Heaven's Got A Plan For You: The Future of Organized Real Estate, Part 1

It’s been a while since I’ve written. Blame a travel schedule that would be marriage-destroying, were I actually married, combined with far too much to do and far too little time to do it in. But I realized recently that I have actually never set down in words one of the main themes of my speaking and consulting work of recent years. I’m not entirely sure why, except perhaps my personal quirks that has me not talking about my client work (or even who they are) publicly, and most of these concepts and ideas and strategies were developed for clients over the years.

But when I spoke at CMLS 2016 two weeks ago, I laid out in broad strokes most of these, with permission from clients. You can’t get more public than that, can you? So I figured maybe it’s time to share the ideas with all of you, the Most Informed Readers in the industry. I’ll do this in multiple parts, since there’s no way to put all of them into one post, no matter how lengthy and gigantic.

This series is not likely to be of interest to the working REALTOR on the street, so go ahead and skip the entire thread. None of this will help you get a lead, convert a lead, or what-have-you. I also know a few of you like to just rail against anything in organized real estate — the Association, the MLS, etc. etc. Of course I respect your right to do that, but maybe, for this series, it might make sense to actually read and think about what I’m laying out before you start ranting about “criminal cartels” and such. #justsayin

The series may be of interest to those of you involved with organized real estate: Association Executives, MLS staff, elected leadership, and brokers who have to deal with the structure of the industry as it exists today. I will be incorporating slides I’ve used in past presentations where they fit.

So let’s get into it. In this first part, I’ll lay out the overall thesis and why I feel the way I do.

In brief, the real estate industry in the U.S. is suffering from a crisis of incompetence amongst real estate agents. The only way to address that problem is by making REALTOR Associations be what it can and should be: the institution which guarantees and enforces professionalism. However, the Association’s dysfunctional co-dependent marriage to the MLS prevents that. Yet, because of financial pressure, separation seems impossible. I propose a way to do just that through MLS Privatization, which guarantees financial viability for the Association, while liberating the MLS to be what it can be, so that the Association can do what it needs to make the term REALTOR synonymous with competency, fairness, and high integrity.

This is one future of organized real estate, filled with promise and brightness. The other future… is a dark one, which we’ll get into in future parts.

The Crisis of Incompetence

A few years ago, I remember having conversations with friends about working in the real estate industry — or any industry, for that matter. I felt then, and I still feel today, that if you’re working in an industry, you should be working on one of the top five problems that industry faces — otherwise, what’s the point?

Well, the number one problem of the real estate industry today is rampant incompetence on the part of the real estate agent. (In some cases, that incompetence crosses over into unethical and even illegal behavior.)

That’s not just me disparaging real estate agents, by the way. That’s the conclusion of the National Association of REALTORS in the DANGER Report:

Thing is, the industry has known about the problem for years, if not decades. The whole “raise the bar” conversation has been happening as long as I’ve been involved with real estate.

Question is, what can you/we DO about this?

The Typical Solutions Bandied About

Most often, people agitate for government action — make real estate licenses harder to get, require more education, etc. etc. There are at least four problems with this, and probably more.

• Politicians have zero interest in seeing unemployment rates rise while they’re in office; real estate agents don’t file for unemployment, even if they’re making no money.
• Most politicians view real estate as a “transitional career” in between “real jobs” and therefore are loathe to make licenses harder to get.
• Every scheme requiring more education and/or credentials (college degree, etc.) has to grandfather in all those agents who don’t have those things today; well, some of the incompetence/unethical crap is coming from those people.
• The problem of incompetence isn’t an issue of ignorance of real estate law (although it can be) or license requirements, but of customer service, honesty in business dealings, and knowing what to do to represent a client.

The other tack that most of the #RTB folks take is that brokerages ought to be responsible for ensuring that agents are competent and ethical. And to be fair, a whole lot of brokerages really try hard to do just that. But there are a number of problems with making the broker responsible for solving the incompetence issue.

• The dominant business model of brokerage today doesn’t reward quality over quantity. In fact, it’s exactly the opposite, where Headcount Is King. Why?
• Because agents are independent contractors, which means that the brokerage has zero costs of “employing” an agent until s/he closes a deal, at which point the broker takes a big chunk as a split. Legal liability can be an issue, but that’s what E&O insurance is for — it’s just the cost of doing business.
• And because agents are independent contractors, the broker is limited in what he can make the agents do and not do.
• In fact, one of the dominant brands (REMAX) says in its public filings that its business model is driven by desk fees and other fees charged to the independent contractor agent.

The long and short of it is that there is zero incentive for a broker to be a pain in the ass about competence, ethics, and so on. Brokers still try — I know so many who do — but it’s really not in their financial best interest to do so.

Finally, you do get some people say once in a while that the Association/MLS ought to raise the bar in a variety of ways. The method most often mentioned is to raise dues dramatically, so as to “wash out” the incompetent part-timers. Again, there are at least two problems with this approach (if not more).

• First, the government in the form of the DOJ views the MLS as an “essential utility” for engaging in brokerage business (which it is). Therefore, any attempts to restrict/limit access to the MLS is automatically viewed with suspicion on anti-trust grounds.
• Second, the assumption is that incompetence is limited to part-timers. That assumption seems to make sense at first glance, but it simply isn’t correct. Some of the worst offenders are top producers with business practices that would make a used car salesman blanch with embarrassment.

So again, what do you DO about the problem?

The Association of REALTORS

Personally, I have always thought of the Association of REALTORS as the institution that ought to promote and ensure professionalism. It’s written right into the Preamble to the Code of Ethics, which every Association everywhere considers its core founding document. In fact, the difference between a REALTOR and a mere licensee is said to be the Code of Ethics. Remember this campaign from a couple of years ago all over Facebook?

It even quotes from the Preamble to the Code of Ethics. Well, here are the parts I consider to be fundamental to the very identity, the soul, of the Association:

Under all is the land. Upon its wise utilization and widely allocated ownership depend the survival and growth of free institutions and of our civilization. REALTORS® should recognize that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment.

Such interests impose obligations beyond those of ordinary commerce. They impose grave social responsibility and a patriotic duty to which REALTORS® should dedicate themselves, and for which they should be diligent in preparing themselves. REALTORS®, therefore, are zealous to maintain and improve the standards of their calling and share with their fellow REALTORS® a common responsibility for its integrity and honor. [Emphasis added]

I love those words: Beyond Ordinary Commerce. That’s exactly what makes real estate brokerage a “profession” in any sense of the term. And I believe in them, because I know so many great brokers and agents and Association Executives and franchise operators and so on and so forth who believe in them and live like they believe in them.

So later in the Preamble, we get this:

The term REALTOR® has come to connote competency, fairness, and high integrity resulting from adherence to a lofty ideal of moral conduct in business relations. No inducement of profit and no instruction from clients ever can justify departure from this ideal.

Maybe the term REALTOR meant those things in 1924 when Arthur Barnhisel, then the Chair of the Ethics Committee of the young National Association of REALTORS, wrote the ringing words of the Preamble. But in 2016, the term means nothing of the sort and it hasn’t meant anything of the sort for years, if not decades.

The Degradation of “REALTOR”

Ask any working REALTOR today about the biggest headache she faces in working on a transaction, working in the business. The answer is almost always “The agent on the other side.”

The other agent doesn’t know what he’s doing. He doesn’t return phone calls. He screws up important paperwork, so she has to do the work for him. He engages in shenanigans, like not presenting your offer on time to the client, or with such biases so as to double-end the deal for himself. He doesn’t know the neighborhood. He doesn’t know how mortgage works. He’s lazy, he’s stupid, he’s incompetent. And so on and so forth, etc. etc. That litany of complaints is familiar to just about every single person who has closed more than a few deals in her career as a real estate agent.

Thing is, in just about every state, every county, every town in America, that crappy agent on the other side is a card-carrying, dues-paying, Code of Ethics governed REALTOR.

NAR spends tens of millions of dollars every year on advertising campaigns to promote the REALTOR brand and using a REALTOR. Yet, just about every shitty consumer experience that any buyer or seller has in America is likely with a REALTOR. And personal experience trumps fancy TV ads every day of the week and twice on Sunday.

How did this come about?

There are two reasons, if you think about it, why the term REALTOR went from “competency, fairness, and high integrity” to utterly and completely meaningless.

First, organized real estate is the victim of its own success. In 1924, when the Preamble was written, only a handful of states had passed licensing laws (the first was California, which passed a licensing law in 1917). Real estate then was far more of a wild west type of atmosphere with charlatans and con-men taking advantage of buyers and sellers in a variety of ways. The founders of NAR and some of the leading real estate businessmen of the early 20th century (think of Benjamin Banker and Colbert Coldwell) thought that situation was horrible and worked to professionalize real estate. The Code of Ethics is born out of that effort to eliminate some of the worst abuses.

And REALTORS were incredibly successful as state after state started to pass license laws and regulate the profession. Over the years, they have continued to work with government to professionalize the industry. The success of REALTORS in doing this meant that most of the concepts and principles of the Code of Ethics were imported into state real estate laws.

Ask yourself this today, because I’ve asked it of just about every Association leader I’ve talked with on this topic: What does the Code of Ethics require of you that your state law does not?

The answer is “Nothing”. (In some cases, people know enough of their state law to say, “Well, there are some provisions that have to do with professional-to-professional stuff… but nothing as far as consumers are concerned.”)

As the laws and regulations incorporated more and more of the Code of Ethics, NAR never really updated the Code to require more of its members, the REALTORS, than the law does. Sure, there are changes and modifications every year to the Code and to the Standards of Practice, but they rarely have anything to do with consumers. And they rarely have much to do with “competency, fairness, and high integrity.”

It isn’t as if NAR is unaware of the problem. In 2014, the Board of NAR voted to create a Code of Excellence, describing it as a “first step” towards “raising the bar” on the profession. But from the very start, the Code of Excellence (CoX?) was “aspirational” rather than mandatory, which sort of defeats the purpose of a “Code” of anything.

Okay, if the first reason is success, what’s the second reason?

The second reason why the term REALTOR has become so degraded over time is the MLS: the Multiple Listing Service. More precisely, the reason is that the MLS and its growing importance to the practitioner meant that the Association didn’t have to work all that hard for members. And those membership dues funded, and continues to fund, all manner of operations of the Association — local, state, and national — that have nothing to do with professionalism.

The Dysfunctional Marriage That is the MLS and the Association

Maybe back in 1924, real estate brokers and agents joined the Association of REALTORS because of the Code of Ethics and what it meant to consumers looking for people they could trust not to screw them over on a land deal. We don’t rightly know. But in 2016, we know that the #1 reason why brokers and agents join the Association is to get access to the MLS. It’s not debatable. Everyone from the agent on the street to the CEO of NAR knows it to be true.

The MLS began as and has always been (except for those few Broker-owned, or otherwise non-Association MLS’s) a “member service” of the Association. For decades, only REALTOR members of the local Board had access to the MLS, which was a member service. But that landscape has changed over the years.

First, a number of lawsuits established that in several states, tying REALTOR membership to MLS access was illegal (so-called “Thompson jurisdictions”).

Second, with the advent of technology, the MLS became far more important and far more crucial to how real estate is practiced. That exploded, obviously, with the introduction of the Internet, and the consumer’s ability to see what’s for sale and where.

Third, more and more people joined the Association just to get access to the MLS, transforming what was once a true membership organization of people who believed in the Code of Ethics and voluntarily wanted to get together with other “professionals” into something more like a quasi-government/labor-union that many, many people felt they were forced to join.

So where are we today? I describe the relationship between the MLS and the Association as a co-dependent, dysfunctional marriage.

On the one hand, the Association derives most of its membership from the MLS. It’s the reason people join and pay the Association dues.

On the other hand, the MLS gets a de facto monopoly where its market area is identical to the Association’s boundaries. Instead of natural competition between MLS’s (who are, after all, offering concrete technology and services of value to professionals), we end up with little fiefdoms and any cross-border incursion is treated as an act of war.

On the other other hand, though, the MLS is forced to operate as a non-profit with zero pricing power, because it is owned and operated by the customers (aka, “the members”) who feel compelled to join, and therefore regard the MLS fees/Association dues as something like a tax. And nobody likes paying taxes.

And on the other, other, other hand, the Association doesn’t need to provide any value in and of itself to justify the dues. As long as it is tied to the MLS, people will join and pay the dues, even if they’re grumbling the entire time. So it is that over the past few decades, while MLS technology advanced by leaps and bounds (well, let’s be real here… more like crawled along, always behind the times…) the Association hasn’t changed significantly, hasn’t offered much in the way of new innovation or value or what-have-you.

And on the (other x 4) hand, the governance of the MLS became political as Directors were (and are) appointed/elected by a political process, rather than a business process. That in turn means the MLS is extraordinarily slow to act on anything, and the entire decision-making process is consensus-driven and done by committees. The CEO in so many of our MLS’s are not actually Chief EXECUTIVE Officers; they are, rather, Chief ADMINISTRATIVE Officers who just do whatever the Board tells him to do and has very little independent decision-making or strategic ability.

I’ll get much more into depth on the MLS in the next part of the series, but suffice to say that most of the problems of the modern MLS and of the modern Association stem from this unhealthy relationship with each other. And this is a marriage that needs to end.

Why? Because neither the MLS nor the Association can be who each needs to be while they’re together. Yeah, classic co-dependency.

The Core Mission of the Association and the MLS

Fact is, the Association’s core mission, it’s identity, it’s very soul and its reason for existing is in the Preamble quoted above.

That mission is (1) Advocacy, and (2) Professionalism. Everything else is gravy. All the training, the education, the forms, the arbitration, etc. etc. etc. are all secondary to those two goals of lobbying the government (“grave social responsibility and a patriotic duty”) and of professionalism (“beyond ordinary commerce”).

The Association cannot achieve that mission unless it is exclusive. Membership has to mean something. And if every single licensee in an area is a REALTOR, short of the miracle of every REALTOR being a committed, politically-active, zealously ethical and competent professional (which has never happened and never will as long as human beings are involved), the Association cannot fulfill that mission.

In a real way, the Association has to decide whether the blue-and-gold REALTOR “R” is more like the Costco “membership” or more like the Navy SEAL Trident.

Today, it’s the former: everybody who wants the “R” just pays the required dues and they get it. I believe it should be more like the latter. Not everyone who wants to be a Navy SEAL gets one. You have to prove yourself worthy of the title and the Trident.

The MLS, on the other hand, has the core mission of being the marketplace for properties for sale. It has to be inclusive, if not exhaustive, in order to fulfill its mission.

Think about it — is an “MLS” that only has 20% of the homes for sale in a given area worth anything? Sure, you can talk about “cooperation and compensation” and “data compliance” but if those only exist for one out of five homes being sold in an area, does anybody give a damn?

The MLS is valuable because it is the marketplace for properties where (ideally) all of the homes for sale are listed.

Given that, the MLS can’t start chopping off access willy-nilly. It must accept all comers who agree to abide by the terms of the MLS.

The two missions are in direct conflict with each other. They cannot be reconciled.

The MLS and the Association are like a married couple where the most important thing in the world to the husband is to have a huge family with six kids, and the most important thing in the world for the wife is to be CEO of a Wall Street bank. The two are in direct conflict and cannot coexist.

So… Divorce… But How? And What About the Money?

In order to make the Association all that it can and should be, and to allow the MLS to be all that it can and should be, divorce is necessary. I’ve been working this plan out for the last few years with some forward-looking, fearless, innovative MLS executives (you know who you are — won’t mention you by name given the possible political sensitivity of the topic) and I think I’ve got it figured out. I’ll present the details in future posts, but the broad strokes are as follows.

Like in any divorce, the divorce of the MLS and the Association have to take money into account. In fact, it might be the most important topic — again, just like in any divorce.

If what we tell the Association is to just get rid of the MLS, suffer horrible financial consequences, and to just suck it up… it’s never gonna happen. Hell, I wouldn’t do that if I were an Association Executive.

It’s just too much to ask a REALTOR Association to risk giving up 40-60-80% of its membership with all of those dues dollars, lay off the entire staff, and just shrink. After all, the Association has really important, vital tasks for it to do: government affairs and professionalism. It can’t do those things with no money.

The solution, then, is what I’ve been calling MLS Privatization. It seeks to separate the two as much as possible, but guarantees the financial survival of the Association. Privatization accomplishes this by converting the ownership of the MLS by the Association into economically meaningful, dividend-paying, shares in a for-profit commercial venture.

And on paper, it works. It works beautifully. Every model I’ve ever built, some using real numbers from real MLSs, show that the Association actually makes more money through dividends and equity ownership than it does from lost member dues.

Privatization does this without substantially disturbing the control over the MLS that the industry has always had, and that the industry guards jealously. It accomplishes this by bifurcating the governance structure to streamline the business decision-making, while insuring — actually, enhancing — the ability of REALTORS to control the rules, policies, and the day-to-day utility of the MLS.

Along the way, Privatization creates hundreds of millions, possibly billions of dollars, in wealth. Not just income for the Associations, but actual assets and positive net worth: wealth. And because brokerages are the Participants of the MLS, Privatization has built into it a variety of scenarios for profit-sharing with the Participants, who are, after all, the engine that makes the MLS go.

This, ladies and gentlemen, is the future of organized real estate. I’m convinced of it.

That Incompetence Problem…

Bring it back full circle. I began this essay by noting that rampant incompetence is the single biggest problem in real estate today. The only viable solution is for the Association of REALTORS to make that term mean something again. If the term REALTOR were once again synonymous with “competency, fairness, and high integrity” then consumers can trust that they will be protected and looked after by true professionals should they choose to work with a REALTOR.

In order to do that, the Association must be able to make demands and have real requirements for a licensee to qualify for the REALTOR name. The REALTOR “R” must be something more like the Navy SEAL Trident: not everyone who wants one gets to have one. And in any given marketplace, no more than a small minority of practitioners can carry the REALTOR brand, because it truly is a mark that sets them apart from all the others.

We don’t raise the bar by asking the government to do it for us. Nor do we do it by demanding that brokerages do it, against their commercial self-interest. We do it by having the proper institution — the Association of REALTORS — with its proud hundred-year tradition of professionalism make the term REALTOR meaningful again.

If the Association’s financial viability were guaranteed, would its leaders not want to make that reality? Wouldn’t you?

And of course, the MLS will benefit immensely as well, and be able to become what it could be, should be, in the Information Age of the 21st century, instead of remaining mired in the models of the mid-20th century. Again, I’ll detail that in a future post.

In Closing…

This is but the first part, an introduction to concepts and principles I’ve spent years developing and refining, with some of the brightest minds in our industry.

But I really wanted to do it for a few reasons.

First, just to lay out the concepts in broad strokes feels good. 🙂

But more importantly, I’ve come to realize that there are a number of people in the industry who think that I’m hostile to the Association, that I hate NAR, or that I disparage REALTORS or some such thing. Nothing could be further from the truth.

The truth is that I love NAR and the Associations for the under-appreciated work that they do. REALTORS are the only major political force in the United States who give a damn about property rights, and with their political muscle, do something about it. Yes, NAR is a trade association, but in so many ways, it lives up to the ringing words of the Preamble — the grave social responsibility and the patriotic duty to create and maintain communities across the country.

I have been fortunate enough to work with some of the finest Government Affairs Directors in the industry over the years. The government abuses that they have prevented, the mistakes that they have corrected, and the positive things that they have done through the power of organized real estate simply cannot be underestimated. The average member simply has no idea just how important the Association has been and remains not just for their business but for their client’s homeownership rights.

Now, I don’t love NAR or the Associations for what they’ve become over the years, and some of the inertia that prevents them from being all that they could be. But that’s why I am so… compelled? Driven? Crazy enough? to want to see them be who they were and need to be again.

All of this comes from a place of love and respect for the hard work, the traditions, and the ideals of the REALTORS who came before. It was, is, and will be motivated by those individual REALTORS, brokers, managers, Association Executives, MLS executives, and others who hold on to those ideals, who continue to work, to continue to behave in exemplary fashion, living up to the ideals of the Founders of NAR. There are so many of you who do the right thing, and fight to do the right thing. Arthur Barnhisel, Benjamin Banker, Colbert Coldwell, and all of the other forefathers of the REALTOR movement would be proud of you.

And that’s why I do what I do.

Please let me know if you have any questions on anything so far, but future parts with more details are coming… when I can find time to write them down.

-rsh