Will Compass Invest in the MLS?

There is a great interview with Robert Reffkin, CEO of Compass, up on Inman today. Read the whole thing. But I saw something that really made me sit back and think, so figured I’d share it with everybody.

Here’s what Reffkin said:

And the third is that agents are starting to operate their business on sites that are not the MLS more than the actual multiple listing service (MLS) and that’s not a great thing. When you use something you make it better, with your actions, with your activity. And the MLSs have a very important role, you want them to be stronger.

The majority of markets that I see, the MLS has less inventory than sites that are not the MLS. So if that’s true, people are not going to search the MLS they’re going to search a different site. I think it’s really important to support MLSs right now and to invest more money into MLSs and make them stronger. They play an important role for the brokerage community.

If every MLS was the best it could possibly be, it would be a really good world for agents. Where MLSs are stronger and have better data quality, agents have more time and are successful. And where MLSs have poor data quality and aren’t invested in as much, it’s harder for agents. In San Francisco, Craigslist has more than two times as many leases on it as the MLS, so nobody will search the MLS for leases. We don’t want that to happen in sales across every market. [Emphasis added]

Having spent some time with Reffkin in person, I know that he’s a really smart, really thoughtful, and really strategic guy. Compass has been an impressive company with impressive growth over the past few years. So when he says something like this, I take it seriously.

So, the question is whether the highlighted statement above signals that Compass is willing to invest in the MLS. If so, how would that work?

What, Why, Where, Who, and How

Let’s start with the premise that Reffkin has answered the What (the MLS) and the Why (MLS has a very important role). What Reffkin sees is that the MLS has less inventory than sites that are not the MLS. One assumes that he’s talking about Zillow, Realtor.com, Rent.com, and other for-profit portals here, since Redfin gets all of its listings from the MLS like any other brokerage.

Let’s also assume that the Where is answered simply with “Anywhere” — any MLS that is willing to take investment. This is not a trivial matter, since most MLSs are operated as not-for-profit divisions of a not-for-profit REALTOR Association (even when the MLS is legally set up as a for-profit corporation with a separate Board of Directors and such). But for the sake of this discussion, let’s assume that some number of MLSs are willing to take investment to become the “best it could possibly be”.

All that leaves, then, are the questions of Who and How… and then a follow-up What, as in What would the MLS do with all this extra money?

Who Invests?

The first point to make is that a loan is not an investment: it’s a loan. Banks will make loans to the MLS and Association all day long, because they simply expect to be repaid with interest. An investment is one where the investor shares in the risk and the reward with the company – so it usually means equity ownership.

So who would be doing the investing in the MLS? Financial investors will not, for the simple reason that the MLS is a non-profit (or operated like one). Putting money into a nonprofit is not “investment”; it’s a gift or an endowment. So venture capitalists, private equity, etc. etc. are out of the picture. Individuals and families will not, since again, no profit.

That leaves ‘strategic’ investors — people and companies that would invest in the MLS not for financial reasons, but for strategic reasons: the REALTOR Association, the brokerages, or perhaps national franchises and others who do not expect a direct financial return on their investment but expect some sort of strategic business gain. The REALTOR Association invests in the MLS because the MLS is the most important draw for membership in the Association. The MLS itself may break even, but the member dues dollars that flow from it are important to the Association.

Brokerages (and franchises) might invest in the MLS for the sake of control over the MLS and its decisions. For example, some of the past controversies such as public-facing websites and the MLS “leveling the playing field” were largely absent from broker-owned MLSs. Being broker-owned, they were free to adopt NAR MLS rules and policies, or disregard them. They were certainly free to deploy or not deploy various tools and products and services without regard to what the local REALTOR Association did or did not want.

But there are a couple of issues with that kind of strategic investment by brokerages.

First, there is the issue of government interference regulation. Incumbent brokerages coming together to control a necessary utility for practicing real estate is fraught with legal and regulatory landmines. That’s the case even when the brokerages do not actually own the MLS, so it’s far more sensitive when they do.

Second, if you are the CFO of a brokerage, you really do have to question an investment that yields no direct return. It would be extremely difficult to trace any kind of concrete business benefit to the brokerage’s ownership and control over the local MLS that did not simultaneously violate all kinds of laws and regulations. So take Compass as an example. If Compass puts $10 million into better technology, recruiting top agent teams, or buying a competing brokerage, there are reasonably clear and direct returns to that $10 million investment over time. If Compass puts $10 million into an MLS that does not pay dividends and does not have liquid shares, but results in control over the Board, how do you trace the return from that investment?

How Does One Invest in the MLS?

But set all that aside for a moment. Suppose that Compass could see real ROI from investing in one or more MLSs. How would Compass go about doing that?

It would be a simple matter in broker-owned MLS systems, such as FMLS in Atlanta or MLS PIN in Boston or NWMLS in the Seattle area: just buy in, assuming the existing shareholder brokerages are willing to let you in. Perhaps those MLSs would welcome the infusion of capital, in which case I recommend making some calls to Compass HQ to see what the appetite is over there for making significant investments to make the MLS the best it can be.

On the other hand, I imagine that the nonprofit Association-owned MLSs are a straight up no-go for investment. For example, the largest MLS in the country, CRMLS, is a mutual benefit nonprofit corporation. Most MLSs are either wholly owned subsidiaries of REALTOR Associations, or mere divisions of nonprofit REALTOR Associations. Compass could gift these MLSs some money, but the shares have no economic value, and they don’t pay dividends, so… it’ll be hard to classify that money as an investment.

Then you have for-profit Association-owned MLSs. The best example of that might be BrightMLS, a for-profit Maryland corporation. It is privately held by some number of the 43 REALTOR Associations that participate in it. Would such an MLS welcome investment by brokerages like Compass?

Perhaps.

What I know of these for-profit Association-owned MLS is that they would welcome an infusion of capital, but they would be rather leery of “giving up control”. And from where I sit, it’s difficult to imagine a scenario in which the two sides could come to agreement… unless Compass is willing to be incredibly generous for strategic reasons. For example, Compass puts in a bunch of money, but despite owning (let’s say) 40% of the equity in the MLS, it agrees to have its 40% equity select only one Director out of sixteen.

Furthermore, the other brokerages in that MLS would be paranoid about a competitor taking a huge stake in the MLS, even if Compass controls only one seat. We can’t ever forget that the MLS is a group of competitors coming together in an example of coopetition: every single brokerage who participates, who sends people to sit on the Board, who collaborate for transactions are fierce competitors who are constantly trying to recruit each others’ agents away, who are constantly trying to gain market share, etc.

What Would the MLS Do With the Money?

A more fundamental question, I suppose, is what the MLS that has received this investment would do with the money. Reffkin says that the MLS needs to be stronger and have better data quality. He notes that portals often have more inventory than the local MLS. As he pointed out, it’s really easy to see when it comes to rental inventory, but we could include FSBO and off-MLS listing activity as well.

He’s absolutely correct. But we have to take into account the simple fact that a portal invests in XYZ because XYZ will result in more revenue and more profit down the road. Portals can monetize their investments. Can the MLS?

So for example, Zillow invests in rentals because it hopes to sell more advertising or more services or more products to landlords and property managers down the road. So investing $10 million into better rental information could yield $100 million in rental segment revenues in the future. Redfin invests $50 million in data analytics because it hopes to capture more market share that would result in $500 million in additional commission income to the company. (By the way, that additional $500 million would have to come from taking $500 million away from other brokerages, because competition….)

What about the MLS? Could they monetize the investment?

If you have ever been inside a MLS boardroom when the topic of discussion is raising dues, you know that such a thing is not something to be undertaken lightly. Because of the political and structural peculiarities of the MLS, it really is not a given that investment today will result in increased revenues or profits tomorrow. Sure, in some cases, the MLS could look at different monetization strategies that are “non-dues revenues” but if it comes down to it, raising fees is like raising taxes: to be done only when unavoidable, because you can more or less guarantee that many of your brokers and agents are not going to be happy about it.

Invest, Absolutely, But…

None of this is to discourage Compass or anyone else from investing in the MLS. I happen to agree with Reffkin that the MLS is in some peril. Could the MLS be stronger and have better data quality? Of course — everyone everywhere could be stronger and have better data quality. Would that benefit agents? Of course it would. Is there a real danger to other websites being a better, more useful source of sales information than the MLS? Possibly. Given some of the recent changes, could we foresee a time when the rank and file agent decides that she can do what she needs without the MLS?

Of course! We actually have rank and file agents who say such things today:

“Theoretically, if any agent, including The Jills, could not use the MLS we would have to do business differently,” she added. “I could go on to anyone’s website and pull up any information I need. Any top producer has a website. Or you could go to Redfin. There are many different sites you could go to that pull up everything you need. So we would just have to rely on different things. You don’t have to be a member of MAR to be a real estate agent.”

So if it’s going to require investment in the MLS to get the MLS to a better place, then I am absolutely in favor of making and taking that investment.

But that’s going to require some changes with the structure and business model of the MLS. It’s going to require a broader perspective on the part of strategic investors, such as brokerages and franchise companies. It’s going to require that subscribing agents and participating brokerages recognize that the MLS needs to monetize its investments if it is going to make any at all.

I’ll say this, though: it would be a game-changing event should Compass, with its billion dollars in cash, would step up and offer to invest $50 million or so in a few MLSs. That would get people talking, and more importantly, thinking about what is and is not possible. That alone would be worth seeing.

-rsh