A STUDY OF THE USE OF BANKS AS AN ALTERNATIVE
DELIVERY SYSTEM FOR REAL ESTATE BROKERAGE SERVICES
by
Larry E. Hinman
B. S.
,
M.B.A., University of Maryland, 1980
Chemistry, University of Maryland, 1978
SUBMITTED TO THE DEPARTMENT OF ARCHITECTURE IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS OF THE
DEGREE OF
MASTER OF SCIENCE
IN REAL ESTATE DEVELOPMENT
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JULY 1988
Q
Larry E. Hinman
1988
The Author hereby grants to M.I.T. permission to reproduce and
distribute publicly copies of this thesis document in whole or
in part.
Signature of Author
Larry E. Hinman
epaytment of Architecture
July 29, 1988
Certified b y
Dr. Mbfarc A. Louargand
Lecturer - Department of Urban Studies and Planning
Thesis Supervisor
Accepted by
ilichael Wheeler
Chairman of the Interdepartmental
Degree Program in Real Estate Development
1
TABLE OF CONTENTS
PAGE
AB STRACT.................................................
3
INTRODUCTION................................................ 4
CHAPTER ONE:
THE REAL ESTATE BROKERAGE MARKET............
Background............................................
History of real estate brokerage...................
Regulation of the real estate brokerage industry...
Estimated size of the market........................
Major firms in the industry.........................
Pricing of brokerage services......................
Supply/demand curve for brokerage services ........
Emerging trends in real estate brokerage...........
CHAPTER TWO:
PRIOR RESEARCH ON REAL ESTATE BROKERAGE.....
Market share and broker income.....................
Brokerage commission rates..........................
Consumer preferences and attitudes toward brokers..
Property pricing strategies & time on market.......
Effects of a multiple listing service..............
Effects of state licensing regulations.............
6
6
8
9
10
12
16
19
21
22
23
28
30
33
34
35
CHAPTER THREE: BANKS AND REAL ESTATE BROKERAGE........... 37
Historical role of banks in real estate............
Real estate brokerage/savings & loan affiliations..
Bank regulation.....................................
Bank restrictions on real estate
brokerage activities................................
37
40
43
46
CHAPTER FOUR: BANKS AS AN ALTERNATIVE DELIVERY SYSTEM FOR
REAL ESTATE BROKERAGE SERVICES ............ 50
Market for real estate brokerage services in banks.
Bank market survey..................................
Advantages and disadvantages........................
Summary of proposed delivery system ...............
CHAPTER FIVE:
50
57
60
66
SUMMARY AND CONCLUSIONS..................... 78
APPENDIX: OPINION LETTERS FROM BANK REGULATORS...........
80
BIBLIOGRAPHY............................................. 90
2
A STUDY OF THE USE OF BANKS AS AN ALTERNATIVE
DELIVERY SYSTEM FOR REAL ESTATE BROKERAGE SERVICES
by
Larry E. Hinman
Submitted to the Department of Architecture on July 29,
in
partial
1988,
fulfillment of the requirements for the Degree
Master
of
Science in Real
Estate
Massachusetts Institute of Technology.
Development
at
of
the
ABSTRACT
This thesis investigates the potential of utilizing banks and
bank branches as a means of delivering real estate brokerage
services.
The thesis will
answer the question:
Is it
advantageous for a new or existing real estate brokerage firm
to offer
its services through commercial banks, and if so,
what
methodology or strategy should be used to maximize both
market share and profits?
Since banks currently face severe limitations on their ability
to own and operate real estate brokerage firms,
this study
focuses on the feasibility of
outside, non-affiliated, real
estate brokerage entities contracting with banks to provide
real estate brokerage services to the customers of the banks.
The thesis is primarily concerned with residential real estate
brokerage services, although it is conceivable that commercial
real
estate brokerage services could also be provided through
banks.
After a thorough examination of the real
estate brokerage
industry both past and present, prior research in the field of
real estate brokerage is analyzed, and the legal implications
of banks offering real estate brokerage services is explored.
Drawing on prior research in the field,
this thesis examines
the market for real estate brokerage services in banks, and
analyzes the results of a survey to determine the willingness
of
senior bank management to embrace the concept of offering
real
estate brokerage
services.
Finally,
a theorectical
methodology
is proposed for providing real estate brokerage
services
in banks to maximize market share and profits.
Thesis Supervisor: Dr. Marc A. Louargand
Title: Lecturer - Department of Urban Studies and Planning
3
INTRODUCTION
When existing homes are sold in. the United States, the sale
is usually handled by a state-licensed real estate broker or a
salesperson working for a broker.
licensed
seller,
the
the
of
the broker or salesperson typically receives a sale's
commission,
of
As agent
a stated percentage of the selling price
usually
1986,
In
home.
real estate
an
generated
brokers
estimated commission revenue of $30 billion, about three times
that of the securities brokerage industry.
the industry comprises approximately
In the United States,
15,000 active real estate brokerage firms.
largest
the bulk
volume in recent years,
revenues
gross
brokerage firms have increased their
dollar
and
While the nation's
of
real
U.S.
estate firms continue to be small-scale companies with no more
than
ten
sales
agents,
Association of Realtors
In recent years,
vertical
most
evident
in
(NAR)
National
[26].
toward
there has been an increasing trend
integration
financial services.
the
revealed a survey by
of service delivery among providers
of
integration
is
The trend toward vertical
larger real estate
brokerage
firms,
that
expand to provide the wide variety of services that are needed
in
real estate.
finance services,
settlement
services,
Many brokerage firms now
title searches,
services.
competition
provide
mortgage
appraisals, insurance, and
As large real estate firms expand their
for
brokerage-related
services
will
likely intensify.
The trend toward vertical integration of financial services
4
has
not
been
prevented
completely
uniform,
since
banks
have
by law from operating real estate brokerage
been
firms.
Recently, bank regulators and certain members of Congress have
expand permissible bank
attempted
to
areas
securities underwriting,
as
activities
real estate
such
into
development,
real estate investment, and possibly real estate brokerage.
It
remains unclear whether banks will be permitted to
operate real estate brokerage firms in the
and
Although
firms,
near
cannot own and operate real estate
banks
own
future.
brokerage
it is permissible under current law for non-affiliated
real estate brokerage firms to contract with banks (via
arrangements)
to
provide
brokerage
services
to
the
lease
bank
clientele.
This
thesis examines the residential real estate brokerage
industry in the United States and, drawing upon prior research
as well as field study,
and
firm
analyzes the feasibility, advantages,
disadvantages of a new or existing real estate
offering
its services through commercial
banks
percentage lease or other contractual arrangement.
5
brokerage
via
a
CHAPTER ONE: THE REAL ESTATE BROKERAGE MARKET
Background
The
primary function of real estate brokerage is to
match
buyers and sellers in the housing market. The residential real
estate
broker
provides
information about the steps
purchase and sale transaction,
and
most importantly,
in
negotiates the terms of
sale,
provides information about the
and about houses being offered for sale.
the
market
Brokers usually have
expertise and information that consumers lack.
Most home sellers use the services of a real estate broker.
The
broker
listing
with
broker,
contract.
A
the
is
home
receive
6
whom they contract is referred
to
and is compensated according to the
as
listing
typical listing contract might specify that,
sold within a given
period,
the
percent of the selling price as a
the
broker
if
will
commission
for
achieving the sale. The listing contract also will specify the
price which the seller hopes to obtain;
selling
however,
the
actual
price is frequently lower than the initially proposed
price.
Listing
brokers
facilitate
perform a variety of
the sale of a home.
tasks
designed
to
One of the most important
of
their tasks is to list the home in the local
Service
CMLS),
association
Multiple Listing
which is generally owned and operated by
of brokers.
Most brokers participate in the
an
MLS
system, although participation in most areas is not mandatory.
The MLS is an information sharing and exchange mechanism,
the
use of which is reserved for its member brokers. The MLS is a
6
means
of informing members,
brokers,
will
of
who are potentially
the seller's desire to sell.
describe the property,
features,
or
the asking
outstanding mortgages,
her
willingness
cooperating
broker
to
share
the
The listing broker
price,
etc.,
cooperating
any
unusual
and will indicate his
commission
who finds a suitable buyer.
with
The
any
listing
broker sets the percentage of the total commission which
be
offered in this arrangement,
the total commission.
most
listing
newspapers,
hold
which may amount to half
brokers
advertise
homes
for
sale
in
local
advertise in specialized homes publications,
buyers
suitable
of
In addition to utilizing the MLS system,
homes "open" on weekends to attract prospective
Home
will
homes
buyers.
often work with real estate brokers
to purchase.
and
to
While brokers typically
find
inform
prospective buyers of their own listings first, they will then
turn
to the local MLS to find additional
meet
the buyer's needs.
offer
to
process
purchase
of
relating
listings
If the buyer makes a
the home is made through
negotiation often
follows,
with
which
may
selection,
the
broker.
an
A
counter-offers
to price and other contractual terms changing
hands
through the intermediation of the broker.
Once
the seller and buyer agree to price
and
transaction is put in the form of a contract,
into a stage referred to as escrow.
an
firm
escrow
agent (in some states,
terms,
the
and then enters
During the escrow period,
the real estate
itself) will hold the contract and a
specified
brokerage
deposit
referred to as earnest money to bind the buyer during a period
7
while
the buyer seeks to obtain financing or funds needed
close
the
transaction.
The
listing and cooperating
to
brokers
will generally monitor the progress of the buyer in
procuring
financing.
has
obtained
met,
At
close of escrow,
if financing
been
and the other requirements in the contract have been
title
funds,
the
to the property transfers to the buyer,
including
usually
distributed
by
the
brokers'
the escrow agent
[27].
and
the
commissions,
In
some
are
states,
an
attorney representing one or both parties serves in lieu of an
escrow agent to close the transaction and disburse funds.
History of Real Estate Brokerage
The
date
unknown;
of the first real estate brokerage
however,
business
is
real estate brokerage firms were operating
in New York before 1800. Through the rapid growth of cities in
the 1840's,
real estate brokerage in the larger cities became
a recognized, established business [4].
In
1847,
the earliest known formal organization
estate brokers,
York
a local real estate board,
of
real
was formed in New
for the purpose of exchanging information among brokers.
The first state associations of real estate boards were formed
in the early 1900s [4).
CNAR),
brokers
was
founded
representing
The
National Association of REALTORS
in Chicago,
19
realty
association (that of California).
its
name to the current form,
the
National
Illinois in
boards
Until
and
1908
one
by
120
state
1972, when it changed
the organization was known
Association of Real Estate Boards
(NAREB).
as
By
1926 the organization included nearly 25,000 members. However,
8
the
Depression brought a sharp decline;
less
than
9,000
thereafter,
has
over
by
1935.
Membership
700,000 members,
fell
increased
gaining momentum after World War II.
to
slowly
The NAR now
85 percent of whom are
engaged in residential brokerage.
itself
membership
primarily
The NAR currently describes
as "the largest trade and professional association
in
the nation" [27].
The
NAR is the parent organization for a tripartite
organization operating on national,
Under
state,
trade
and local levels.
a three-way agreement among the different
levels,
the
NAR grants local boards and state associations the use of
the
term
Realtor
in
associations'
exchange
for
the
boards'
and
state
agreement to abide by and enforce the NAR
of Ethics within their Jurisdictions
Code
[27).
Regulation of the Real Estate Brokerage Industry
The
at
real estate brokerage industry is regulated
the
abide
state level,
by
various
although
federal
primarily
all real estate brokers
regulations
pertaining
to
must
fair
housing practices and settlement procedures. All 50 states and
the
District
salespersons
framework
delineate
of
Columbia require real
to be licensed.
for
the
estate
The license statutes
state control of the brokerage
licensure
brokers
prerequisites,
and
form
the
industry,
and
the
prohibited
practices for which licenses may be suspended or revoked,
and
the structures and powers of the regulatory agency.
All states have established two separate categories of real
9
estate licenses: one for salespersons and one for brokers. In
order to operate a real estate brokerage firm,
an
individual
must have a broker's license; therefore, applicants for broker
licenses
usually
education
The
are required to have
proportionately
and experience than those for salesperson licenses.
prerequisites for licensure vary considerably from
to
more
state,
ranging
requirements
from
no
education
and
no
for either class of license in the
state
experience
District
of
Columbia, to 240 classroom hours and three years of experience
for broker applicants in Pennsylvania.
States
of
vary in their willingness to accept the credentials
licensees
from
reciprocity
other
agreements.
participate
states.
Thirty
Most
the
of
states
have
remaining
states
in reciprocity agreements with a small number
jurisdictions;
in
no
of
many cases waiving only a portion of their
requirements for transferees.
In addition t.o adhering to state regulations,
licensees
who are members of NAR,
real
estate
must abide by the NAR Code
of Ethics. Local real estate boards apply and enforce the Code
of Ethics through Board of Grievance Committees,
Professional
Standards Committees, and Arbitration Panels.
Estimated Size of the Real Estate Brokerage Market
There
are
no
accurate figures on the size
of
estate brokerage market either in terms of commission
or transaction volume.
the
real
revenue
Even the NAR maintains only records of
home sales of existing properties and average sale prices, and
does
not take into account new home sales or properties
10
sold
without the services of a real estate broker.
Bureau
has
number,
a Standard Industrial Classification
6531,
activities
The U.S. Census
which
(brokerage,
comprises
all
management,
real
(SIC)
estate
appraisal,
code
related
investment,
etc.). Unfortunately, they do not have data available on total
industry revenue,
and even if they did, it would be difficult
to extract only the brokerage portion of the revenue.
The
real
only published estimate available on total size of the
estate brokerage market is provided by the
Estate
Roulac
Real
Consulting Group of Deloitte Haskins & Sells in
their
annual publication Roulac's Top Real Estate Brokers: Facts and
Figures
on
the
edition
of
the Roulac publication,
data,
The
1987
on
1986
estimates the total transaction volume handled by
real
estate
They
Nation's Leading Brokerage Firms.
which is based
brokers in the United States in 1986 at $500
estimate
brokers
the
total revenue generated
by
billion.
real
estate
in the United States in 1986 at $30 billion [26).
estimate was made as to what percentage of the $30 billion
revenue
was generated from residential transactions and
percentage
Using
No
in
what
was generated from commercial transactions.
data available from the U.S.
Census Bureau and
the
NAR, one can make several simplifying assumptions to obtain an
estimate
of the size of the residential real estate brokerage
market. First, an estimate must be made of the total aggregate
home sales for new and resale homes.
This figure must then be
discounted to allow for the percentage of homes sold for
11
sale
by
owner
(i.e.,
estate
broker).
figure
must
obtain
the
homes sold without the services of
Then,
the
a
real
discounted aggregate home
be multiplied by an assumed commission
total residential real
estate
sales
rate
brokerage
to
market
revenue. Based on the calculations in Table 1 on the following
page,
the
total
market revenue for residential real
brokerage services in 1987 can be estimated at $24.8
estate
billion.
Major Firms in the Real Estate Brokerage Industry
In
the
addition to providing the only published estimate of
size
report
of
the real estate brokerage
market,
edition,
approximately
15,000
largest
nonfranchise
active
networks
together
transaction
estimated
percent
estate
volume,
firms and the seven
handled
or
than half
real
In 1986,
largest
approximately
more
major
According to the
brokerage firms exist in the United States.
and 3).
Roulac
provides the only consistent annual overview of
firms in the real estate brokerage industry.
1987
the
$252
of
estate
the
25
franchise
billion
the
in
industry's
$500 billion in transactional volume (see Tables
While these 32 large
2
firms accounted for more than 50
of the industry's volume,
the vast majority of
brokerage firms continue to be
small-scale
real
companies
with no more than ten sales agents.
Results
NAR
from
indicate
a 1,200 firm random survey conducted by
that
43
percent
of
real
estate
the
companies
nationwide have five sales agents or less, while an additional
23
percent
of
firms have six to ten agents.
12
Thus
only
34
TABLE 1
Calculation of the Estimated Size of the 1987
Residential Real Estate Brokerage Market
1987 New Home
Sales (2)
671,000
Average New
Home Price (1)
$127,000
x
1987 Home
Resales
=
Average Resale
(2)
3,526,000
Aggregate New
Home Sales
Aggregate
Resales
Home Price (2)
=
$106,300
x
TOTAL AGGREGATE SALES
Total Aggregate
Sales
$460.0 Billion
.06
x
$414.0 Billion
Estimated Total
Revenue
Rate (4)
Data sources for Table
(1)
(2)
(3)
(4)
=
6% Commission
Adjusted Total
Sales
$414.0 Billion
Adjusted Total
Sales
Owner (3)
$46.0 Billion
$374.8 Billion
$460.0 Billion
10% Homes Sold By
-
$85.2 Billion
=
$24.8 Billion
1:
U.S. Census data for 1987
National Association of REALTORS data for 1987
Estimate from Carney [4] doctoral dissertation pg. 32
Estimate based on industry research
13
percent of firms have eleven or more sales agents,
percent
of
brokerage
representatives.
firms
operate
firms
have
more
than
According to the NAR survey,
from one office,
and only
fifty
sales
89 percent
7 percent from two
4
of
offices,
most of the remaining 4 percent from ten or fewer offices; and
less than 0.5 percent operate from more than ten offices [26].
TABLE 2
LARGEST FRANCHISE BROKERAGE FIRMS IN THE U.S. IN 1986
Rank
1
2
3
4
5
6
7
8
Company Name
Gross
Revenues
(millions $)
Century 21, International
RE/MAX International, Inc.
Electronic Realty Associates
Better Homes and Gardens
Execu-Systems, Inc.
Better Homes Realty
Key Associates, Inc.
Coast-to-Coast Properties
2,037.0
815.9
655.0
424.0
59.2
23.5
19.0
12.2
Residential
-86%
N/A
85%
100%
85%
93%
90%
92%
Source: Roulac's Top Real Estate Brokers - 1987: Facts and
Figures on the Nation's Leading Real Estate Brokerage
Firms
14
TABLE 3
LARGEST NONFRANCHISE BROKERAGE FIRMS IN THE U.S. IN 1986
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Gross
Revenues
(millions
Company Name
Coldwell Banker Real Estate
Merrill Lynch Realty, Inc.
New America Network, Inc.
Royal LePage Ltd.
Company
Grubb & Ellis
The Office Network, Inc.
Cushman & Wakefield, Inc.
Weichert Company, Realtors
Johnstown American Companies
Schlott Realtors
Goldman Sachs & Company
Colliers International
Long and Foster Real Estate
Fred Sands Realtors
Shannon & Luchs, Realtors
O'Conor, Piper, & Flynn
Great Western Real Estate
Rubloff, Inc.
Marcus & Millichap, Inc.
The Keyes Company
Baird & Warner
Cornish & Carey Commercial
Inc.
Edward S. Gordon Co.,
Mount Vernon Realty
Cross and Brown Company, Inc.
1,155.6
692.0
462.0
350.0
319.8
285.0
198.0
194.0
145.5
131.4
122.5
121.5
112.0
103.8
73.1
70.0
59.1
58.0
55.3
53.3
52.8
50.0
50.0
45.9
45.0
Residential
54%
81%
10%
60%
27%
none
N/A
100%
3%
100%
none
none
92%
71%
N/A
86%
95%
10%
none
65%
80%
60%
none
91%
10%
Facts and
Source: Roulac's Top Real Estate Brokers - 1987:
Brokerage
Estate
Real
Leading
Nation's
on
the
Figures
Firms
15
Pricing of Home Brokerage Services
Critics
that
the
estate
of
the real estate brokerage industry
commission rates for the sale of
in
have
said
residential
real
most markets are too uniform to be
determined
by
competitive
forces.
conclusive,
tends to support the hypothesis that the price of
real
estate
Studies
of
The
brokerage
evidence
services
available,
is
while
not
noncompetitively
high.
brokerage fees nationwide also indicate that
commission rates contracted for and ultimately paid
the
generally
are highly uniform within any geographic region [27].
A
survey
Commission
of
consumers conducted for
the
Federal
Trade
(FTC) in 1979 indicated that 85 percent of sellers
surveyed alleged they were quoted a commission rate of
6
percent
or
7 percent by the broker whom
they
either
used,
and
ultimately 78 percent paid either 6 percent or 7 percent
Table
4).
Sample
Development
percent
indicate
all
that in 11 of 16
Department
cities
[273.
50
states (73 total market areas) and
proportions
of
commission rates occurred
area modal rate,
Although
within
Urban
surveyed;
80
a
commission
brokerage
given
rates
6
Carney [4) examined over 7,000 observations
actual commission rates for 23 maJor U. S.
market
of
or more of the commission rates actually paid were
or 7 percent
on
studies by the U.S.
(see
market
cities and
found
at
a
usually at 6 percent or
that
several
may be lower on:
(1)
studies
high
predominant
7
percent.
commission rates tend to be
area,
for
the
same
show
that
the sales of
higher-
priced homes, (2) sales of new relative to existing homes, and
16
(3)
non-co-op relative to co-op sales (a co-op sale
the
cooperation
one acting as
of two brokers,
involves
the
listing
[5)
broker and the other acting as the selling broker). Carney
this hypothesis by regressing commission rates on
proved
selling price of the home and on dummy variables for
the
existing
sales.
The
results of his regression yielded coefficients which were
all
versus
new
significant
homes and for co-op versus non-co-op
at the 1 percent
level.
TABLE 4
National Sample of Real Estate Brokerage Commission Rates
Based on 1979 FTC Consumer Survey of Home Sellers
Percentage of Total
Commission Rate
CPercentage)
Quoted
Actual
3.4%
6.6%
4.4%
5.6%
---
2.8%
Less than 5%
5%
5%-6%
52.7%
6%
1.9%
1.9%
31.9%
27.9%
5.0%
5.0%
6%-7%
7%
49.9%
Greater than 7%
For many years, the total aggregate real estate commissions
generated
in
FTC
United States have grown at
the rate of inflation.
higher than
rate
the
a
rate
much
The unusually high growth
of aggregate commission fees was pointed out both by the
in
total
average
a
1983 study
dollar
of
amount
[27)
and by Crockett
of gross commissions
at least 615 percent between
17
in
1984
[8].
increased
1950
and
The
by
1979,
an
a
growth
rate
of nearly twice that for all white-collar
during the same period,
acknowledged
The
wages
and nearly three times the officially
increase in consumer prices (215 percent)
aggregate
market
and pricing
for
[27).
residential
real
estate brokerage services may be portrayed (as in Figure 1) as
having
relatively
inelastic demand, because
consumers
lack
information, and relatively elastic supply, because entry on a
small scale is easy.
In addition, the market has a relatively
stable and horizontal supply,
demand
caused
real income,
demand,
by increases in the number of
households
and
but with unanticipated fluctuations in short-run
because of changes in mortgage market conditions [4).
Paradoxically,
services
shows
salesperson
the supply curve for real estate
that
being
the prospect of a
attracts
accomplish
efficiently
inefficiency
Crockett
[7),
in
industry,
more
real
agents
the
than
broker
function
estate
of
brokerage
among
brokers
by
excessive
was
probably
rates
estate
to
brokerage.
This
documented
has
large commitment of resources to the
supported
or
are, necessary
who concluded that the traditional
competition
inefficiently
skillful
brokerage
able to earn a high income in real
brokerage
price
with a long-run upward trend in
for
by
absence
of
led
an
to
brokerage
consumers
of
brokerage services.
A
relatively recent phenomenon in the real estate brokerage
industry has been the advent of the "alternative" real
broker
or "discount" broker.
These firms' business practices
differ substantially from the norm in either commission
18
estate
rates
FIGURE 1: AGGREGATE MARKET AND PRICING
OF HOME BROKERAGE SERVICES
Commission Rate (Price)
Demand
Supply
Quantity
level,
or type,
study
or variety of services offered. The 1983 FTC
reported
revealed that approximately 2 percent of
[27]
could
be
services
at
the services of firms which
involved
transactions
characterized as discount brokers.
brokers
Discount
substantially
costs
generally
provide limited
lower than full
service
brokers.
charge a flat fee for their services.
typically
In the past,
growth of discount brokerages had been blocked
the
They
by
local
estate boards that denied these firms access to the MLS.
real
Today
however,
brokerage
firm
Department
of
Justice and the Federal Trade
U.S.
the
and both
access to an MLS system,
Commission
in
willing to assist discount brokerage firms
quite
estate
it is illegal to deny a discount real
are
gaining
full access to the MLS.
The
problems
could
brokerage
competition.
evident in the fee structure of real
of
introduction
resolved by the
be
estate
price
stock brokerage is much less dependent
Although
upon cooperation among brokers than real estate brokerage, the
success
of
brokerage,
Charles
has
&
into
concept
a
Company,
that the
demonstrated
brokerage
discount
Schwab
a
and
be
successful
as well.
previously
vertically
effective
integrated
financial
use of technology;
in
non-price-
real
estate
nationally-based firms;
institutions;
and
the
many brokerage firms may choose
to cut their prices in order to gain a larger market share.
20
the
that environment
As competition in
brokerage increases from multioffice,
of
introduction
competitive environment can affect changes
stock
discount
Emerging Trends In Real Estate Brokerage
editions
The Roulac Real Estate Group in the 1986 and 1987
of
brokerage
survey of top real estate
annual
their
the following emerging trends in the industry:
noted
firms
(1)
The
trend toward nationally oriented real estate brokerage markets
as
major financial institutions promote
centers
"one-stop"
include brokerage services; (2)
that
the
shopping
continued
trend toward vertical integration of service delivery as large
real estate firms, as financial institutions and conglomerates
their
expand
financial
from
competition
of
computerization
technological
(3)
services;
the
trend
increased
toward
services
companies;
(4)
the
and
analysis,
as
the
information
revolution expands into real estate
brokerage;
the development of electronic mortgage networks;
5)
and
(6)
the increasing demand for competitive pricing structures [26].
Analyzing
these
trends
leads
to
the
conclusion
that
real estate brokerage services in bank branches is a
offering
natural direction for growth in the industry. In an attempt to
a significant
"one-stop" financial shopping centers,
provide
of
number
banks
have vertically integrated
by
offering
a
variety of financial services. Providing real estate brokerage
would
be a logical addition to the financial services already
being provided by many banks. In addition, the development and
of
growth
competition
electronic
a
networks
will
increase
among lenders for home mortgage loan origination.
Through referrals,
have
mortgage
banks offering real estate brokerage would
higher probability of capturing home
21
loan
business.
CHAPTER TWO: PRIOR RESEARCH ON REAL ESTATE BROKERAGE
For an industry of the magnitude of real estate brokerage,
a
relatively small amount of empirical research and
been
has
performed.
The industry
organization,
trade
National Association of Realtors (NAR),
analysis
maintains data on the
number
of
number
of home sales and the average selling prices of
in
Realtor members within a given
various
time,
things
as
surveys
and
The NAR has done few,
time
such
studies
strategies,
to
estate
real
if any,
demand for real estate brokerage services,
in
estimating
pricing strategies
or examining the effects of price competition
for properties,
The
of
profits
the area of market share maximization
on the
and from
the
homes
of its membership to determine
expenses,
income,
firms.
brokerage
jurisdiction,
areas throughout the country,
conducts
the
industry.
of quantitative research performed
majority
on
real
estate brokerage has been conducted by the academic community;
disciplines
exception
faculty members from the finance and
by
primarily
at
is
colleges
the
work
and
done
universities.
by
the
Roulac
economics
One
notable
Estate
Real
Consulting Group in their annual study of the U.S. real estate
brokerage
The
estate
primary
periodicals for prior research
in
the
real
brokerage field are the American Real Estate and Urban
Economics
extent,
industry.
Association
CAREUEA)
Real Estate Review.
Journal,
and
to
a
lesser
Recently, a new publication, the
Journal of Real Estate Research, has begun to publish articles
22
dealing with real estate brokerage.
The following is a brief topical summary of prior
research
on real estate brokerage:
Market Share and Broker Income
The most detailed recurring survey of the U.S.
real estate
brokerage market is the Roulac Real Estate Consulting
Group's
which is currently in its sixth
edition
annual
publication,
publication surveys over 200 of the largest
This
[26).
real
estate brokerage firms and lists for each of the firms:
revenues,
number
of
offices,
services
transactions,
number of agents,
business
mix,
and a one paragraph company profile.
publication
is
The
Roulac
largest
however, it only surveys the 200
an estimated 15,000 firms in the
of
of
corporate
valuable for looking at the nation's
real estate brokerage firms;
largest
number
growth,
management,
gross
United
States,
it difficult to draw conclusions for the industry as a
making
whole.
The
Roulac
Brokerage
less fragmented each year. (2)
7
largest
approximately
total
observations:
volume.
(1)
firms
it
although
is
real estate
In 1986,
volume
firms accounted for a total transaction
approximately $500 billion;
the
following
almost half of the total volume,
brokerage
and
the
still a fragmented business with smaller
is
generating
becoming
study makes
of
the 25 largest nonfranchise firms
franchise
networks
combined
handling
$252 billion or more than 50% of the industry's
(3)
Real
estate
increasingly competitive business,
23
brokerage
is
becoming
and those firms that
an
fail
to
recognize
that
tools
new
and
a
higher
degree
of
sophistication are required today risk obsolescence. (4) There
is an increasing trend toward vertical integration of
delivery,
estate
service
as well as an increasing emergence of national real
markets
industry.
as large financial services firms
(5)
There
is
a growing
demand
enter
for
the
competitive
pricing structures.
detailed information on industry income and expenses
More
is available through the NAR publication entitled Real
Income,
1985:
Brokerage
Expenses,
Estate
which is the
& Profits,
fourth in a series of reports on income, expenses, and profits
of
real
residential
gathered
was
report
brokerage
firm
better
and presumably
operation.
study
are:
firms
in
(1)
who
Marketing
National
Profitably:
somewhat
run firms than the typical residential
A few of the highlights of the
The average gross income of all
the survey was $708,959,
survey.
averaged $246,881,
pre-tax
up
owners
since the course attendees came from- larger,
biased however,
brokerage
the
Profit and Growth."' The study may be
for
Managing
$34,903,
342
for
Data
on "How to Manage a Real Estate Office
Institute
Average
from
a seminar given by the Realtors
attended
1979-80
estate brokerage firms.
(2)
Total
(after
up slightly from the 1979-80
net
real
income of the firms in the
estate
from
up 4.6 percent
expenses
1984-85
the
commissions)
survey.
(3)
survey
was
42.3 percent from the 1979-80 results.
Firms of
all sizes were represented in this study, however, the average
number
of salespeople in the firms surveyed was 29.6 and
median was 14.0 [21].
24
the
that
articles have appeared in the AREUEA Journal
Several
pertain to the real estate brokerage market and broker income.
Frew
and
Jud
concluded
[12]
affiliation
appears
sales.
Jud
[16]
estate
to
that
a
national
franchise
to contribute an extra $929,464 to
found that the tendency for buyers
firm
of
real
seek the assistance of a broker was determined
by
the
buyers' prior knowledge of the housing market,
and
that
the
demand for home sellers to engage the services of a
real
agent was principally dependent upon transaction costs
estate
including the opportunity cost of
in the housing market,
the
sellers' time.
One of the more interesting studies by Colwell and Marshall
[6],
analyzed the factors which determine the market share of
listings
Their
the market share of sales for brokerage
and
study
the
examined
effects
on
market
salesperson
of
obtaining listings and the market
salesperson
of
making sales of six selected
The
characteristics.
significant
factors
firms.
per
share
share
firm
brokerage
affecting
per
either
share per salesperson in listings or market share
market
salesperson in sales are:
per
(1) quantity of display advertising,
and (3) whether or
(2) the number of salespeople in the firm,
not the firm is a franchise. The number of salespeople was the
most
consistently
and
franchise
occasionally
classified
houses,
all
the
significant variable.
quantity
significant.
advertising,
The
of
The presence
display
other three
advertising
a
were
characteristics,
yellow pages advertising,
did not significantly affect market
25
of
and
share.
open
The
firms
study concludes with the idea that studies of brokerage
be mis-directed if one accepts an alternative proposition
may
that
the
the brokerage firm is relatively unimportant,
important
salesperson.
empirical
human
capital
and
goodwill
belong
If this alternate proposition is
work
should
and
to
correct,
proceed to determine
the
that
the
then
impact
of
salesperson characteristics on market share.
A recent article in the Journal of Real Estate Research, by
Richins,
Black,
concepts
as
authors
and Sirmans [24) analyzed marketing strategy
they apply to real estate brokerage
believe
orientations
that
firms follow one
of
three
with respect to revenue generation:
strategy (equal weight to selling and listing),
strategy
(little
strategy
(emphasize selling over listing).
analyzes
firms.
the
dependence on other firms),
effectiveness
of
strategic
a
balanced
an autonomous
or
a
selling
The article
marketing
The
mix
also
strategy
variables, such as service level and advertising, in achieving
market share.
in
the
The analysis indicates a range of effectiveness
strategy
orientation
adopted
variables analyzed,
of
listed
variables,
depending
by the firm.
the most
upon
Of over 20
significant are:
the
strategic
marketing
mix
selling price
property (relative to average value of
properties
listed by the firm), geographic dispersion (distance from real
estate
office to the listed home),
the property sold.
From their research,
following conclusions:
near
and the selling price
of
the authors draw the
(1) Firms should locate their
offices
the areas in which they would like to sell property. (2)
26
the
more properties a firm has sold in an area,
The
the probability of making subsequent sales in that
It
is
easier
properties
for a brokerage firm to
sell
greater
area.
less
(3)
expensive
(relative to the average value of properties
sold
by the firm) than more expensive properties. (4) Service level
is
negatively related to sales.
upon a firm's strategic
depends
(5) The value of advertising
(6)
orientation.
Franchise
affiliation has a positive effect on market performance.
In addition to studies conducted on the market share of the
a few researchers have analyzed the performance of
firm,
the
Illinois
Lutes,
In a 1985 survey of members
within the firm.
salespeople
and
Association of Realtors conducted
Meier
[11],
the
by
of
Follain,
20 factors thought to determine real
estate salesperson success as measured by income were analyzed
via
Their findings included:
multivariate regression.
person
works 50 hours per week can expect to
who
(1) A
earn
more
than 30 percent more than a person who works only 40 hours per
week.
Income
(2)
increases
substantially
with
years
of
experience in the early years of a career (over 20 percent per
year for the first five years), but then increases flatten out
for
the veteran with more than ten years of
experience.
Men and women with similar traits who work the same amount
time earn the same.
and
Although the findings of Follain,
Meier are interesting,
partially
succeed
of
Lutes,
some of their observations may be
do
not
period
and
explained by the fact that salespeople who
in
(3)
the business may leave after a brief
those that are successful go on to earn higher incomes.
27
Brokerage Commission Rates
studies
Several
completed
on
estate
real
commission rates which attempt to address the issue
brokerage
of
been
have
or not price-fixing
whether
exists.
The
Federal
Trade
Commission (FTC) Report, The Residential Real Estate Brokerage
Industry
to
reached the following conclusions with respect
[27],
of
(1) Many consumers are unaware
brokerage commissions:
the basic aspects of selecting a real estate broker, including
fact the the brokerage fee is negotiable.
the
(2) Commission
rates
in all markets tend to be roughly uniform from sale
sale.
(3)
Brokers
low
advertising
that have attracted
many
listings
to
with
commission fees might encounter problems
in
cooperatively selling their listings.
Since
discount brokers may offer cooperating brokers
compensation than that provided by traditional brokers,
alleged that traditional brokers steer their buyers away
by discount brokers.
homes listed
Discount brokers
less
it is
from
charging
less than the prevailing commission rate, therefore, may
find
that while competition in price facilitates the acquisition of
listings,
it
often
hampers efforts to sell those
listings.
This in turn makes price competition an unsuccessful strategy,
and
in the FTC's opinion is the principal explanation for the
uniformity of commission rates in most
Carney
[5]
local markets.
concluded that brokerage commissions are
for higher-priced homes,
new relative to existing homes,
non-co-op sales relative to co-op sales.
consisting
of
over
7,000
observations
28
In a separate
of
home
lower
and
study
brokerage
commission
rates,
commissions
tend
[4)
Carney
concluded:
Brokerage
(1)
single
a
to be uniform or concentrated at
modal rate of 6 percent or 7 percent of the selling price of a
(2)
home.
distribution of rates is
The
some
suggesting
from
discounting
skewed,
negatively
modal
the
(3)
rate.
Commission splits tend to be uniform at a 50-50 ratio.
In a study conducted at the University of Houston, Crockett
that the absence of price
discovered
[7]
among
competition
may have led to an inefficiently large commitment
brokers
to the brokerage industry,
resources
supported by
of
excessive
rates for consumer brokerage services. The results he observed
stem from the way that competitive pressures emerge when price
competition is largely suppressed.
Crockett believes that the
to enhanced price competition probably lies in increasing
key
accessibility
listing
multiple
in the MLS.
of
outcome
access
the market information
service (MLS),
to
in
and that one step
the
that
participate
He concludes with the suggestion that the natural
increasing
accessibility to
to open the MLS
be
by
maintained
is to insure that discount brokers may
direction
might
to
market
non-brokers,
to
information on a fee basis,
since
information
providing
without tying
it
to
other services, is consistent with efficiency in transacting.
In another article, Crockett [8] noted that brokerage firms
attempt
to
than price;
attract market share by means of services
and as a result
rather
the industry is characterized by
an excessively large agent force made possible by an excessive
commission rate. Also, he feels that when commission rates are
29
fixed the competition among brokerage firms can be expected to
lead
costly brokerage firms,
relatively
will
agents.
eventually
full-service,
between
choose
ability to
the
from
benefit
sales
of
number
concludes that consumers
Crockett
Finally,
in
expansion
excessive
to
and other alternatives at
different prices.
study relating to brokerage commission
Another
Zorn and Larsen [30],
concludes
lead
not
the
of
perspective
of
economic theory
the
from
systems
commission
agency.
study
The
that flat-fee and percentage-commission systems
Also,
do
of
the
the flat-fee commission system
has
to an optimal amount of search on the part
real estate agent.
by
analyzes the incentive effects of flat-
percentage-based
and
fee
rates,
incentive effects when the seller wishes to sell for
inferior
the highest bid found in the search process.
In their textbook, Goldberg and Chinloy [14]
apply economic
theory to brokerage commission rates. Economic theory suggests
the higher the number of
that the lower the commission rates,
listings.
authors believe that when a broker raises
The
commission rate,
upon
depends
fall
house listings will fall.
the revenues and costs
the
The extent of the
of
changing
the
commission rate.
Consumer Preferences and Attitudes toward Brokers
The
largest
comprehensive
survey
of
buyer
and
seller
preferences in selecting a real estate broker was conducted by
the
Federal
buyers
Trade Commission (FTC)
£27].
The FTC study
concluded that: (1) The two primary ways
30
that
of
buyers
their
aware of the agents that handle the purchase of
become
homes
percent
the agent was a
that
are
buyer respondents),
of
or
friend
was
and that the agent/firm
to them (22.9 percent of buyer
recommended
(26.9
relative
respondents). (2)
The single most important reason buyers use real estate agents
to
look
for a home is to gain access to information
of homes.
(3) The single
most
on
the
important
widest
assortment
reason
people
listed
with discount firms is that they believe the firms are
looking
for a home might
homes
inspect
not
not reputable or ethical (27.8 percent of buyer respondents).
The FTC study of home sellers concluded that:
most
(1) The
important reasons that homes are listed with real estate firms
are
to
sell
percent
(19.5
quickly
seller
of
and to free the sellers from the time commitment
respondents)
and
home
the
of
of selling the homes themselves (13.8 percent
effort
seller respondents). 2) The most important reasons for listing
with
the
the
and
agent/firm (18 percent of seller respondents),
was
agent
respondents).
Not
competition,
only
a
(13
friend/relative
surprisingly,
due
percent
of
of
to the lack
broker.
that
seller
price
mentioned
2 percent of seller respondents
commission fees as a reason for choosing a particular
list
of
a particular agent are the experience and reputation
listing
3) The single most important reason sellers might not
with
a discount broker is the lack
percent of seller respondents).
commission
respondents
rates
are
of
services
(21.6
4) When asked how real estate
determined,
34.3
percent
of
seller
believed that rates were determined by law or
the Board of Realtors.
31
by
Blair and Rossi
a
purchased
polled 620 consumers who had
services
in the past year to ascertain the brokerage
home
they
[3)
consider most important and the type of
firm
brokerage
they would expect to offer such services. They found that most
provided
services
by local independent firms and
affiliated firms. Having salespeople who
time
nationally
are willing to spend
Many
with the customer was the most valued service.
showing video
the technological factors (i.e,
of
presentations)
rate
Commission
customers.
highly valued by
not
were
between
believe there is or would be no difference
consumers
was
ranked fifteenth in importance out of twenty-one categories of
a
choose
should
seller
nationally
a
local
independent
broker
should
percent
47
broker or a local independent broker,
affiliated
believed
a
whether
asked
were
respondents
when the
Finally,
offered by brokers.
services
be
selected
compared with 20 percent who responded that the seller
broker.
select a nationally affiliated
One
study directly pertinent to this thesis was
by Kehrer [17].
should
performed
Kehrer's study was based on an analysis of the
Survey of Consumer Finance, a 5,000 person survey commissioned
by
the Federal Reserve Board.
Thrifts",
households
through
study,
"Consumer
toward Buying and Selling Real Estate through Banks
Attitudes
and
In his 1985
Kehrer
that a
found
substantial
are interested in buying and selling
banks and thrifts.
number
real
of
estate
He estimates the immediate market
for the services to be almost 8 million households (10 percent
of
all
households).
The
potential
32
market
is
almost
one
household out of every five. Kehrer also noted that the market
for real
estate brokerage services
an upscale market.
interested
and
in
thrifts
That is,
in banks and thrifts is not
three-fourths of the
households
doing their real estate transactions in
are in the middle and lower
income
banks
bracket
of
people under 55, which makes up 65 percent of the homes in the
United States.
Property Pricing Strategies and Time on the Market
recent
A
study
by
Miller and
Sklarz
large high-rise
property pricing strategies. In their study of
sales,
attempted
they
centrally-located
condominium
determine
whether
or not asking prices are an
value
buyers.
The
to
on consumer goods,
done
research
basis for their
with
dealt
[19]
to
indicator
study
previous
was
indicated
which had
of
that
pricing strategies may influence perceptions of quality. Their
concluded
study
strategy
for
study
longer
optimal
large-ticket heterogeneous markets,
also demonstrated a positive
pricing
like
real
correlation
between
value
nonlinear relationship was
found
Additionally,
asking
estimate.
a
a larger list price has
impact on selling price,
Miller
and
at
a
price
marginally
decreasing
as one moves further above the value
Sklarz
believe that
strategy can be inferred,
pricing
list)
an
selling time and property price relative to the
estimate.
where
the existence of
is much easier to assert than to prove statistically.
estate,
The
that
if
any
it seems to be to ask
at least equal to or above
that
typical pricing spread for other similar property.
33
optimal
of
(or
the
Belkin, Hempel, and McLeavey
[2] concluded that time on the
behavior.
is an important factor in describing market
market
The study shows that brokers do a good job in negotiating list
price.
close
sell
submarkets,
Within
on
market data
the
features yields low predictability,
cannot
features
short
list price and within a
to
Time
market.
a large percentage of
on
time
the
against
house
demonstrating that
house
regressed
to predict
used
be
properties
time
on
with
market
accuracy.
Effects of a Multiple Listing Service
Frew [13],
in a recent study of MLS systems, concluded that
although size advantages enable larger brokerage firms to sell
a
advantages
these
that
commission
to
Thus,
enforcing
through
resources
amount
significant
incentives
create
avoid
to
by withholding the listings from the
splits
save
also
indicates
the evidence
greater portion of their listings,
of
resources
improved
be
would
efficiency,
problems
must
be
that
considered
when drawing conclusions about the net benefit
to
intervention
mandate
Frew
carefully
concludes
government
a
in
consumed
compliance with compulsory MLS participation.
enforcement
MLS.
of
MLS
compulsory
participation.
The
Wu
and
effects of introducing an MLS system were explored
and Colwell [29) in their study,
Real
Estate Brokerage Markets
introduction
important
of
an
effects.
MLS
The
"Equilibrium of
Under
system was found
MLS
34
does
cause
Housing
Uncertainty."
to
have
housing
by
The
several
value
to
MLS
indeterminate.
is
found
to
possible
in
appreciation
Although
context.
is
home
consider
reaching
when
values
the
completely
not
the introduction of an MLS system causes
that
conclusion
MLS
that they may have neglected to
appears
it
the
the Wu and Colwell study
of
methodology
in
search
of
efficiency
will
greater
primary reasons relate to the
The
brokers.
clear,
are
on the average,
brokers,
rate
more search for both buyers and listings than
undertake
non-MLS
commission
the
on
effect
its
but
increase,
the
an
increase in home values.
Effects of State Licensing Regulations
in
found
be
can
requirements
1983
the
Residential Real Estate Brokerage Industry
provides
study,
FTC
[27).
The
The FTC study
a tabular synopsis of state education
requirements,
continuing education
requirements,
requirements,
experience
other application requirements.
and
licensing
detailed description of the state real estate
A
on examination results,
information
reciprocity agreements,
The report also contains
requirements,
residency
and state statutes and
license fees,
regulations.
real
provide
on
Their
some
regulation will
1,000
entry
state
practitioners,
provided.
[15) examined entry barriers within
brokerage industry to determine
estate
differing
Loucks
&
Johnson
requirements
and
earnings,
study
support
concludes:
the
for
on
(1)
effect
the
supply
the
on
of
service
Regression
results
hypothesis
that
(2) No support was found for
35
of
of
quality
increased
limit the supply of real estate licensees
population.
the
the
per
premise
that
1,000
earnings will result from
higher
population.
fewer
(3) Quality of service does increase as
result of fewer licensees per 1,000 population:
reduction
a 10
a
percent
in the number of licensees will yield a 5.7 percent
in complaints per transaction lodged with
decrease
per
licensees
estate
commission.
appear
to
occupational
be
The
(4)
acting
licensure
as
real estate industry
cartel
by
regulations to
raise industry earnings.
36
enacting
restrict
the
does
real
not
self-serving
supply
and
CHAPTER THREE: BANKS AND REAL ESTATE BROKERAGE
Historical Role of Banks in Real Estate
national banks,
Historically,
state-chartered banks have not been permitted
all
nearly
bank holding companies, and
own and operate real estate brokerage firms.
on
owning and operating real
banks
holds
still
considering
true
whether
today,
estate
although
The
prohibition
is
banks should be permitted to
several real estate related activities,
firms
brokerage
Congress
to
including
currently
engage
in
brokerage.
Over the years, banks have begun to take a more active role
in many aspects of the real estate business. Today, most banks
extensive real estate lending operations that make
have
mortgage loans,
permanent loans on income producing property,
construction loans.
and
Activity"
for January 1988 [28),
percent of all
46
for
According to the U.S.
and Urban Development's "Survey of
Housing
Department of
Mortgage
Lending
commercial banks now account
long-term mortgage
originations
loan
loans
land) and 80 percent of all construction
(except
home
(see
Table 5).
In
addition to real estate lending operations,
institutions
(i.e.,
the larger
Citibank) have developed their own
real
real
estate
investment
departments
to
provide
estate
investment expertise on a fee basis
to
institutional
clients.
Also,
management
Bank of America, Mellon Bank, and Wells Fargo
Bank currently sponsor real estate investment trusts. However,
banks have been prohibited from making most direct real estate
investments,
participating in real estate joint ventures, and
in operating real estate brokerage firms.
37
TABLE 5
Breakdown of the Market Share for Long Term-Mortgage Loan
Originations (Except Land) and Construction
Loan Originations
Commercial
Banks
Long-Term
1-4 Family
Nonfarm Homes
Loans
Savings &
Loans
Mortgage
Companies
Other
Sources
26%
39%
27%
8%
58%
29%
9%
4%
19%
52%
7%
22%
76%
12%
2%
10%
80%
9%
0%
11%
Construction
Loans for
Nonfarm, NonResidential
Properties
89%
4%
5%
2%
All Long-Term
Property Loans
(Except Land)
46%
28%
16%
10%
80%
11%
6%
3%
Construction
Loans for 1-4
Family Nonfarm
Homes
Long-Term
Multifamily
Residential
Loans
Construction
Loans for MultiFamily
Residential
Properties
Long-Term
Nonfarm, NonResidential
Property Loans
All Construction
Loans
Source: U.S. Department of Housing and Urban Development,
"Survey of Mortgage Lending Activity", January 1988.
38
the principal interaction between banks
brokerage activities,
of
members
and
of
consisted
estate
business.
their
salespeople to solicit
real
several
real
offices each day to distribute rate sheets that
quote
through
their
institution.
and terms
rates
interest
current
Ultimately,
the
available
mortgage
goal of a bank
is to develop a long-term relationship with
officer
real
contacting
officers
has
community
brokerage
mortgage loan officer will visit
a
Typically,
estate
mortgage loan
and
brokers
estate
real
the
bank
estate
real
to restrictions on bank participation in
Due
estate
brokers
and salespeople who
numerous
consistently
will
recommend the loan officer to their homebuyers.
loan
Mortgage loan
officers are usually compensated by receiving a portion of the
loan
origination
-
originate
fee
typically
paid by the
borrower
loans
on
50 basis points (0.5 percent)
they
of
the
face value of each loan.
banks may deal with the real estate brokerage
In addition,
when they have taken back a property as a result of
community
The
foreclosure.
services of a real estate broker may be
of
great value to a bank when a property needs to be sold quickly
or needs maximium exposure through the local MLS system.
money
federally
deposits
be held by real
firms
estate
as
that
require
state real estate commissions
Many
customers.
earnest
may deal with real estate brokerage
also
Banks
brokers
in
insured accounts at banks or savings & loans in the
earnest
money
deposits may comprise 5 percent or more of the purchase
price
state
where
the
licensed.
broker is
39
Since
of
a
the
property,
estate
real
escrow account of a large
brokerage firm could be a major account for a bank.
Real Estate Brokerage/Savings & Loan Affiliations
Although banks cannot own and operate real estate brokerage
note
savings
that
are permitted to operate real estate
institutions
loan
&
companies.
the majority of savings & loans that own and operate
However,
real
to
interesting
is
it
firms,
agents
estate
brokerage firms do not have real
estate
located in their branches. Instead, most real estate brokerage
firms
that
affiliated with savings & loans take advantage of
by distributing literature in their branches and
relationship
by mailing literature in customer monthly statements.
An
York-based
Gallery
the real estate brokerage/savings
is Empire Savings of America,
affiliation
Homes
of
example
savings & loan,
the
loan
&
New
Buffalo,
of
which owns 99% of the Gallery
Empire Savings also
franchisor operation.
of Homes franchise in the Buffalo area,
operates
although
a
it
does not have real estate salespeople staffed in the savings &
of Empire Savings,
great
believes that actually placing real estate
be
the savings & loan branches would not
in
salespeople
Senior Executive Vice President
Daniel Brown,
loan branches.
of
value since the purchase and sale of real estate is not
an impulse transaction.
In
1983,
California,
Great
the
nation's
purchased Walker & Lee,
brokerage
firm,
Western
Savings
third
Inc.,
of
largest
savings
&
loan,
a California-based real estate
and changed the name to Great
40
Hills,
Beverly
Western
Real
headquartered in Santa Ana,
California, has 37 resale offices
Based on 1986
data,
Roulac
and
approximately 1,700 agents.
[26]
ranks Great Western Real Estate as the 22nd largest
estate
brokerage
revenues
of
firm
$59.1
arrangement,
Great
in
the
Like
million.
Western
United
Real
States,
the
Vice
Senior
President
of
has
real
with
Empire
Estate
gross
Savings
physical
no
According to Robert
presence in the savings & loan branches.
Lind,
is
which
Estate,
Real
Western
Great
Today,
Estate.
Great
Savings,
Western
management has been reluctant to allow real estate salespeople
the branches since they may be too "pushy" and offend
in
the
Also, there is some concern over damaging existing
customers.
real estate
with
relationships
brokers and salespeople
who
currently refer mortgage loans to the savings & loan. Although
not had salespeople
have
they
mentioned
in
the
branches,
Mr.
Lind
that Great Western Savings has been able to capture
40
approximately
percent of the loan business
generated
by
Great Western Real Estate sales transactions.
Unlike Empire Savings and Great Western Savings,
Twin City
Federal Savings & Loan of Minneapolis, Minnesota, actually has
a
branches.
real estate brokerage office in five of their 46
Twin City Federal purchased several Realty World
and
currently
operates
"Realty World - TCF."
agents
savings
World
and
under
the
name
Realty World - TCF has approximately 300
ten offices,
& loan branches.
- TCF,
a real estate firm
franchises,
including the five offices
Don Streeter,
President of
in
the
Realty
states that the real estate brokerage operation
41
is
generating
$40 to $50 million annually in
mortgage
loan
referrals to the savings & loan, and has achieved a 49 percent
capture
rate of loan business generated by Realty World - TCF
agents.
When
real
asked what value he places on the
presence
estate offices in the savings & loan branches,
of
Streeter
said that most of the value is in terms of image and exposure.
Based on over 30 years experience in the real estate business,
Streeter's
branches
opinion is that the offices in the savings &
loan
do not generate any significant "walk-in" customers,
and that the real estate agents in the savings & loan branches
do
the same amount of prospecting for listings and
agents
who
Asked
are not located in the savings &
sales
loan
as
branches.
whether the real estate operation damages the savings &
loan's
relationships
salespeople,
sensitive
with
Streeter
situation,
significant
local
real
commented
Realty
estate
that
World
brokers
although
- TCF
enough portion of the savings &
and
it
is
generates
loan's
a
a
mortgage
originations that it counteracts the negative effects.
Another
is
real estate firm with a savings & loan affiliation
Better Homes and Gardens Real Estate Service.
Homes and Gardens Real Estate Service,
Moines,
Iowa
Craig
Iowa,
currently
has one franchisee in the State
will
of
Homes
a franchisee in the New York
soon close a lease deal with a local bank to
real estate offices in 30 bank branches.
42
Des
and according to
the National Marketing Director of Better
and Gardens Real Estate Service,
area
Better
which is based in
that is a savings & loans institution,
King,
The
open
Guarantee Savings of Fresno, California, which was recently
acquired
by Glendale Federal
operates
and
firm
called
However,
located
a three office 75 agent real
currently
estate
Guarantee Financial Realty in the
in
successful
make
brokerage
Fresno
the savings & loan branches.
A
area.
spokesperson
Financial Realty said that a test marketing
placing real estate agents in the branches did
to
owns
the real estate brokerage offices and agents are not
Guarantee
of
Savings & Loan,
at
period
not
prove
since it did not generate enough referral business
it worthwhile for an agent to be
at
available
all
times during normal business hours.
Undoubtedly,
other
real estate brokerage operations exist
that
are affiliated with savings & loans,
some
state-chartered
banks.
This
and possibly
synopsis of
real
with
estate
brokerage/savings & loan affiliations is by no means complete,
and
is intended only to give a brief overview of the
current
state of the industry.
Bank Regulation
There
in
the
are four primary types of depository
United States:
commercial
banks,
intermediaries
savings
&
loan
associations, mutual savings banks, and credit unions. Each of
these major categories can be subdivided in various ways, such
as whether the institution is federally chartered or federally
insured.
This
paper
federally chartered ,
an
alternative
focuses on the category
federally insured,
delivery
system for
services.
43
of
state
and
commercial banks as
real, estate
brokerage
Bankers
American
the
to
According
as
Association,
of
October 1987, there were 14,301 commercial banks in the United
type
of supervision than any other
system
complex
more
these commercial banks are subject to
In general,
States.
a
of
institution. There are four principal categories of regulatory
in the banking industry:
authority
Departments,
Corporation
Corporation,
and (4) the Comptroller of the
Banking Departments or Commissions supervise
State
state-chartered
Banking
State
the Federal Deposit Insurance
(2)
(3) the Federal Reserve Board,
Currency.
the 50
(1)
banks.
CFDIC)
The
Federal
Insurance
Deposit
the
is an independent agency of
federal
government that insures deposits up to $100,000 per depositor.
The Federal
Reserve
Board and the 12 Federal Reserve Banks constitute the
central
FDIC supervises FDIC-insured banks.
The
The Federal Reserve Board's chief
of the United States.
bank
responsibility is monetary policy, although the board also has
broad supervisory and regulatory authority over the activities
of
member
regulates
Currency's
designed
banks.
office
is a bureau of
the
The Comptroller of the
Treasury
Department
Department,
or chartered,
or
bank charters,
banks,
by either the state in
usually
government.
State
the
Banking Commission receives
Banking
applications
grants or denies applications,
44
through
[10].
they plan to do business or by the federal
state-chartered
Board
Reserve
to safeguard bank operations and the public
Banks are organized,
For
Federal
all bank holding companies.
the regulation of national banks
which
the
In addition,
for
and supervises
and examines state-chartered banks in that state.
Banks
chartered by the federal government are referred
as national banks.
National banks are chartered,
to
supervised,.
and examined by the Office of the Comptroller of the Currency.
unlike state-chartered banks, are required to
National banks,
observe
all
subject
to
authorities.
In
addition,
national
Reserve
Federal
and examination by
their
have
banks must
are
and
applicable Federal Reserve regulations
supervision
must
and therefore
be members of the Federal Reserve System,
deposits insured by the Federal Deposit Insurance Corporation.
As
a
minimum
closely
chartered
While
capital
net
requirements
than
requirements
higher
and
most state-chartered banks,
higher
reserve
and are
more
state
supervised and restricted in some aspects than
banks.
national
members
banks are required to be
Federal Reserve System,
chartered
to
national banks are usually subject
result,
of
the
state-chartered banks are not. State-
banks may become members if they
desire,
provided
that they meet the requirements imposed by the Federal Reserve
System.
Reserve
State-chartered banks that are members of the Federal
System
requirements
national
and
banks.
are
subject
minimum
They
to
the
net capital
requirements
must also be members
Deposit Insurance Corporation,
by the State Banking Department,
FDIC.
45
higher-reserve
same
of
the
as
are
Federal
and are subject to examination
the Federal Reserve, and the
Bank Restrictions on Real Estate Brokerage Activities
owning and operating real
from
prohibited
are
and most state-chartered banks
companies,
holding
bank
banks,
national
Under current interpretations of the law,
brokerage
estate
firms. Although Congress is working on legislation which would
bank
and
banks
are that national
indications
recent
most
the
and possibly expand permissible bank activities,
address
holding companies will continue to be prohibited from directly
engaging in real estate brokerage.
federal regulations,
While there is no language in
that explicitly states that real estate brokerage
this paper,
is
not
real
For
brokerage.
estate
the
of
Comptroller
National
the law prohibits banks from
of
interpretation
Bank
Act
example,
that
in such a way
in
engaging
of
the
interprete
the
banks
are
Office
the
staff
Currency's legal
regulators'
the
banks,
permissible activity for
a
of
author
that have been examined by the
regulations
state
and in
national
prohibited from engaging in real estate brokerage. The Federal
Reserve
Board's
Y
Regulation
holding
companies
jurisdiction
example
(12
of
interpretation
Institutions,
interpretation
Section
C.F.R.,
and
of
other banks
Federal
225.25)
under
Reserve
prohibits
their
from operating real estate brokerage
state
regulation,
the
of the Annotated Code of
Section 3-206,
State
Board
of
Maryland,
bank
regulatory
firms.
An
Maryland's
Financial
prohibits state-chartered banks
from owning and operating real estate brokerage firms. In each
of
these examples,
the applicable regulations set
46
forth
a
none of which
list" of permissible bank activities,
"laundry
includes real estate brokerage.
banks cannot directly own and operate real estate
Although
interpretive
issued
have
regulators
bank
federal and several state
firms,
brokerage
non-
permit
letters which would
affiliated real estate brokerage firms to lease space in
branches on a percentage-lease basis
bank
and to offer real estate
brokerage services to the bank clients (see opinion letters in
Appendix).
basis
Banks'
real
to
percentage
to lease space on a
authority
estate brokerage firms
is
upon
conditional
First,
observance of several legal and prudential safeguards.
banks cannot enter into a partnership with the brokerage firm.
banks
Second,
appropriately
should assure that the brokerage
identified
business
as a separate business so that
public will understand that it is not obtaining the
from
services
the
banks.
any bank
Third,
is
the
brokerage
advertising
or
literature that mentions the real estate brokerage firm should
make clear that the firm is independently owned and
Fourth,
be
the relationship between bank and brokerage firm must
at arms-length,
credit
operated.
to
management
and banks must avoid tying extensions
the use of the
should
consider
brokerage
services.
that
banks
hours when banking services are not available.
should
not lease space to
bank
employees,
may
business
arise if the public is given access to the brokerage
during
bank
Fifth,
any security problems
of
Sixth,
officers,
directors, principal shareholders, or their immediate families
for a brokerage operation due to conflicts of interest.
47
to
respect
recent development in Congress with
most
The
the
banks and real estate brokerage involves both the NAR and
American Bankers Association (ABA). Late in June 1988, the NAR
on
and ABA sent to Capitol Hill a carefully crafted agreement
estate
holding companies from directly engaging in real
bank
and
banks
that would prohibit national
legislation
banking
activities.
The agreement is expected to be included in draft
legislation
offered
to
the House Banking Committee
Chairman, Rep. Fernand J. St Germain, D-R.I.,
sometime in July
the
The Banking Committee is expected to begin work on
1988.
bill
its
by
in the middle of July, and a final measure could be voted
on before the end of the summer, according to NAR analysts.
The
agreement
NAR-ABA
specifies
that,
if
freestanding
national banks and bank holding companies are ever
to engage in real estate activities,
conducted
separate.
activities
real
available
that would keep banking and real
or "firewalls,"
The
NAR-ABA
also
agreement
the following: (1) Banks could lend to clients
stipulates
the
those activities must be
through subsidiaries and must be governed by strict
safeguards,
estate
authorized
estate affiliate only under similar terms to
to
other clients. (2) A bank
affiliate
those
would
a customer of either the bank or the real estate affiliate
any service,
company. (3)
prohibited
services,
be
from engaging in "tying" arrangements that require
prohibited
obtain
of
product,
or property from an affiliated
The bank and the real estate affiliate would
from
any
advertising;
joint
to
cross
be
marketing
using the same or similar name, trademark, or logo;
48
a common place of business;
sharing
financial
bank
A
(4)
records.
or sharing corporate and
from
prohibited
be
would
exchanging non-public information about its customers with its
real estate affiliate,
to the affiliate,
other
than
prohibited
or when the information involves activities
real
estate
from
using
activities. (5)
the
services
of
A
bank
its
would
real
such
foreclosed
properties,
except when the real estate
provided on terms similar to those available to
be
estate
as for disposing of the bank's inventory
affiliate,
were
loan
except in connection with a bank
of
services
others.
One issue left unresolved in the joint NAR-ABA agreement is
the application of the proposed safeguards to individuals with
a
simultaneous interest in a bank and a real estate brokerage
firm.
NAR analysts said that Rep. St Germain is interested in
resolving
this question,
reached in the final
and a compromise probably
legislation.
49
will
be
BANKS AS AN ALTERNATIVE DELIVERY SYSTEM FOR
REAL ESTATE BROKERAGE SERVICES
CHAPTER FOUR:
Market for Real Estate Brokerage Services in Banks
In
1985
Kenneth Kehrer,
Dr.
an economist
& Associates in Princeton,
Kehrer
and
immediate
New Jersey,
markets for
potential
with
Kenneth
the
examined
offering
estate
real
His
brokerage services in banks and thrift institutions [17].
research
was
Finance,
a
Federal
based on an analysis of the Survey of
the Comptoller of the
Reserve Board,
consisted
the
large-scale household survey commissioned by
federal
other
Consumer
Survey
The
agencies.
of
Currency,
Consumer
Finance
5,000 in-person interviews
of approximately
and
which
were conducted by the Survey Research Center of the University
The
Michigan.
of
demographic
information
and
survey
income
on debts,
interview
data
assets,
as
well
income,
detailed
obtained
comprehensive
as
use of
and
credit,
attitudes toward innovative financial services. In the opinion
of Kehrer, at the time of his analysis, the Survey of Consumer
was
Finance
unquestionably the best available data
base
to
consumer interest in real estate brokerage in banks and
study
thrifts.
Kehrer's
real
study concludes that the size of the
estate brokerage services in banks and thrifts is
large.
He estimates that 18.5 percent of U.S.
for
market
quite
households are
interested in buying and selling real estate through a bank or
savings
&
loan.
Based
on 1985
data,
this
potential market of 14.7 million households.
50
constitutes
a
Kehrer estimates
services
the immediate market for real estate brokerage
that
or 7.8
in banks and thrifts is 10 percent of U.S. households,
million households based on 1985 figures.
the
Analyzing
potential market for real estate
characteristics,
services in banks and thrifts by demographic
concludes
Kehrer
that the market for real
brokerage
estate
brokerage
services in banks and thrifts is not an upscale market. Of the
potential
business
households
in banks and thrifts,
residual
and
market
real
estate
75 percent are in the
middle
interested in transacting
segments
(see Table 6
below
for
U.S.
household segmentation). Nonetheless, half of these households
TABLE 6
U.S. Household Segments
Segment
Age of
Head of
Household
Annual
Household
Income
% of
Total
Millions
of
Households
$70,000+
5%
2.0
16%
12.8
AFFLUENT
Under 55
MATURE
Over 55
UPSCALE
22 to 55
$20,000$70,000
14%
11.2
MIDDLE
22 to 55
$20,000$70,000
29%
23.2
RESIDUAL
-----
36%
28.8
All
*
*
All Others ----
Middle market households are similar in age and income
to upscale households; however, in the middle market,
the household head is not managerial or professional.
Source:
"Consumer Attitudes toward Buying and Selling Real
Estate through Banks and Thrifts", Kenneth Kehrer &
Associates, 1985.
51
TABLE 7
Percent of Each Segment. That Would Buy
Real Estate through Banks & Thrifts
Rest of
Potential
Market
Immediate
Market
Potential
Market
Affluent
15%
6%
10%
Mature
11%
5%
6%
Upscale
15%
6%
9%
Middle
20%
13%
8%
Residual
22%
11%
10%
Source:
home,
a
own
"Consumer Attitudes Toward Buying and Selling Real
Estate Through Banks and Thrifts", Kenneth Kehrer &
Associates, 1985.
and
a substantial number own
real
additional
estate. Of the affluent and upscale households, 15 percent are
interested in buying and selling real estate through a bank or
thrift,
residual
compared
market
with 20 percent to 22 percent of middle and
households
(see
Table
households are the least interested,
indicating
respondents
selling
real
7
above).
percent of
with only 11
that they would consider
Mature
and
buying
estate through banks and thrifts (see Figure
2
for a demographic breakdown of the potential market).
When
real
Kehrer estimated the size of the immediate market for
estate
discovered
brokerage
that
services.in
banks
and
thrifts,
the downscale nature of the market
more striking than in the estimated potential market.
11
percent and 13 percent of the residual and
52
middle
is
he
even
Between
market
FIGURE 2
Potential Market
14.7 Million Households
Residual
43.0%
Affluent
4.0%
' Mature
10.0%
Middle
32.0%
Upscale
11,0%
Source: Kenneth Kehrer & Associates [17]
FIGURE 3
T
:
Immediate Market
Million Households
Residual
42.0%
Middle
38.0%
Source: Kenneth Kehrer & Associates [17]
Affluent
3.0%
Upscale
8.0%
Mature
9.0%
Rest of Potentia Market
FIGURE 4
6.9 Million Households
Residual
43,1%
Affluent
5, 8%
Middle
26.1%
Mature
10,0%
Upscale
15,0%
So urce: Ken neth Kehrer & Associates [17]
are likely to take their real estate
households
transactions
into banks and thrifts in the short run, compared to 5 percent
to 6 percent for the more upscale segments (see Figure 3 for a
demographic breakdown of the immediate market).
The rest of the potential market households (excluding
immediate
market
households)
are more
upscale.
A
the
similar
proportion (8 percent to 10 percent) of the affluent, upscale,
middle and residual segments expressed interest in real estate
in banks (see Figure 4 for a
services
brokerage
demographic
breakdown of the rest of the potential market).
In
addition to looking at the demographic breakdown of the
and
potential
in
services
immediate markets for
and
banks
attitudes
and opinions.
potential
market
appear
thrifts,
estate
brokerage
examined
consumer
real
Kehrer
He concludes that households in
more
innovative
committed
than
to
using
households
in
the potential market are more
equity
general
the
Also,
services.
financial
population
the
to
likely
in stocks and are more willing to take risks in
investments
than
the general population.
own
their
Households in
the
potential market for real estate services in banks and thrifts
are very interested in consolidating their financial
in one institution.
offering
innovative
brokerage
may
business
This suggests that banks and thrifts
financial services such as
real
risk the loss of their customer base to
not
estate
other
institutions already entering the business.
Finally,
in
Kehrer pointed out that survey responses
similar
nature to the Survey of Consumer Finance (which he used to
56
generate
believes
he
However,
type.
this
many
that well-designed marketing campaigns and favorable
of
experiences
banks
of
use services
would
households
how
generally overestimate
conclusions)
his
estate
others who buy and sell real
through
and thrifts could attract additional households to
use
such services.
While
real
between
Kehrer's study does not differentiate
estate brokerage services being provided directly by banks and
savings & loans, or through contractual arrangements with non-
it
paper
this
for the purposes
real estate brokerage firms,
affiliated
is
that
assumed
consumer
of
and
attitudes
preferences would be the same in both cases.
Survey
Bank Market
success
the
Ultimately,
or
of
failure
real
a
estate
brokerage firm's efforts to develop a network of banks through
which
to
offer
contingent
brokerage services is
conc-ept.
In
management
to
willingness of bank management to embrace such a
order
to
determine
the willingness of
bank
a survey of
consider offering real estate brokerage services,
bank
in Maryland,
officers
and the
Virginia,
the
upon
District
of.
Columbia was conducted by mail and by telephone. The 27 survey
respondents consisted of bank presidents,
vice-presidents.
Survey
size
was
CEOs, and marketing
limited
due
time
to
constraints and a relatively low response rate (20 percent) to
an
initial
different
willingness
mailing
to
bank
management.
Since
parts of the country might have a higher
to
consider
offering
57
real
estate
banks
or
in
lower
brokerage
survey was also limited by geographic sampling
the
services,
constraints.
with a brief
respondent
the
providing
the
of
methodology consisted
survey
The
following: (1)
of offering real estate brokerage services in
concept
the
of
explanation
banks;
(2) inquiring as to whether or not the respondent 's bank would
in offering real estate brokerage services
interested
be
perceived
(3) inquiring as to the
point in the future;
some
at
advantages, if any, of offering real estate brokerage services
of the bank;
clients
the
to
estate
real
of offering
any,
if
disadvantages,
perceived
the
to
as
and (4) inquiring
brokerage services to the clients of the bank.
statistical
generalizations
the
about
this
embrace
the willingness of bank management
in
areas
to
not
an
and
D.C.
Washington,
concept.
broad
several
it is possible to make
analysis,
meaningful
precludes
size
survey
limited
Although
Baltimore metropolitan
For
example,
there
is
overwhelming or immediate interest in the banking community to
offer real estate brokerage services,.
respondents
(7.4
since only 2 out of
percent) indicated that
their
institution
might have an interest in offering real estate brokerage.
the
might
two
respondents
have
an
that indicated that
interest in offering
their
real
estate
27
For
institution
brokerage
services, the following three principal advantages were cited:
(1)
the
additional
real
estate
revenue/fee
brokerage
income,
operation
generate
(2) it would create an
house" source of mortgage loan originations,
58
would
(3) real
"inestate
brokerage would be a useful service to provide to customers.
Of the 25 respondents who indicated no interest in offering
real
estate
brokerage
disadvantages
services,
were cited:
two principal
reasons
or
(1) offering real estate brokerage
does not conform to the strategic plan for the bank,
and
offering
existing
real
relationships
estate brokerage services may damage
with
real estate brokers
(i.e.,
real
(2)
estate
brokers who are currently referring mortgage loan business
to
the bank).
several
With
brokerage
services
the
subject
of
and discount real estate
pricing
brokerage
brokerage
estate
services at a discount, for
reprisals from the real estate brokerage community.
one
bank
services
of
were
The general attitude seemed to be against offering
discussed.
real
respondents,
president
believed that if real
were offered at a discount,
estate
fear
In
of
fact,
brokerage
someone would
throw
a
bomb through his bank's windows.
Overall,
the
of offering real estate brokerage
concept
the
willingness of survey respondents to embrace
somewhat disappointing.
in
offering
brokerage
real
services.
services
was
However, banks may be more interested
estate
brokerage
The
"Invest"
than
services
subsidiary
of
stock
ISFA
Corporation of Tampa, Florida is the largest provider of stock
brokerage
an
services in bank and savings & loan branches;
estimated
Butcher,
stock
75 percent of the market.
Public
brokerage
Relations Director,
services
According
David
Invest currently offers
through 270 out
59
to
with
of
an
estimated
30,000
leader has less than 1 percent market
market
the
banks and savings & loans,
among
States. Since
banks and savings & loans in the United
penetration
it is conceivable that more
banks may be interested in offering real estate brokerage than
stock brokerage.
Advantages and Disadvantages
bank
the
for
both the real estate brokerage firm and
for
Clearly,
offer
considering a contractual agreement to
real
estate brokerage services, advantages and disadvantages exist.
the real estate brokerage firm,
For
to
the largest advantage
offering real estate brokerage services in
obtained
exposure,
increased
the
a
with
as
branches,
well
as
customers' monthly statements,
would
create
the
physical
presence
presence
in
(distance
variable
brokerage
with
capital
modest
mailing
information
bank
in
the real estate brokerage firm
and
having
a
communities.
Having
a
appearance of being active
in many different
many communities is significant
and Sirmans [24]
Black,
market
and
visibility
relatively
branches
By displaying posters and providing brochures in
expenditure.
the
be
probably
would
bank
since
Richins,
have shown that geographic dispersion
from real estate offices to listed homes) is a
in
determining market share.
firms,
For new
real
or for smaller real estate brokerage
only a few offices,
key
estate
firms
the market exposure to be gained by
offering real estate brokerage services in bank branches might
lead to significant increases in market share.
Another
advantage for real estate brokerage firms offering
60
their services in bank branches is the possibility of
referral
estate
bank
on
business.
Upon
receipt of information
direct-
about
brokerage services being provided at their
real
bank,
the
customers may contact the brokerage firm for information
buying
or selling property.
However,
based
on
limited
discussions with savings & loans that have offered real estate
brokerage
referral
services,
it appears that the amount of
"walk-in"
business generated by such operations is negligible.
Increased
market exposure and the possibility of
business
generated through bank branches create an
for
real estate brokerage firm seeking
the
salespeople
to
demonstrated
join the firm.
to
referral
advantage
recruit
Colwell & Marshall
new
have
[6]
that the market share for listings and sales are
greatest for firms having the largest number of salespeople.
Finally,
services
real
estate
through
bank
arrangement
what
for
expense.
estate
would
most
their
via
a
is a fixed
in
expense
(gross
income
offices.
paid
In
of
minus
cases,
the rent
lease
transforming
into
a
variable
real
[21],
percent
commissions
of
to
co-brokerage fees,
to owners) on rent and
most
their
percentage
a 1985 survey by the NAR
franchise or referral fees,
commissions
offer
firms spent an average of 12.4
dollar"
salespersons,
and
is,
brokerage
"company
branches
that
have the added advantage
firms
That
brokerage firms
utilities
for
real
for
estate
brokerage firms is fixed, or is fixed with an added percentage
rent.
Real
expenses
estate
brokerage firms able to
into variable expenses (i.e.,
61
transform
fixed
by signing percentage
with banks),
leases
over
brokerage business is highly cyclical and
estate
the
since
real estate brokerage firms,
for
important
particularly
This is
with large fixed expenses.
firms
advantage
have a tremendous competitive
real
closely
is
tied to market interest rates. During periods of high interest
rates, real estate brokerage firms having good market exposure
and low fixed expenses are in the best position to survive and
gain market share from competitors.
for
several potential disadvantages
are
There
the
real
brokerage firm considering the possibility of offering
estate
real estate brokerage services in bank
the
First,
branches.
inordinate amount of time and work involved in locating a bank
to senior officers and the board
concept
presenting the
in offering real estate brokerage,
interested
the
negotiating
of
directors,
and
may be
too
details of the lease agreement,
much for the small real estate brokerage operator to consider.
Using
network
Invest
take
to stock brokerage being offered
by
the
in bank and savings & loan branches,
it
may
analogy
the
bank
six months or more to finalize an agreement with a
to offer real estate brokerage services.
The
to the real estate brokerage firm
downside
having
peak
lease arrangement with a bank is that during
percentage
a
periods in the real estate cycle, when commission revenues are
the
highest,
paying
a
real
This
competitors.
negotiating
which
rent
a
will
estate brokerage firm
is
risk
percentage
higher
than
that
could be offset to
paid
some
lease with a rental
62
probably
its
by
extent
amount
be
by
which
decreases with higher revenues,
cap
or by placing an overall
on the amount of percentage rent to be paid.
estate brokerage firm would
Finally, in some cases the real
not
benefit from the lease arrangement with a bank.
In those
where banks may not be fully committed to
offering
instances
referral
rent
percentage
not
would
guard
To
paid to the banks.
the
worth
be
this
against
brokerage
to contractually segregate real estate
attempt
business
gained
the real estate brokerage operator would be wise
possibility,
to
be
to
business
and
the amount of exposure
estate brokerage services,
real
generated from banks from that generated from
other
sources. That is, although such separation of sources might be
difficult,
the
percentage
rent
real
to
estate
brokerage
that
banks only on
firm
pay
should
generated
business
through bank affiliations.
In
order
to close a percentage rent deal with a
offer real estate brokerage services,
to
bank
it is critical for
the
banks,
and
motivates
real
estate broker to understand what
what
advantages and the disadvantages banks will consider
in
the decision-making process.
As discussed previously in the "Bank Market Survey" section
of this report, there are three principal advantages for banks
offering
would
real
estate brokerage services.
First,
the
bank
look to the real estate brokerage operation as a source
for additional revenue/fee income.
Historically,
banks
have
made money principally by taking in deposits from customers at
a
stated
interest rate and loaning the money back out
63
at
a
significant
earn
banks
by offering and performing a variety of services for
revenues
bases. This trend toward
customer
their
Today,
borrowers.
to
rate
higher
new
offering
institutions into
many
led
has
revenue
service"
for
"fee
and
unusual services to augment their interest income.
advantage
second
The
services
brokerage
a
bank
gaining
of
and
originating
estate
real
offering
be the possibility
the market for
of
share
larger
would
to
a
servicing
residential mortgage loans. In a real estate sale transaction,
influence
real estate agent generally exerts significant
the
Of
the
brokerage,
one
the purchaser's selection of a mortgage lender.
over
savings & loans that have offered real estate
percentage
been able to achieve a "conversion rate" (the
has
of purchasers that end up getting their mortgage through them)
as
and
originating
by
banks
servicing home mortgage loans can
be
quite
example,
For
large.
gained
as 49 percent.
high
The revenue to be
mortgage
institutions originating home
loans typically earn at least one point (1 percent of the loan
a
bank
originating $50 million annually in home mortgage loans,
this
from
loan
up
amount)
would
front
origination fees.
with
the
servicing
an
According to Rob Rosenblatt,
Mortgage Bankers Association,
fee
revenue
extra $500,000 in annual
an
mean
For
fee.
as a loan origination
paid to the servicing
the
agent
economist
average
for
one-to-four
family
residential mortgage loans is between 40 and 44
points
C.40
amount).
percent to .44 percent of the
annual
outstanding
basis
loan
Because mortgage loan servicing fees can create such
64
a substantial annuity over time,
Rosenblatt stated that
some
institutions even originate loans at a loss in order to retain
the servicing rights.
Finally, the third advantage to a bank offering real estate
brokerage
bank
services
customers.
is that it provides a useful
Offering
real
strengthen existing customer
new
strategic
takes
services
of
integration
- a recently evolving trend
delivery
services
help
from a
In addition,
toward the vertical
step
another
may
establish
estate brokerage
real
offering
standpoint,
brokerage
to
relationships or help
relationships.
customer
estate
service
financial
among
larger
financial institutions.
As noted earlier, there are several potential disadvantages
to
Other than
banks offering real estate brokerage services.
estate brokerage not being part of the bank's
real
strategic
plan, the biggest disadvantage perceived by bank management is
the
possibility of damaging existing relationships with
If a bank currently derives a large amount of
estate brokers.
from
revenue
mortgage
revenue
decreased
Any
brokerage.
revenue,
however,
increase
in
loan originations
community,
brokerage
estate
as
a
result
short-term
may
estate
not
through
of
decrease
offering
in
or
be more than offset by a
for
estate
longer-term
from
the
If on the other hand, a bank
through
real
mortgage
loan
then offering
real
the amount of their home
is currently insignificant,
65
real
origination
loan
originate most of its mortgage loans
originations
real
revenue due to loan referral business
brokers,
the
exists
then the potential
real estate brokerage operation.
does
real
estate brokerage services could result in a direct increase in
from the outset.
revenue
Another
brokerage
real
alienating
If the real estate salespeople become too
existing customers.
aggressive,
of
services is the possibility
brokerage
estate
for banks considering offering
disadvantage
if a customer has a bad experience using
or
they
services,
the
banking
business
without extensive field
research
may take
their
elsewhere.
Summary of Proposed Delivery System
it is impossible,
While
and testing, to definitively determine the optimal methodology
bank
in
services
optimal
based on the limited research in the
system
delivery
brokerage
is possible to develop a theoretically
it
branches,
estate
real
delivering
for
field.
This section describes such an optimal approach for maximizing
market
share
brokerage
services
following
issues:
(2)
marketing
in the delivery
profits
and
in
bank
branches,
of
by
(1) contractual and legal
estate
real
the
analyzing
considerations,
strategies and pricing of brokerage
services,
and (3) hiring and motivating real estate salespeople.
As noted earlier,
owning
and
operating
most banks are currently prohibited from
estate
real
brokerage
would preclude banks from purchasing,
prohibition
This
firms.
acquiring,
or holding an equity interest in a real estate brokerage firm.
In
addition,
prohibited
in most states real estate brokerage firms
from
paying "finder's fees" or referral
individuals or companies that refer potential clients,
66
fees
are
to
unless
Therefore,
license.
valid
real
estate
legally offer
real
estate
the referral holds a
making
entity
the
in
order to
services to their customers and still
brokerage
some
receive
form of compensation, banks must execute lease agreements with
non-affiliated
bank regulator opinion letters
(see
services
For
real estate brokerage entities to provide such
Appendix).
real estate brokerage firm may execute
a
example,
in
a
lease to permit the brokerage firm to occupy a 100 square foot
in each branch office of the bank.
area
the
percentage of revenue,
variable
In
under the lease may be fixed
bank
terms
of
brokerage
an
firm
banks, the best
is
to
fixed
or
amount,
a
or some combination thereof.
optimal arrangement
considering offering
for
the
brokerage
estate
real
services
in
lease agreement would be one in which the rent
calculated on a percentage basis with no fixed obligation,
or a very small fixed obligation,
of
The rent payable
with the additional benefit
cap on the maximum rent that would be paid in
a
-a given
This would give the real estate brokerage firm a
time period.
competitive advantage during both slow and peak periods in the
estate market.
real
cycle,
the
expenses,
the
brokerage
and
During slow periods in the
firm would incur no large
estate
real
rent
fixed
cycle,
during peak periods in the real estate
rent expenses would not become unusually large.
However,
one potential obstacle for a bank considering leasing space to
a real estate brokerage firm would be legal provisions in
bank's
the
branch office lease(s) that may prohibit the bank from
subleasing
space or from utilizing their branch office
67
space
(i.e, real estate brokerage).
for certain activities
estate
brokerage
adhere
to
firms,
earlier,
as discussed
in order to legally offer real
authorities
real
banks
must
the
by
guidelines established
other
for
considerations
specific lease
to
addition
In
estate
regulatory
brokerage
services. First, the bank cannot enter into a partnership with
the real estate brokerage firm.
carefully
Second,
This issue can be overcome by
must assure that the brokerage business
banks
will
brokerage
service from the bank.
and
advertising,
addition,
the
of
use
The
operated.
the
obtaining
the
any bank advertising
signs
disclosure
should
language
address
on
these
and
owned
brochures,
issues.
In
given
the real estate brokerage operation could be
appearance
firm
brokerage
independently
that the firm is
clear
make
Also,
that mentions the real estate
literature
must
not
understand that they are
customers
is
that
identified as a separate business so
appropriately
or
agreement.
drafting a percentage lease
of separation from the bank business
through
floor,
movable
the use of different colored carpeting on the
partitions, or a kiosk-type booth.
The
third
relationship
remain
guideline that must be adhered to is
between
at arms-length,
the banks and the brokerage
that
firm
the
must
and banks must avoid tying extensions
of credit to the use of the brokerage services.
Fourth, bank management must consider any security problems
that
may
arise
if the public has access
to
the
brokerage
business during hours when banking services are not available.
68
This
firm
can be avoided by the real estate brokerage
issue
hours.
utilizing the bank branches only during normal banking
banks
Finally,
officers,
lease
cannot
directors,
space
to
bank
employees,
or
shareholders,
principal
their
due
immediate families for a real estate brokerage operation,
to conflicts of interest.
optimal
an
Developing
marketing
and
strategy
optimal
services
strategy for offering real estate brokerage
pricing
in bank branches are difficult issues to definitively resolve.
of
terms
In
they
strategy,
firm
making
of
probability
research
has
subsequent
firm
the
and that
area, the
sales
more
the
greater
in
Instead,
in
areas
area.
that
suggests that the "shotgun approach"
estate brokerage should be avoided.
brokerage
an
estate
real
locate their offices near
sold in
by
research
prior
[24) indicates that
would like to sell property,
a
properties
This
should
firms
brokerage
which
and Sirmans
Black
Richins,
marketing
a
to
real
the real estate
should attempt to be geographically
specific
with respect to its principal area of service. The size of the
geographic
the
offices,
size
of the sales
of the firm.
resources
and
area should vary in accordance with the number
staff,
and
the
financial
acknowledged
This concept is widely
adhered to in the real estate business and is
referred to as "farming"
a territory
or region.
In
of
offering real estate brokerage services in bank
it
may
be difficult to get highly specific with
geographic
region
frequently
the context
branches,
respect
of service since some banks have
69
of
to
multiple
branch locations which can be widely dispersed. Accordingly, a
resources,
limited
of
estate brokerage firm,
real
new
should attempt to lease space in branches
which are in reasonably close
banks
proximity
and which tend to service the same
office(s)
with
firm
brokerage
or a
to
their
community(ies).
Larger brokerage firms, or those with significant resources to
devote to developing new sales areas,
in
space
bank
outside of
branches
leasing
might consider
area
normal
their
of
operation.
From
an operations standpoint,
beneficial for
it is also
real estate brokerage firm to keep all of the leased bank
the
within
branches
office.
bank
close proximity to an existing
real
estate
In order to comply with regulatory restrictions,
leased
space
would
not be available
to
real
the
estate
salespeople after normal banking hours. Therefore, since it is
7-day-a-
essential that real estate salespeople have 24-hour,
week access to copying equipment,
telephones, contract forms,
conference rooms, and the MLS computer system, the real estate
brokerage
firm
should
maintain
a
fully
equipped
office
reasonably close to the leased bank space.
In actuality,
occupied
experience
brokerage
business
by
a
the leased bank branch space would seldom be
real
estate
salesperson.
The
historical
of savings & loans that have operated real
firms
seems to indicate that the walk-in
generated by having a salesperson available
estate
referral
at
all
times in the branches is insufficient to motivate a commission
only salesperson to consistently staff the branches.
70
Instead,
lease relationship with the bank should be used primarily
the
to
increase the market exposure, image, and credibility of the
real estate brokerage firm, as well as to potentially generate
direct referral business.
Black,
Research by Richins,
[24) demonstrates
and Sirmans
less-expensive
it is easier for a brokerage firm to sell
that
sold
(relative to the average value of properties
properties
is
it
That is,
by the firm) than more expensive properties.
easier for a real estate brokerage firm to go down-market than
Kehrer
up-market.
real
for
indicates that the market
[17]
not
estate brokerage services in banks and savings & loans is
upscale
an
in
directly
from
purchase
or
sale of
lower-priced
homes.
should
branches
bank
generated
business
bank lease arrangement would be
the
firm
brokerage
estate
real
that the majority of the referral
expect
given region,
Consequently,
arrangements
brokerage
should
firm
lease
above
the
Black,
and
selling and listing homes priced
on
to
homes
marketing efforts outside of the bank
its
concentrate
the real estate
the
for
a larger share of the market for higher-priced
capture
a
the
brokerage
offering
contemplating
in
so
market,
median.
strategic
Regarding
Sirmans
three
strategic
listing),
firms),
Richins,
believe that real estate firms
[24)
orientations
with
respect
follow
one
to
revenue
an autonomous strategy (little dependence on
or
of
balanced strategy (equal weight to selling and
a
generation:
orientation,
a
selling
strategy
71
(emphasizing selling
other
over
listing).
Their
balanced
research
listings,
in terms of absolute number
both
and
Therefore,
number of sales and
in
for
the
Using
per
the balanced strategy is
and
agent.
its
probably
the brokerage firm would
the balanced strategy,
good chance of earning commissions
a
of sales
listings
a
market
real estate brokerage firm offering
services in bank branches,
have
following
strategy achieve higher relative measures of
performance,
best.
indicates that firms
on
listings
and
sales from bank-affiliated referrals, and by getting listings,
would
have
advertise.
an adequate internal inventory of
In
turn,
properties
to
having properties to advertise for sale
attracts additional buyers to the firm,
some of whom may have
properties to sell. Of the largest real estate brokerage firms
in the United States,
as surveyed by Roulac [26],
all but
firms seem to pursue a balanced strategy as evidenced
few
a
by
the balanced breakdown of business composition between listing
and sale, sale only, and listing only.
An
implement,
since
Washington,
which
firms
strategy
autonomous
D.C.
virtually
most
difficult
is
major
metropolitan areas
all major residential real estate
participate.
Even
large
independent
firms in this type of environment
surviving
without the benefit of the MLS system.
all
systems require members to input all
listings,
autonomous
(like
area) have well-established MLS systems
brokerage
MLS
successfully
to
listings,
estate
difficulty
Since
72
most
or nearly
it is usually not feasible to operate under
strategy on a large scale.
in
brokerage
real
have
the
an
the autonomous strategy,
Like
a selling strategy is
difficult to implement successfully on a large scale.
cases, in order to attract potential purchasers
brokerage
firm
must
have
listings
to
also
In most
a real estate
advertise.
Generic
advertisements that read "homes for sale" or "we sell houses,"
without
not
making reference to a specific property,
motivate
brokerage
prospective
real
firm (although there is no research to
conclusion).
steady
purchasers to call a
usually
Therefore,
source
do
estate
prove
this
unless a brokerage firm has a large,
of potential purchasers,
a
strategy
selling
should be avoided.
For
the
real
arrangement
estate brokerage firm considering
with a bank,
a
lease
there are several ways to make bank
customers
aware of the availability of real estate
services.
First,
brokerage
brochures or literature describing the real
estate brokerage services can be sent to the bank customers in
their monthly statements.
Second, in each branch of
the bank
the real estate brokerage firm can display brochures, posters,
countertop
sale.
placards,
Third,
and photographs of homes currently
since many banks now use their automated teller
machines as advertising media,
can
make
for
the real estate brokerage firm
arrangements with the bank to have a brief
message
appear on the automated teller screens.
Closely
related
to
the
selection
of
an
appropriate
selection
marketing strategy for real estate brokerage is the
of
an
optimal
pricing strategy.
pricing strategy is very difficult,
73
Selection
of
an
optimal
if not impossible, due to
industry
the real estate brokerage
that
fact
the
limited
experience with price competition.
context
of
has
had
in
the
However,
offering real estate brokerage in bank
branches,
be
real estate brokerage services at a discount may
offering
real
the
to
detrimental
Since
firm.
brokerage
estate
cooperation among brokers is critical to the success of a real
lack of cooperation from traditional real estate
the
addition,
historical problems with
discount
Consequently,
because
of
it is unlikely that most banks
estate brokerage,
home mortage loans through real estate brokers
see their referral business from outside
certainly
dramatically
drop
brokerage.
although
Therefore,
that
began
if they
to
would most
brokerage
offer
discount
seems
theory
traditional economic
offering real estate brokerage services
discount would be the best way to gain market share,
real
be
best
the
approach
for
the
at
a
offering
estate brokerage services at traditional pricing
to
In
banks that currently originate a significant number
addition,
suggests
would
business.
want to become involved in such a controversial
firms
and
property,
to
brokers.
are
of
brokers.
estate
commonly reported among discount
disparagement
real
damage
as death threats,
such
Incidents
In
[27].
FTC report cites numerous examples of discount
being harrassed by traditional real
brokers
as
brokers,
shown in a 1983 Federal Trade Commission report
is
a
to
offering services at a discount can lead
firm,
estate
brokerage
levels
firm
considering bank lease arrangements.
The
ability
to
hire
and
74
motivate
good
real
estate
is
salespeople
determining
firm.
probably
the
most
the success or failure of a real
In
fact,
demonstrated
research
that
by
factor
critical
Colwell
in
estate brokerage
and
Marshall
the most consistent factor in
[6]
determining
the market share per salesperson of listings and sales was the
number
of
salespeople
Research
that
licensed
with
the
hire
salespeople
firm.
indicates
the field of real estate brokerage
in
brokerage firm should attempt to
the
brokerage
experienced
who are capable of working in excess of 50
hours
In addition, it is advantageous to hire salespeople
per week.
experienced in
listing and selling higher-priced homes, since
they have a higher probability of being able to list and
be some resistance from agents that sell
might
there
However,
homes in the moderate and lower-price ranges.
sell
upper-bracket
homes to dealing with moderate income buyers and sellers.
Traditionally,
good
salespeople
real estate brokerage firms have
upon their reputation
based
amount
firm,
the
"payout"
is
recognition
of market exposure and name
variety
of
services the
service,
the size of the firm,
their physical location and facilities,
the
for
attracted
firm
offers,
of
the
and
the
or percentage of the total commission that the
firm
a
real
factor, since
real
willing to pay to the salesperson.
is
The payout to
a very important
estate
salesperson
estate
salespeople usually do not receive any base salary and
are compensated solely on the basis of commission income.
Over the past 15 years,
been used successfully
the issue of commission payout has
to build
75
one of the
nation's largest
RE/MAX International. Founded in
real estate brokerage firms,
1973 by two real estate entrepreneurs,
RE/MAX
International
experienced,
of
payout
full-time
the
based on the
is
Dave and Gail Liniger,
concept
of
real estate salespeople
commissions they earn.
In
offering
100
1986
percent
RE/MAX
had
already become the third largest real estate brokerage firm in
the
States with $815.9 million in gross revenues
United
RE/MAX sells franchises to local real
11,923 salespeople [26].
by
salespeople
estate
offering
100
percent
broker to cover basic office
the
been
excess of 40 percent per year since
of
monthly
fixed
and
The phenomenal growth of RE/MAX,
profit.
in
real
payout
expenses
broker's
in
top
brokers attract
to salespeople who agree to pay a
commissions
to
local
The
territories.
assigned
fee
offices
brokers who operate real estate brokerage
estate
and
the
which has
its
inception,
supports the belief that good salespeople are highly sensitive
to the percentage payout of commission income.
Consequently,
or existing real estate brokerage firms
new
contemplating
offering their services in bank branches should
consider
possibility
the
salespeople
However,
a
result
with
attracting
100 percent
a
real
estate
payout
option.
top
commission
for sales leads and listing leads which originate as
of
salesperson
the bank lease
receiving
subtracted
from
applicable
amount
Real
of
estate
gross
100
arrangement,
the
percent payout would
commissions (sufficient
real
estate
have
to
pay
of percentage lease payment to the
brokerage firms should also consider
76
funds
that
the
bank).
bank
lease
arrangements
salespeople
the
themselves may attract good
to Join the firm.
the higher
that
the
it appears that brokerage firms
should attempt to hire as many salespeople as possible.
77
estate
Since research has shown
more real estate salespeople a firm has,
market share per salesperson,
real
CHAPTER FIVE:
The
United
estate brokerage industry in the
real
States
brokerage
15,000 active real estate
approximately
comprises
firms,
SUMMARY AND CONCLUSIONS
and generated an estimated commission revenue in
1986
of $30 billion. Of the $30 billion in 1986 commission revenue,
approximately
83% was generated from residential real
transactions.
Although most of the brokerage firms tend to be
small-scale
larger
real
estate
firms
brokerage
provide
expanded
their
many
Today,
mortgage
the
salespeople,
have
integration.
searches,
title
services,
ten
firms
brokerage
through vertical
operations
estate
with less than
companies
estate
loan
real
origination
and
insurance,
appraisals,
settlement services.
While
financial service providers such as savings
some
loans have been able to vertically integrate by offering
estate
law
brokerage services,
However,
banks
services
to
real
most banks have been prevented by
owning and operating real estate
from
&
are permitted to offer real estate
lease
arrangement with a non-affiliated real estate brokerage
firm.
This
paper
feasibility,
through
advantages,
real
the
and
real
residential
disadvantages
estate brokerage firm
commercial
contractual
legally
examined
estate
industry in the United States and has analyzed
brokerage
existing
has
a
brokerage
percentage
their
client base through
firms.
brokerage
of
offering
its
banks via a percentage lease
arrangement.
The
or
new
or
services
similar
analysis indicates that it
permissible for banks to offer real estate
78
a
the
is
brokerage
that
provided
arrangement,
to their clients via a lease
services
adhere to certain guidelines established
banks
by
the
regulators.
For the real estate brokerage firm considering offering its
services through banks via a lease arrangement,
advantages appear to be increased market
image,
increased credibility.
and
visibility, enhanced
Experiences of savings
which have offered real estate brokerage indicate
loans
of walk-in referral business from a
amount
the
the principal
real
&
that
estate
brokerage operation located in branches is negligible.
can benefit from the lease arrangement by
Banks
rental income from the brokerage firm,
as well as potentially
of home mortgage
increasing their volume
receiving
originations.
loan
the principal drawback, as seen from the perspective
However,
that offering real estate brokerage
of the banks surveyed, is
their relationships
damage
may
services
real
with
brokerage firms which currently refer mortgage loan
In a survey,
estate
business.
only 2 of 27 (7.4 percent) bank officials stated
that they may be interested in offering real estate brokerage.
an estimate of the potential market for real
Given
brokerage
services
percent of U.S.
1985
data),
it
brokerage
estate
in
banks
and savings &
estate
concept
of
18.5
households (14.7 million households based
that the concept of
appears
in
services
bank
branches
feasible but also potentially profitable.
real
loans
estate
brokerage
firm
should
on
offering
real
not
only
is
The new or existing
certainly
explore
of offering brokerage services in bank branches as
means of increasing both market share and profits.
79
the
a
APPENDIX:
OPINION LETTERS FROM BANK REGULATORS
80
Comptroller of the Currency
Administrator of National Banks
Washington, D. C. 20219
November 17,
1987
Larry E. Hinman, President
Developers Capital Corporation
8 Old Baltimore Court
20832
Olney, Maryland
Dear Mr. Hinman:
This is in response to your letter dated July 28, 1987,
proposing that your company, Developers Capital Corporation
("Corporation"), lease space in the branch offices of national
banks to offer the Corporation's residential and commercial
real estate brokerage and consulting services.
In some cases,
rent would be paid on the basis of a percentage of the revenue
generated from the Corporation's business in the leased space.
Based on the facts and conditions described below, I have no
objection to your proposal.
Summary of Proposal
The Corporation, as mentioned, would lease space on a
percentage basis from national banks to offer the Corporation's
real estate consulting and brokerage services. The Corporation
proposes that its real estate brokerage services be made
available to the banks as well as the public. Thus, a bank
would have the option of disposing of real estate acquired
through foreclosure and the like by using the Corporation's
brokerage services.
Your proposal is accompanied by representations that the
following conditions would apply. First, none of the lessor
banks or their officers, directors, employees or affiliates
would hold any stock in the Corporation. Second, the described
relationships between the banks and the Corporation would be at
arms-length, and there would be no arrangements tying a bank's
extension of credit to a customer's acceptance of a product or
81
- 2 -
service from the Corporation. Third, the real estate brokerage
activities of the Corporation would be appropriately identified
as being separate from the banks' business.
You also indicate that there would be no relationships between
the banks and the Corporation other than those described. I
have therefore assumed that the Corporation would not employ
bank personnel to provide or manage the provision of the
Corporation's products and services.
Finally, you represent that the Corporation's activities would
be conducted in full compliance with applicable state law,
including the regulations promulgated by the various state real
estate commissions.
Discussion
Permissibility of Proposed Bank Activities
It is well established that national banks may lease their
excess office space to others pursuant to 12 U.S.C. S§29 and
24(Seventh).
See Wirtz v. First National Bank & Trust Co., 365
F.2d 641, 644 (10th Cir. 1966); Wingert v. First National Bank,
175 F. 739, 741 (4th Cir. 1909), appeal dismissed 223 U.S. 670
(1912); Brown v. Schleier, 118 F. 981, 984 (8th Cir. 1902),
aff'd
194 U.S. 18 (1904).
Incidental to a national bank's
power to lease its
office space is the authority to establish
appropriate lease terms by bargaining for whatever terms are
usual and customary in the leasing of commercial office space.
Sgg Interpretive Letter 274 from Brian Smith, Chief Counsel
(Dec. 2, 1983), reprinted in Fed. Banking L. Rep (CCH)
185,438. As a result, the Office found in Interpretive Letter
274 that a national bank may lease excess space in its lobby to
an insurance agent, and receive rent in the form of a
percentage of the insurance agent's volume of sales or gross
income from the rented lobby space.
Emm id.
Because national banks merely exercise their leasing authority
rather than engage in the business of a given tenant by leasing
excess space on a percentage basis, Interpretive Letter 274
established that banks' authority to enter into percentage
leases applies regardless of the nature of the tenant's
business. / Accord Letter from Peter Liebesman, Assistant
A/ Since the lessee described by Interpretive Letter 274 was
not a bank employee and did not propose to employ bank
employees to sell the lessee's products and services, the
Interpretive Letter did not address the circumstances under
which a national bank could share its employees with a party
renting lobby space on a percentage basis.
Similarly, I need
not address this matter here since you have not proposed that
the Corporation employ bank personnel.
82
-
3 -
Director, Legal Advisory Services Division (Nov. 20, 1984)
(LASD Precedent File No. 42 for 12 U.S.C. §24(Seventh)).
Therefore, national banks may lease excess office space to real
estate brokers and consultants, such as the Corporation, on a
percentage basis pursuant to 12 U.S.C. $$24(Seventh) and 29.
Banks' authority to lease on a percentage basis is conditioned
on their observance of the legal and prudential safeguards
enumerated by Interpretive Letter 274, which will be summarized
here. First, banks cannot enter into a partnership with the
tenant. 2 / State law generally negates any inference of a
partnership from percentage leasing; however, such an inference
could arise in cases where the lease percentage is unusually
high or the lessor exercises management control over the
lessee.
ee Uniform Partnership Act § 7(4)(b); Friedman on
Banks and their counsel should
Leases S 6.101 (2d ed. 1983).
accordingly review the lease terms under state law to ensure
that no partnership would be created. In addition,
Interpretive Letter 274 advises lessor banks to include a lease
clause expressly precluding the existence of a partnership, and
for safety and soundness reasons, a lease clause expressly
precluding any bank liability for a tenant's debts and other
liabilities.
ee Interpretive Letter 274, supra..
Second, banks should assure that the tenants' business is
appropriately identified as a separate business through the use
of signs, labeling, and the like so that the public will
understand it is not obtaining the tenant's products and
Be id.
services from the banks.
Third, any bank advertising or literature that mentions the
tenant should make clear that the tenant's business is
independently owned and operated.
fe
id.
Fourth, the relationships between banks and a tenant must be at
arms-length, and banks must avoid arrangements tying extensions
of credit to the sale of the tenant's products and services.
Fifth, bank management should consider any security problems
that may arise if the public is given access to the tenants'
business during hours when banking services are not available.
See id.
Sixth, Interpretive Letter 274 advised against leasing retail
banking or lobby space to bank employees, officers, directors,
principal shareholders, or their immediate families for the
operation of their businesses due to the conflict of interest,
self-dealing, and tying questions that leases to insider-owned
businesses could raise.
5g
id.
2/ Banks are generally prohibited by 12 U.S.C. §24(Seventh)
from entering general partnerships.
ee Merchants National
Bank v, Wehrmann, 202 U.S. 295 (1906).
83
- 4
Your proposal to lease space from national banks is accompanied
by representations that comport with the second, fourth, and
fifth conditions described above. Therefore, banks must also
adhere to the remaining conditions above to satisfy the legal
and prudential concerns described in Interpretive Letter 274.
Finally, the limitations of Interpretive Letter 274 do not
generally preclude a bank from having access to the services
offered by its tenant to the public. In my opinion, such
non-leasing transactions between a bank and its tenant do not
give cause for objection where the bank is authorized to engage
in the transactions and the transactions are conducted on an
arms-length basis.
In this case, the Corporation would make
its real estate brokerage services available to banks as well
as the public, and therefore give banks the option of
purchasing and selling real estate through the Corporation.
Under 12 U.S.C. S29, national banks are expressly authorized to
purchase and convey real estate for the purposes described by
the statute. Thus, banks' use of the Corporation's brokerage
services to purchase and convey real estate for the purposes
authorized by 12 U.S.C. S29 would not give cause for objection
if done on an arms-length basis. You represent in your letter
that all transactions between banks and the Corporation would
be at arms-length. As a result, I assume that any brokerage
transactions would be at arms-length, and in particular, that
banks would not be obligated in any manner to use the
Corporation's brokerage services.
Applicability of Real Estate Moratorium of CEBA 9 201(b)(6)
Section 201(b)(6) of the Competitive Equality Banking Act of
1987 ("CEBA") precludes the Office from issuing a rule,
regulation, or order that would have the effect of increasing
the real estate powers of banks. This letter does not have the
effect of increasing banks' real estate powers since the letter
addresses an existing real estate power:
the power of banks to
lease their excess office space pursuant to 12 U.S.C.
SS24(Seventh) and 29.
The subject bank power was recognized by
the courts and specifically applied to percentage leases by
Interpretive Letter 274 prior to the moratorium period.
Similarly, this letter's discussion of banks' use of real
estate brokerage services also addresses an existing real
estate power--the express power of banks to purchase and convey
real estate for the purposes authorized by 12 U.S.C. S29--and
consequently, does not have the effect of increasing banks'
real estate powers. Therefore, the real estate moratorium of
CEBA section 201(b)(6) could not apply here.
84
- 5 -
Conclusion
In my opinion, your proposal does not give cause for objection
if implemented in accordance with the facts and conditions
described here.
Sincerely,
Jonathan Rushdoony
Senior Attorney
Legal Advisory Services Division
cc:
William Glidden, Assistant Director, LASD
85
FDIC
Federal Deposit Insurance Corporation
Washington. DC 20429
Legal Division
May 22, 1987
Mr. Larry E. Hinman
President
Developers Capital Corporation
8 Old Baltimore Court
Olney, Maryland
20832
Dear Mr. Hinman
By letter
of May 12,
1987, you requested the FDIC's opinion on whether
or not a particular program Developers Capital Corporation ("Developers")
intends to enter into with FDIC state chartered insured nonmember banks
complies with any applicable federal statutes and regulations. According
to your letter, Developers offers general real estate brokerage and
consulting services.
Developers proposes to enter into arrangements
with state chartered insured nonmember banks whereby it will rent space
in bank branches which would be used to offer residential and commercial
real estate brokerage services to bank customers.
The lease terms
may be calculated as a percentage of revenue generated from the brokerage
services during the previous month.
The banks involved may promote
Developers'
brokerage services by distributing literature
to
their
customers or by placing signs or posters in branch offices.
Neither
the banks, their officers, nor their directors will have any equity
interest in Developers but the banks may from time to time utilize
Developers' services to liquidate portfolio properties or DPC property.
Please be advised that the FDIC's current regulations do not prohibit
an insured nonmember bank from leasing space in its branch offices
to a real estate brokerage firm.
Whether or not a bank may do so is
therefore dependent upon state law.
The FDIC would, of course, at
a minimum, evaluate such leasing arrangements for conformence with
safe and sound banking practices.
Each situation would be evaluated
on the basis of the particular facts and in view of applicable laws
and regulations of the state in which the bank is located.
Generally
speaking, the utilization of bank space, equipment and personnel in
connection with the operation of any business which is not an intergral
part of the bank would require reimbursement to the bank.
Full details
regarding
the
shareholders
lease
arrangement
should
and of course be approved by
86
be
disclosed
to
the
bank's
the bank's board of directors.
What constitutes adequate compensation will vary from circumstance
The FDIC would be concerned that customers of the
to circumstance.
leases space in a bank's branch office are fully
that
agency
brokerage
dealing with a separate and completely independent
are
they
that
apprised
More over, as the relationship is one which
entity from the bank.
is frought with possible conflicts of interest, the arrangement would
probably be the subject of careful review during an examination of
the bank.
We hope that the above is responsive to your request.
Sincerely,
V
Pamela E.F. LeCren
Senior Attorney
87
.
.....
STATE OF MARYLAND
WILLIAM DONALD SCHAEFERSTEBAKCMSSO
GovernorSTATE
Governor
of Licensing and Regulation
- D A SDepartment
BANK COMMISSIONERR
THE BROKERAGE - SUITE 800
34 MARKET PLACE
BALTIMORE, MARYLAND 301333626
21202-4076
313366
WILLIAM A. FOGLE, JR.
Secretary
MerarGI H4 MULLER
MARGIE H. MULLER
Bank Commissioner
May 22, 1987
Mr. Larry E. Hinman, President
Developers Capital Corporation
8 Old Baltimore Court
Olney, Maryland 20832
Dear Mr. Hinman:
In your letter,
This is in response to your letter to me dated May 12, 1987.
you request an opinion that your company,Developers Capital Corporation
("DCC"), may lease space in banks located in the State of Maryland. For
the reasons stated herein, and also upon the terms and restrictions stated
herein, it is my opinion that this activity is permissible under Maryland
law.
As I understand the facts, DCC is a general real estate brokerage firm. DCC
would lease space in branch offices of banks and offer residential and
commercial real estate brokerage services with the customers of the bank.
The rent paid would be a percentage of revenue generated from the services.
The banks may assist DCC by distributing literature to their client base or
by placings signs or posters in the branches. The banks, their officers,
DCC
in DCC.
will not have an equity interest
directors,. or other affiliates
as
a
estate
held
bank's
real
may be retained by a bank in regard to that
result of foreclosures. These transactions constitute the full relationship
of DCC with the banks.
There are no specific provisions in Maryland law that concern the leasing
of space by a bank to a real estate brokerage concern. However, I may
approve activities for Maryland banks that are permissible for national
banking associations pursuant to Maryland Financial Institutions Article,
National banks have been permitted to lease space in their offices
55-504(a).
and branches to both insurance agents and travel agencies under percentage
See OCC Interpretative Letter No. 274, Fed. Banking L. Rep. (CCH)
leases.
185,438; and OCC Interpretative Letter No. 342, Fed. Banking L. Rep. (CCH)
185,512. See also Wirtz v. First National Bank & Trust Co., 365 F.2d 641,
incidental to bank business
The rationale is that it is
(10th Cir. 1966)
88
OUTSIDE BALT1MORE METRO AREA, TOLL FREE 1-800-492-7521
TTY FOR DEAF, BALTIMORE METRO AREA 383-7555, D.C. METRO AREA 565-0451
Mr. Larry E. Hinman
May 22, 1987
Page 2
for a bank to own its premises and lease space therein. That rationale is
applicable here subject to the restrictions set out below.
National banks are permitted to lease space in bank buildings with certain
restrictions. These restrictions are that:
(1)
The non-banking business should be appropriately and
separately identified from the banking business;
(2)
The relationship between the bank and the leasing entity
should be arm's length and the bank must insure that
there are no tying arrangements;
(3)
The bank should consider security problems if the tenant
requires after-banking hours entrance either by customers
or employees; and
(4)
The bank should avoid leasing any space to employees,
directors, or officers of the bank or entities controlled
by such people.
Since these requirements have been imposed upon national banks, it is my
opinion that these restrictions are also applicable to state-chartered banks.
Consequently, it is my opinion that the activity as you propose is permissible
If you have
for state-cnartered banks subject to the above restrictions.
any questions, please call Assistant Attorney General Frank C. Bonaventure, Jr.,
Chief of Financial Regulations and Advice, at (301) 333-4214.
Sincerely,
L/
Margie H. Muller
Bank Commissioner
MHM:pjp
cc:
Frank C. Bonaventure
89
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