As many of you may know, real estate agents must be knowledgeable about federal and state antitrust laws and regulations, which can have a major impact on what they can and cannot do in representing buyers and sellers of real estate, especially in their dealings with other agents. As some unfortunate brokers and agents have learned, the rules are not straightforward, and the penalties can be severe (including, in some cases, treble damages).
Given these risks, it doesn’t hurt to review a few basic dos and don’ts. This blog article will address four areas where real estate professionals must take special care, in which antitrust violations can occur. N.B.—Some of these situations involve actions that are considered “per se” violations—that is, the mere commission of the act is deemed to be illegal, without further inquiry into the intent of the persons committing the action or its anticompetitive effect.
A customary practice among real estate brokers is to charge sellers a commission for their brokerage services based on a percentage of the sales price of the property. They also regularly advertise that they will share a portion of that commission with the broker who procures a buyer for the property. While these types of arrangements are perfectly legal, establishing standard rates for these arrangements constitutes price fixing, which is a “per se” antitrust violation. As a general rule, brokers should not agree with other brokers to set minimum commissions or set commissions for a category of properties. Brokers should also refrain from discussing commissions with competitors, outside of the context of a specific transaction.
Explicit bargains between business rivals to restrict their activities to particular locations, or to parcel out potential clients, will constitute “per se” antitrust violations. In the real estate arena, these market division or customer allocation schemes can arise where competing brokers or agents divide geographic areas or possible patrons among themselves. As a general rule, real estate professionals should not discuss the division of territories with their competitors, or agree to restrict offering their services to particular clients or categories of clients, and should keep in mind that such agreements need not be formalized or in writing to constitute a violation. Such illegal agreements may also be inferred from conduct—in other words, if you act as though you have agreed not to call on a certain type of prospect, it may be surmised that you had agreed to refrain from doing so, thus acting to reduce competition.
As the name implies, bid rigging occurs when brokers or agents take concerted action to manipulate the result of a bidding process, and is also a “per se” violation. In the real estate context, one of the most common uses of this procedure is in foreclosure auctions. If you are attempting to purchase real estate in this manner, you must make your own bids and avoid coordinating with any other bidder. In the wake of the housing crisis, FBI antitrust investigations produced over 40 guilty pleas to conspiracy to rig bids and commit mail fraud at public foreclosure auctions in Northern California. In view of these constraints, if you wish to attempt to purchase real estate at auction, do not discuss any sensitive information with any other potential bidder.
While a company may legally refuse to do business with any other business, an agreement among competitors not to do business with specific individuals or businesses will likely be treated as an illegal group boycott, especially when those cooperating competitors hold collective market power; such arrangements constitute “per se” violations as well. Among real estate professionals, these types of arrangements can arise when a group of agents or brokerages agree to refrain from working with competitors who may charge a lower commission for their listings. A regular situation in which these types of violations can arise occurs when a small group of brokers exercises control over access to the multiple listing service (“MLS”).
A Useful Quiz
While real estate agents and brokers frequently work together to list and sell properties, a crucial difference exists between professional collaboration and illegal collusion. One way to become more attuned to the difference is by studying various scenarios and testing yourself on which activities are violations and which are not.
Towards this end, I have found a free test on the National Association of Realtors website that is helpful in this regard, and I encourage you to take it. When you complete this eight-question online quiz and hit submit, it immediately returns a scored version with annotations and explanations. The quiz is found here. As ignorance of the law is no defense, knowledge of the law is essential to avoid violating it.
Rick Smith says
Thought provoking article. Worth reading, and be sure to take the Quiz if you are a Realtor!