The Church of REALTOR Faces A Fundamental Question

[You can consider this Part 2 of an ongoing series that started with my last post about comments on MLS and Upstream, but really this is more like Part 372 of an ongoing series about the future of organized real estate. You can blame my pie-in-the-sky high-level theorizing on my philosophy degree. But anyhow…]

Organized Real Estate faces a fundamental question about its future. The immediate cause is the growing concern over Project Upstream, which certainly looks like it seeks to replace the MLS as the “reference database” of real estate. But the deeper cause is that changes in technology, society, and the industry are finally coming together to force ORE to evolve, one way or another.

Here’s my thesis:

• Organized Real Estate historically has not differentiated between the Association and the MLS. The two were the same, with the MLS being a “member service” provided by the Association.
• Changes in technology, society, legal environment, business environment, etc. — not the least of which is the Internet — have separated the Association and the MLS into two separate, distinct, yet inter-related parts of ORE.
• The MLS is the State, which lays down the rules of the road and enforces them. It’s about rules, policies, violations, compliance, and the creation and operation of a marketplace by, of, and for professionals.
• The Association is the Church, whose charter lays out its core functions as advocacy and professionalism. It’s about aspirations of higher service, transforming a mercantile activity into a profession infused with skill and civic responsibility “beyond ordinary commerce.”
• For most of its history, and still today, the Association is dependent on the MLS for membership and revenues. The Association is like a state church whose members may or may not believe, but attendance is mandatory.
• Technology, however, has driven the concentration of power into large organizations. Brokerages and national franchises have become larger, and national in scope. NAR has become far more than just a gathering of local Associations, and is today an entity unto itself.
• Project Upstream, properly understood, represents an attempt to evolve past the origins of ORE: brokers in a local market coming together to cooperate, then those local groups getting together with other groups to create State and National Associations of REALTORS.
• The vision behind Upstream is for more of a top-down approach which promises economies of scale, uniformity across the country, and a centralized structure that more easily meets the needs of large, national and super-regional companies.
• The fundamental question for ORE, then, is whether it should become more like the Catholic Church or remain closer to its Presbyterian roots. Top-down, or bottoms-up? That’s the big question of the day.

L’affaire d’Upstream is actually about how the real estate industry should be organized and operated. It is ultimately a question of governance, of power, and of structure.

Let’s get into it, for those of you who like to read lengthy, overly-wordy posts. For everyone else, the above summary should serve.

Brief Explanation on Ecclesiastical Polity

For those who are not from the church business, let me offer a very brief overview. If you’re more interested, you can dig deeper with this entry in Wikipedia.

The Catholic Church is an episcopal organization, which is hierarchical and ruled from the top-down. The Pope is the ultimate arbiter of all things in the Catholic Church, and local congregations are parishes with a priest, who answers to the bishop of a diocese, who in turn answers to the archbishop of the archdiocese.

Most Reformed churches are more of a presbyterian organization, and PCUSA (Presbyterian Church USA) is a classic example. Members of a local church elect elders, and those elders govern the church. They meet with elders from other churches nearby to make policy for that region. They then send representatives up to the national General Assembly that governs the entire organization. While some hierarchy exists, the key difference is local control by the local congregation. It is much more of a bottoms-up organization.

There are dozens of variations, but for our purposes, those are the two models.

The Church of REALTOR

There is no denying that the origins of organized real estate in the United States followed a presbyterian model. After all, NAR itself was founded as the National Association of Real Estate Exchanges in 1908:

The National Association of REALTORS® was founded as the National Association of Real Estate Exchanges on May 12, 1908 in Chicago. With 120 founding members, 19 Boards, and one state association, the National Association of Real Estate Exchanges’ objective was “to unite the real estate men of America for the purpose of effectively exerting a combined influence upon matters affecting real estate interests.”

The Association’s founding boards included the Baltimore; Bellingham, Wash.; Chicago; Cincinnati; Cleveland; Detroit; Duluth, Minn.; Gary, Ind.; Kansas City, Mo.; Los Angeles; Milwaukee; Minneapolis; Omaha, Neb.; Philadelphia; St. Louis; St. Paul, Minn.; Seattle; Sioux City, Iowa; and Tacoma, Wash., boards and the California State Realty Federation (now the California Association of REALTORS®).

I don’t know how those local boards were governed in 1908, but I imagine those local boards were entirely independent, recognized no authority over them by anybody else, and governed themselves either through direct democracy of the membership (congregationalist) or through elected leadership (presbyterian) models.

Today, local Associations run much like a presbyterian church: the members elect the Board, and that Board hires the Association Executive and other staff. The local Board makes its own rules, by-laws, etc. Local control and local governance is the norm, not the exception.

However, like PCUSA churches, in order to be an Association of REALTORS, each local Association affiliates with NAR (and the State Association through the 3-way agreement). It must recognize the authority of NAR to create and enforce a variety of rules that it must follow. (The most important of these is the Code of Ethics and the related Standards of Practice.) Refusal to acknowledge the authority of NAR could result in losing the charter, which makes that local Association no longer a REALTOR organization.

NAR itself is governed, in theory, by its Board of Directors, who are sent there by local Associations. (The number and composition of NAR Directors are set by a complicated formula. See Article IV, §6 for detailed description.)

The Local MLS

As we can see, the origins of NAR itself is in a number of local “exchanges” coming together. It makes sense. Brokerages in Duluth, MN weren’t getting together solely for socializing; they were doing deals with each other, and offering cooperation and compensation.

For most of ORE’s history, there was no gap between the Association and the MLS. The two were — and in many markets, still remain — one and the same. The MLS is a member benefit offered by the Association, and created by the members themselves putting listing information into the MLS.

Naturally, then, when these local Associations got together at the REALTOR equivalent of the General Assembly (NAR Board of Directors), they chose to coordinate the rules and policies of their member benefit service (the MLS) with each other. So NAR set policies of the local MLS because there was go gap between the Association and the MLS.

As long as real estate remained almost entirely local, as it has for most of NAR’s existence, this wasn’t a major issue. Pre-computers, pre-Internet, when the MLS was printed into books for distribution amongst local brokerages, why would anyone have cared greatly who governed what when in reality, each local Association operated the MLS according to the needs of local brokerages and the local buyers and sellers? Even large national franchises, such as Coldwell Banker, were really just a conglomeration of local brokerages in each local Association/MLS doing what they do locally.

It just wasn’t a big deal.

Enter the Information Age

Then the Information Age came to real estate. Computerization, digitization of information, and of course, the Internet changed everything. When listing information could be delivered electronically to terminals in brokerage offices, and a computerized database replaced the printed book, consolidation and regionalization became efficient.

At the same time, brokerages and real estate franchises could get larger than they had ever been able to before, because information technology and improved communications made it possible for them to market to consumers as a single entity (disclaimers notwithstanding) and to offer products and services to their agents across wide geographical areas from the central headquarters office. Just think about a company like Keller Williams, which boasts over 110,000 agents: would that company be possible without telecommunications and information technology any more than Walmart is possible without technology?

And of course, the impact of the Internet on real estate continues to reverberate. When consumers were suddenly able to get access to information through the Internet that they could not get before, the industry went through a decade (or more) of turmoil trying to figure out what it should do. The advent of portals like Realtor.com, Trulia, Zillow, and others suddenly made the local market by local market structure of the pre-Information Age MLS incredibly painful and inefficient.

Even locally, the Internet and technological advances meant that local brokers could and needed to service wider and wider areas. Just imagine being a broker in the Washington DC metro area. A client wants to buy a house. You could be looking from DC itself to Maryland to Northern Virginia; three different states (DC has its own licensing law and commission, like a state) and dozens of possible markets.

Consolidation and regionalization are inevitable given those changes. The large regional MLS’s of today, such as CRMLS, MRIS, MRED, ARMLS, MyFloridaMLS, and others are the direct result of technology driving social and business change.

One rarely examined result, however, of those changes — including regionalization — is that they created distance between the MLS and the Association. Quite a few Associations today “belong to” (that is, they are shareholders of) regional MLS’s that are separate entities with its own Board of Directors, its own staff, and its own building. Even single-Association MLS’s are often setup as a separate legal entity with its own separate governance structure.

We see this all over the industry today as AE’s of Associations that are shareholders of the regional MLS refer to “them” and “us” all the time. Members do the same, and MLS Directors have to be reminded constantly that they have to take off their “Association hat” and put on their “MLS Director hat” to fulfill their fiduciary duty to the MLS itself.

The Complication that is the MLS

Along the way, the MLS, once the origin of the Association itself, and then the most important member benefit of the Association, became a complicated problem.

It is now widely understood by Association leadership that the vast majority of their members are MINOs (members in name only) who join the Association solely for the purpose of getting access to the MLS. We’re talking in the 80+% range. In markets where the local Association has nothing to do with the MLS (e.g., Seattle area), the membership is roughly half of similar areas where the Association controls the MLS.

In a way, the local Association is somewhat like the churches in Puritan New England where attendance was mandatory. Not all believe, but all participate and pay.

As one can imagine, that leads to quite a few problems.

First, “members” feel extorted to join. It’s hard to get the warm and fuzzies about an organization you have to join.

Second, many who do join don’t care about the Association; they’re just buying a subscription to the MLS, which they need for business, but all that hoo-hah about Code of Ethics and professionalism and all that is just mumbo-jumbo.

Third, because the subscribers are “members” instead of customers, the overwhelming incentive is to pay as little as possible and they make demands of the elected leaders accordingly.

At the same time, the local MLS is rubbing up against the new reality of real estate brokerages and national franchises with operations across the whole country. It really is inefficient and painful for a brokerage to have to belong to 72 local MLSs with their varying rules and policies and fees. And those 72 have different MLS systems as well as differing levels of technical competence, adding to the pain. Setting up a simple IDX website becomes a nightmare of expense, time, and navigating red tape.

Calls for consolidation and regionalization have been loud in the industry for at least the past ten years, but such efforts have been slow, slow, slow and often marked with failure for a variety of reasons. The core reason, however, is above: the Association relies on its MLS for membership and revenues. And given the historical origins of the Association itself as local exchanges built on the presbyterian “local control” model… it’s very, very difficult to get local Associations to give up the MLS.

Which… is why we’re here with l’affaire d’Upstream being the most discussed issue on the circuit today.

Upstream Is About Polity and Governance

I have said time and again that I love the concept of Project Upstream: broker control over data. The problems and pain points that the Upstream people point out, such as multiple data entry, difficulty in getting data out of the MLS, “overlapping market disorder”, etc. etc. are all real. Those do need to be addressed.

But as my last post made clear, I’m deeply uncomfortable with the current incarnation of Upstream for a variety of reasons. I won’t rehash those here. What I realized, however, in thinking through the issue more is that this really isn’t about technology or data management or whatever. It’s actually about how organized real estate is governed today, and how it should be governed tomorrow.

I realized that because I thought more about what I asked in that video: Who makes the rules in the post-Upstream world?

Today, the NAR MLS Policy Committee creates the rules for 70+% of MLSs. I wondered out loud who would make the rules for Upstream, and assumed that it would be the Upstream Board of Managers. The light that went off for me personally — since no one has actually said any of what follows — is that maybe NAR got so heavily involved in Upstream because it wanted a seat at that table. $12 million is a small price to pay if the end result is that NAR continues to have a real voice in how the local MLS is to be governed.

And so we come to the crux of the matter.

Top-Down or Bottoms-Up?

When it comes to the MLS, there is a strong argument to be made for ever-larger MLSs, because the MLS is fundamentally about rules, regulation, and compliance as well as providing actual business services to its subscribers. I don’t think a national MLS is possible due to cultural differences, but I have little doubt that far fewer than 800 or so local MLSs is doable. I am a fan of regionalization, consolidation and even super-regionals.

The ever-larger brokerages and national franchises who are able to leverage technology to get bigger and more efficient as time goes on would welcome such a change. In fact, forcing that change is one of the motivations behind Upstream.

Since it has become clear that organic consolidation takes far too long and fails far too often, brokerages have decided that it’s time for action. I can hardly blame them. If MLS consolidation cannot happen from the bottom-up by local Associations choosing to merge and regionalize and consolidate… then Upstream will either (a) force them to merge, or (b) replace the whole damn inefficient structure with something new.

As I’ve said again and again, I understand the Why. I sympathize with the pain. I just think going down that path is throwing the baby out with the bathwater and opening the door for government regulation.

Interestingly, though, the Big Question that Upstream poses to the industry isn’t about the MLS itself, but about the local Association, the Church of REALTOR. In the post-Upstream world, with a few super-regional MLSs (or perhaps one national MLS under the auspices of NAR), and MLS policy set by some mix of Upstream’s Board of Managers and NAR/RPR, what does “local control” mean?

If we’re going to be honest about it, the answer has to be “not much”.

Local Control Without the Local MLS

Even though the rise of the regional MLS has created more distance between the local Association and the local MLS, most regionals today are still owned by those Associations and often governed by them indirectly through appointments to the MLS Board of Directors. Push comes to shove, there are powers reserved by law to shareholders of companies, even non-profit companies.

With the current incarnation of Upstream, however, the MLS itself is merely a destination for broker data, which is put into and managed by Upstream via NAR’s RPR. Who governs that project is as yet unclear, but there would be no point in Upstream opening up its Board of Managers to all and sundry local Associations — that simply recreates NAR’s Board of Directors with its 500+ Directors. Plus, Upstream is firmly a large broker initiative, born out of frustration with Organized Real Estate. If ORE is to have a voice in how Upstream is governed, it will be through NAR, the technology partner for Upstream.

Even if the local MLS remains in some form to do (some) compliance work and to do the cooperation and compensation business (which isn’t difficult to replicate), could it have rules and policies and procedures that go against whatever the rules/policies are from Upstream? I suppose that’s theoretically possible, but I can’t see it in reality. Presumably, the data feed from Upstream would come with a license that restricts the recipient’s ability to do whatever it wanted….

Again, NAR may have a voice in those rules and regulations and policies; the local Association would not, except very indirectly through NAR.

So what does “local control” mean in that world? Local control over what, exactly?

Separation of Church and State?

Some of my readers know, because they’ve heard me speak in person, about my belief that the Association and the MLS should be separated as much as possible. I’ve called it the separation of Church and State in some presentations; in others, I’ve called it a divorce, because co-dependency is not healthy, and no happy marriage ends in divorce.

Curiously, if Upstream is successful, we might achieve just that: a real separation between the Church of REALTOR and the State of Real Estate. It won’t be what I imagined, but it will be a separation….

My genuine fear is that once the “State” has been moved to the national level with Upstream/NAR, the actual state — that is, the actual civil government of the United States and its 50 states — would step in and take over regulation. The Association will be left with its own particular rituals and traditions for those who are willing to join and pay dues, but everyone else who couldn’t care less about all the advocacy stuff and the Code of Ethics (which has been incorporated into state real estate laws), would not. Overnight separation, but the industry would no longer be self-regulating in any way whatsoever.

The One True Church

If the government does not step in, however, then the more likely outcome is that organized real estate becomes far more like the Catholic Church.

The “exchange” would be operated by Upstream in partnership with NAR. Any MLS policy of the future would be created by that group.

Enforcement and compliance could be left to the local “MLS” (the name, I’m sure, would stick around) but in reality, that couldn’t happen. What exactly is the stick that the local MLS would hold over the broker/agent to get them to comply? Fines? Refuse to pay. Expulsion from the MLS? I have Upstream.

Unless Upstream agrees to enforce the rules of the local MLS — which then defeats the strategic purpose of creating Upstream in the first place — there is no effective penalty that the MLS can wield to get brokers and agents to comply.

On the Church side, as an Association of REALTORS, the local Association already has precious little control over policy. The only area where there may be value — local government affairs advocacy — is the one area where the benefit of local control is outweighed by being part of a much larger organization. Look, for example, at the national parties. It is far more powerful to be the Chairman of the local chapter of the Democratic Party, then to be the CEO of some small town activist organization.

Plus, as we discussed above, a local Association without an MLS would lose between 50-80% of its membership. So the funding to do local activities would dry up as well.

In this scenario, it would be better for all local Associations to become chapters of a larger entity — either NAR, or the State Association. Staff, budgets, resources, etc. would be set by the Mothership and allocated according to need. On the flipside, the local chapters wouldn’t have those costs on their books, and could potentially offer far more in terms of services and local advocacy than small Associations can today.

That’s not necessarily a bad thing, and maybe that’s what the rank-and-file REALTORS (and I mean REALTORS, the people who are active in the Association, rather than MINOS who just want the MLS) actually want. I honestly do not know.

But that’s the question.

The Vision of Episcopalian Organized Real Estate

If organized real estate should be more like the Catholic Church, I think this is what that vision entails:

• All local Associations become chapters of NAR, with the State Association serving as something like an archdiocese, but they are all part of NAR, the one catholic universal Association.
• Rules and policies are created by NAR and pushed down through the State and to each local Association.
• Revenues and expenses would be shared throughout NAR, or at least within each “archdiocese”, such that local staff might be paid by NAR (or CAR, TAR, etc.)
• The local MLS becomes a local service center of a national MLS, whose core is the joint venture between UpstreamRE, LLC. and NAR, with one uniform set of rules created and enforced from the top down.
• Organized real estate becomes far more staff-driven, since the bishops are all professional clergy. Similarly, professionals in various areas, whether MLS or lobbying, drive policy and action from the top down.
• We should replace the fiction that Associations are governed by volunteer “leadership” and acknowledge that the AE is for all intents and purposes the leader. Continuing with the church analogy, the local AE becomes the parish priest, the state AE becomes the bishop, and the CEO of NAR becomes the Pope.

The benefits are greater unity as NAR and possibly cost savings (e.g., putting all local staff on NAR payroll might result in savings) and uniformity of rules and policy across the board.

The downside is loss of local control which may or may not be important to REALTORS. I don’t know right now.

The Vision of Presbyterian Organized Real Estate

If, on the other hand, organized real estate should be more like the presbyterian church, I think this is what that vision entails:

• State Associations become the presbyteries of local Associations, and NAR in turn becomes the “General Assembly” of the states. (I could see some large locals become their own “presbytery” — for example, the Miami Association of REALTORS is large enough to warrant direct representation.)
• The fundamental building block, however, is the local Association; the State Association and above that, NAR, become gatherings of local Associations for joint policymaking.
• I don’t know right now whether REALTORS do or do not want to acknowledge the authority of “higher up” councils, such as the State or National Association of REALTORS, to control the local Association. If so, to what extent?
• Instead of a single national MLS, local Associations decide what they do or do not want to do with their MLS. Some may choose regionalization, others might merge, and still others might not. But that’s the decision of the local brokers in that local market.
• The key governing body becomes the local Board of Directors, not a national body of any kind, whether Upstream or NAR/RPR or anybody else.
• One implication here is that the industry has to move past the tradition of annual elections. One year in office is simply not enough time for anyone to do anything. By the time you barely understand what’s going on and what to do, it’s time for the next person to step in. Some Elders in a church serve for decades, building up institutional knowledge and competence.

The benefits are greater local control and preservation of the historical conventions of organized real estate — that is, brokers in a local market got together to form the local MLS and the local Association, and they will continue to govern themselves with whatever authority they choose to grant to larger associations above them.

The downside is inefficiency and lack of uniformity and slower decision making that comes with a democratic process. Again, I don’t know whether that’s important to REALTORS or not.

A Third Path?

It may be that there is a third path out there where organized real estate can split the difference somehow, preserving local control for those things that benefit from local control, while creating more of a staff-driven, top-down approach for those things that benefit more from unified control. I’m thinking about such possibilities, but would love to get any ideas/suggestions on that front.

Back to Upstream/RPR and Wrapping Up

This is getting way long, but then again, that’s sort of how I figure out what I think so… thank you for making the journey with me.

As I see things now, while there are a number of questions and a number of unknowns, there are a few things I can conclude:

• If you believe in a presbyterian model of governance in which local control and local independence are more important than national unity, then you cannot support Upstream in its present form.
• If you believe in an episcopal model of governance in which national uniformity is more important than local control and local independence, then you cannot support the local MLS and the local Association as it exists today.
• These two things are incompatible and in direct conflict with each other.
• There may be a third path in which these two conflicting desires for local control on the one hand and national uniformity on the other hand could be harmonized. I just haven’t figured out what that looks like… yet.

In wrapping up, for now at least since I’m sure I’ll revisit this issue later, I know that the surface debates over the next few months will be about technology, about data management, about compliance, about all of the details… but the deeper debate, I think, will be about this issue: the future polity of organized real estate. Should it be top down and catholic? Or bottoms-up and presbyterian?

‘Tis a big topic. If I’m sure about anything at all, it’s that: this is a big topic.

-rsh