Note: I previously posted an explanation of this reposting of a series of columns I did for Inman News back in 2006. This is the third of three. Read the first and second.

“Facts are the enemy of truth.” – Miguel de Cervantes (1547-1616)

For Cervantes’ Don Quixote, facts were something to be distrusted. That’s fine for a mystical idealist, but most of us in the real estate industry are inclined to realism. And realism works best with facts — which are the stock-in-trade of MLSs as we now know them.

The real core MLS service
I have spoken to business and community groups about how MLS works, and almost invariably the audience has questions about things like, “Are all the listings there?” and “How often are they updated?” Then I go on to explain the interbroker compensation mechanism in MLS, and I get questions like, “Are all the listings there?” and “How often are they updated?” Those folks in Minnesota who do not have real estate licensees seem to have no understanding of the “core purpose” of the MLS — interbroker compensation. Based on my anecdotal experience, I believe the consumer’s perception of the value of a broker’s membership in MLS has everything to do with listing data and little to do with interbroker compensation.

It’s also interesting to note that folks who are hell-bent on pirating data content from MLSs do not appear the least bit interested in interbroker compensation. I suggest that the real core service, the reason for being, for each MLS is quality data content.

That data thing is tricky, though. It’s important to have data content that is complete, current and accurate. MLSs affiliated with the National Association of Realtors typically impose certain requirements on brokers to ensure these objectives are met. Brokers are required to submit all their listings that meet certain requirements. Brokers must submit listings soon after they are taken and must advise the service of status changes promptly. Brokers are subject to fines and discipline if they report inaccurate and incomplete information to the service. And if brokers do not meet these standards, they lose MLS participation.

What brokers and the broader real estate market really need from MLS can be summed up in three objectives:

  1. Provide a place for the brokerage to put its listings where everyone interested in buying can find them.
  2. Provide a place for the brokerage to look for listings for its buyers that has everything (or nearly everything) available on the market.
  3. Provide comprehensive and very current information about sales and expired listing information to support valuations of properties, whether the brokerage or appraiser is preparing a CMA for a prospective seller, an opinion about a listing’s price for a prospective buyer, or an appraisal of the property for a mortgage or other purpose.

None of these things has anything to do with interbroker compensation. In fact, MLSs could continue providing every service of significance they currently provide without addressing compensation at all. Without the offer of compensation, however, NAR would not refer to them as MLSs — to such organizations, NAR might say, “You are dead to me.”

New models for the successors to MLSs
In a world without offers of compensation through MLS, future listing services (FLSs) could organize their efforts in a dozen different ways. Just to start the discussion rolling, I’ve provided one here. I don’t recommend this approach, and I recognize it has a number of potential problems and weaknesses. But I suspect readers will find as many solutions as they will problems and will probably offer more compelling potential models as well.

What if an FLS merely viewed itself as an aggregator and distributor of listings on behalf of listing brokers? Let’s pretend such an organization exists today in East Overshoe, Minn. What does it look like? FLS does not have participants; any broker licensed in Minnesota can put any listing in the area surrounding East Overshoe into the service. FLS has quality control rules: listing information must be accurate and listing status must be updated promptly upon any change (from active to pending sale, for example).

FLS charges no periodic fees to listing brokers, but it does charge the listing brokerage a significant fee for each listing the brokerage puts into FLS. If, upon the sale or expiration of the listing, the listing broker goes into the system and provides accurate information about the listing’s disposition (did it expire? was it sold? and if so, for what price and on what terms?), FLS refunds to the listing broker 90 percent of that listing fee. FLS is essentially paying listing brokers for timely off-market information.
FLS monitors the accuracy of active and off-market information listing brokers provide. By automated means, it checks listing information against public record information, requiring brokers to fix or clarify discrepancies; it checks public records regarding sales to make sure brokers are accurately reporting off-markets. (Because the counties around East Overshoe are slow to publish these records, FLS looks back a few months to compare sales information reported in the service with that reported by the counties.) Listing brokers that put inaccurate information in the service must pay FLS an administrative fee (something like a fine) to cover quality control costs. If a listing brokerage fails to pay the fee or continues to submit inaccurate information, FLS refuses to accept further listings from it.

Incidentally, this is why FLS accepts listings only from brokers and not from consumers: Brokers will be repeat customers in the short-term, and as a result will be sensitive to losing their entry privileges in FLS. If a consumer could input her own listing, FLS would have no leverage over the consumer in its quality control efforts.

The result: FLS has a pretty darned good database of active and off-market listing formation, and the cost to listing brokers is just quite small per listing, provided they provide accurate off-market information.

But what about users of this data? FLS allows anyone, real estate brokers and licensees, as well as the public, to view all active listings free of charge on FLS’s public Web site. Visitors must register by giving a valid e-mail address and “sign” an agreement promising not to use the listing content for any but the specified purposes. This permits brokers working with buyers, including exclusive buyer agents, as well as interested consumers, to see everything FLS has currently for sale.

FLS offers a subscription service, paid quarterly in advance, for anyone wishing to view and use the off-market information for valuation purposes. It provides the service to anyone, including consumers and non-brokerage businesses, willing to pay for it. It strictly enforces a policy prohibiting the sharing of passwords by requiring strong authentication (in this case, a key fob that generates a login code for each session). FLS charges $150 per quarter per login ID for this service. [UPDATE 12/2010: I think there might be better choices for strong authentication now…]

Any other use of the listing broker’s data requires listing broker permission. Brokers and other businesses (including folks like Trulia, Oodle, LendingTree, Realtor.com, etc.) can obtain active listing data for use on their consumer Web sites. Each entity that wants to obtain active listing data for display on its own Web site signs up with FLS, paying a registration fee and agreeing not to use the data except for the specified purposes and not to share the data in bulk with any third party. It also agrees to update the data on its site from FLS at least daily; this helps to prevent the problem in the marketplace of very stale data. (I recently found listings on Yahoo Real Estate showing as active that had expired in my client MLS four months earlier.)

All the data-using entities appear on a list in the FLS system. The principal broker in each listing firm can pick and choose which registered recipients receive that brokerage’s listings, checking a box for each entity she wants to receive the data. Or, she can check one of the boxes at the top, which say, “Send to all” and “Send to none.”

Each day, registered data recipients receive a feed of the listings of brokers who have authorized release of data to them. Their display of the listings is subject to very rudimentary rules, the principal one being that the listing broker must be identified on each listing. FLS does not have the sort of detailed regulations found in the current IDX programs. If a broker does not like the way a data recipient is using her data, she can complain to the recipient, and if dissatisfied, she can stop sending her listings to that recipient.

Most brokers in FLS do not offer compensation to cooperating brokers, requiring them to obtain their own compensation from their buyers. Those listing brokers who offer compensation do so by extending offers through the mail, by fax or via e-mail to those cooperating brokers who seek compensation.

The FLS model results in the following benefits to brokers and consumers:

  • The only rules necessary are those to ensure the data is accurate and to ensure that listing brokers’ listings are used in ways that they expect and understand. No more MLS rules based on an NAR model that is more than a dozen pages long.
  • The listing broker controls where her listing goes.
  • There is no discrimination of any kind based on business model. Anyone who will pay for a data feed and agree to basic usage and quality control requirements can display data on their Web sites. They need to maintain good relations with listing brokers, however, to ensure they do not lose listing content.
  • Brokers and others willing to pay for it have access to excellent off-market information.
  • National and regional Web sites operated by third parties will have much more accurate and up-to-date information about listings. Obviously, this is good for consumers. But based on the anger with which listing brokers complain to me about non-current data on third-party Web sites, I think listing brokers will like it, too.

There are problems with the FLS model, and readers may post scathing analyses of it. But remember, the FLS model isn’t the only possibility: It is listing-broker-centric, but I think we can conceive of models that are buyer-broker-centric or even consumer-centric.

Conclusion
Interbroker compensation makes little if any sense. Getting rid of it would mean the end of MLS as we know it, but it solves a series of problems and may also open the door for more innovative brokerage and listing service models.

[UPDATE 1/2011: Well, as I look back over my hypothetical FLS, I’m having trouble remembering what I thought the problems with it would be. I’m sure they’ll come back to me. You can help by reminding me… Note, too, that the advent of RPR puts a new spin on this whole discussion, one I could not have foreseen in August 2006.]

Reader Interactions

Comments

  1. Interesting Thought Experiment – thanks for sharing.

    As I read along, I was trying to understand why change is necessary – what is the compelling reason that would force change and make for a better universe of property buying and selling.

    Todays rules do not seem that unreasonable or onerous – I would say – only 12 pages – thats a basic preamble to most multi-party

  2. hmmmm Well now…right off the bat I see a HUGE one. #1 "Listing brokers that put inaccurate information in the service must pay FLS an administrative fee (something like a fine) to cover quality control costs. If a listing brokerage fails to pay the fee or continues to submit inaccurate information, FLS refuses to accept further listings from it."

    Brian… That statement,

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