The End of MLS as We Know it (Redux) - Part II

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 second of three. Read first and third parts.


"Lack of money is the root of all evil." - George Bernard Shaw (1856-1950)

Real estate brokers surely will not want to see the end of interbroker compensation if it means brokers will not be paid for providing services to buyers. The first order for one envisioning a world without MLS offers of compensation must therefore be making sure brokers get paid for their services. After we propose ways for that to happen, we'll talk about some of the advantages to the consumer of getting rid of the offer of compensation through MLS.

Interbroker compensation out of MLS
The problems of having interbroker compensation in MLS can be addressed simply by ridding the MLS of the offer of compensation. But some brokers will be unwilling to part with what has become an ingrained tradition. Removing compensation from MLS does not mean that brokers could no longer offer each other compensation. They could do so just as they please, by sending faxes or e-mails to brokers in their markets prior to doing business with them or at the time the cooperating broker asks to show the listing. They could even publish unilateral offers to compensate cooperating brokers on their Web sites.

The MLS offer of compensation arose at a time when e-mail and fax machines were unknown. Communicating an offer to compensate a cooperating broker in writing in those days meant hand delivery or reliance on the Postal Service. Now they can be transmitted nearly instantaneously.
What's more, the listing broker making the offer of compensation can control its offer in more detail than MLSs allow. Think back to Nifty Builders in part one of this series. They wanted cooperating brokers to do more than just show up at the first meeting with the buyer. Free from the MLS policies that prevent adding any conditions to performance as procuring cause, Nifty could offer other brokers compensation and spell out in clear terms what the cooperating brokers have to do to earn it. [UPDATE 12/2010: On the other hand, they might also offer poorly worded terms that result in compensation disputes later. Although "procuring cause of sale" is not an easy standard to apply for compensation, it is perhaps better understood than some of the terms that might be drafted by "amateur lawyers."]

Buyer brokers will want to control their compensation
The possibility that listing brokers will want to establish conditions on cooperating brokers' entitlement to compensation will engender a natural response: cooperating brokers will want to get paid by someone other than the listing broker. This will be just fine with listing brokers, who are likely to say, "Take it or leave it, but if you take it, you need to do the following things. Leave it, and I'll take care of those things myself."

But brokers working with buyers can take this further: they can charge what the market will bear for their services. For example, I knew a salesperson years ago who worked in a small, highly desirable neighborhood in St. Paul, Minn. He knew not just the housing stock, but all the residents. He often knew they were going to sell before they did. As a consequence, if you wanted to buy in that neighborhood, you needed to call him and get on his list so you could get a showing and make your offer the same day your dream house was listed (and usually before it ever appeared in MLS). Is that worth more to the buyer than 2.4 percent of the purchase price (the prevailing cooperating compensation in St. Paul at the time)? I suspect the answer is yes, but it was impractical for him to charge more than the prevailing rate because buyer/consumers were aware that the prevailing rate is what listing brokers were paying.

There may be a down side for brokers: I discussed this proposal before a group of brokers, and a very soft-spoken elderly woman commented, "But that will cause price competition for buyer brokers." Yes, probably it will. Many licensees, who expect the MLS to find homes for their buyers, will not get paid 3 percent (or even 2.4 percent or 2.1 percent) for the assistance they provide. Others, who assist buyers in complex situations, may be entitled to 3.5 percent or even 4 percent, or perhaps a retainer that is not conditional on a sale (e.g., $x to show up to 10 homes; $y to negotiate and close a purchase; etc.). [UPDATE 12/2010: I'm not sure this approach would work out very well; or should I say I'm not sure it did for one prominent online broker.]

The advent of price competition for buyer brokers will no doubt disturb some, but the flexibility afforded to those brokers may pay off in a substantial way. For example, much has been written about limited service listings, where the listing broker puts the listing in the MLS and does nothing else, for a low flat fee. Cooperating brokers express frustration about having to do additional work and assume additional risk, all without additional pay, when working for buyers in these transactions. But the same problem has existed for years with regard to for-sale-by-owner listings. If the buyer's broker gets paid by the buyer, she can specify varying compensation depending on the nature of the transaction. For example, "Buyer will pay broker a commission equal to 3 percent of the purchase price; but if buyer purchases a property from a seller who does not have brokerage representation during negotiations and closing, buyer will pay broker a commission equal to 4 percent of the purchase price."

What about this notion of the buyer paying?
It is widely believed that it is impractical or impossible for the buyer to pay her own broker at closing. A report published in spring 2006 discussing the future of MLS considered the idea of buyers paying their own brokers: "It is unlikely that this will happen unless HUD and Fannie Mae allow the buyer to finance the portion of the commission that the buyer would need to compensate their own agent."

In fact, HUD and Fannie Mae regard a commission paid by buyer to buyer's broker at closing as a valid closing cost. In other words, to the extent that closing costs can be financed, a buyer broker's fee can be financed as well. The traditional view is that the buyer borrows money to pay for the purchase price and comes to the closing with the closing costs in cash. Practically speaking now, buyers have the option to come with a piggyback loan ready to cover some of the down payment and closing costs in return for a second lien position on the property. There may even be tax advantages to this approach for the buyer.[UPDATE 12/2010: I suspect the piggyback loan may be a thing of the past. Does this kill my idea?]

Even if you are queasy about the buyer paying, the transaction can still fund the buyer broker's commission. The buyer merely seeks the necessary amount as a concession from the seller. Note that this is a request from the buyer that the seller cover some of buyer's closing costs. It is not a request from the buyer for the seller's broker to pay more than the published cooperating compensation to the buyer's broker; such a contract clause would likely run afoul of NAR's Code of Ethics. A seller concession to pay the buyer broker should be perfectly OK from the perspective of mortgage lenders and the secondary market. But the buyer broker had better have a buyer representation agreement first.

Brokers must have buyer representation agreements
In a world without interbroker compensation, the buyer's broker must look to the buyer for payment. And the only way to ensure the buyer will pay is to have a contract with her. Many states already require this, though the provisions appear to be honored more in the breach than the observance.
In addition to any provisions mandated by statute or rule, a buyer representation agreement should include the following:

• What the buyer's broker will be paid, along with circumstances that can cause that payment to be varied (e.g., transaction with an unrepresented seller).
• What the buyer's broker will do, stating with particularity what services the broker will offer. Most consumers don't know, and it will make it easier for the broker to get paid if it's laid out. Brokers can also take this opportunity to distinguish themselves from competitors.
• Permission from the buyer to seek payment from the seller, from the listing broker, and from anyone else who might be willing to pay.
• Clear explanation of how the brokerage firm will handle a dual agency, if one arises (and provided it is legal in the state). Some states mandate agency disclosure language for representation agreements.

If the broker is worried about the buyer saying, "But Fly-by-Nite Real Estate won't require me to sign this," the broker can point out that state law requires it, if state law does, and hand over a copy of the statute or rule. The broker can point out that it is important to discuss upfront what services the buyer will receive and how the broker will get paid.

If the broker is worried about the buyer saying, "I don't want to be tied down/locked in," the term of the agreement [can] be terminable upon notice by the buyer. An override clause/protective list can ensure the broker is paid if the buyer purchases one of the homes the broker showed her after she terminates the representation agreement.

Once the broker has the buyer's commitment to compensation and her permission to obtain payment from other parties, it is now perfectly consistent with the broker's agency duties to seek compensation from the seller or listing broker. Seeking such payment without the buyer's commitment and permission might be a violation of the broker's fiduciary duties, because the broker might jeopardize the buyer's interest to obtain payment. Once the buyer has a financial obligation to the broker, however, the broker's duty requires it to do its best to obtain that payment in the way most convenient for the buyer.

Solution addresses several problems
Getting rid of interbroker compensation improves the market in several areas:

1. Buyers and their brokers have more options for structuring their relationships and the compensation that will flow between them.
2. Buyer broker fees can be commensurate with the skill and experience of the broker and with the buyer's needs.
3. Brokers do not have to fuss with the accounting details and conflicts associated with paying each other.
4. The market benefits from price competition for buyer broker services.
5. Buyer brokers working in transactions with FSBO or unrepresented sellers can obtain additional compensation for the additional work and risk they assume.
6. The question of buyer's brokers "rebating" commissions to the buyers becomes moot. There will be no compensation from the listing broker out of which any rebate could be made.
7. The dangers of price fixing, and the claims by industry watchdogs that it exists now, will largely be addressed. Brokers will really be unable to tell what their competitors are charging for services, and there will be no incentive for commissions to be "standard."
8. Buyer's brokers can achieve the type of relationship of trust with brokers that supports a claim to being "professionals." When the buyer knows what she is paying for broker services and what she is getting in return, buyer expectations and broker performance are both likely to be more refined.

Well, assuming the reader is still with me, I still have to address in part three how the MLSs that make up the bulk of my client base will survive this transition.

-Brian

The End of MLS as We Know it (Redux) - Part I

Note: Over four years ago, I wrote a series of three guest columns for Inman News arguing the industry should get rid of interbroker compensation. A friend reminded me of that series just today, so I went back and reread it. It's striking how much I still believe what I said then, and also how little has changed. As I retained the copyrights in those columns, I've decided to reproduce them here (perhaps with a few notes to update them where necessary. You can see the original posts on Inman (if you are a subscriber there). I'll post the other two here over the next couple days. I can't repost the disapproving response from NAR's president, but if your web search skills are good and you are an Inman subscriber, you can find it on your own. I'm interested whether you think any of this ever made sense... Read second and third parts.

The end of MLS as we know it

Guest perspective: Let's get rid of interbroker compensation (Part 1 of 3)

"It's the end of the world as we know it, and I feel fine." - R.E.M.

The real estate industry now operates multiple listing services that not only draw attacks for suppressing competition, but also have at their core a service that is obsolete and inefficient: the communication of interbroker compensation offers.

The essence of the MLS for more than 30 years has been the offer of cooperation and compensation. The National Association of Realtors includes the offer of compensation in its definition of MLS, considering services without compensation mere "exchanges." Even broker-owned MLSs not affiliated with NAR generally require that listings input in the system must have offers of compensation. [UPDATE 12/2010: We now have a couple clients that are broker-owned MLS that merely permit offers of compensation but do not require them. That's not a result of them taking our advice in this column. They just always operated that way...]

I've argued for five or six years that interbroker compensation should go the way of the MLS book and broker subagency. Recent events persuade me that the industry is ripe for this change now.

Core purpose of MLS -- A 35-year-old model
The MLS model of the 1960s and '70s made sense because at the time, nearly all brokers involved in transactions represented the seller either as the seller's agent or as the subagent of the listing broker. Listing brokers got paid by sellers; listing brokers could therefore compensate brokers working with buyers.

This all changed in the late '80s and early '90s because of the arrival of exclusive buyer agents, who represent the buyer in the transaction rather than the seller or seller's broker. Also, listing brokers became more concerned about vicarious liability, a legal theory that says that the listing broker is legally responsible for misdeeds of cooperating brokers who are subagents. And under pressure from Realtor organizations, state legislatures began fashioning non-agency forms of representation; depending on state law, these "facilitators" and "transaction brokers" do not owe traditional agency duties to buyers or sellers.

NAR kept up with the times. It clarified, first, that MLSs had to allow exclusive buyer agents (EBAs) to participate -- sometimes over the objections of incumbent listing brokers, who complained EBAs "came to the potluck with a fork but no dish to pass." Later, NAR clarified that the offer of compensation through MLS could extend to cooperating brokers representing buyer brokers and cooperating brokers "acting in a non-agency capacity defined by law." In light of these changes, most listing brokers moved away from subagency, preferring to compensate other brokers as buyers' agents and non-agents.

As a result, the vast majority of listing brokers no longer offer subagency to other brokers. With the demise of subagency, there is little reason to keep interbroker compensation. There are also affirmative reasons to get rid of it.

Seller pays but does not receive service
It does not make sense for listing brokers to pay buyers' brokers for the services the latter provide to buyers. This is a bit like the lawyers working for one side in a transaction paying the lawyers working for the other side. It may happen, but it would not be anyone's first choice. In fact, there are rather complicated rules about what happens when a lawyer working as the fiduciary of one person is being paid by another person who is not his client.

Faced with the prospect of creating a real estate market from scratch, who would embrace this model? In fact, there are real estate markets being created from scratch, throughout the former eastern block and Soviet Union. By and large, the brokers there do not embrace interbroker compensation. One acquaintance of mine, a frequent advisor to real estate organizations in those developing economies, put it this way: "(Interbroker compensation) is the toughest concept to get across -- they just don't get it." I know my friend is a good teacher -- so I conclude that what my friend is trying to teach does not make sense to folks who did not grow up with sub-agency.

Constraining the nature of broker relationships
Interbroker compensation through MLS imposes unnecessary constraints on the relationships that buyers' brokers can form with buyers. Here are examples of how that's true:

First, imagine that Stirling Realty has a great reputation for providing excellent buyer representation. It believes that its services to the buyer are worth 3 percent of the sale price on most residential transactions. The prevailing cooperating compensation offered in the MLS where Stirling participates, however, is only 2.1 percent. (I use the term "prevailing" here to mean the average or market-rate compensation, acknowledging that neither brokers nor MLSs can establish a standard commission.) If Stirling sells another broker's listing, Stirling will have to arrange for additional compensation to be paid separately, either by the buyer or by the seller. This separate compensation will not be subject to Realtor arbitration if not paid; if there is a dispute about compensation in the transaction, Stirling might have to bring separate actions against the listing broker (through Realtor arbitration) and against the buyer. This is unnecessarily complicated.

Second, imagine that Buyer First Realty has developed a model for working with buyers that costs a flat $3,000, regardless of the purchase price of the home. Buyer First helps its buyer find a home, which the buyer purchases for $500,000 and on which the listing broker has offered a 2.4 percent cooperating commission (the prevailing rate in that MLS). Buyer First is entitled under the MLS offer of compensation to a payment of $12,000 from the listing broker. At closing, Buyer First wants to give $9,000 of that back to the buyer. Because the money comes to Buyer First at closing, Buyer First now has to comply with RESPA regulations to pay the rebate to the buyer; in some states, the rebate itself would be considered illegal. In the absence of interbroker compensation, Buyer First would just not charge the $12,000.

Third, imagine that Nifty Builders, a residential construction firm, has a wholly owned subsidiary brokerage firm, Nifty Brokers, that markets its listings. Nifty Brokers would rather not pay cooperating brokers at all but is willing to offer 2.1 percent cooperating compensation to other brokers, the prevailing rate in the MLS where it operates. In return it wants cooperating brokers to be present with the buyers to advise them during the process of selecting finishes, developing a budget for options, etc. Nifty is tired of agents showing up for the first appointment at the construction sales center and then never showing up until closing. Under NAR MLS policy, Nifty cannot condition the compensation it offers other brokers on them performing specific tasks; all that matters in interbroker compensation is whether the cooperating broker was the procuring cause of the sale. There is a way around this for Nifty (which I'll save for another column), but it can be confusing for everyone involved. [UPDATE 12/2010: I never got around to that other post to help Nifty out. Maybe if someone expresses interest in the topic, I'll manage in the next few weeks.]

Discouraging buyer rep agreements
Interbroker compensation discourages buyer brokers from entering into buyer representation agreements with their buyers. I have recently given lectures to brokers in three states where I asked the brokers present to indicate by show of hands whether they require buyer representation agreements with all or nearly all buyers before they begin showing them homes. In each case, fewer than a third of the brokers present raised their hands.[UPDATE 12/2010: I have not given talks like these to brokers for a while; anecdotal conversations suggest that many brokers continue not to have buyer rep agreements with their buyers. What's your firm's practice?]

A good buyer representation agreement provides numerous protections and advantages to the buyer's broker: It offers some remedies for problems associated with working with unrepresented sellers (we'll save the details for later). It permits the buyer's broker to spell out the boundaries of her representation of the buyer. And it can be critical in ensuring that the buyer's broker gets paid if there is a dispute about procuring cause. In some states, without a buyer rep agreement, the broker may not be entitled to receive compensation -- from buyer, seller or listing broker -- at all.

Buyer brokers get away with not having buyer representation agreements -- even in states where the law requires them -- because they are assured payment by the listing broker through the MLS.

Danger of price fixing
Normally, antitrust regulators frown on competitors publishing their prices to each other, because it makes price fixing easy. Assume, for example, that a large broker in Midtown MLS, where the prevailing cooperating compensation is 2.4 percent, has decided it wants to pay cooperating brokers less. It starts putting its listings into MLS at 2.1 percent cooperating compensation; it waits a few weeks to see if other market-leading brokers follow suit in lowering their compensation. If they do, great, the change sticks. If not, the large broker can raise its compensation back to the market rate. In this way, a few market-leading brokers can establish the market-rate cooperating compensation without ever speaking directly to each other. They can just watch what happens on MLS.

Thanks to the MLS offer of compensation, listing brokers effectively are able to fix service prices of buyers' brokers; many buyers' brokers are loathe to collect more than what is offered in MLS, even if the broker has a written agreement with the buyer providing for a higher payment.

Criticism from outside
Just because folks don't agree with us on some issues does not mean that everything they say is wrong.

The first of a recent round of criticisms came from the Government Accountability Office report of August 2005. Some of the GAO's comments echo what I have said here. For example:
"While MLSs provide important benefits to consumers by aggregating data on homes for sale and facilitating brokers' efforts to bring buyers and sellers together, the cooperative nature of the MLS system can also in effect discourage brokers from competing with one another on price.... As previously noted, MLSs facilitate cooperation in part by enabling brokers to share information on the portion of the commission that sellers' brokers are offering to buyers' brokers.... When choosing among comparable homes for sale, brokers have a greater incentive -- all else being equal -- to first show prospective buyers homes that offer other brokers the prevailing commission rate than homes that offer a lower rate. Therefore, even without formal policies to maintain uniform rates, individual brokers' reliance on the cooperation of other brokers to bring buyers to listed properties may help maintain a standard commission rate within a local area, at least for buyers' brokers."

The GAO report also notes:
"Further, some states prohibit brokers from giving clients rebates on commissions, and some states require or are considering proposals to require brokers to provide consumers with a minimum level of service. Although such laws may offer some consumer protections, DOJ and FTC have argued that they can potentially prevent price competition or reduce consumers' choice of brokerage services."

An AEI-Brookings report, authored by Bob Litan and others, appeared in November 2005 and was the subject of a New York Times editorial by Litan in June 2006. The Brookings report notes:
"First, we believe that the involvement of multiple parties and the unique splitting arrangements make it difficult for buyers and sellers to pay for services according to their needs. Second, the commonality of the structure across firms and its persistence over time suggest the possibility that alternative models have not had a fair chance to compete."[UPDATE 12/2010: As you probably know, there has been litigation against some MLSs in the U.S. by the Federal Trade Commission, and a recent settlement between organized real estate and competition regulators in Canada, over MLSs attempting to dictate some of the services that brokers must provide in order for listings to receive treatment in MLS that is comparable to what are sometimes call "full service" listings.]

The Brookings report further noted:
"Commission rigidity results in a socially wasteful oversupply of underproductive agents in high-priced cities, compared to lower-priced ones."

The Consumer Federation of America released a very unflattering report called "How The Real Estate Cartel Harms Consumers And How Consumers Can Protect Themselves" in June 2006. Many of the assertions in the document were entirely unsupported by documentary evidence. Some of their comments were nonetheless provocative. For example: "If sellers and buyers each separately negotiated compensation with their brokers, uniform 5-6 percent commissions would quickly disappear."

The CFA continued: "Traditional brokers not only continue to oppose separate buyer and seller compensation but also have vigorously promoted state anti-rebate laws which prevent brokers working with buyers from rebating a portion of the... commission split to their clients." It is true that organized real estate has championed anti-rebate regulations in some states. But I do not believe that traditional brokers "continue to oppose separate buyer and seller compensation." In fact few brokers have discussed the issue, and the ones with whom I've discussed it would happily get rid of interbroker compensation tomorrow.

Brokers don't like it
I gave a presentation to a large national brokerage concern last year. Before my talk, I heard the participants discussing the problems they experienced with paying out and collecting interbroker compensation: disputes about the amount of compensation due; complaints about the time between closing and payment of the compensation; tracking payments to be made and received; and even arguments about whether any compensation was due at all. Before I began my talk, which was on a different topic, I asked them whether their lives would be easier if there were no interbroker compensation. Every one of them said "yes."

Consider this: Every broker being paid through the MLS by another broker has to track amounts due and follow up on payments. Doesn't it make much more sense for buyer's broker and seller's broker to be able to walk away from the closing table with the money due them?

Conclusion to Part I
Interbroker compensation is an anachronism, and for the reasons I've noted above it should be eliminated. Getting rid of it means ceasing to be MLSs, at least from NAR's perspective. But if indeed this would be the end of MLS as we know it, how do we survive the end?

[So, other than references to some old reports from 2005 and 2006, I think all of this still makes sense, perhaps more so... What do you think?
-Brian]

MLSs and brokers infringing copyrights?

Dashing off a quick post tonight.

Elizabeth wrote earlier this year about the basics of copyright. But she was writing from the perspective of protecting MLS and broker copyrights. Today, I'm concerned based on inquiries from a couple clients this autumn about the possibility of MLSs and brokers infringing copyrights, particularly copyrights in photographs. Here are two scenarios:

1. MLS or broker hires someone to build them a web site ("site builder"). The site builder comes up with a dazzling design that includes some great photographs of the local area (maybe a downtown skyline and others). Unfortunately, the site designer found those photos online and failed to obtain permission from the copyright owners to include them on the MLS/broker web site.
2. Listing agent finds a photo of the property she is listing (maybe on the county assessor's web site, maybe on the web site of a magazine that featured the home in an architecture spread). The listing agent never gets permission from whoever took the photo to use it as a listing photo. She puts it in MLS, and it ends up all over the MLS, on the MLS's consumer-facing web site, and on other brokers' IDX sites.

In scenario 1, the MLS or broker is probably liable to the photo copyright owner(s) for copyright infringement. It does not matter that the MLS or broker did not know the photos on its site were infringing or that its site designer was using infringing content. There is really no way to eliminate this risk of liability, but the following steps can reduce it:

• Have a written agreement with the site designer under which the site designer (a) warrants that it has a license to any contents it will put on your site and (b) it will indemnify you (that is, pay legal costs and damages) if you get sued for infringement. Of course, the indemnification is good only to the extent the site designer can pay; some site designers are pretty small operators.
• So, you also need to be proactive. When you see your site design, look for photos on it, make a list of them, and ask the site designer to tell you specifically where each one came from and where the license was obtained. If your own staff are doing your site design, you need to do the same thing. Make someone other than the designer on your staff your "compliance officer" for this type of thing.

In scenario 2, the MLS and every brokerage that displays the infringing photo on its IDX site is probably a copyright infringer... UNLESS your web site satisfies the "safe harbor" provisions of the Digital Millennium Copyright Act (DMCA for short). The safe harbor requires that you put a DMCA  notice on your site--it must meet certain requirements defined by the statute. You must also appoint a copyright agent (probably someone on your staff) and register him/her with the U.S. Copyright Office. Then, anyone who finds infringing content on your site (content contributed by someone else, not by you or folks working on your behalf), must give your copyright agent notice that satisfies certain technical requirements. You can generally avoid liability by taking down the allegedly infringing content. (This is called a "notice and takedown process.")

Satisfying the DMCA safe harbor and complying with a notice under DMCA are not complicated or expensive, but they require attention to technical/legal details. Have your friendly local copyright attorney step you through the process.

By following the steps in this post, I hope your MLS or brokerage firm can avoid liability for copyright infringement.

Questions/comments?
-Brian

Public records from RPR will not replace your public records provider contract...

RPR seems to be getting traction, at least among more of our clients. But many MLSs coming to us to have the RPR contract reviewed come with a big misconception. I usually first ask them what their business objectives for the relationship are, and almost every one has said, "We want to reduce our costs by replacing our public records provider with data from RPR."

We seem always to have to explain two things:

1. Your MLS does not have to provide MLS data to RPR in order to get public records from RPR. (Though I don't know personally of MLSs using the API who are not licensing data to RPR, I take RPR at its word that an MLS does not need to license data to RPR to use the API.)
2. The RPR agreement for its public record API provides none of the assurances you would normally expect from a public records provider. For example, RPR can terminate the agreement and stop providing public records to your MLS without notice; RPR does not warrant non-infringement; your MLS agrees to indemnify RPR, but not the other way round; etc. (See the agreement for the API at: http://blog.narrpr.com/tax-api .)

I'm not trying to knock the RPR API agreement; if I were giving away access to valuable PR data, I'd offer it under a pretty one-sided contract too. If your MLS currently does not have public records, or if you are not concerned by the possibility of an interruption in your public records access, the RPR API might be a good option. (We'd still caution you about some of the provisions in that API agreement, but the bargain might be worth assuming some risks.)

But if your MLS currently has a public records agreement and wants a source of public records on which it can rely, the RPR API is not a good substitute for a contract with CoreLogic, LPS, iMapp, or one of the other providers out there. 

Your thoughts?
-Brian

IDX "indexing": What’s so special about franchisors?

NAR’s board of directors adopted a policy at its meeting in New Orleans in November regarding “Display of IDX Information by Real Estate Franchise Organizations.” This post looks at the policy from a high level. We might be able to talk about some details in a future post. It first presents the policy and a little of its background; then it describes what “franchisors” are; finally, it questions the rationale for singling out franchisors in the new policy.

The new policy

Realogy Franchise Group President and CEO Alex Perriello gave an impassioned speech to the MLS policy committee at NAR’s Washington meetings in May. My cynical summary goes like this: “We are one of you. Letting us do this is good for all of us. If you don’t let us do it, there will be dire consequences.” Of course, that would be an effective paraphrase of pretty much any request made for MLS data. Mr. Perriello characterized his request as permitting franchisors to “index” franchisee web sites, but some folks might resist that terminology as a device to make his proposal seem more palatable. They might argue this is really a limited form of aggregation, in light of the fact that franchisors do not meet NAR’s definition for “recognized search engines.”

A policy working group at NAR developed the final proposal late this summer and early this fall. Here is the text of the policy adopted last month, which becomes effective with the publication of the NAR Handbook on Multiple Listing Policy in January 2011:

Participants may provide IDX information to their real estate franchise organizations (“franchisors”) to be indexed for display on franchisors’ websites. For purposes of this policy, “real estate franchisor” is defined as a company granting real estate brokerage franchises under the franchisor’s trademarks pursuant to a franchise disclosure document meeting applicable Federal Trade Commission rules. Display of IDX information by franchisors is subject to the following requirements and limitations. Failure of a franchisor to comply with the following requirements and limitations can, at the discretion of the MLS, result in suspension or termination of the participant(s)’ authority to provide IDX information to the franchisor:

1. Initial search results that provide minimal information (e.g. “thumbnails”) are exempt from MLS-required disclosures (e.g. listing firm, listing agent, source of information, notice that information is deemed reliable but is not guaranteed accurate) provided that a direct link to a detailed (“full view”) display that includes all required disclosures is provided.

2. Consumers can link directly to the detailed (“full view”) display that complies with MLS disclosure/display rules of the source MLS.

3. IDX information is not used for any unauthorized purpose.

4. Inaccurate or incomplete information related to any listing is promptly corrected by the franchisor at the request of the source MLS.

5. No advertising may appear on pages displaying IDX information.

6. IDX listing information will not be modified, manipulated or permanently retained.

The NAR multiple listing policy committee offered the following rationale to the board of directors: “This proposed expansion of the IDX policy would authorize real estate franchise organizations, with their franchisees' consent, to index those franchisees' IDX displays, with the results being displayed on franchisors' websites, subject to appropriate qualifications and limitations.”

The action item going before the board of directors purported not to have a “financial impact on board or state associations.”

What franchisors are

The International Franchise Association defines “franchising” as:

“a method of distributing... services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.”

In other words, the franchisor and franchisee have a contractual relationship under which the franchisee gets certain rights to materials, trademarks, and assistance from the franchisor. In return, the franchisee sells the franchisor’s services (though this picture is a bit more complicated in real estate) and pays the franchisor a fee. In real estate, franchises function a little like associations: A local broker affiliate/franchisee pays a fee for certain services from the franchisor and the right to identify itself with the franchisor’s brand (e.g., “ERA” or “REALTOR®”; I know there are differences between franchises and associations, but this just helps my discussion along a little). The local brokerage affiliate/franchisee exists as a separate company, independent of the franchisor and other franchisees. (This discussion excludes, for the moment, the case of franchisor-owned offices.)

Why franchisors, particularly?

So, my high level question about this policy is “What’s so special about franchisors?” After all, as I noted above, a franchise is really just a kind of association of brokers who receive trademark rights and services in return for a fee. Why could independent brokers not form consortia to do the same thing? Why can’t multi-regional real estate firms with local operating companies do it?

In the case of consortia, consider the Leading Real Estate Companies of the World, an association/network of real estate brokers that claims more than 600 firms as its affiliates. It offers some of the services that franchisors offer, including lead generation, relocation referrals, and the right to use the “LeadingRE logo of excellence.” In the case of multi-regional firms, consider HomeServices of America, which owns local brokerage firms in 15-20 states. Each local operating company is managed on its own, but all are owned by HSA (which is itself owned by Berkshire-Hathaway).

As far as I know, no one at NAR has offered any rationale for why franchisors to have this special treatment. It seems to me that on most dimensions of analysis, franchisors fit somewhere between associations like Leading Real Estate Companies and multi-regional superfirms like HomeServices. So, I’m hoping readers of this blog can enlighten me why NAR would make this new service available only to franchisors and not to the others.

I have some other specific questions, too, and I’d love to hear your feedback on them.

• Does the approach of providing this benefit only to franchisors favor traditional brokers? (I’m just suspecting that franchisors are more likely to be working with traditional brokers—is that wrong?)
• What is the MLS’s interest in saying that a franchisor must have a franchise disclosure document on file with the FTC? What’s in that document that addresses the interests of the MLS, the other brokers, or NAR?

By the way, I have nothing against franchisors. I’m not necessarily knocking the idea of franchisors being able to “index” IDX sites in this way (though I hope to discuss issues with that later). Right now, I’m just focused on why NAR singled out franchisors.

-Brian

P.S. If you want more reading on what search engines are, whether they are good for IDX, etc., check out the following previous posts:

• Are search engines necessarily benign? 
• Series on search engines and IDX. This link is to the capstone post. The series predated NAR's policy change to permit indexing of IDX sites by "recognized search engines," whatever that means. 

Updated: P.P.S. I wanted to include links to some other posts discussing this issue and forgot... Here are some. Let me know if you have posted on this issue somewhere else.

• AgentGenius, November 10

Back from Camazotz

I expect that fans of MLSTesseract wondered whether we had been tessered off to Camazotz. In fact, the lawyers at Larson/Sobotka PLLC (and principals at Larson/Sobotka Business advisors) have been very busy, both on work and personal projects. That’s made us less diligent about sharing our thoughts about what’s going on in the industry. Of course, we’ve had a few thoughts, but every time we say, “We need to do a blog post on that!” We write down the topic, and then we get embroiled in the numerous other tasks that demand our attention.

This week, we have a little breathing space, and we figured it’s time to get to work on the blog again. Of course, next week and the balance of December, we’ll get a bunch of projects from clients who want stuff done this month to get it on the 2010 budget... But until then, we have a few moments, so let’s talk about a few more-or-less important things.
-Brian