, commission-based model. In flat fee MLS listings, the seller is paying to be advertised in the MLS and for other contracted services. The seller, in many respects, is selling the property as a For Sale By Owner (FSBO), and actually waives some of those "fiduciary responsibilities" a broker typically owes his or her client. The "flat fee MLS" broker typically does not assist in any of the contract preparations, or assist in any way other than providing those marketing services contracted for and entering the property into the "MLS" system. Some Flat Fee service providers are now offering "contract review" and/or "contract negotiation" services as an upgrade option, but that should be spelled out in detail in any Flat Fee service agreement. In some areas, such as New York City, brokers by practice do not typically prepare contracts, so the lack of broker's providing contract preparation services is a moot point. On the other hand, in states like South Carolina where brokers can act as "scriveners" and actually provide and complete forms prepared and archived by the State's Realtor Association, Flat Fee subscribers should ask whether their Flat Fee service provider will provide standard real estate forms as requested.

Typically, with flat fee MLS the fee is paid at the time of listing the property rather than at closing or settlement, the opposite from traditional brokerage services. However, if a Buyer's Broker sells a Flat Fee MLS listing, the commission payable to the Buyer's Broker is typically paid at closing.

Flat Fee Service Advantages[edit]

Many flat fee service providers allow the seller to advertise as a For Sale By Owner (FSBO) by using their sign and contact information in the yard. In fact, there is some degree of confusion in the market regarding FSBO signs being used on properties that are also listed in the MLS. Some MLS systems reportedly have issued a rule that disallows FSBO signs if the property is listed in their local MLS - a rule which may draw the ire of the DOJ. Other MLS systems have not.

Another significant advantage to Flat Fee is most service providers stipulate that if the seller finds his own buyer without the use of a buyer's broker, then the buyer's broker commission is eliminated, and the seller owes no broker a commission.

In certain circumstances, flat fee services also allow the use of MLS lock boxes which allow feedback directly from a buyer's broker that may show the property. Some flat fee brokers will even provide representation at closing for a much smaller fee than the normal commission.

Other advantages for the seller may include the option to cancel the listing at anytime without penalty (sellers should investigate this prior to signing any service agreement) and relist with another service provider or full-service broker, effectively eliminating any "minimum length of service" (the listing period) typically required by full-service brokers. Because MLS rules typically have strict requirements of its member brokers, a Flat Fee subscriber may not be able to terminate a listing after a contract with a buyer represented by a Realtor member of that MLS system has been ratified. The reason for disallowing termination or withdrawal from MLS under this scenario is because the entire MLS system is based on its members agreeing to cooperate with each other and ensure payment from their listing clients to each other upon closing. To allow Flat Fee listings any privileges in this regard would undermine the very foundation of the MLS system.

Flat Fee Service Disadvantages[edit]

A potential downside of using a flat fee listing service is that, in most cases, the seller must represent himself in the transaction, or arrange for other professionals such as an attorney or title company to handle closing. Because most Flat Fee service providers offer "limited representation" by the real estate broker, which typically excludes services such as offering advice during contract negotiations and making sure all offers, counter-offers, counter-counter offers, etc. are properly executed by the parties, flat fee listings are not advised for the first time home buyer, or for the property owner who simply does not have the time or perhaps personality to manage the selling process. In Texas the Broker is required to negotiate all deals, whether or not they are receiving a smaller commission.[3] In any case, both flat fee (limited service) and traditional full-service brokers should always advise clients to seek qualified legal and tax advice regarding their real estate transactions.

Flat Fee may not be the best choice for sellers who have moved away from the area where their home is located, either. While it happens successfully from time to time, it can be difficult and frustrating for a home owner to negotiate a long-distance contract and smoothly navigate to a closing.

Sellers should be aware that once the fee has been paid, it is generally non-refundable and non-transferrable. In fact, some service providers charge a penalty if you withdraw or terminate your listing prior to the agreed-to period. Sellers should demand the opportunity to review all paperwork prior to signing and paying for a flat fee service.

In a flat fee program, sellers probably will not have the access to their broker they normally would in a full-service listing agreement. Even asking simple questions about who pays what closing costs in a negotiation with a potential buyer may not be an option because in a flat fee listing the seller has typically waived their broker's fiduciary responsibilities. Remember that flat fee programs always entail limited Realtor services.

Sellers should realize that Flat Fee programs are not a panacea for problems or issues they may have experienced in trying to sell their home. No real estate broker - limited or full service - can guarantee a property owner's home will sell at the desired price and terms.

History[edit]

Traditionally real estate brokerage services in the United States have been delivered as part of a bundled package including such services as (i) assisting the seller in setting a list price for the property; (ii) marketing and advertising a property for sale, including listing the property in the MLS; (iii) handling buyer inquiries and scheduling and arranging showings of the property to prospective home buyers; (iv) holding "Open Houses" to allow the public to preview a property for sale; (v) handling contract preparation and negotiation on behalf of the seller; (vi) management of the real estate transaction to final settlement (or closing escrow). The fee structure for this bundled package of services in the United States and Canada has generally been to pay a commission on the gross sales price of the property of between 5-7%.[4]

Stephen J. Dubner and Steven D. Levitt report that this typical large commission does not even benefit the average real estate broker as much as one might expect from the recent run up in housing prices because of the excessively large amount of time that the average real estate broker must spend trolling for new clients, and the relatively small percentage of their time they spend actually performing real estate services for each client.[5]

However, the fixed fee concept existed for many years before the internet became popular. There are also fixed fee broker groups that cooperate with each other across the United States. Many FSBO websites will also locate local flat fee brokers for interested sellers. Those offerings normally include a FSBO webpage to assist in advertising the property.

In recent years, with the unbundling of services accelerated by the advent of the Internet, a number of brokerage models have developed to cater to the FSBO market by providing services on an "a la carte" basis. The widespread availability of information about properties for sale has caused downward pressure on real estate fees in the United States.[6] For changes in the industry also read real estate trends.

A useful overview of real-estate payment practices in the United States is found in an October 2006 report by the AEI-Brookings Joint Center for Regulatory Studies. The study notes that "real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided." It further concludes that "consumers would benefit most from a fee-for-service approach – combining flat fees, hourly fees, and bonuses, including percentages of extra value created." [7] It offers a number of examples of such options.

Minimum service laws: Government involvement in the Fee-For-Service format[edit]

According to the US Department of Justice's Antitrust Division on Real Estate and Competition Minimum Service States, currently 11 states have passed some form of "minimum service laws" which require consumers to pay for thoses services whether they want to or not. An additional eight states have minimum service requirements but allow consumers to waive those extra services, preserving choice.

While the DOJ and FTC monitor and challenge real estate laws or changes to law perceived as anti-competitive in all States, this Press Release from April 2005 is an example of their effort: "The Department of Justice and the Federal Trade Commission (FTC) issued a joint letter urging the state-created Texas Real Estate Commission to reject a proposed regulation that would change current rules by imposing new restrictions on the ability of Texas real estate professionals to offer flexibility in brokerage services. The agencies expressed concern that the proposed regulation would not only cause Texas consumers to pay more for real estate services, but also would reduce consumer choice by restricting the ability of real estate brokers to provide services tailored to customer needs."[8]

The United States Department of Justice Antitrust Division announced the launch of a new web site in October 2007 to "educate consumers and policymakers about the potential benefits that competition can bring to consumers of real estate brokerage services and the barriers that inhibit that competition." Among other findings, they report that new sales models can reduce consumer home sales costs "by thousands of dollars. For example, in states that allow open competition, some buyer's brokers rebate up to two-thirds of their commission to the customer, and some seller's brokers offer limited-service packages that let sellers list their homes on the local multiple listing service (MLS) for as little as a few hundred dollars."[9] "Competition and Real Estate", includes a link to the real estate laws of each U.S. state and how they support or inhibit real estate brokerage competition.

Need to inform the public via written disclosures[edit]

An alternative to "minimum service laws" is a written disclosure to home buyers and sellers of exactly which services will be offered and which services will not be offered. Proponents of this method point out that a disclosure-based alternative allows consumers to be fully informed about the services they may not receive using flat fee or limited services while still allowing them a choice in the types of services to be purchased. Ohio[10] and Virginia[11] are states that have recently passed legislation to allow a new form of representation called "limited service representative" which calls for the real estate practitioner to (i) disclose that the licensee is acting as a limited service representative; (ii) provide a list of the specific services that the licensee will provide to the client; and (iii) provides a list of the specific duties of a standard broker set out in subdivision that the limited service representative will not provide to the client.

However, service level disclosures have sometimes been a normal aspect of the contractual terms of all real estate brokers. Practicality dictates the need to outline the scope of services provided in order to create any kind of listing agreement. Therefore, in some jurisdictions, both full-service and limited-service brokers have described the services they are providing. Over the years even full-service brokers have offered various service options such as "agency listings" and, in some states, "open listings".

These alternative service options existed long before flat fee brokers introduced them on the internet. In some cases, such services were offered to friends or relatives of real estate brokers and to institutions such as banks or investors that could find a broker to provide such options. It is the proliferation of these services on the internet that has drawn attention from the real estate industry and legislatures.

Interest in flat fee listing service to gain price advantages in a down market[edit]

During the housing slump in some states starting in 2007, a new interest in flat fee listing services to help gain a price advantage has occurred. By reducing the listing broker cost, property sellers have been able to reduce their price below their neighbors', thus increasing the chance of making the sale. Also, in some cases sellers may avoid the need to make a short sale. It is important to remember that any commission rebates, etc. given to the buyer or seller in a transaction must be disclosed to all parties.

See also[edit]

References[edit]

  1. ^ http://searchjustice.usdoj.gov/search?q=cache:YpjpKVWTyi0J:www.justice.gov/atr/public/comments/209149.wpd+fee-for-service+site%3Awww.justice.gov%2Fatr&output=xml_no_dtd&ie=iso-8859-1&client=default_frontend&proxystylesheet=default_frontend&site=default_collection&access=p&oe=UTF-8
  2. ^ http://searchjustice.usdoj.gov/search?q=fee-for-service&btnG=Search&sort=date%3AD%3AL%3Ad1&output=xml_no_dtd&ie=iso-8859-1&oe=UTF-8&q=site%3Awww.justice.gov%2Fatr&client=default_frontend&proxystylesheet=default_frontend&site=default_collection
  3. ^ Texas Real Estate Commission Rule §535.16. http://www.trec.state.tx.us/pdf/rules/trecrules.pdf
  4. ^ Darlin, Damon (3 September 2006). "The Last Stand of the 6-Percenters?". New York Times. Retrieved 2006-10-10. 
  5. ^ Dubner, Stephen J. (5 March 2006). "Endangered Species". New York Times Magazine. Retrieved 2007-05-02. 
  6. ^ "Real Estate Commissions Shrinking" from NPR's Morning Edition, 14 April 2006 (retrieved 8 April 2007)
  7. ^ Nadel, Mark S. "A Critical Assessment of the Standard, Traditional, Residential Real Estate Broker Commission Rate Structure". Publication no. 06-28,: 2. Retrieved 2008-01-01. 
  8. ^ DOJ AND FTC PRESS RELEASE THURSDAY, APRIL 21, 2005
  9. ^ ""Antitrust Division Launches Web Site on Competition in the Real Estate Brokerage Industry", DOJ Press Release, 10 October 2007". Retrieved 2007-10-17. 
  10. ^ "Waiver of Duties Statement Ohio Department of Commerce Division of Real Estate and Professional Licensing". Archived from the original on 6 December 2006. Retrieved 2008-03-18. 
  11. ^ "Code of Virginia: Real Estate Brokers, Sales Persons and Rental Location Agents, "Limited service representative, contract disclosure required" portion of the law". Retrieved 2007-03-26. 

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