NAR & DOJ – Russ & Russell Part 2

by Russell Shaw

Mega-Producing Realtor

Author website

Russ Cofano responded:

Russell,

I appreciate the opportunity to chat with you on this subject.

First, my comments should not be taken to mean that I support the DOJ’s position and hope that they win. Nor do I necessarily support the NAR position with its rulemaking. As I have said before, I do support innovation and think that brokers need to spend more time finding new ways to deliver value to consumers.

Second, let’s define a couple of terms.

“Broker” means any person or firm that has been licensed as a real estate broker under applicable state law.

“Traditional Broker” means a Broker who either directly or through agents, actually assists buyers and seller with buying or selling a home.

Third, this is a VERY long post and I apologize in advance as I usually don’t like posts of this length. Proceed with caution and a good cup of coffee….

Regarding the definition of MLS Participant, you said:

“And that is the most logical definition possible under the circumstances. It is important to keep in mind what the MLS actually IS – a communication system set up by brokers for offering and accepting offers of compensation…..to fail to define a real estate broker (the only people ever originally intended to have access to the MLS) any other way than someone who is actively working with buyers and sellers makes no sense.”

Here is the problem from the DOJ’s perspective. Before this rule change, a licensed Broker could join the MLS and open up a store front with no intent of helping a seller sell or a buyer buy. They could call it “Referral Realty” and have full access to the MLS database for purposes of cultivating potential buyers to refer on to “traditional” brokers in exchange for a referral fee. This is allowed by most state license laws. In fact, this type of situation occurs today in some areas where retiring licensee hang their licenses with a Broker in hopes of leveraging their referral base despite having no intent to actually assist a buyer or seller. The problem with this business model is that the referral business is limited to the personal sphere of the referring Broker. Because of this limitation, the impact on market share of Traditional Brokers is quite limited. Nobody worries. So, to your point, it DID make sense to define MLS Participant broadly as any licensed Broker…..BEFORE the Internet.

Enter the Internet. Referral Realty now has a much larger potential sphere. It is the world. Traditional Brokers (i.e. NAR) get scared that this could really impact how they do business. So, instead of innovating new ways to attract eyeballs of consumers before they get to Referral Realty, they create a new MLS rule. That rule, the VOW Policy, says that each Traditional Broker can withhold their listings from display on Referral Realty’s website. Based on the new rule, Referral Realty will be back to where it was before the Internet. Nobody worries.

The DOJ then cries foul. Traditional Brokers then amend the rule to make it look more appropriate (blanket opt-out) but at the same time, change the rule that would even allow Referral Realty the ability to join the MLS.

The variable in this equation is not Referral Realty’s business model. Instead, it is the potential impact Referral Realty could have on Traditional Brokers due almost exclusively to the Internet. The industry needs to answer the question: “if it made “sense” before, why not now?”

You also said “If an “innovative broker” isn’t actively working with buyers or sellers what kind of meaningful assistance could they possibly provide to consumers?”

According to the DOJ, the answer to that question is up to consumers, not the industry. If there is no meaningful assistance, no value proposition, no consumer benefit, Referral Realty has no business model and there is nothing for Traditional Brokers to worry about. If, however, consumers do see some value in Referral Realty, the DOJ believes that they should be provided access to MLS data just like any other licensed Broker.

You also said, “The MLS isn’t (like Microsoft) hidden code. It is a distribution system – a distribution system for offers of compensation to other agents for bringing me an offer acceptable to my seller. Period. The fact that some other organization or company can not replicate it does not give the federal government the right to “nationalize” it for them. The MLS is really more analogous to Wal-Mart and their incredibly efficient distribution system. Few rational people would argue that Wal-Mart should truck freight in for their competitors for free. Or worse, truck it in and just give the merchandise to the inefficient business (their acquisition cost would be zero) so they could “help consumers and make a profit”. Yet that is what these “non-traditional brokers” are asking the DOJ to do.”

The Microsoft case was not about hidden code. It was ALL about distribution. MS owned a monopoly on the PC desktop and was requiring PC manufacturers to bundle IE with their computers that they shipped. By doing so, IE became the de facto Internet browser which made it difficult if not impossible for others (e.g. Netscape) to compete. The DOJ was not saying that IE was bad or Netscape was good. Instead, they were saying let the consumer make the choice. By allowing MS to bundle IE with Windows PCs, there was no practical choice. By not allowing Referral Realty to join the MLS and have access to MLS data, the DOJ is saying that, like MS, consumers have no choice to determine if they like the Referral Realty business proposition. Microsoft did not like this argument and it makes sense that Traditional Brokers don’t like this same argument applied to their sandbox.

Your analogy to Wal*Mart is flawed. Wal*Mart, for all its superiority in its logistics, does not own a monopoly on building a great distribution system. Without making this more complicated, there is really nothing (except money and hiring good logistics experts) that prohibits one from competing with Wal*Mart. On the other hand, if Wal*Mart was not a single entity but rather a collection of competitors (like the MLS) that got together to build a powerful distribution system and then refused to let other retailers be a part of that system in order to preserve traditional business practices, the DOJ would be quite interested in investigating this entity. You might want to read my analysis on the Visa case to provide some perspective on this point.

Lastly, you said, “I believe that if the individuals involved at the DOJ look at this issue as it really is, and if they truly have the welfare of the American public in mind, they will drop this litigation. Even if they “win” the ultimate outcome would not be what they are attempting to achieve anyway. Should the DOJ prevail a far more likely scenario would be NO listings available to the public via an IDX feed of the MLS. None.”

I agree that there is risk on both sides of this case for consumers. The DOJ cannot compel big brokers to be a member of the MLS and there is always the potential for a mass exodus from the MLS if the Traditional Brokers don’t like the rules. I agree that would be very bad for consumers. My guess is that the DOJ does not think it will happen as the cost and disruption to the industry would be massive and for most brokers, not economically viable. I also don’t think that under any set of circumstances, brokers will withhold listing information from the public. It is to valuable for attracting eyeballs.

Russell, I don’t know how this will all turn out. I do think, however, that we will be talking about it for some time to come.

Cheers

-(the other) Russ

Russ,

Likewise, I appreciate the opportunity, as well. Truth is, I’ve been a fan of yours ever since I read this – I think it was on Inman News. The only issue there we may disagree on is if it would be “better” if NAR settled or not. I totally agree that if settled, everyone would know just what they had agreed to vs. litigation where the outcome is (almost always) uncertain. I am not a regular lawyer, but I have seen the future: it is lot like the past, only longer.

Either NAR will ultimately prevail in court or they won’t. If they do, then “The new rule defines an MLS Participant as a broker who makes offers of compensation to and accepts such offers from other brokers” will stand. If NAR should lose, then there may be some other definition for an MLS participant forced upon NAR. Should that come to pass and depending on how restrictive or outlandish that definition might be, would determine the future of the MLS. My main point in my last writings on this subject wasn’t to make some veiled threat of “no more MLS” if NAR does not get what it wants in court. I believe that the entire problem (the fact of the litigation occurring at all) is based on a misunderstanding: the meaning of the term “MLS”. In virtually everything you’ve written and everything I’ve seen from the DOJ – all of the legal precedents involved – the definition for MLS being used does not even seem to consider that it is a BROKER TO BROKER OFFERING OF COMMISSIONS. Period.

One of the great dumb philosphy questions is, “If a tree falls in a forest and there’s no one there to hear it, does it make a sound?” What makes the question dumb is the concept of “sound” being used in the same sentence with two completely different meanings. One is the experience of hearing and the other is sound waves.

All of the DOJ “definitions” are only from the “market power” anti-trust perspective. In its original “pure form” the MLS was only a way to offer compensation to other brokers. When I started the MLS book didn’t even have photos, that “breakthrough” came later. LOL. I believe that NAR (along with the various and numerous Realtor associations) consider the MLS valuable enough to protect it. I was predicting that a “DOJ victory” would not deliver anything even close to the outcome they had in mind. In the not too distant past – for a company or individual agent – Realtor.com was the only possible way to get your listings “out there”. That isn’t true anymore. There are now dozens of sites that allow listings to be uploaded (many for free) that then propagate those listings to other sites that display them. For example, here is a partial list of where my listings show up.

What I believe will happen if the “DOJ wins” is the DOJ loses, right along with everyone else. I believe that the IDX feeds that got all this started in the first place will ultimately be limited to each broker displaying just their own listings. The sites that allow FTP mass uploading will wind up with a LOT of listings to display! The definition of what the MLS is will be become strictly enforced in order to preserve it. The other possible scenario would be for each local MLS to break off from the NAR and possibly wind up broker owned – again, with a strictly broker to broker compensation as it’s basis. Either way, I don’t see the DOJ “winning”. And, for the record, I’m glad the NAR is taking the position of not backing down on this issue.

You also said “If an “innovative broker” isn’t actively working with buyers or sellers what kind of meaningful assistance could they possibly provide to consumers?”

According to the DOJ, the answer to that question is up to consumers, not the industry. If there is no meaningful assistance, no value proposition, no consumer benefit, Referral Realty has no business model and there is nothing for Traditional Brokers to worry about. If, however, consumers do see some value in Referral Realty, the DOJ believes that they should be provided access to MLS data just like any other licensed Broker.

Consumers aren’t ever going to “see value” in Referral Realty. The largest company that would push this idea would be Yahoo. They are not “helping consumers” they are attempting to do nothing (provide NO service) and yet take a slice of the pie. The people they would be “helping” wouldn’t usually even know that “Yahoo helped them” or was getting paid for “helping them”, or that the agent who got the referral was going to be VERY unlikely to further reduce or negotiate his commission, due to “Yahoo having helped them so much”. I fully understand that this flies in the face of the DOJ “thinking” on this point. Oh well.

When some Realtor retired and gave out referrals for a while there was seldom much impact on the market. The internet changed the playing field dramatically. This is why I am in complete agreement with the NAR definition of an MLS participant. Listings are not something that just happen. They are the product of listing agents and brokers. How and where those listings get advertised and promoted is an individual broker decision – not some issue for the federal government to decree.

Your analogy to Wal*Mart is flawed.

I agree. I should have stayed on point. 🙂

I agree that there is risk on both sides of this case for consumers. The DOJ cannot compel big brokers to be a member of the MLS and there is always the potential for a mass exodus from the MLS if the Traditional Brokers don’t like the rules. I agree that would be very bad for consumers. My guess is that the DOJ does not think it will happen as the cost and disruption to the industry would be massive and for most brokers, not economically viable. I also don’t think that under any set of circumstances, brokers will withhold listing information from the public. It is to valuable for attracting eyeballs.

I totally agree that listing information won’t get withheld from consumers but I do believe that the two (up until now compatible definitions) of the MLS will become separated should the DOJ prevail. There would be the broker to broker MLS and quite apart from that would be a version where the DOJ / NAR – decision applied.

The future, according to some scientists, will be exactly like the past, only far more expensive. – John Sladek