Concerning MLS Enforcement of Cooperation and Compensation, An Observation

In the comments section of my post on Listhub and Zillow, an intelligent discussion and debate broke out. Given the rarity of such thing on the Interwebz, I think we should celebrate that.

Now then, the subject of the discussion was around the “value proposition” of the MLS in the 21st century and how the rise of these huge tech companies, as well as potential threats from things like the as-yet-unknown Project Upstream, could impact it. The discussion turned to what many consider to be the core value proposition of the MLS: “cooperation and compensation.” As it turns out, there’s something to think about here, so let’s get into it.

Setting the Stage

Sam DeBord, who knows as much as anyone about these issues, and often has remarkable insight into the issues, started things off with this:

Until portals get into the business of broker cooperation and commissions, the MLS’s core value won’t change (not that it can’t happen, it’s just not on the horizon now).

Now, this happens to have been (and sort-of still continues to be) my view of the MLS: it’s all about cooperation and compensation (“C&C” from hereafter).

Colleen Sullivan then responded to Sam:

I think that’s only true if brokers themselves still see the core value of the MLS as enforcing cooperation and commissions. If you’re a big enough broker in your market, can you do that yourself, to your satisfaction?

Whereupon, Sam’s response was:

Why share listings under an MLS banner instead of going directly to a (mostly) unregulated direct marketing system on a website?

Because that’s the way we did it in the past when real estate was the Wild West. Can you imagine not having co-brokerage commission arrangements upfront and enforced? Do you want Zillow to enforce the commission paid to every buyer’s agent? They don’t want that, and neither do we. Zillow and brokers benefit from the MLS having the enforcement teeth to keep the industry’s sales running smoothly. It’s frightening thinking of going back to a world of “negotiate your commission at the point of sale”. [Emphasis added]

That’s the stage. Now the issue.

What Is “Enforcement”?

The key issue that I missed up until I read those comments, and that perhaps many of us who have battle scars in the MLS sub-field might have missed, is what we all assume about enforcement.

More I think about it, more it seems to me that the MLS actually has few mechanisms in place for C&C enforcement.

I spoke with a few MLS CEO’s after the question arose, and it appears that there are a bunch of issues here.

The Association Handles Grievances

First, many an MLS simply does not handle any sort of grievance procedure; those are handled by the Association (which usually owns the MLS). It makes perfect sense for the smaller local Association-owned MLS, which doesn’t have the staff or the large number of volunteers to handle commission disputes.

The Association then deals with the C&C issue through its ethics complaint process. Note, however, that the Code of Ethics only deals with the Cooperation part of C&C; the Code specifically does not require the Compensation part of C&C:

Article 3 of the Code of Ethics requires that “REALTORS® shall cooperate with other brokers except when cooperation isn’t in the client’s best interest.” The Code goes on to say “the obligation to cooperate doesn’t include the obligation to share commissions, fees, or to otherwise compensate another broker.” REALTORS® must cooperate with other brokers regardless of whether or not compensation is offered. This “cooperation” may include sharing information about listings and allowing others to show a listing. [Emphasis mine]

The compensation piece is contained in the MLS, via the member agreement and the property listing which contains a requirement for compensation offered. The amount of that compensation, of course, is not regulated by the MLS or anyone else. So you could offer $1.00 in compensation, as a certain Iowa brokerage did against a local KW franchisee.

Nonetheless, when the MLS is a wholly owned subsidiary of the Association, presumably the Association’s grievance procedures could also cover alleged violations of the Compensation piece of C&C. It is important, however, to keep in mind that the Association actually has no authority whatsoever to adjudicate a dispute over compensation as a matter of ethics.

Procuring Cause Issues Are Outsourced

Second, even the larger MLSs (particularly regional MLSs where multiple local Associations are involved) tend to deal with only a fairly narrow band of C&C related issues. The single biggest reason for compensation disputes is related to “procuring cause.” Buyer Agent Susie works with a client, shows him 123 Main St. Client dismisses Susie for whatever reason, and then buys 123 Main St. from the Listing Agent Joan. Susie brings an enforcement action against Joan.

Thing is, each and every procuring cause dispute is highly specific, varied, and fact-dependent. It is obviously not against the rules of the MLS or the Association to refuse to pay a broker/agent who didn’t do anything deserving of compensation. The whole issue of procuring cause is whether the broker/agent bringing the complaint did in fact do something to be the “procuring cause” of the transaction, and that’s a difficult, face-based, case-by-case adjudication. The Rules Committee or the Enforcement Committee or the Star Chamber or whatever it’s called at the MLS — which is usually made up of brokers or broker representatives — are loath to get into trying to figure out a he-said-she-said type of a situation.

So almost all of those issues related to procuring cause are booted to an outside arbitrator.

The MLS enforcement mechanism only gets involved in a narrow group of cases where the rules of the MLS itself may need interpretation. The example I was given was when the compensation offered changes between publishing a listing on the MLS and a later point. So Joan puts in a listing offering 3% as compensation; Susie sees it, starts showing the house, etc. Two weeks later, Joan modifies the listing offering 1.5% as compensation, but Susie didn’t see that modification since she was busy writing up an offer on the house. Does Joan owe 3% or 1.5%?

It’s that sort of decision that the MLS committee adjudicates. Because it’s not about procuring cause or something super fact-dependent. It’s about the rules of the MLS and what they mean.

Limited Enforcement Power

Third, and this is important, the MLS (or the Association) ultimately holds limited power to enforce its decision. The MLS can levy fines, levy suspensions, etc. but ultimately, its final enforcement power is expulsion from the MLS. If Joan and her broker simply refuses to pay Susie, refuses to pay the fine, etc., then the MLS can expel them, but Susie won’t get a dime.

If Susie wants to recover the actual compensation owed, she must resort to the legal system, whether the courts or arbitration, which can do things like freeze bank accounts, send armed men (i.e., cops) to Joan’s house, etc.

In that legal action, Susie will surely refer to the MLS membership agreement, the rules of the MLS, and the listing agreement and claim that Joan and her broker is in breach of contract. But it is the American court system that enforces contract, not the MLS.

The Power of the MLS

Today, of course, few if any broker is willing to face expulsion from the MLS, so its enforcement power is fairly robust. Losing access to the MLS makes it awfully difficult to stay in the real estate business, after all.

However, in light of the discussion referenced above, I think it’s important to recognize that the power of the MLS is ultimately rooted in its network effect: brokers needs to be on the MLS because other brokers are on the MLS, who are in turn on the MLS because other brokers are on the MLS, etc. etc. The value of the MLS, and its power to enforce, is dependent entirely on the number of users on the MLS.

Sam DeBord is correct, therefore, that neither Zillow nor brokers want to have the Wild West, as he called it. But I would caution us all on sort of taking it for granted that MLS enforcement is the only way to enforce C&C.

Framework vs. Enforcement

That is, the MLS undoubtedly provides the framework — the legal agreements between the Participant and the MLS, which then ends up binding Participant to Participant — for C&C. It provides enforcement based on network power, but only for a narrow band of “rules interpretation” issues that arise. The bulk of compensation disputes, which are procuring cause disputes, are outsourced to the legal system (arbitrators are part of the legal system).

There is no reason why a brokerage, or a group of large brokerages with lots of cash to hire attorneys, could not setup the legal framework of agreements binding its members to C&C. As to enforcement, any procuring cause dispute can and will be booted to the legal system, precisely as is done today under the MLS, and any rules interpretation disputes can be handled by a committee that meets once in a while.

The only difference between our hypothetical brokerage network — let’s call it… mmm… I dunno… Project Supdream — and the MLS is that the former may or may not have network effect power while the latter does. For that matter, if a large enough portal created the legal framework of agreements requiring something one might imagine could be called Zooperation and Zompensation, the difference between that and normal C&C is the value of the networks involved.

I can think of a number of scenarios in which membership in a non-MLS network is important enough to the participants that they will comply with the rules of that network rather than face expulsion. Even some private pocket listings type of networks could establish C&C within its limited membership, and enforce it, as long as members value that network enough to comply with its orders.

In that sense, I differ with this statement by Sam DeBord:

The problem with Upstream doing commission regulation is that it then requires a regulatory/enforcement arm. That’s a much bigger organization than the current plan which seems to be almost solely marketing.

Not really. Upstream could mandate C&C, regulate it, and even enforce it. As we see above, the vast bulk of enforcement happens off-MLS with the legal system. No reason why Upstream, or Zillow, or some new thing could not do the same.

So, About Direct Feeds…

If we might return one moment to the whole Listhub, Zillow, Direct Feeds, etc. discussion….

What’s truly intriguing about the Direct Feed is what’s unknown, but constantly assumed. It is assumed by most industry participants that the MLS is unaffected when brokerages do a direct feed to Zillow, because the value of the MLS is in Cooperation and Compensation.

What if that’s simply a bad assumption on our part?

The power of the MLS is the result of network effect. The value of the MLS increases with adding one additional subscriber, and decreases with losing each member. But post-Internet, have we not seen that some of the value of the MLS was that it was the conduit to the Web through which brokers and agents could advertise properties for sale to a far wider consumer audience? We don’t know just how big a part of a contemporary MLS’s value is in its being the technical, legal, and policy gateway to the Internet for most brokers and agents, but I think we have to accept that some part of the value is just that.

If all sellers want their homes advertised on Zillow, and all buyers go to Zillow to look for homes, at some point, that network effect will translate to the brokers and agents who are theoretical fiduciaries of said seller and said buyer. And if the network effect builds on Zillow (or anywhere else), it has the same power that the MLS has to enforce policies and decisions, doesn’t it?

Again, I’m 110% sure that Zillow has zero intention of becoming an MLS, or starting a compliance department, or any such thing. (So you can relax, Jay Thompson.) I hope the MLS remains a vital part of the industry’s fabric as the lawgiver that organizes the chaos. But I’d rather hope that with eyes wide open as to the actual mechanics and structures of the whole edifice.

Whoa, this got long. I’m on the road for the next few days so blogging will be light. Nonetheless, your thoughts and comments are, as always, welcome.


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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