Let's speak to the future...

The Uninteresting Tale of Salesman Steve?

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Mon, 19 Nov 2007 11:35:25 -0600

When I made the Salesman Steve post last month, I expected some responses, critical and thoughtful, as I usually see on AR. But only one comment posted: Yolanda asked

Hi. Maybe I didn't understand fully your story, but why didn't you hire Salesman Steve to represent you? (I gather he's licensed and practicing). If he is, shouldn't the check you sent him go through his broker?

I still think the story is interesting, however, so I'm going to make a few comments here.

In response to Yolanda's first question, I offered to hire Steve, but he declined my offer. I think maybe Yolanda means, "Why didn't you sign up as Steve's buyer so he could be procuring cause of the sale and get a coop compensation from the listing broker?" Answering that question requires an understanding of (A) interbroker compensation in MLS (B) the value I think brokers bring to buyers in transactions and (C) the value I was asking Steve to bring to this transaction.

MLS compensation: Most (though by no means all) brokers get paid on a commission, often a percentage of the gross selling price, paid only when a transaction closes. The listing broker puts the listing into the MLS, offering a coop compensation (often between 2.1% and 3.0% of the gross selling price in our market - let's assume it was 2.7% on this listing). The cooperating broker earns that commission by being the procuring cause of a sale. Even though the cooperating broker may be the buyer's agent (under Minn. license law), he receives the lion's share and usually all of his compensation from the listing broker. (This is a quirk of history dating back to times when sub-agency was the common form of relationship between listing and selling broker.)

Note also that the price structure of the traditional commission factors in Steve's risks. In other words, if he works with a buyer from scratch, he is betting his efforts showing the buyer around will pay off in a coop commission. But he may get nothing if the buyer declines to buy. Presumably, he receives enough on the transactions that DO close to cover his time on ones that never come to fruition. Brokers can address this issue in other ways (with different fee structures, etc.) but doing so swims upstream against the prevailing MLS compensation approach, where the listing broker appears to pick up the tab.

Please do not tell me that the seller pays the buyer broker, or that the buyer does not pay the buyer's broker. The compensation paid to the buyer broker is a transaction cost. Both principals bear it, because without that cost, the seller would net more, and could accept less from the buyer. Theoretically, the offering price would split the difference...

Assuming the coop comp in MLS on this listing was 2.7%, Steve could have earned around $5,400 for being the procuring cause. He works for a "100% broker", meaning that he does not split the commission with his broker, though the broker might impose some transaction fees, etc. Frankly, I leave those details for Steve to work out with his company.

Value the broker brings to the buyer: I think a real estate broker has great value to bring to a buyer in a transaction. I see the value as breaking into three phases:

Location advice: I can't imagine anyone better than a real estate broker to help me find the right property, based on my needs. The best ones have a detailed knowledge and understanding of human psychology and the real estate market.
Negotiation advice: Market understanding and negotiation skills are essential to a successful contract negotiation.
Closing facilitation: Brokers know better than most the problems that can crop up between acceptance of a purchase agreement and closing - title problems, financing problems, etc. Resolving these problems is essential to getting the transaction wrapped up.

I value the first and second items the most, because that is where the broker's expertise, rather than persistance and tenacity (both of which I have in abundance), come into play.

The value I wanted from Steve. In this case, I did not need Steve for location advice: my parents had already located the property they wanted. If this deal had fallen through, they had a couple other options, but those listings were located in suburbs where Steve was not as familiar with the terrain - I would have wanted local experts to help me if we had pursued either of those.

As for closing facilitation, we had already selected the service providers we wanted to use - title company, mortgage company, etc. The transaction was a conforming loan, with a substantial down payment, for which my partner and I qualified with full documentation. My partner is a VP at the mortgage company we used, so I expected no processing delays :-)

It was that middle bit, negotiation advice, where Steve would be indispensible. That's what I wanted Steve for.

Note, too, that I proposed to Steve a zero-risk compensation - I offered to pay him for his advice, whether or not the deal closed, whether or not we even ultimately made the offer.

In short, if Steve's location advice, negotiation advice, and closing facilitation, plus his self-insurance against the risks of clients who never close deals, was worth $5400, then his advice on negotiations alone should be worth something less than that.

As it happens, I would have been willing to pay Steve between $1,000 and $2,000 for his advice during that call, not contingent on having the transaction close. In fact, if he had asked me to sign the buyer rep agreement, I might have agreed to - in light of the fact that his advice was saving me $10k, it would have been worthwhile to me to share that amount with him, but then I would have left his compensation contingent on the closing. I would also have insisted on a short termination clause so I could work with another expert in another part of town.

Who gets the check?

Yolanda also wanted to know if I should have paid Steve's broker instead of Steve. There are at least two potential answers:

1. I didn't retain Steve for brokerage services - he refused to let me hire him and he refused payment. That makes my check to him a gift, not a brokerage fee or commission. (OK, even I don't buy that, but I'd make the argument if someone asked me to :-)

2. I assume that Steve behaves ethically and legally, and that if the money should have gone to his broker first, Steve signed the check over to his broker, and they worked it out between them. As Steve is his broker's agent (in the common law sense), I'm entitled to rely on Steve to do whatever is in his broker's interests.

Conclusion

This post went a bit longer than I wanted, but I'm curious what you think... Was my thinking about how to work with Steve wrong-headed? Did he make mistakes working with me? Are there lessons for other folks here?

-Brian

The (Extra)Ordinary Story of Salesman Steve

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Wed, 03 Oct 2007 20:54:31 -0500

I took a month vacation from posting - busy with work but also thinking a lot about what I wanted to write about next. I've been thinking a lot about this story and how to share it, because it comes from my personal experience. It is ordinary in the sense that things like it happen every day in every market in the U.S. It is extraordinary because stories like it are so rarely told, even by real estate brokers.

I'll tell you the tale in this post, and then I'd like to spend the next couple posts identifying principles I think this story illustrates and teaches. Throughout, I welcome your comments.

A rental for the parentals

In winter 2006-07, my sister, my partner, and I decided to persuade my parents to move closer to Minneapolis, where the rest of us live. They are elderly and in questionable health, so we wanted them closer to be able to spend more time with them and to look out for them. They agreed, in fact, but balked at the much higher price of housing here than their little town two hours away.

We hatched a scheme: my partner and I agreed to buy a house and rent it to the parents at a very favorable rate, provided my sister would help them find the home they wanted. (My sister is not a real estate agent - she's just the care-taker type.) Mom, dad, and sister started looking in the corner of the Minneapolis-St. Paul metro area closest to my sister's home. My mom does not drive, and was looking forward to my sister being able to chauffeur (or is that chauffeuse?) her around. My sister was hoping that Mom would look after her dog while she was at work some days - my mom really likes dogs. It seemed like a good deal.

The three of them made showing appointments with the listing agents of several listings in the area. The parents got really excited about one of them: a nice one-level twin-home, no steps (my dad is a little mobility-challenged), big living area, two-car garage (one for their car, one for accumulated "treasures"), and separate bed- and bathrooms. (One of my parents snores so intensely that the other chooses not to sleep in the same room - I'm not naming any names.) The property lay in a development of twenty-some units about half completed and maybe one-third sold, in a small suburban community, we'll call it Smallville. (All the names in this story have been changed to protect . . . well, actually just because that's what everyone seems to do). Mom, dad, and sister all thought this was the one.

My partner and I arranged to see the unit; we explained to the listing salesperson that we were representing ourselves. We thought it looked pretty good, too, and the list price of $205,000 was within our target budget.

We wanted to figure out how much to offer. I did not use Zillow.com (though I now regret not having checked it out just for fun). Instead, I figured I'd ask a real estate professional what it was worth.

Fifteen minutes with Salesman Steve

The local REALTOR^® association CEO in that part of town is a former real estate salesperson. I called him and asked if he knew of a broker or salesperson with a lot of experience in Smallville. He gave me the name and phone number of Salesman Steve. I called Steve's number and left a message. He called back within a half hour.

"Steve," I said, "I'm not really looking for a broker to represent me. I just want to pay you to do a valuation and advise me what to offer for this property. What would you charge me for that?"

"Well, let's just talk for a bit first. What is the address?" he asked. I told him.

"Yeah, I know that unit." In the next 15 minutes, here is what he told me.

He had inspected the unit once.
The developer was Smallville's Housing Redevelopment Authority (HRA).
The property had previously been a light industrial site, but it had not required any hazardous substance cleanup before redevelopment.
He described the finishes (floors, countertops, etc.) accurately.
He noted that the units being constructed were slated to have finer finishes, so we should disregard the listing broker's claims that the unit prices were going up.
He said the list price was below construction cost.
He said the HRA was under pressure to move units because the development was not selling as quickly as anticipated, and budgets were getting busted.

"I'm pretty sure if you offer $190 thousand and say you want to close within 30 days, they'll jump on it."

"Thanks, Steve, I said. "What do I owe you?"

"Don't worry about it," he said.

"I would really like to pay you for your time," I said. (I'm in a business where the last thing I want is people asking me for free advice on the phone.)

"I'll catch you on your next transaction," he said.

Offer, acceptance, and consideration

I got off the phone with Steve. I called the listing agent, let's call him Dual Dave, and said I was writing up an offer. I told him I'd send him a draft, but that I'd welcome his suggestions for changes before we finalized it and presented it to the seller. I sent the contract to Dave on a 2006 standard Minnesota Association of REALTORS^® contract form, with an offer of $190,000 and a proposed closing four weeks later. Dave called back, discussed a couple of changes he proposed that I agreed were good, and offered to re-write the purchase agreement on the 2007 version of the MAR form. (I teach a class on the forms, so I knew the 2007 form was fine - the only reason I used the 2006 form is that I had a pad of them lying around . . . Sound like a real estate broker now, don't I?)

Dave emailed me the purchase agreement as he had drawn it up. Interestingly, he also sent along a buyer representation agreement with the dual agency option checked. My partner and I signed the purchase agreement and emailed it back to Dave. (We crossed out the representation agreement and sent him that too.)

The seller accepted our offer; less than a month later, we closed; and the parents have been living in the new home for about six months now. (What it's like to be landlords to your parents is fodder for a whole other series of posts.)

The day I faxed the original offer to Dave, I dropped a check for $250 in the mail to Salesman Steve. On the one hand, it seemed like a pathetically small amount for the value he had delivered. On the other hand, for a fifteen minute phone call, that works out to $1,000 per hour, more than three times what I charge for my services. He called and left me a voicemail saying "thank you," sounding surprised and delighted.

The call for comments

I think this story illustrates a number of important principles and teaches some useful lessons about the real estate business. I want to talk about some of them in my next few posts, but I'm hoping some of you will comment here first.

(Feel free to slam me for representing myself - a real estate broker clobbered me on that point at a state REALTOR^® convention where I presented and told this story. "Shame on you," she said.)

-Brian

Bonuses and Conditions on MLS Offers of Compensation

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Sat, 25 Aug 2007 13:42:43 -0500

Ok, so I posted earlier about why I think bonus offers are bad PR for the industry. But it is also unclear to me whether bonus offers can be allowed in MLS.

Policy background

If we take the example of MLSs affiliated with the National Association of REALTORS (NAR), they should be complying with NAR policy. NAR's model MLS rules address inter-broker compensation in pretty strict terms: One section provides that "The amount of compensation offered by the listing broker must be indicated either by showing a percentage of the gross selling price or by showing a definite dollar amount." Another section says "The listing broker shall specify, on each listing filed with the Multiple Listing Service, the compensation offered to other Multiple Listing Service Participants for their services in the sale (or lease) of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker's performance as the procuring cause of the sale (or lease)."

(Note that a listing broker can under NAR policy vary the compensation she offers to other brokers by correspondence outside of MLS - e.g., by sending a letter to a particular broker saying, "Notwithstanding what I offer on my listings in MLS, I'm paying you y%." This practice also deserves a couple posts, but that will have to wait. But even these superseding offers have to come in the form a dollar amount or a percentage of the gross selling price.)

The "unconditional" thing is important. It's not consistent with NAR policy for a listing broker to put a comment on the listing that says, "buyer broker receives compensation only if she shows up at all finish selection conferences with buyer and builder" (as some builders have tried to do). It cannot say "buyer broker must do X and Y to be compensated." The only condition for the buyer broker's compensation is whether she is the "procuring cause" of the sale. (There are also lots of problems these days with brokers in MLSs wanting to pay compensation based on the "net" of the sale, rather than the gross selling price. This is against NAR policy, but some MLSs allow it as an accommodation of long-standing local practice. Again, fodder for future posts.)

The procuring cause standard of NAR is a test that takes into consideration many factors but with no factor being predominant. So, from the procuring cause standpoint, the absence or presence of any one condition is not determinative, and the demands of the listing broker are probably irrelevant.

But most MLSs, even those that aggressively enforce the "no conditions on offers of compensation" strictures, permit brokers to make bonus offers in MLS. Some MLSs have requirements about how they are expressed and indicated on listing records, but most accept them.

The bonus exception swallows the unconditional rule

The exception swallows the rule. Isn't a bonus offer just a conditional offer of compensation? And couldn't the bonus exception to the "no conditions" rule eventually swallow the rule? For example, as a listing broker, I could put a listing in MLS offering $1 of cooperating compensation, but then, in the remarks, say "Cooperating broker will receive compensation equaling y% of the net selling price if she meets the conditions on listing broker's web site at www.xyzrealty.com/compconditions.htm." Now, the listing broker can demand all sorts of things from the cooperating broker not contemplated in the MLS policies.

It's hard to imagine the variety of creative ways that listing brokers might describe cooperating brokers obligations in the previous example. The probability is that there will be many poorly drafted statements of performance requirements. Arbitration panels will be confronted with the need to interpret those statements; and they will not be able to rely on the (relatively) well-understood procuring cause standard.

I'm also worried about listing brokers using bonus offers to disadvantage new brokerage models. I've already seen one case where a listing broker has said in MLS: "Coop compensation is 1%; if cooperating broker does A & B, compensation is 2.5%." Would this be prohibited in this form but permitted if the listing broker characterized the additional 1.5% as a "bonus"? What if other brokers pick up on the practice (because these offers are all published in MLS)? Will brokers who tend not to do A&B (despite the fact they are procuring cause of their transactions) end up effectively boycotted by listing brokers? I don't really want to think about it . . .

To the extent you think compensation through MLS is important, allowing it to be muddled in this way without some clear guidance as to how these provisions should be interpreted is a bad idea.

What do you think?

-Brian

Bonus offers in MLS are bad for the industry

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Mon, 20 Aug 2007 10:40:44 -0500

Under current conditions in many markets in the U.S., listing brokers are dusting off the practice of offering bonuses to buyer brokers in an effort to speed the sale of their listings. I'd like to make the argument that bonus offers of this kind are bad for the industry, but first I need to give a little background.

What bonus offers look like

Here are examples very similar to bonus offers my MLS clients have asked me to evaluate in the last few months.

"$5000 bonus to selling agent on sale closing before July 31"
Listing broker puts 1% in the MLS compensation then in agent remarks says, "1.5% of sale price bonus if you negotiate for your buyer and arrange inspection and appraisal"

Example 1 is typical of the kind of bonus offers that have been around since before my time. Example 2 is of a type that is showing up more frequently now, as listing brokers want to try to specify exactly what buyers brokers must do to earn their commissions. (I've also seen some very poorly worded bonus offers, ones so confusing that I can't imagine anyone being able to figure out whether they had satisfied the conditions or not. But we'll leave that discussion for another day.)

Bonus offers send the wrong message to consumers

Why do listing brokers make bonus offers like example 1 above? How do they justify them to sellers? The only justification I can think of is that it will encourage a sale because cooperating brokers will be motivated by the opportunity for personal gain to show buyers the listings with bonuses, or to show such listings more favorably.

I've spoken to many brokers who say (1) that they would never put their own interests ahead of their buyers' to obtain a bonus and (2) that they do not believe other professional brokers would do so. I hope they are being honest about (1), but if they are putting bonus offers on their own listings, I think they are being less than honest about (2). Why would they put bonus offers on their listings unless they believed they have an impact?

Brokers point out that it is nearly impossible for a buyer's broker to conceal listings from her buyer that pay less and show only ones that pay more, because consumers have access via IDX and sites like REALTOR.com to nearly complete listing compilations. They can thus "check up" on their brokers. This may be true, but the broker holds more subtle influences than just choosing which listings to show; she can also influence the buyer by the order in which she shows listings, how she shows the listings, what features of each listing she identifies as being important, etc. Remember, that's why consumers hire brokers - for their expertise.

Consumers know about the bonus offers: A listing broker generally needs consent from the seller to offer a bonus (under the Code of Ethics and other regulations.) I'm assuming every broker is aware that she must disclose bonus offers to her buyer in a transaction (at least under the laws of any state that I have considered and under the common law of agency, where that still prevails).

So what messages do these disclosures send to sellers and buyers? Simple: "Listing brokers believe they can buy influence with buyer brokers by offering them extra compensation - despite the buyer brokers' duties to their clients." Does anyone think that's a good message for the industry?

(There are other problems with bonus offers in MLS - I'll try to tackle them later this week.)

Can two brokers list the same property and put it in the same MLS?

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Fri, 17 Aug 2007 08:59:40 -0500

Real estate firms occasionally work together in marketing a listing of a seller. The term "co-listed" is often used to describe such listings, where more than one real estate brokerage firm can be described as the "listing broker." At least two issues crop up in these cases, one where both brokers are participants in the MLS and one where one is a participant and the other is not. (I won't trouble everyone with discussions of where there are three or more co-brokers.)

If both brokers are participants in MLS, one question is whether both may put the listing onto the service. I think the National Association of REALTORS's (NAR) policies are silent on this issue, for those of you in MLSs governed by NAR policy.

I have generally advised MLSs not to allow it. Here's why: Theoretically, at least, each listing broker who puts the listing into MLS is making an offer to compensate the broker who is the procuring cause of the sale. If I am the procuring cause, under the MLS rules, I might seek compensation from both listing brokers. Let's say the listing brokers anticipate this, each putting in about half the compensation cooperating brokers typically receive in the market. In that case, how is the cooperating broker to know how much she will be paid and by whom? An arbitration panel cannot rely on "average commission" levels or other numbers to establish what the cooperating broker should be paid; it will not know whether to require both listing brokers or only one of them to pay.

I usually advise the MLS to tell the co-listing brokers to decide which of them will put it in MLS and then require that broker to indicate in the public remarks the identity of the co-listing firm. I suggest public remarks, because the identity of the co-listing broker may be material to buyers and their brokers in a number of ways.

Where the co-broker is one who is not a participant in MLS, we have to be concerned about another problem: free-riding. A participant in MLS could essentially be acting as a conduit for non-participant brokers to get their listings exposed through MLS. There is a host of good business reasons for brokers not to want to do this, but brokers do not always make good business decisions. Thus the MLS will want to prevent a participant broker from "selling" MLS to non-participants.

I usually recommend that the MLS require the participant broker on a co-listing to identify the co-broker in the public remarks (as above) and that the MLS require the participant listing broker to provide to MLS a copy of the listing agreement, showing both the participant and non-participant as listing brokers. In this way, we ensure that the only listings getting into MLS are those where at least one of the listing brokers involved is actually identified as a listing broker on the listing agreement. The possibility of certain forms of free riding remains, but it is much reduced.

Some MLSs prohibit listings that are co-listed with non-participants, because accepting them is more complicated than not accepting them. Until now, I have not seen a problem with my clients choosing to do that. On the other hand, accepting them makes the MLS database more complete and arguably more valuable.

Have you witnessed any problems with this sort of thing in your market? Do you see agency law or other implications of permitting this? Would you do it differently?

-Brian

(To the extent this sounds like legal advice, it ain't. Retain your own legal and business advisors before acting on the information in this post.)

OMD: Is the cure worth the side effects? V Other options and choosing a course

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Thu, 16 Aug 2007 08:52:45 -0500

What are the other options?

Among the approaches other than centralized and decentralized regional MLSs, the options for cooperating vary widely. For example, two MLSs may allow their participants to view each other's active listings only, or they may include off-markets. They may coordinate on IDX rules, IDX data feeds, or both; they may not coordinate on IDX at all. They may include offers of compensation between participants in the two MLSs; they may not extend offers of cooperation. They may coordinate their rules, creating a third entity for enforcement, they may coordinate their rules keeping their own enforcement, or they may have entirely independent rules.

A note about compensation in MLS cooperative agreements: Many folks start with the assumption that the offer of compensation must extend to participants in other MLSs if there is cooperation among the MLSs. This need not be the case. Sometimes listing brokers in remote or resort areas will resist MLS cooperation efforts because they fear uninformed agents from other market areas will sell their listings but not properly service the transaction between purchase agreement and closing. They may be more comfortable if they can choose to extend compensation to participants in other MLSs on a case-by-case basis. Many of the benefits of cooperation are available without the offer of compensation; and removing compensation concerns of some brokers may deliver the benefits sooner.

Some commentators have dismissed these concerns as those of listing brokers wanting to protect their territory: "Those resort brokers just want to protect what they've got! They don't want to have to share their commissions. The cooperating broker should be able to evaluate whether she is qualified to serve her buyer in the area in question." This overlooks the fact that a great many cooperating brokers should probably not even be in the business; and assuming they will make reasonable judgments about their qualifications is not wise. Furthermore, if the listing broker is offering compensation, most feel they are entitled to a certain level of service.

Choosing a course of action

It may be reasonable for two MLSs to choose not to cooperate at all, and it may be reasonable for them to merge. In most cases, the best choice will be somewhere in between. Inefficiencies and lost opportunities are associated with failing to cooperate. But putting together a plan for merger or regionalization could take years; in the meantime, it may be as if the MLSs are not cooperating at all.

For many organizations, "commando cooperation" may be the best choice. Commando cooperation is what I call any effort by two or more MLSs to cooperate quickly and aggressively on two or three important issues.

One example of commando cooperation is unified IDX. Imagine a small state with six separate MLSs. The MLSs come together and agree that over the course of four to six months they will standardize their IDX rules, pull their IDX listing data feeds together into a single data feed, and allow any participant in any of them to have an IDX site with listings from all of them. The result? Every broker in the state now has a web site where consumers and its own salespeople can view virtually every active listing in the state. This approach delivers significant value to all the brokers in the state (not just those on the "edges" between two MLSs). This approach does not deliver all the possible benefits of cooperation, but it can be achieved quickly and at low cost. It can also serve as the model for further cooperation among the MLSs.

Concluding notes

Cooperation between MLSs should result from a business decision. It is the responsibility of MLS leaders to identify objectives for cooperation, attaching value to them, and comparing that value to the costs of the approaches proposed. For some organizations, moving quickly to deliver on limited objectives will make sense; for others, a comprehensive approach to fixing a "broken" market may be necessary.

What are your thoughts? Does your market need MLSs to cooperate more, or should they be focused on other issues?

OMD: Is the cure worth the side effects? IV Costs of cooperation

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Tue, 14 Aug 2007 17:03:52 -0500

What are the anticipated costs of MLSs cooperating with each other?

Monetary costs for MLS cooperation depend a great deal on the form of cooperation chosen. Generally, they come in the form of "soft costs," staff and volunteer time to make decisions and manage the resulting efforts; and "hard costs" paid to outside contractors and professionals. There will be implementation costs associated with launching any cooperative effort; there may also be ongoing or overhead costs.

Some forms of cooperation come with other kinds of costs: They can reduce the price and service competition among cooperating MLSs. They can reduce the influence of the rank and file broker on decision-making (a large broker within a single MLS may be a relatively small broker in a much larger organization). They can take a great deal of time and money to negotiate, structure, and implement.

What are the available structural approaches?

There are almost as many ways for MLSs to cooperate as there are MLSs. Cooperative efforts, however, tend to take one of the following forms:

Centralized regional MLSs. Where previously there were two MLSs, now there is only one. The new MLS entity is responsible for all MLS issues. This does not automatically mean that underlying REALTOR® associations merge or go away; they may continue to exist as associations without MLS operations or with MLS "service centers" maintained on behalf of the regional MLS.

A centralized regional MLS provides the greatest opportunity for reduced costs, operational efficiencies, improved consumer experiences, and strategic options. Theoretically, a centralized regional MLS eliminates all the costs associated with overlapping MLS markets. In practice, however, much depends on the quality of leadership and the wisdom underlying the MLS's governance structure. Centralized regional MLSs often take a great deal of time to put together because of the many issues and politics involved. Such organizations can get "out of touch" with broker participants, seeing themselves ultimately as for-profit corporations instead of organizations designed to serve their participants. Regional MLSs are usually difficult or impossible to dismantle - if the pre-existing MLSs or their brokers are unhappy with the results, there may be little they can do about it. The costs to create a centralized regional MLS are those associated with creating any new business of its size; ongoing, there are no additional costs associated with this structure.

Decentralized regional MLSs. Two MLSs create a third entity to provide core services, implementing a single MLS system. The pre-existing organizations continue to retail services to brokers, setting their own prices and perhaps adding value with training, technology support, and other services. The degree of regionalization varies; sometimes the regional takes over things like rule-making and enforcement and training and technical support, and sometimes these are left to the pre-existing organizations.

A decentralized regional MLS generally does not provide the same opportunities for reduced costs and operational efficiencies as a centralized regional, though it enjoys some enhanced buying-power advantages. It can, however, provide some degree of price and service competition (between the pre-existing entities, which are now retailers), while ensuring that brokers buying from any source get access to the same data using the same system. A decentralized regional can deliver most of the strategic and consumer-experience benefits of centralized regionals, including enhanced partnership opportunities and improved consumer experience.

In some cases where local associations/MLSs distrust the idea of a regional MLS or where politics make a centralized MLS unlikely, a decentralized regional can be a compromise. Like centralized regionals, decentralized ones are hard to undo once they are created. Because they tend to be compromise solutions, they often have governance structures that may give disproportionate power to small numbers of participants/brokers; it is critical to give special attention to governance to prevent decision-making impasses down the road. The cost to set up a decentralized regional MLS is that to set up any business of its size; on-going costs to maintain a separate layer of organization usually make the decentralized MLS more expensive than a centralized one or independent MLSs.

Sharing technology without creating new legal entities. Pre-existing MLSs have options to cooperate on technology without creating new regional entities. In shared back-end systems, two MLSs hire a third party to take data from both of them and integrate it on a third system that is accessible to participants in each. In MLS data exchanges, two MLSs have their vendor or vendors package data from each and transmit it to the system of the other, so that participants in one MLS can see listings on that MLS that originate from the other MLS system. In a coordinated vendor selection, two MLSs intentionally choose the same MLS database system or lockbox system; each then makes its service available to participants in the other on a discounted or favorable basis. (They may also coincidentally select the same vendor and decide to cooperate later.) In each of these cases, the MLSs can agree to coordinate other activities, such as rule-making and enforcement, but the degree of cooperation can vary widely.

Technology sharing does not realize the full potential of operational efficiencies, but it does ensure that brokers in either MLS can access listings from both MLSs via a single interface. Technology sharing provides price and service competition between the pre-existing entities, which remain independent. Governance can be challenging if not structured carefully. Technology sharing is reversible; if the MLSs discover they have irreconcilable differences regarding technology, they can go their separate ways. There are always some costs associated with coordinating the activities of two MLSs, but these vary widely depending on the approach taken.

Reciprocal participation. Two MLSs agree that participants in either obtain some or all the participatory rights of the other. This may include logging into the other MLS to see active listings and perhaps off-market listings; as well as possibly permitting input of listings into one MLS of listings of brokers participating in the other. The MLSs continue to maintain entirely separate systems.

The only benefit this approach generally provides is to prevent the need for offices to pay to belong to more than one MLS. All the other potential efficiencies, opportunities, and cost savings are absent here. There are on-going administrative costs associated with reciprocal participation.

Note: With the exception of the centralized regional MLS approach, the pre-existing MLS entities continue to exist and to sell their own services. As a result, it is important that they set their own retail prices without consulting each other. (The Sandicor antitrust case in San Diego demonstrates what happens if MLSs ignore this advice.)

Are you working with an MLS that engages in a different kind of cooperation from that described above? Are there other options you think should be discussed?

MLS consolidation: See posts on my blog

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Fri, 10 Aug 2007 08:59:24 -0500

Hey, y'all!

I just got subscribed on the MLS issues group. I figured I'd give you all a heads up on posts I've been making to my ActiveRain blog regarding the issue of consolidating MLSs.

Find them at: http://activerain.com/blogs/swede1022

I'd love to have your feedback.

-Brian

OMD: Is the cure worth the side effects? III "Lies, damned lies, and surveys"

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Fri, 10 Aug 2007 08:49:10 -0500

This week saw yet another example of the use of a survey to argue that the MLS industry needs to take a certain course of action. Using survey data to reach these kinds of conclusions is a mistake. And in fact, I don't think even the survey in question supports the headline that an Inman News article foisted on the story.

NAR's Center for REALTOR Technology published its annual technology survey this week. About 550 brokers/salespeople replied to a "survey link" that CRT emailed to more than 25,000 NAR members. I can't tell from the survey methodology section what steps CRT took to make sure the respondents were representative of the entire membership. (A buddy of mine who does market research says his company is satisfied that Internet surveys are about as representative as any other approach for gathering this kind of information, but that it's best to test that assertion in any given industry.) We don't know where the responses come from, as they are not broken out by geography. Remember that with a few exceptions, the big OMD problems are on the heavily-populated coasts...

One of the questions the survey asked was "What would you consider the ideal size for a consolidated MLS?" The Inman article reported that about 34% of brokers/salespeople responded "state-wide." In fact, the survey received the following responses from brokers/salespeople:

34% Statewide
23% By market areas or metropolitan statistical area (MSA)
22% By larger market region within state
12% National MLS
08% Regional across several states
03% Other

Inman's reporter, Glenn Roberts, leads his article: "Support is growing for large-scale multiple listing service consolidation." Within two paragraphs, however, he acknowledges: "But most respondents who are affiliated with an MLS stated the ideal size for an MLS is by market area or metropolitan area." Well, so much for support for "large-scale" consolidation. In fact, though, 54% of respondents wanted state-wide or larger MLS... compared to 45% who think smaller-than-state-wide. Factor in the survey's margin of error of 4%, and it's hard to say what brokers/salespeople want. So the Inman story muddles the survey results a little.

The big problem is that folks might actually pay attention to the survey at all. Ask me if I want lower interest rates, higher pay, better working hours, more vacation time, a nicer car, a more attractive spouse, etc., and I'm likely to say "yes" on every one (except the last, as I know it's just not possible). These surveys ask about what folks would like without any consideration of the costs or consequences.

If you manage an MLS or are an elected leader of one, you need to make a business decision about consolidation. Your decision-making will not likely benefit from asking these kinds of over-simplified questions. Survey your members, but ask them questions about where they are practicing, use open-ended questions to get at frustrations the current system may be causing them, and then make your decisions. And don't forget the data you have: If you are considering consolidation with another MLS, analyze the transaction data in them to see which brokers are doing which transactions where. You can ascertain the extent of market overlap and benefits of alleviating it much more effectively by analyzing your data than by running surveys.

-Brian

OMD-Overlapping market disorder: Is the cure worth the side effects? II

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Mon, 06 Aug 2007 13:52:16 -0500

Diagnosing OMD - Using licensee overlap, population density, and referrals

One of the benefits of MLS cooperation is meant to be the cure to overlapping market disorder or OMD. This is the situation where a broker is compelled to belong to more than one MLS in order to operate within a single "natural market area."

Many of the writings about OMD suggest that the problem is equally bad everywhere. Folks who tout OMD as a major problem in the industry usually point to the examples of brokers in California, Southern Florida, and parts of the East Coast, who may be forced to belong to many MLSs. But the extent of the problems varies greatly from region to region.

To assess whether your MLS should be looking for a cure to OMD, you should use these two tests to see whether your MLS suffers from it, and to what extent.

Licensee overlap

Find out by survey or otherwise what percentage of your licensees belong to MLSs other than yours. If more than 10% of your brokers belong to any one other MLS, then you probably should be considering treatment for OMD. Note that I did not say 10% or more belonging to any other MLS. The reason for this is simple: Unless you move to a single, national MLS, your MLS will always have edges. In fact, the bigger your MLS territory, the more edges you are likely to have. A state-wide MLS will have participants in border towns who feel compelled to join MLSs in the adjacent states. But that does not mean that a city on one side of the state-wide MLS is part of the same market as the city on the other side of the state-wide MLS. Aggregating all the overlapping brokers from all the edges of the MLS may give an artificially high count of brokers affected by OMD.

What if there is relatively little licensee overlap, Does that mean that there is no OMD? Probably not. Sometimes, the costs of belonging to multiple MLSs discourage brokers who would like to cover a larger territory from doing so. Thus, it's worth looking at a second test for OMD.

Relative population densities

One symptom of OMD is multiple MLSs within an area with a relatively continuous population density. Check out this PDF showing U.S. population density by county for 2000. Note that those counties in blue and dark green have density at or above the U.S. national average ("High Density Counties"). Light green, tan, and white counties are below the national average ("Low Density Counties"). This is a great simplification, but it's helpful for discussion.

Where two high-density counties are adjacent to each other, I would argue they are likley part of a single "natural market". There is no barrier of intervening rural land to distinguish them into two separate markets. Consequently, if your MLS is one of two or more MLSs serving an area of contiguous high density counties, your MLS should probably be assessing the need to cooperate with its neighbors to address OMD.

Doing so is a strategic decision aimed at enhancing the value your brokers receive from MLS. Even if they are not already joining multiple MLSs or clamoring for MLS merger, the lack of a single market provider for MLS services may be impairing their ability to serve consumers. MLSs should not wait until brokers complain about OMD to consider its possible effects.

The population density test suffers from some problems. One is that there are parts of the U.S. where the density is high over a very large area. Take the Northern Virginia to Boston corridor, for example. Though Rockland and Putnam Counties in New York (just north of NYC) are arguable part of the same natural market, it is unlikley that they are part of the same natural market as Bucks County PA (ouside of Philly). There perhaps state-by-state markets make sense. (Though note that Trend in Philly and MRIS in DC recently announced a partnership to CURE OMD, effectively creating a data share running from northern Virginia into New Jersey.)

The referral test

If brokers from one MLS typically choose to offer referrals to participants in a neighbor MLS rather than joining up with that MLS, chances are they are really two markets. Brokers in the one MLS may feel that brokers from the other are insufficiently servicing their transactions, if as a result of MLS consolidation those other brokers are now entitled to a full cooperating compensation as set out in MLS. Many folks scoff at the listing brokers' concerns, noting that they are often in resort communities and are not used to "interlopers" selling their listings. I think this is a bit unfair. The listing broker has a right to expect a level of service from the cooperating broker in return for the compensation the coop broker gets. If listing brokers are not getting that from brokers in adjacent areas, they will naturally prefer to pay referral fees instead of a percentage of the sale price.

Final thoughts

If your MLS passes the licensee overlap, relative population density, and referral tests, I think it is probably free of OMD. Focus your efforts on other initiatives. If you have one or more of these symptoms, you should examine the costs and benefits of greater MLS cooperation.

OMD-Overlapping market disorder: Is the cure worth the side effects? I

Brian Larson (Larson/Sobotka Business Advisors, LLC) — Sat, 04 Aug 2007 23:57:30 -0500

Like all business decisions of an MLS or association, the decision whether and to what extent to cooperate with other MLSs or associations in providing services should be based on sound business judgment: In other words, do the anticipated benefits outweigh the anticipated costs, taking into account the risks?

Too much of the rhetoric surrounding efforts to "merge," "regionalize," and "nationalize" the offering of multiple listing services is centered on flawed logic rather than business analysis. For example, one NAR leader said NAR needs to build its gateway, "because if we don't, someone else will." By that logic, every bad but untried business plan is worth giving a go. Others argue that merging entities to create larger ones automatically leads to greater efficiencies. Many customers of recently merged telephone companies and banks will tell you that the "efficiencies" are often offset by higher fees and frustrating customer service experiences. Some folks have pointed to results of surveys (notoriously unreliable in the first place because they are not conducted scientifically) that show brokers and agents want to be able to practice across long-standing service boundaries. The surveys rarely explain the likely costs or trade-offs, and who would not want to get more if they thought they would not have to pay more?

I want to think about benefits and costs of cooperation. Let's start with bennies...

What are the anticipated benefits of MLS cooperation?

According to one estimate, the inefficiencies associated with brokers overlapping MLS markets may impose costs on the industry of $150-200 million per year. Distributed over the more than 600 MLSs in the country, this cost is relatively small, but MLS cooperation has the potential to deliver many benefits, however, in the form of opportunities for reduced costs, increased service quality, strategic positioning, and improved consumer experiences.

This short paper looks at some of the costs and benefits of various approaches to MLS cooperation.

What are the anticipated benefits of MLS cooperation?

Reduced costs. There are really two kinds of cost savings available from MLS cooperation: the savings from eliminating market overlap and those from increasing operational efficiency. Market overlap occurs where offices and salespeople operate across multiple MLSs. E.g., an office in East Overshoe may need to belong both to the Overshoe Regional MLS and to Beltbuckle MLS in order to serve its customers, because the consumers in question do not view the East Overshoe area as being clearly associated the territory of either MLS.

The costs of this sort of market overlap can fairly easily be calculated. They consist of duplicated fees, as well as additional costs for brokers experiencing the overlap to train their employees on multiple systems and forms, input listings into multiple MLS systems, integrate data feeds from multiple MLSs into their IDX sites and back-office systems, etc. The extent of overlap varies a great deal from market to market. Some real estate offices in Northern California claim to belong to 10 or more MLSs to serve their "market." In other cases, a single MLS may cover a large region of a large state, with no brokers feeling the need to belong to any neighboring MLS.

It is possible also to assess the opportunity or operational efficiencies if MLSs cooperate. In the case of two MLSs merging, for example, one would expect some costs to go down. Two CEOs would be replaced by one (though a second senior-level manager might still be necessary). Note that some forms of cooperation actually create new layers of cost; we can discuss that later, maybe.

Improved services. Operational efficiencies need not result in lower costs. Instead, they can be used to create higher levels of service. For example, if two MLSs, each with one IT staff member, merge, the resulting organization could keep both staff members, but have each develop more specialized knowledge to assist customers. Choices about balancing reduced costs and increased service quality mean that some of the nation's largest MLSs also have MLS fees that are higher than the national average. This does not reflect poor management; it just reflects the organizations' decisions to focus on improving service rather than reducing costs.

Strategic opportunities. Cooperation can provide great strategic benefits that are hard to quantify. For example, if two metro areas are distinct but growing toward each other, cooperation now may allow brokers in the two markets to avoid overlapping market fees in the near future. Cooperating in certain kinds of technology acquisitions can make cooperating MLSs more attractive business partners to vendors, leading to better options and pricing. And cooperating before problems get out of hand can prevent other organizations that really do not understand MLS from imposing solutions. (I'm thinking NAR here.)

Improved consumer experience. Market areas, especially those just outside of large metropolitan areas, can end up "chopped up" due to the existence of multiple MLSs. For example, the Minneapolis/St. Paul area has a large regional MLS (with more than 20,000 salespeople) that covers a 13-county area. But if a Minneapolis-area resident seeks a lake home within three hours of her downtown condo, she will be looking for and at listings in as many as 11 different MLSs. Even if a single broker chose to belong to each of those MLSs, it might not be able to create a single, searchable database of their listings: Some MLSs forbid "co-mingling" of their listings with those of other MLSs; some use technologies that make it difficult to maintain a single site with listings from multiple MLSs; etc. For the consumer with this real estate need, MLS boundaries result in a diminished customer experience. In this scenario, MLS cooperation (at least on IDX) could greatly improve the consumer experience an increase the value of brokers delivering that experience.

What do you think are the potential bennies of MLS cooperation?