The U.S. Department of Justice vs. the National Association of

Almost eight years ago, Steve DelBianco became an investor in what he thought would be the real estate equivalent of the hugely successful discount travel sites Expedia.com and Travelocity. The Web site, eRealty.com, was designed for Internet-savvy home buyers who would prefer to search online for potential homes rather than have brokers do the legwork for them. This, he thought, would cut down on buyers' commission costs to brokers and prove to be an instant hit with house hunters.

In the heady dot-com days of 1998, eRealty looked like a slam- dunk success, the executive director of NetChoice Coalition said during an Oct. 25 workshop on competition policy and the real estate industry hosted by the Federal Trade Commission and the U.S. Department of Justice in Washington, D.C.

But the doors started slamming shut, he said, as established brokerages used (the National Association of Realtors) and their local associations to block or exclude, punish eRealty.

The Web site was meant to work by taking listings for 4.5 percent and giving 1 percent rebates to buyers. However, DelBianco said, laws prohibiting rebates meant that eRealty couldn't do business in several states.

Lately, the spotlight on this issue has been getting more intense. On Sept. 8, the DOJ's Antitrust Division filed a lawsuit against the NAR - the United States' largest real estate trade organization - charging the group with obstructing real estate brokers that use Internet-based tools to offer lower costs to consumers.

Real estate brokers share information about properties for sale through a local multiple listing service (MLS), a joint venture among competing brokers. Some of these brokers have begun offering services over the Internet, using password-protected sites to allow customers to search the MLS database on their own.

The DOJ alleged that the NAR's Virtual Office Website policy restricts competition by requiring that NAR-affiliated MLS databases adopt rules that allow brokers to withhold their clients' listings from other brokers' Web sites.

In other words, the NAR's rules allow traditional brokers to block their competitors' customers from having full access to all of the MLS listings.

On the same day that the DOJ filed suit, the NAR enacted a new rule, the Internet Listing Display policy, which allowed brokers who had opted out of displaying listings on their competitors' sites to make an exception at the direction of a particular seller.

However, on Oct. 5, the DOJ issued an amended complaint stating that provisions in the new policy still allow agents to withhold their listings from display on competitors' sites and therefore still violate antitrust laws.

It is this whole idea of choice, where consumers pick and choose which professional services they want and which ones they don't want - that is at the heart of the issue today, said Phil Querin, a real estate lawyer with the Portland law firm of Davis Wright Tremaine. It is what has driven the U.S. Department of Justice and the Federal Trade Commission to take action against the NAR, and to discourage state regulators from enacting minimum service laws.

However, Querin said, with such a hot housing market, there's room enough right now for traditional and discount brokers.

On the seller's side, he said, the traditional and discount business models usually have two things in common. They are based upon a reduction in compensation to real estate salespeople involved in the transaction, and they result in a reduction in traditional real estate services to the seller.

For example, some current business models involve charging a flat fee to place the property on the local multiple listing service, whereas the traditional negotiated commission structure is based on the home's sale price, which is paid if the property sells.

The flat fee models vary, but in many instances the cost to place a home on the MLS is a few hundred dollars. Although some companies do make enhanced services available to the consumer for a discounted commission, it is the flat fee model that has received the greatest attention, said Querin.

Companies charging a fixed fee of a few hundred dollars to be placed on the MLS do not provide many of the typical services usually associated with the listing and selling of a home, he said, such as educating the seller as to what documents need to be signed, providing reliable information on recent comparable sales, assisting in the evaluation, negotiation and transmission of offers to purchase a home, drafting of counteroffers, addenda and other paperwork, and answering the sellers' questions.

These new business models are the direct outgrowth of the marketplace, said Querin. In a seller's market, such as what we have been experiencing over the last few years, homes are selling faster and for top dollar. Some consumers are willing to trade the traditional Realtor services, which include more hands-on assistance, for the substantial commission reductions offered by minimum and discount service brokers.

Are these new business models here to stay?

In my opinion, the answer is yes, said Querin. We are becoming a Home Depot society where consumers decide which services or products they will purchase and which ones they will provide themselves.

But, he said, this new business model is not the death knell for traditional real estate brokerage, where full services are provided for a negotiated commission.

Today, minimum service works because of the strong sellers' market, said Querin. As the market softens - which it appears to be doing in some locales - minimum service models may have to adjust to their sellers' need for more assistance in completing the sale.

Querin believes that the brokers that win out will be those with the most effective business models, regardless of whether they are traditional or discount.

DelBianco, the eRealty founder, said he'll let the courts figure out if Realtors are guilty of antitrust violations.

But the court of consumer expectations is beginning to pay attention, he said. Web-savvy home shoppers will be incensed that large, traditional brokers want to restrict co-branding relationships with favorite destinations like Yahoo!, MSN, eBay and Lending Tree.

DelBianco predicts that tech-literate home buyers and sellers will become increasingly distraught that their listing agents restrict Web sites where their home can be seen by the broadest possible audience of prospective buyers. Sellers will be speechless to learn that Realtors are restricting limited-service, discount brokerages, by using their control of state licensing boards and influence in state legislatures.

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