Are you better off with a non-monopolistic MLS?

February 10th, 2010 | by admin |

Multiple listing service (MLS) is short-hand for a system that co-ordinates the orderly buying and selling of real estate. One of the key components of the MLS system is a centralized database of listed homes for sale. Owned by real estate associations like The Canadian Real Estate Association (CREA), it can effectively shut out competition by setting their own rules on membership and deny the flow of information to non-members.

Battered by the internet’s race towards to the bottom and a DIY niche, MLS fought back and their tactics struck were seen by some as uncompetitive. As with all things having to do with consumer protection, Canada, better late than never, acted on the allegations of MLS’ uncompetitive conduct, with the Competition Bureau announcing it was challenging how MLS does business.

What exactly is the problem?

MLS is, in practice, a totality of real estate services. For the real estate agents, it is a way for listing agents to publish its compensation along with the property description. For the public, in order to list real estate on MLS, one typically has to buy the bundle of services which includes hiring a real estate agent, using the standardized agreement of purchase and sale forms, negotiating the deal, registering the sale etc.

There are two primary ways around this traditional model. Flat-fee MLS describes a real estate agent posting a property for sale on MLS for a customer with no other services provided; The compensation is paid immediately. Think of the investment advisor paid to render an opinion on your portfolio rather than to sell you the full gauntlet of products.

Others attempted to set up internet-based businesses outside of the MLS system. Typically, these allowed customers to search a separate database downloaded from MLS themselves rather than having a broker do it. For the time saved, brokers could, and often did, charge less commission. These types of sites are sometimes known as virtual office websites (VOW) because they operate without traditional bricks and mortar operations.

Various MLS’ prohibited flat fee MLS to prohibit real estate agents competing on price (according to the Canada Competition Bureau, CREA engages in this practice). In other cases, real estate brokers simply did not deal with brokers who set up VOWs or information from MLS was not provided in a timely manner to VOWs.

What has been the solution?

In 2008, the U.S. Department of Justice settled with the National Association of Realtors (the equivalent of CREA) after an investigation of its practices in connection with VOWs (here is the press release). As part of the settlement, VOWs will be treated no differently than the traditional broker. A real estate broker operating a VOWs must be accepted as a member of MLS regardless if she is operating a non-traditional business model. The VOWs shall be provided with timely information and MLS members who do not operate VOWs must treat VOW brokers the same as a non-VOW broker.

Two things strike out at me reading the settlement:

First and foremost, the settlement really speaks to real estate association conduct against its broker members. In many respects, the Department of Justice is settling a civil war between agents who uphold the status quo vs. agents who want to provide different service offerings.
The settlement protects the proprietary intellectual property of MLS. VOW must take precautions against any customer misappropriating MLS information. The settlement is not about smashing MLS; it is about defusing the information in a responsible way which acknowledges the capital costs of building and maintaining the MLS.

In many respects, the settlement acknowledges that real estate agents can chose to race to the bottom on fee or provide traditional services with traditional compensation. The question comes down to what the customer perceives as value.

What does this all mean to me?

MLS’ get big for a reason; they are smart and ruthless. What did some MLS’ do in the wake of the Department of Justice settlement? They set up their own VOW to compete with the existing VOWs. More service offerings to the consumer is not such a bad thing. After all, a MLS owned VOW can always up sell a customer to full brokerage services.

In Canada, the Canada Competition Bureau has most likely dissected the Department of Justice settlement in a thousand different manners. I would not be surprised if it took a similar approach and, in addition, force CREA to allow flat fee MLS. In many respects, the solution has already been presented to the bureau and, absent a made in Canada spin, it is hard to imagine the bureau taking a substantially different approach. Of course, this is speculation on my part.

The ultimate effect may be a choice between a quantity based model (low margins, high volume) of a VOW and flat-fee MLS and a quality based model (high margins, lower volume). This is not altogether bad for the consumer.

Canadian Capitalist has a post on the MLS’ alleged uncompetitive practices. I found some of the comments have a sky is flying tone to them and others believe this will alter the real estate industry for good. The result will be somewhere in the middle.

Real estate associations and MLS are analogous to the legal profession: an insular, self-governed body which guards its intellectual property like a jealous lover. In the 1980’s, Jane Harvey opened a pure retail law firm to the horror of the profession. All her offices were in malls and she advertised her prices; advertised was prohibited by the Rules of Professional Conduct. In 1987, the Law Society of Upper Canada allowed advertising due in part to Jane being a ground breaker.

Jane Harvey & Associates caused waves in the profession. But, contrary to many people’s beliefs, she did not destroy the legal profession. She merely recognized that there was a niche for cost-effective legal services for the retail market and filled it. Jane also did nothing to stop fee creep in many lawyers. In other words, the sky has not fallen and Jane may have merely filtered out the weaker market players who could not provide value to their clients.

In some cases, vendors and purchasers will require a full set of real estate brokerage services just like some smaller clients may need a larger law firm to represent them (if your civil liberties are at stake, you really don’t want to hire the lawyer on a fixed price schedule). In other cases, a flat-fee MLS may do them just fine.

However, at the end of the day, you get what you pay for in life and, if given a range of choice, one picks a choice which costs them money because it is unsuitable for their individual context, they live with the consequences of that decision. You cannot deny the option of that person to make that choice and that mistake and policy-making should not be around this concept.

It will be interesting to see when and how the Competition Bureau rules.

Financial Solutions