[VIP] The MLS and Coming Soon: A Way Forward

The great move West is now complete! The last boxes are finally unpacked, and while we still have to set up the new house, I think we’re able to get back into the regular swing of things.. Once again, I apologize to you VIP Subscribers for being so silent, but I do hope you all enjoyed your complimentary copy of The Red Dot.

But we’re back now, and I thought for the first post written from the desert, I’d take a stab at something I hinted at in my last public post:

This is not the place to really dig into this big issue, which is at the heart of the kerfuffle with RealScout and buy-side data, and I’m likely going to need to write one or more posts about it. But we really do need to have a wider conversation and debate about the now common and oft-systematized use of off-MLS marketing by brokerages.

Let’s have that wider conversation and debate.

TL;DR Summary

This post is exceptionally long, even by my standards — over 5,000 words. So let me summarize it up front for you, then you can decide whether you want to dig into it or not.

In summary, the concept is to change the definition of Participant to simply mean those brokers and agents who are willing to treat the MLS as the Primary Marketplace for properties, which means that the MLS is where a property will be marketed/advertised first, before it is market/advertised anywhere else.

With an application-and-waiver system, the MLS can allow for limited usage of Off-MLS and Coming Soon marketing for rare situations that truly warrant them, and grant waivers freely to brokers and agents who aren’t trying to abuse the exception to the rule.

With a little bit of common sense, most of the MLS subscribers and Participants will understand what you’re trying to accomplish on their behalf and agree with those rules.

The choice offered to brokers and agents, then, is a simple one: either join the MLS, or don’t. Either market your listings to everybody else, or don’t and keep them as exclusives.

After all, we can’t forget that the MLS is a private organization, a cooperative of competing brokers who choose to come together for mutual benefit. It isn’t a requirement of having a real estate license, nor is it mandated by any law or any regulation anywhere. If a broker decides that his private benefit of going off-market is greater than the benefit of being part of the private club that is the MLS, then he should have every right to pursue that private benefit… outside of the MLS.

The antitrust concerns pop up only when the MLS uses its market power to discriminate against certain business models; there is no such concern here. All business models, all types of brokerages, all types of agents are welcome… as long as they too want to be part of the MLS. If not, let them go their own way.

I cannot think of a single argument from an antitrust point of view that says that a company or an organization is required to allow individuals and companies seeking its destruction and replacement to be part of that company or organization.

Understanding the MLS

With the summary out of the way, let’s dive in.

A brief overview of the MLS, its past and its present, might help us all understand my recommendations for the future.

The very origins of the MLS are shrouded in history, but one imagines it was no different than how the NYSE got its start: a bunch of merchants hanging out at the local tavern starting to talk. The real estate men back in the horse and buggy days likely knew each other, hung out at the same tavern or public house or watering hole, and started telling each other about some property they had agreed to sell for the owner. “If you bring me a buyer, I’ll hook you up!”

What we do know is that by the turn of the 20th century, when NAR itself was founded, the practice of sharing information on properties — as well as sharing compensation to incentivize other brokers to bring them buyers — was commonplace. The original name of NAR, after all, was the “National Association of Real Estate Exchanges.”

The MLS has been remarkably stable and consistent over the course of its existence. Yes, the technology of delivering the information has changed from printed books to client-server over dialup to web-based, but the core of the MLS has always been about (a) complete inventory, (b) cooperation and compensation, and (c) accurate data.

In pursuit of those three goals, the MLS over time evolved a rather large set of rules and policies and regulations for its members that range from the obvious to the incredibly arcane and bizarre. Nonetheless, those rules and policies, which include the various policies surrounding data input, usage, and distribution, are at the heart of the modern MLS.

The Impact of the Internet

I have written on this many times over the years, including in the March Red Dot on the Future of the MLS. Since that report goes into far greater detail, I recommend it for subscribers who wish to dig in deeper. But fundamentally, the Internet changed the fundamental value equation of the MLS. From the March Red Dot:

What the MLS forgot (and to this day refuse to understand) is the fact that the value of the MLS in the past was that it was the most cost-effective way of advertising a property for sale.

When newspaper classified advertising was the primary way to let consumers know that a particular home was for sale, the cost to brokers and agents to take out those few lines of classified advertising was exorbitant. That cost went up if the ad were to include even a single black and white photograph, and went up dramatically for things like full or half-page ads in the local newspaper for a few weeks.

But in those pre-internet days, buyers would call a local real estate broker when they wanted to know what homes were on the market. They were forced to, since a few lines of type in the local newspaper provided very little information and there would be but a phone number to call in the ad. Or they would skip the telephone game altogether and stop by a local real estate broker’s office, talk to the nice receptionist, meet with an agent and ask what homes were for sale in their price range and meeting their criteria.

As a result, letting other real estate brokers in the area know about a house for sale became the most cost-effective way of advertising a home for sale. This is not to say that brokers and agents didn’t pay the newspapers, didn’t take out ads in magazines and circulars, put up posters and yard signs, and mail postcards and newsletters or whatever else. It is simply to say that the MLS was the most cost-effective way of advertising a home for sale in the pre-Internet era. For a flat monthly fee, a brokerage could advertise all of the homes that he had been hired to sell for clients, as well as view the entire inventory of homes that other brokerages had advertised in the MLS.

Like many other exchanges rooted in the need for sellers to advertise what was for sale, and for buyers to find out what was for sale, the MLS became the marketplace for houses. Even as the MLS evolved from gatherings at a local watering hole to printed books to some of the earliest computerized networks, the it remained extremely valuable for brokers and agents because it was the most cost-effective way to advertise a home for sale.

And then, the internet came along.

Because listings are fundamentally advertisements of properties for sale, once the MLS was no longer the most cost-effective way to advertise, its value started eroding almost immediately.

We have seen some of the effects of that value erosion already. But for our purposes, we’re going to focus on one of those effects: the proliferation of systematic and programmatic “Coming Soon” and other off-MLS marketing of properties.

The Modern “Coming Soon” Strategies

To begin, let me quote from the March Red Dot again to make sure we’re talking about the same thing. Because pocket listings, Coming Soon, and Off-MLS marketing have existed from the very beginning of real estate. It is, if you will, the default model until the MLS came of age.

From the Red Dot:

Private “pocket listings” have always existed in real estate. Indeed, it’s more or less the norm in commercial real estate, which is only distantly related to residential real estate. (Commercial real estate is as similar to residential real estate as investment banking is to local credit unions.)

In residential real estate, however, pocket listings were usually reserved for special and unique situations, found often in the ultra-luxury segment where the client has serious privacy concerns. A celebrity, for example, might not want random fans and tourists pretending to be buyers touring his Beverly Hills mansion. An athlete might want to keep his free agency intentions secret by not putting his house on the market. Or the owner may have a home filled with priceless artwork that she doesn’t want the hoi polloi and potential thieves knowing about.

Whatever the reason, when the client’s privacy concerns were paramount, brokers and agents often agreed to keep the listing private, sharing it only with a trusted network of other agents, and showing the home only to a small group of qualified buyers who would be vetted carefully.

Everyone knew such situations existed, and everyone was okay with such exceptions to the general rule about putting the property in the MLS for it to be exposed to the entire marketplace.

Similarly, so-called “coming soon” listings, which the listing agent knows he’s going to get but isn’t ready to put it “on the market” have always existed in real estate as well. Many a broker and agent have memories of Monday morning sales meetings when agents would go around the room and talk about a listing he’s going to take in the next few days (or has already taken, but hasn’t had repairs or painting done, so the house wasn’t ready to show) in case anybody in the room has a buyer who might be looking for a house just like it.

As I mentioned in the report, however, in recent years, this once-rare situation where a unique client situation demands privacy over marketing and the rare Coming Soon situation where the house really does need a lot of work to make ready for the market have evolved into actual strategies and programs.

It may be because real estate coaches have been teaching using Coming Soon as a strategy for years. For example, here’s one such example from Wade Webb:

Though the language of the Wade Webb strategy makes it seem like the reason for Coming Soon is low inventory, that just doesn’t actually add up. Listing agents can’t get all the marketing they promised the seller? Does the seller care if the home sold for asking price within 48 hours? Likely not. Buyer agents are frustrated because the listing agent moved too quickly? Last I checked, the seller has to accept the offer, so what’s this about the listing agent moving too quickly?

Then you have the broker-level programs that have flipped the script — what was once a rare exception to the rule of open market exposure via the MLS is now the standard operating procedure, and only those properties that do not get sold during the “Coming Soon” period are put on the MLS.

The most (in)famous of these is from Compass:

But as night follows day, once a brokerage as big and as prominent as Compass started an actual program to encourage off-MLS listings, it was inevitable that others would follow suit. So we now have Howard Hanna, the #4 largest brokerage in the country, launching its own Coming Soon program:

It’s just a matter of time before the other large companies, from Realogy to Re/Max to Keller Williams and HomeServices of America, to all follow suit. It’s a bit of an arms race situation at this point.

These modern Coming Soon strategies have very little to do with low inventory, or with customer service, or with anything other than using private listing information to create competitive advantage.

Creating Competitive Advantage with Private Listings

I took Andrew Flachner of RealScout to task in my previous post on the subject:

What’s the point of all this hand-wringing about market share, superpowers and demand aggregation? Helpfully, Andrew tells us:

To know when you’ve achieved the Minimum Viable Liquidity that unlocks the market making superpower, two key things have to happen:

1. 1. Clients/agents feel you have enough in-house buyers and exclusive listings to switch to your brokerage.
   2. Sold prices for proprietary listings are comparable to those sold on the open market. [Emphasis added]

Izzat so? And while these companies partnering with RealScout are busy creating in-house buyers and exclusive listings, and putting together a sold database for proprietary listings that will one day be “comparable” to those sold on the open market, the rest of the industry will be doing… what exactly?

Andrew seems to believe there are only two options for brokerages. They can join forces (i.e., work with RealScout) or watch others join forces:

You can watch it happen, as big players make their moves to rapidly acquire agents and brokers, companies, and market share to become dominant players.

Or, you can make it happen by joining forces with other brokerages. When brokerages come together in new ways, they can unlock value for agents and consumers that no new entrant into the market is capable of.

Either Andrew does not think there’s a third option, or believes that brokerages and MLSs and the rest of the real estate industry would not be ready, willing or able to take that third option: brokerages can join forces to kill this superpower-making initiative before it gets going.

But a more erudite take on this phenomenon comes to us from Mike Delprete’s series on Compass, particularly when he discusses the endgame of Compass’s growth strategy:

The secret to building audience with exclusive content is scale: Compass needs significant market share for this strategy to work. Pocket listings, which are withheld from the MLS for a period of time, have been around for years, but never employed at this scale. Compass needs to advertise so much exclusive content, including coming soon listings, that consumers can’t afford to miss it.

The evidence that Compass is strongly promoting exclusive content is plainly visible on its web site. In fact, exclusive content is the primary call-to-action on Compass’ web site, starting with top billing on its site navigation.

Scrolling down the page, the first content after the search box is a section highlighting exclusive listings before they hit the market.

Delprete goes onto illustrate just how much focus and emphasis Compass is putting on its exclusive listings, all of which are done as a Coming Soon, which means that these exclusives may eventually end up on the MLS… if it doesn’t sell first.

The point of the exclusive listings, Delprete thinks, is to become a consumer destination and platform:

It would be naive to think Compass has raised over $1.1 billion in venture capital to become just another real estate brokerage. Even adding adjacent services like mortgage doesn’t change the core economics of the broker model — bigger changes are required to justify its valuation. Compass has larger ambitions, and it’s likely that its big hairy audacious goal is to become a real estate platform. The evidence suggests the following strategy:

• Build market share (listings) through aggressive agent recruitment and acquisition.
• Once market share is high enough, encourage sellers to list exclusively on Compass for a period of time.
• Leverage exclusive content to drive consumers to the Compass portal.
• Launch a Compass platform that generates and distributes leads to agents.
• With platform power, transition the role of an agent (Redfin/Purplebricks/Uber), taking a larger cut.

Compass is a real estate disruptor on a scale never before seen in the U.S. With deep pockets and big ambitions, its impact on the real estate industry is only just being felt. Compass, its investors, and a number of well-funded peers are aiming for massive change in an industry that has resisted massive change for years. Whether its strategy succeeds or fails, the die is cast and the race is on.

I think Delprete is exactly on point as to what Compass is hoping to achieve. In the same vein, when Howard Hanna launches its own Coming Soon program, it may be seeking to do the same, or it may be doing it in order to keep up with Compass.

Whatever the reason, this modern manifestation of Coming Soon is entirely incompatible with the existence of the MLS in the first place. As I wrote previously:

If we as an industry are going to have the MLS structure, then Coming Soon and off-MLS marketing must be relegated to what it once was: rare occurrences for the truly unique client situation. MLS leaders need to stop wringing their hands as if they are powerless to stop the destruction of the system from within and start taking action.

Okay, so what action should the MLS take?

What Does it Mean to Participate in an MLS?

I believe the key lies in redefining the term Participant as it applies to the MLS. I suggested as much in my original post on RealScout, but let’s delve into this more.

NAR’s Handbook on Multiple Listing Policy defines “Participant” in §2:

Mere possession of a broker’s license is not sufficient to qualify for MLS participation. Rather, the requirement that an individual or firm offers or accepts cooperation and compensation means that the participant actively endeavors during the operation of its real estate business to list real property of the type listed on the MLS and/or to accept offers of cooperation and compensation made by listing brokers or agents in the MLS. “Actively” means on a continual and ongoing basis during the operation of the participant’s real estate business. The “actively” requirement is not intended to preclude MLS participation by a participant or potential participant that operates a real estate business on a part-time, seasonal, or similarly time-limited basis or that has its business interrupted by periods of relative inactivity occasioned by market conditions. Similarly, the requirement is not intended to deny MLS participation to a participant or potential participant who has not achieved a minimum number of transactions despite good faith efforts. Nor is it intended to permit an MLS to deny participation based on the level of service provided by the participant or potential participant as long as the level of service satisfies state law. (Adopted 11/08)

The history behind the key highlighted phrase is an attempt by NAR, various brokerages, as well as a number of MLSs to try and deal with the “paper brokerage” problem from a few years back. These were companies that had a brokerage license, got access to the MLS, and then setup businesses mostly involving  using IDX websites to generate leads and then referring them to other brokers and agents for a fee.

This section was trying to say that the MLS is for “real brokerages” only who are actually trying to sell real estate, not for paper brokerages who just use the MLS to generate referral income.

The problem with that, as evidenced by the rest of §2, is that there is no good way to determine whether a company or an individual agent is a “paper broker” or a “real broker” who happens to do referrals. All the language about part-time, seasonal and good faith efforts and minimum number of transactions and all that is an attempt to try and draw lines where such line drawing is quite difficult to do.

The other problem with §2 is that NAR had to be very careful about antitrust issues, seeming to allow discrimination against low-service brokerage models or other innovative businesses.

In addition, the entire practice of cooperation and compensation is under legal and regulatory assault today. If cooperation and compensation are ruled as an unlawful violation of federal and state antitrust law, what then?

I propose, therefore, a change in the definition of Participant:

A Participant is a broker or agent who utilizes the MLS as the primary marketplace for properties.

I’m sure that the people on the various NAR committees and CMLS workgroups and elsewhere can come up with more precise language. But the idea is a simple one and it involves defining what it means for a property to be on the market, which means defining “marketing” a property.

What Does it Mean to Market a Property?

I recommend something along the lines of:

Any dissemination of information to the public about a property for sale, lease, or exchange within the next 180 days shall be considered as marketing.

Again, people with more experience than I have in working on various committees can wordsmith the above to greater precision. The point is to distinguish between telling service providers, such as photographers and stagers, and telling potential buyers that a property is about to come on the market. The former is a necessary part of getting a house ready to market; the latter is a dodge.

Practically speaking, there is no way to stop an agent from telling her neighbor about a house that’s about to come on the market. There has never been. But that kind of one-off insider information has been a fact of real estate from the earliest days of the Republic. We’re not looking to stop that. We are looking to stop the kind of systematic and programmatic Coming Soon and Off-MLS strategies that undermine the entire edifice.

Primary Marketplace for Properties

The Rules and Policies found in every single MLS require the mandatory submission of listings. From the Model Rules and Regulations for an MLS provided by NAR:

Listings of real or personal property of the following types, which are listed subject to a real estate broker’s license, and are located within the service area of the multiple listing service, and are taken by participants on (indicate form[s] of listing[s] accepted by the service—See Notes 1 and 2) shall be delivered to the multiple listing service within _____ (usually 48) hours after all necessary signatures of seller(s) have been obtained: (Amended 11/01)

a) single family homes for sale or exchange

b) vacant lots and acreage for sale or exchange

c) two-family, three-family, and four-family residential buildings for sale or exchange

The additional concept that needs to be added, likely to the Rules and Regulations, is the idea of “primary marketplace.” The idea is simple: the primary marketplace is where the listing was first advertised. Priority in time is the key concept here.

If a listing appears anywhere other than the MLS first, then the MLS is not the primary marketplace. It’s a simple rule, and has the benefit of drawing a bright line that is easily understood, easily defined, and easily enforced.

Making Coming Soon and Off-MLS Rare Again

Finally, in conjunction with the above, the MLS needs to simply ban all Coming Soon and Off-MLS marketing of properties without a specific waiver from the MLS. There have always been some unique situations where both the Coming Soon and the Off-MLS were warranted. But how to preserve the ability of brokers and agents to service such unique clients and unique situations, without throwing open the doors to exploitation?

The way to handle that, I think, is to allow for waivers on a case-by-case basis to be issued by the MLS upon application by the Participant. There has to be a strong pro-consumer or pro-public justification for such a waiver to be issued, with privacy being the main consideration.

Rather that trying to craft a detailed rule and “safe harbor” provisions and such, just put it to the judgment of the MLS staff or other brokers and agents to see if the application and the justifications offered pass the smell test.

So if your client is a Hollywood superstar and doesn’t want anybody to know he’s selling his house, the MLS can accommodate that. You need to apply for a waiver, with whatever supporting documentation that the MLS requires, and then get a waiver. Systems and procedures will need to be put in place for the MLS to handle such applications and issuing waivers, but that’s the kind of thing that the MLS tends to be very good at doing.

Antitrust is Not an Issue

An important point here is that unless I am very mistaken, there are no antitrust issues with any of the above.

There is zero discrimination of different business models; indeed, by dropping all of the references to offers of cooperation and compensation, the above may remain in place even if some legal or regulatory disruption comes to compensation practices.

There is no discrimination to becoming a Participant, other than the Primary Marketplace rule. The MLS merely has to be first, not the only way to market a property or even the most important way. There is no prohibition against advertising properties wherever the broker or agent sees fit… as long as the MLS is the first place for marketing and advertising a property.

There is no impact on cost to consumers.

There is no impact on discouraging innovation, unless that innovation is to eliminate the MLS, which we address below.

And because the whole point of the exercise is to limit the number of off-market listings that have less visibility to buyers and to the public, the entire strategy tends to be pro-consumer and pro-competitive rather than less. It is the systematic Coming Soon and programmatic Off-MLS marketing companies that have to answer questions about transparency and data access, not the MLS.

Some Practical Considerations

Now, there are a few practical considerations here for the MLS. Most of these come from discussions with Sunny, my recovering broker wife, whose experience with NWMLS based in Seattle is an excellent reference for anything Coming Soon related, as NWMLS has some of the toughest rules around Coming Soon that have been modified and tweaked over the years.

Nonetheless, this is hardly an exhaustive list. It is more of a start of a list of considerations; you can add to it with your experience in your local markets.

Go Live Date

First, because of the day to day realities of taking listings and getting a house ready for market, MLS will need to consider adding some kind of a “Go Live Date” field, if one does not already exist. The distinction there is between the actual listing contract date (when all signatures were acquired) and the day when the property will begin to be marketed.

This was the original impetus behind Coming Soon, so the MLS has to be careful not to create such a giant hole as exists today that enables all of the systems, programs and strategies using Coming Soon to create off-market exclusives and in-house buyers and such. I lean towards allowing greater latitude in exchange for more transparency: put the property into the MLS as you put together the photographs, the marketing materials, etc. but don’t have it visible to anyone else. It becomes visible on the Go Live Date, and that is when Days On Market starts ticking and that is the date to be used for the Primary Marketplace rule. The mandatory delivery date, however, can be tied to the original listing contract date, so 24-48 hours after the signatures are complete, the listing is in the MLS, but not yet marketed.

The Client Demands It

Second, there are situations where the seller wants the listing agent to market the property privately, to his private network of contacts, before going public with it, because the experience of selling is just so painful. I know, because I’m someone who has done just that. It sucks to pile the kids into the minivan for an hour every time there’s a showing.

I believe that the waiver process provides relief in those situations, but that requires that the waiver process is fairly efficient and speedy: an agent can’t wait a month to hear back from the Board of Directors to see if his waiver request was granted. That does create the need for the MLS to setup a good waiver process and staff it to ensure proper level of responsiveness.

If it were my MLS, I’d delegate the authority to staff, and have the staff review the waivers with either the Board or a designated committee on a regular basis to ensure that the waivers are being issued under proper guidelines.

For practical purposes, I think it’s better to provide discretion to the human beings issuing waivers. Most people can see the difference between an agent whose client is making a special request versus a brokerage who is using the loophole to create a program of off-market activity.

Office Meetings, Agent Networks, Email Lists

Third, and this is likely the biggest practical issue, the distinction between public and service providers creates a large gray area: telling other brokers and agents about a property that is not yet being marketed. This is a potential exception that swallows the rule, but it is also (a) what has happened for a hundred years or more, (b) impossible to enforce, and (c) too much interference with brokerage practice and brokerage value if the MLS gets too involved.

Perhaps it’s because of my legal background, but I am not a fan of rules that everyone is going to ignore. It’s better to change the rules such that most people will follow them, which allows you to enforce the rule against the extreme outliers. The speed limit is a good example of such a rule — most folks don’t obey the 55 MPH speed limit, but they do frown on some crazy nut going 130 MPH down the freeway. That implies that the speed limit ought to be something more like 75 MPH.

Fact is, agents are going to tell their friends and colleagues about a listing they’re about to take. Brokers are going to have sales meetings where agents tell each other about a listing that’s coming and ask them to think about it for their buyer clients. Many agents have mailing lists of other agents in their area specifically for the purpose of marketing their clients’ homes to a smaller, more trusted network. There is no way to stop any of that, nor is it obvious that the MLS should try to stop that.

Again, the way I would suggest dealing with these issues is to adopt the soccer approach to things rather than the NFL approach to things. That is, provide general guidelines, such as the Primary Marketplace rule, then allow people charged with enforcement and adjudication more leeway when to call a foul and when to let it go.

It’s one thing to tell your office about a listing coming on market soon, and email two dozen other agents you know; it’s another thing altogether to be part of a formal, organized agent network that sits outside the MLS and has a database of Coming Soon properties. Like pornography, you’ll know it when you see it.

Go Your Own Way

In summary, the concept then is to change the definition of Participant to simply mean those brokers and agents who are willing to treat the MLS as the Primary Marketplace for properties, which means that the MLS is where a property will be marketed/advertised first, before it is market/advertised anywhere else.

With the application-and-waiver system, the MLS can allow for limited usage of Off-MLS and Coming Soon marketing for rare situations that truly warrant them, and grant waivers freely to brokers and agents who aren’t trying to abuse the exception to the rule.

With a little bit of common sense, most of the MLS subscribers and Participants will understand what you’re trying to accomplish on their behalf and agree with those rules.

The choice offered to brokers and agents, then, is a simple one: either join the MLS, or don’t. Either market your listings to everybody else, or don’t and keep them as exclusives. Your choice. Either make the MLS the Primary Marketplace, or go your own way, with our blessings. Your choice.

After all, we can’t forget that the MLS is a private organization, a cooperative of competing brokers who choose to come together for mutual benefit. It isn’t a requirement of having a real estate license, nor is it mandated by any law or any regulation anywhere. If a broker decides that his private benefit of going off-market is greater than the benefit of being part of the private club that is the MLS, then he should have every right to pursue that private benefit… outside of the MLS.

The antitrust concerns pop up only when the MLS uses its market power to discriminate against certain business models; there is no such concern here. All business models, all types of brokerages, all types of agents are welcome… as long as they too want to be part of the MLS. If not, let them go their own way.

I cannot think of a single argument from an antitrust point of view that says that a company or an organization is required to allow individuals and companies seeking its destruction and replacement to be part of that company or organization.

So, there it is. A path forward for the MLS as it comes to this thorny issue of Coming Soon and Off-Market listing activity. I’ll leave it be with this final note: time is not on your side. I don’t think you have years and years to shepherd this through the normal years-long NAR committee process. I’d like to urge NAR and the MLSs to prioritize this issue and get it done sooner rather than later.

If not, go your own way applies in a wholly different context as well.

-rsh