The Boston Real Estate Oligopoly
Stubbornly High Fees & Other Consumer Harm
Stubbornly High Fees & Other Consumer Harm
Buying real estate, particularly less liquid, high-end real estate, in a buyer beware state like Massachusetts is tended to with a high degree of risk. The fact that buyers and sellers are expected to navigate these risks in the context of a well established oligopoly stacks the deck against them.
An oligopoly is defined as a state of limited competition in which a market is shared by a small number of producers or sellers. It’s generally accepted that when four or fewer market participants control in excess of 50% of a market, an oligopoly exists. In the Back Bay & Beacon Hill luxury real estate market, the four largest brokers control 78% of the market.
The market dominance of the oligopoly is underscored when you consider that the fifth largest broker has a market share of just 2%. We’re defining luxury as properties that sold for $3 million and up. For the trailing 12 months ended September 30, 2021, there were 101 sales representing over $1.2 billion in transaction volume.
If we drop the threshold from $3 million to $2 million, which is roughly the average selling price of a Back Bay condominium, the story is essentially the same, with the top four brokers controlling in excess of 73% of the market.
This market dominance is compounded when you consider that two of the top four brokers are closely connected via common ownership of their parent company and/or franchisor.
Whose Agent is Whose? It’s Complicated
It’s important to understand the basic relationship between consumers and real estate professionals, particularly the difference between a licensed sales person, or agent, and an actual real estate broker.
Real estate broker (“broker”) – Only a real estate broker can list a property for sale, set commission rates, negotiate listing terms, and receive compensation from clients for buying, selling, or renting real estate. Most consumers never meet the actual broker and firms can have one broker of record for many offices.
Licensed sales person (“sales agent”) – Consumers generally interact with real estate sales agents. Sales agents can not work independently; they must affiliate with a licensed real estate broker. Sales agents can only receive compensation from their broker, not directly from the broker’s client. Sales agents are general agents of the broker, and special, or limited, agents of the clients. They are almost universally independent contractors, not actual employees of the broker.
So when you list your property with your friendly neighborhood sales agent, you’re actually listing the property with their broker.
“Sales teams” – It’s worth highlighting sales teams as many sales agents these days are on “teams.” At first blush these teams appear to be independent real estate brokerage firms, and the senior team members adopt titles like CEO, or President. But a team is simply a group of sales agents that brand themselves within a brokerage firm and work under a broker, just like other sales agents.
As illustrated from the market share data, our brokerage market is not nearly as competitive as one may think. In fact, it’s far from it. Consumers buying or selling property are almost guaranteed to come in contact with the oligopoly.
The oligopoly protects its market dominance vis-à-vis total control over state regulations that govern real estate brokerage activities. They also force their independent contractor sales agents to join their trade association - the National Association of Realtors (NRA).
State Regulations – The Fox Guarding the Hen House
The Board of Registration of Real Estate Brokers and Salespersons (the Board) is a five member board appointed by the Governor. Not surprisingly, the Board is comprised of three licensed real estate brokers and two representatives of the general public. Among other duties, the Board makes rules, oversees licensing, and disciplines licensees who violate laws and regulations.
One of the Board’s rules requires that in order to get a broker’s license, one must work for a broker as a sales agent for a minimum of three years before being allowed to sit for the broker’s exam. We view this rule as overly burdensome, self-serving, and an overt form of protectionism for the incumbent brokers. No such minimum work requirements exist in the highly regulated financial services sector, the practice of law, and other professional service industries.
It’s also worth pointing out that it’s the Board that continues to allow the practice known as “dual agency” where the same broker is allowed to represent both the buyer and seller in the same transaction, a practice that is illegal in many states.
Independent Contractors and National Association of Realtors
The cornerstone of the real estate brokerage business model is its use of independent contractors, or a variable cost labor source. Since the sales agents are not employees, the broker has no obligation to provide any base compensation or benefits. This allows brokers to flood the market with sales agents, many with little or no actual training.
The downside for businesses that depend on independent contractors is that in theory they don’t have control over how their independent contractors conduct their business activities. When you unleash thousands of marginally trained commission-based sales people to the market place, it’s a bit like watching a pack of jackals picking over a rotting animal carcass – not a pretty sight.
For real estate brokers, the workaround to this problem involves the National Association of Realtors (NAR). Nearly all brokers require their sales agents to join a local chapter of the NAR, a private trade association with about 1.5 million members. NAR, which of course is run by brokers for the benefit of brokers, requires sales agents to periodically attend “Code of Ethics” training. The hallmark of the NAR ethics training relates to “Duties to Realtors” and it lays out in great detail the ground rules for interacting with other sales agents.
The Duties to Realtors are tantamount to a handbook for an anti-competitive marketplace. As example, buyers and sellers are generally completely unaware that once they enter into a representation agreement with a broker, NAR forbids any other member to have contact with that buyer or seller. Once the paperwork is signed, buyers and sellers are effectively locked into that broker, and the broker has eliminated any possibility of competition.
Coming from Wall Street, it’s hard to fathom my old firm, Merrill Lynch, refraining from calling on a prospect just because that prospect happens to have an account with Goldman Sachs. But that’s more or less how it works in real estate brokerage. In the real world, companies are free to compete with each other and consumers decide who has a better value proposition.
In an unprecedented move, the Department of Justice (DOJ) recently abandoned a proposed settlement with NAR that was aimed at resolving some anti-competitive business practices. The DOJ stated that “the proposed settlement will not sufficiently protect the Antitrust Division’s ability to pursue future claims against NAR.” Not only does NAR want to eliminate competition, apparently they want to operate with immunity from DOJ interference.
Limited Competition = Higher Fees
The state of limited competition lends itself to higher consumer prices - this is a basic law of economics. The lack of true competition in residential real estate brokerage has allowed brokers to hold the line on pricing, while nearly all other service industries have seen fee compression as a direct result of increased competition.
Fee compression is well illustrated in the investment/asset management industry. In recent years, equity trading commission rates have plummeted to zero (thank you Robinhood), investors are paying about half as much to own mutual funds and ETFs, and according to InvestmentNews, asset management fees have dropped 10% in just the last two years.
Technology has played a big role in Wall Street’s ability to reduce fees while maintaining profitability and a high level of service. Real estate brokerage has also greatly benefited from technology, but without true competition these cost savings have not been passed along to consumers.
Since only brokers can set fees, and given the fact that most buyers and sellers never have any contact with the actual broker, efforts to negotiate the fees with sales agents typically go nowhere.
Perhaps the biggest reason that brokers want to maintain high fees is because if fees meaningfully declined, many sales agents would likely abandon their real estate sales activities. That could trigger the end of the variable cost labor pool which would be devastating to the incumbent broker’s business model.
Arbitrarily Inflated Prices
While stubbornly high commission rates clearly harm consumers, in our view the real damage the oligopoly inflicts on consumers is in the actual pricing of real estate. It’s important to recognize that unlike the financial services industry, where it’s illegal to offer securities that are being grossly inflated, in the unregulated buyer beware world of real estate brokerage, this is the life blood of the industry.
It’s not uncommon for high-end properties in our market to sell at 20–30%+ discounts to the original asking price after sitting on the market for years. In our market commentary, we occasionally ask the question, “was this property mispriced because the sales agent didn’t know the market, or were they hoping for some uninformed sucker to come along?”
The harsh reality is that most of these properties sit on the market for extended periods of time because sales agents routinely discourage buyers from submitting legitimate, market correct offers that may embarrass the seller’s agent, preferring to negotiate superficially around price, not value.
Fiduciary Duty and the Minefield of Conflicts of Interest
We have previously written about fiduciary duty as it applies to real estate brokerage (see, “https://www.batterymarchgroup.com/p/fiduciary-duty”) so we won’t rehash all of the finer points here. What consumers need to know is that fiduciary duty in real estate is flimsy at best and is often contracted away.
In theory, a professional can only have one principal, a person to whom they owe a duty of loyalty, but this isn’t the case in real estate brokerage. The sales agents, who are subject to the laws of agency, are general agents of their broker (principal number one) and special agents of their clients (principal number two).
A sales agent can’t be in the market place criticizing or undermining their broker’s listings. It would be unethical and a breach of the fiduciary duty that they owe to their broker (principal number one). This becomes a very serious problem for buyers seeking un-conflicted advice in a market like ours, where a small number of brokers effectively control the market.
Independence is Paramount
Sales agents working for the seller-centric oligopoly, or even smaller firms focused on representing sellers, are inextricably trapped in a web of conflicts of interest when they attempt to swap hats and represent buyers. The concept that “no man can serve two masters” (Matthew 6:24) has been true since time immemorial, yet real estate brokers capitalize on these conflicts routinely – it’s a key part of their business plan.
As an independent broker whose primary focus is on representing buyers, our clients are chiefly concerned about knowing that the property they are considering is being fairly represented, and if the value is market correct. This requires a broker willing to get into the weeds and not afraid to ruffle a few feathers along the way. No one wants to be that sucker who comes along and unknowingly pays an enormous premium because they fell prey to the oligopoly.
About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent both sellers and buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25 year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to the real estate brokerage.