The Hamptons became my new home 13 years ago, and I’ve been working in the real estate industry on the East End ever since.
Complaints by real estate agents made me aware of what I believe are significant and frequent antitrust violations in the East End real estate industry. Initially, a selective fax “co-broke” process was the key vehicle for breaking the law, but recently the violations have expanded, due to the advent of an online exclusion vehicle, the OREX automated co-broke system.
Real estate agencies in the Hamptons routinely excluded and continue to exclude small competitors from knowing about and participating in the sale of their exclusive listing properties through co-brokes. Such behavior is in restraint of trade, and should be a violation of antitrust laws, punishable by years in jail and treble damages. Using market sales for the last 10 years, it is my opinion that the larger firms in the Hamptons have damaged smaller firms (some have been forced out of business by this practice) by more than $500 million, which means treble damages would be $1.5 billion.
Every real estate agent and broker, to obtain a New York State real estate license, goes through a 75-hour training course. Quoting from the training manual used to prepare New York State licensed real estate salespersons:
“The purpose of the Sherman Antitrust Act, enacted July 2, 1890, was to preserve a system of free economic enterprise and to protect the public against the activities of monopolies, contracts, or other combinations that tend to be an unreasonable restraint of trade. The focus of the act was to allow small businesses to compete with larger companies …”
The practice of excluding agencies is not only detrimental to the agencies being excluded—for property sellers, it greatly diminishes exposure for the sale of their properties.
Multiple pages of the real estate sales training course material are devoted to the subject of antitrust law. The “New York Real Estate for Salespersons” manual’s section on “antitrust law” begins: “In general, antitrust violations are any business activity in which there is a monopoly, a contract, a conspiracy, or a combination that negatively impacts an individual’s or a company’s ability to do business. This negative impact is called restraint of trade.”
Agents are taught the importance of abiding by antitrust laws. They are taught that failure to follow the laws could result in heavy fines or court awards (fines of up to $300,000 per salesperson), and even jail time (up to three years in prison) for breaking the law.
Breaking antitrust laws not only damages those real estate agencies and agents being discriminated against, but also hurts real estate buyers and sellers (owners). The unfair practices delay the selling of properties and cause incomplete exposure of properties to the marketplace. Brokers have a fiduciary responsibility to the public to promote properties to maximize the price and sell the properties in a short time.
The larger agencies in the Hamptons have most of the exclusive listings for houses and vacant land. The smaller agencies cannot fairly compete without knowing about and co-broking these listings. When a real estate broker prevents his competitor from participating in the sale of a real estate property, that’s like taking goods off the shelves in a store, or preventing key suppliers of products from delivering to a store, thereby limiting what the store has to sell.
Until recent years, brokers faxed invitations to attend open houses and to co-broke their exclusive listings to selected competitors. Each real estate office had pre-recorded lists of the fax numbers of the selected real estate agencies. When they put a new exclusive listing on the market, faxes were sent only to the agency offices on the fax list, inviting them to open houses where real estate agents would see the property and receive the co-broke agreement. These invitations allowed those selected brokers/agents to participate in finding prospective buyers for the properties and thereby participate in receiving a certain part of the commission for selling the property. Those agencies not selected for their fax list were excluded from participating in the sale of the property.
With the fax system, certain agency offices had more than one list to which co-broke listings were sent. At these agencies, the multimillion-dollar house listings were sent to an even more limited list of brokers. Unpopular and smaller agencies were routinely, and obviously deliberately, left off the fax list, or sent faxes only for the lower-priced properties.
When a certain Manhattan real estate agency set up an office in Southampton, it had trouble getting on the fax list at certain other high-end agencies. For about a year, the other agencies simply refused to add the newcomer to their fax lists. This was in spite of many requests from individual agents and management at the new agency. Without the ability to view, co-broke, and sell listings exclusive to the other agencies, agents at the new office were prevented from participating in a substantial percentage of the market during that period. And sellers were deprived of the efforts of the agents at the new firm.
New York State offers a course in antitrust in real estate. The caption advertising the early November 2008 course read:
“Antitrust and Real Estate, 19.5 hours: NYS Course No. M-8664—The consequences of federal and state antitrust violations by real estate licensees in their conduct of business can be financially costly and also result in jail sentences. This course is intended to alert the real estate licensee to the many situations that could result in antitrust violations in the course of everyday business.”
Today, the larger agencies in the Hamptons, and about 20 other agencies, use OREX, an automated co-broke system run by RealNet, a listing system in the Hamptons, but the majority of the real estate agencies in the Hamptons do not. OREX consists of an e-mail-based service, which is used by these subscribing agencies to invite competitors to co-broke listings and to attend open houses for the OREX subscribers’ exclusive listings. The fax list system was and is abused, but because of the design and use of the more automated system, the OREX system abuse is much worse.
When entering a property in the OREX system, agents are allowed to exclude any agency “at will.” Real estate law allows only one reason for exclusion: that of a property owner directing the exclusion, without prompting by the real estate agency, i.e., “I don’t want Sotheby’s to sell my house.” There is no warning on the selection screen that any other exclusion is a serious antitrust law violation and, thus, a crime, nor is there any review or supervision of the process.
Further, each agent is allowed to make the decision as to which listings are put on the OREX system. This allows one more opportunity for unsupervised discrimination against some real estate agencies.
Worse even than allowing individual agents the unlimited “right to exclude,” there seems to be an almost random criterion as to which agencies are even selected to be included within a real estate agency’s OREX system.
I believe that real estate agents who use the OREX system are opening themselves up for possible criminal prosecution and civil penalties. The management of firms who subscribe to OREX are even more liable, I believe.
Thus far I have discussed the tragic antitrust lawbreaking on the South Fork—but how about the North Fork? The North Fork is predominantly MLS (Multiple Listing Service), which is designed to prevent the discriminatory practices enabled by OREX used on the South Fork. Any MLS listing system (including those on the East End run by the Long Island Board of Realtors and the Hamptons and North Fork Realtors Association) is designed to prevent the type of selective co-broking currently rampant in the Hamptons.
The OREX system functions as a Multiple Listing Service, but it is priced far above the market price for such a service. Such high prices are out of reach of most small real estate agencies, and thus they are left out of the game. According to my market intelligence, RealNet/OREX is priced at 10 to 15 times the price of the MLS services offered by HANFRA and LIBOR, whose services are functionally comparable to RealNet/OREX.
The law requires that brokers must have access to an MLS in order to compete effectively. A supplier of the MLS service that is priced multiples above other competitive services certainly prices many agencies out of the game. In addition, no agency should have to pay more than the law requires. I believe that the OREX service is a conspiracy of 25 agencies in restraint of trade, violating the law requiring fair access to the “MLS.”
In United States v. Realty Multilist Inc., a U.S. District Court found that when a broker is excluded from an MLS without reasonable justification, the broker and the public are harmed. The court also held that:
MLS charges are to be equal to the cost of setting up the participant in the MLS.
The cost of operations are to reflect the pro rata share of operating expenses including accumulation and maintenance of reasonable reserves.
Charging 10 to 15 times the going price falls outside of this ruling.
It is not only the five bigger players in the Hamptons real estate industry that are involved in unfair practice. All agencies who use the OREX system and/or fax to only selective agencies are no less responsible.
We should not lull ourselves into thinking that all unfair competitive activities are harmless. It is not like going 65 mph along the Long Island Expressway. The antitrust activity of real estate agents and brokers has caused agencies to go out of business, caused real estate agents and the owners of agencies to make far less money than they would have had the playing field been level. I believe the financial woes caused by these unfair competitive practices has caused lives to be ruined.
And the use of the OREX system, which creates an incomplete exposure of a property to the marketplace, tramps upon the rights of property owners and the rights of prospective buyers. Real estate brokers have a fiduciary responsibility to the public to promote properties to maximize the price, in the least time. Most sellers continue to be hurt by the extended length of time it takes to sell their properties, because the right to help sell the property (co-broke) was not offered to a wide list of brokers.
This extensive exclusion activity must stop. I believe agencies that use the RealNet/OREX system must switch to a legal system like the MLS services offered by HANFRA or LIBOR. Agents whose agencies refuse to stop the antitrust activity should go to an agency that is law-abiding.
Agents (as stated in the manual they received in their licensed real estate salesperson course) should be cautioned by and reminded of the laws they were required to learn and abide by. Individual agents, themselves, who are found guilty of antitrust crimes, may spend up to three years in jail, and/or be fined up to $300,000.
Buyers and sellers should demand that the real estate agencies and agents they deal with abide by the law. The seller of each property should demand that the real estate agency/agent, contracted for their exclusive listing, distribute accurate and complete information and co-broke with all competitor agencies/agents.
George R. Simpson is president of Suffolk Research Service Inc. and Office Management Systems Corp., real estate software and data firms.
on Oct 21, 2008