Sunday July 20, 2008

Home

Latest Headlines

Popular Stories

Bookmark Us

Reader Comments

SUBSCRIBE

SEARCH OUR SITE

MLS and Commissions Under Attack Again

RSS

COMMENTS(26)

LINK HERE

ADD NEWS TO YOUR WEBSITE

This space generally reports on what is going on in the real estate and mortgage industry; rates, suggestions on buying or selling, news about Fannie Mae, Freddie Mac, or what is happening in building, the law, and so forth. Most of the time we try to do so objectively. Well stand by for a little attitude!

There is a lot that is wrong with real estate brokerage and over the last two years, we have touched on some of the flaws:

• Admission standards are ludicrously low; almost anyone can get a license regardless of their background, education, intelligence, or ethical behavior. More to the point, it appears that a huge portion of the population does so. How many real estate agents do you know?
  
• Agents are exploited by managing brokers and customers alike because of a poorly defined system of agency, compensation, and a lack of agent control. Some agents make a lot of money; many barely subsist.
  
• Customers are victimized by poor adherence to and disclosing of rules relating to agency.
  
• Agents are not held fast to their fiduciary duty and often put their own financial well being above that of their customers and clients.
  
• Mergers and franchises have virtually eliminated the small independent office and have forced independent businesspersons (again exploiting the agent) to share commissions with relocation, referral, and affinity programs and pay increasingly large franchise or "administrative" fees.

And someday we will explain why all of this is not really as inconsistent as it sounds.

But right now we are wondering why, with ample reasons why state and federal regulators might examine real estate ethics, agency, credentialing, and consolidation, the focus of critics, especially the feds is on commissions and on a proprietary product, the multiple listing services.

The Department of Justice has filed suit against the National Association of Realtors® for "conspiracy" ostensibly for enabling brokers to withhold their listings from other brokers' Web sites. Congresspersons Michael Oxley and Barney Frank of the House Financial Services Committee have been investigating the "monopoly" aspects of MLS...... NAR is fighting this war on a hundred fronts.

MLS is a homegrown product that has been around for decades. For years it was pretty rudimentary. Agents would take a listing, type it up on an MLS form, and send it to the local MLS office, by courier, mail, or more recently fax. On a regular basis - once a week in my territory - MLS produced a listing book, printed on cheap paper and containing thumbnail prints of listings by town within that MLS territory. Eventually this morphed into an on-line system where agents printed computer listings on huge bundles of paper that were separated and stored in loose leaf notebooks or file folders. I remember an agent in Houston during the real estate glut in the 1980's saying that her office could only afford to print out the massive inventory once a week. There was no search ability, just the capacity for what was delicately known as a data dump.

But now MLS has reached a point where an agent can define a search and identify a house within seconds anywhere in the country - four bedrooms, three baths, and a hot tub, within a two square mile section of a given city - done. This information is widely available on line through REALTOR.COM® or through individual real estate web sites. The info is hardly being hoarded. MLS, however, does not feel that that the listings its members have acquired through years of farming neighborhoods and that MLS is now able to display through, no doubt, the investment of millions of dollars in technology, should be in the public domain. Non-MLS members are free to search the MLS database and show MLS properties when acceptable to listing agents, as it almost always is. But now, MLS is viewed as a commodity, as valuable to those in the industry who have done nothing to create, nurture, and improve the product as it is to those who have paid through dues and hours of volunteer activity to develop it.

Everybody wants in!

The most recent volley was fired on June 17 by Robert E. Litan, a senior fellow at the Brookings Institution and the vice president of research and policy at the Ewing Marion Kauffman Foundation. In an op-ed column in the New York Times, Mr. Litan starts by restating the oft-quoted information that the typical seller pays more than 5 percent of the sales price to his real estate broker and that, for many middle-class families this will exceed $15,000. He then compares real estate with the securities market. "Ask E-Trade what IBM's stock sells for and you are likely to get the same information as if you made the request of a Merrill Lynch broker. The markets are transparent and efficient, and transaction costs are low. Some discount securities brokers now charge $7 for trades that in the early 1970's would have cost hundreds or thousands."

"But if you want to sell or buy a house you generally need to go through multiple listing services, the exchanges that are to houses what the New York Stock Exchange and NASDAQ are to stocks. The more than 800 multiple listing services nationwide are typically operated by the dominant local brokers in a given city under rules set by the National Association of Realtors. Each is run separately. If you don't go through a licensed Realtor in that city, you don't get access to the listings."

Want to read that again? I can, in some instances, go to a company, McDonald's for example, and buy stock directly (DRIP program). Not every company offers this service but where they do one has to first of all know how to locate the company and then how to affect a trade. Not rocket science, but people use stock brokers for convenience and information. Is it a good investment? What is the return on investment? How do I make the trade? And for the research that answers those questions as well as custodial and transactional advice, the investor pays a commission. Where a company does not offer direct stock investment, then an investor has no choice but to go through the various stock exchanges and since most of us cannot afford to buy a seat on even one exchange, we must use a broker. By the same token, without investing large sums of money in administrative services to offer a DRIP, McDonalds or Disney must list their stocks with an exchange registered agent. In other words, it is difficult and expensive to FSBO a share of stock.

Mr. Litan manages to stretch quite a few analogies past the breaking point. If I wish to buy a specific home I have seen on the internet through an MLS site, I will have to, in some way, go through the listing broker. So what? He is selling a product - his product. Just as I cannot buy a Whopper Jr. from the local 7-11, I can't buy MLS #37752 directly from the owner. In fact, in this example, the MLS is even less controlling than other sectors of the market. I can't buy a Whopper Jr. from anyone other than Burger King, but I can buy MLS #37752 from any member of MLS and probably from a non-member agent who contacts the listing broker.

The big issue seems to be that the National Association of Realtors has issued rules that govern "or impair" other brokers' online activities. In other words, if a Century 21 office in Des Moines does not want to see their own listings featured on the website of a competing broker, they are allowed under MLS rules to refuse access to that broker to display those ads with little to indicate that they are not his own. It doesn't matter that the competing broker is unethical, withholds his own listings from MLS, or is generally unpleasant and dangerous to deal with; Mr. Litan wants equal access for all to an essentially proprietary product.

Litan is calling on Congress to "fix this clear structural conflict of interest by empowering the Federal Trade Commission...to oversee the National Association of Realtors" and to ensure that real estate markets are competitive; to preempt laws "that are intended more to protect Realtors® from new competition than to protect consumers from possible abuses by discount real estate agents."

"Like a stock exchange," he says, "multiple listing services make markets more efficient, but only if they don't discourage entry by new competitors." I have never heard of a MLS that refused entry to an agent or an agency who/which was willing to meet the rules of membership and pay the requisite dues. It seems that Mr. Litan would like to see a lot of people given a free ride. Perhaps he will next call on NASDAQ to allow me or you to trade directly on its floor.