MLSs grapple with new business model

'Paper brokerages' flying under the radar

Into the unknown image via Shutterstock.Into the unknown image via Shutterstock.

Editor’s note: This is the second in a four-part series examining website operators who use brokerage licenses to obtain shared listing feeds from multiple listing services to generate leads for other brokerages. See Part 1. In this article, Inman News reporter Andrea V. Brambila looks at how MLSs are struggling to interpret whether their rules allow “paper brokerages” and fears that denying them listings could violate antitrust law. Part 3 examines whether website operators that obtain Internet Data Exchange (IDX) listings are complying with MLS rules governing their display. Part 4 looks at whether widespread adoption of the paper brokerage business model could undermine participation in IDX, and the MLS system itself.

Companies that join multiple listing services to gain access to MLS listings data but don’t provide brokerage services to buyers and sellers pose a dilemma for MLSs — if they’re aware of the practice at all, an Inman News investigation has found.

So-called “paper brokerages” have cropped up to take advantage of MLSs’ efforts to help their members compete with national listing portals.

By managing a feed of pooled listings in their market that brokers have agreed can be displayed on each other’s websites, MLSs have sought to help their members land more business by making them the best source of listing information in their markets.

But some brokers who seek access to MLS Internet Data Exchange (IDX) listing feeds that can attract consumers to their websites don’t always represent buyers and sellers. Their goal is often to instead capture the consumers’ contact information and sell it as a “lead” or referral to a brokerage that actively represents buyers and sellers.

Who can participate?

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A key issue in determining who has the right to display IDX listings has been whether a company qualifies as an “MLS participant.”

We're seeing a lot of creative people coming into the business. We never want to discriminate against somebody's business model. --Jim Harrison, CEO, MLSListings Inc.

Obtaining a brokerage license and joining an MLS without providing brokerage services is a relatively simple way for a website operator to gain access to an IDX listing “feed” — all of the listings in a given market represented by brokers who have agreed to publicize each other’s listings.

The IDX feeds are available only to “MLS participants” — defined by the National Association of Realtors as individual brokers and real estate firms that “offer or accept cooperation and compensation to and from other participants.”

In other words, only brokers who “actively endeavor” to list properties for sale and offer compensation to a broker who brings a buyer to a sale, or brokers who accept such offers of compensation for representing buyers, can join an MLS and display IDX listings on their websites.

NAR’s 2005 definition of an MLS participant — enshrined in the language of a 2008 settlement with the U.S. Department of Justice, which had filed an antitrust suit against the trade group  – was intended to keep “referral only” brokers from joining an MLS.

Listing brokers “did not want to be placed in a position of having to pay for referrals on their listings by brokers (who) were not truly in the brokerage business but only in the referral business,” NAR General Counsel Laurie Janik told Inman News.

NAR feared that brokers would pull out of the MLS system if referral-only firms were allowed to remain, Janik said.

With the change, brokers who display only other brokers’ listings to generate referrals do not qualify to be in the MLS. Such referral-only brokers can continue to operate their business model, but, like a third-party vendor, they need to license the listings they display from MLSs should the MLSs offer that option, she said.

“The strengthening of the participant requirement was a major victory for NAR in the settlement of (the Department of Justice’s antitrust lawsuit) because it keeps ‘free-riders’ out of the MLS,” Janik said.

But NAR’s definition of MLS participant has a hole that can be exploited. Because the definition does not require that MLS participants engage in a minimum number of sale transactions, companies that don’t engage in a single transaction can still claim to be making a “good faith” effort to list or sell a property.

Aggregating IDX data

Two of the best-known listing portals that display IDX listings for the purpose of converting some or all traffic into leads for brokerages other than the company that operates them are ZipRealty.com and RealEstate.com.

Most broker-operated websites that display IDX listings offer consumers the ability to search for homes only in markets where the broker is licensed to represent them.

While some brokerages with a large regional or national presence can offer IDX search in multiple markets, IDX sites typically have much more limited geographic coverage — to a city, region or state, for example — than national “third party” portals like Zillow, Trulia and realtor.com, which aren’t eligible to receive IDX listing feeds.

Third-party listing portals can provide national coverage by rounding up listings directly from multiple sources, including MLSs, brokerages and agents. Often, they rely on feeds compiled by listing syndicators like ListHub and Point2, which aggregate listings from those sources. But brokers can always choose to opt out of providing listings to third-party sites, so they may not have all of the listings in every market.

Although IDX websites usually have a nearly comprehensive set of data on all, or nearly all, of the properties that brokers have listed for sale in a particular MLS, until recently, aggregating IDX listings from multiple MLSs where a company wasn’t prepared to represent buyers and sellers itself seemed to be outside the rules.

In August 2012, Kirkland, Wash.-based Market Leader Inc. — a company that helps real estate brokers and agents generate and manage leads — caught industry insiders by surprise when it announced that it was relaunching RealEstate.com as a listing portal displaying more than 1.6 million IDX listings from more than 150 MLSs around the country.

What surprised and concerned some brokers was that RealEstate.com had formerly been operated by a large national brokerage company. Market Leader, which acquired the website in the fall of 2011, was not even in the brokerage business.

Market Leader has said RealEstate.com provides leads on an exclusive basis to more than 1,000 brokerage companies and agents who sign up to brand an entire city on the IDX-powered real estate search platform.

When Market Leader relaunched, CEO Ian Morris told Inman News that although the company was not providing brokerage services to consumers, it was a licensed broker and MLS member in each of the markets where RealEstate.com was getting an IDX feed.

Inman News has since learned that Market Leader has brokerage licenses in at least 38 states through a Georgia-based subsidiary, FastStart Real Estate Services, which does business as RealEstate.com and appears to have no sales agents.

In at least 23 of these states, the broker of record for FastStart or RealEstate.com is a single person, Carolyn Marie Johnson, based in Dacula, Ga. State brokerage license records vary on where FastStart is headquartered, though the address listed most often is 2505 Dacula Ridge Drive, Dacula, Ga.

FastStart’s broker of record in Georgia is not Johnson, however, but Charlotte, N.C.-based broker Wendy W. Cohen, who was also FastStart’s broker of record in North Carolina until June 30, when the brokerage’s license expired. Cohen was also FastStart’s broker of record in Iowa until May 2012, when the Iowa Real Estate Commission inactivated her license. Johnson now represents FastStart in Iowa.

Johnson also seems to have recently affiliated with real estate marketplace Auction.com. She is licensed as a broker under the company in at least five states: Alaska, North Dakota, Delaware, Missouri and Vermont. In Vermont, she is broker of record for both FastStart and Auction.com.

Johnson and Cohen declined to comment for this story, directing all inquiries to Market Leader. Market Leader declined repeated requests to comment for this story.

(Market Leader was acquired by Trulia on Aug. 20, and Trulia has pledged it will not operate RealEstate.com as an IDX site. See Part 4).

In at least nine of the remaining 14 states where neither Johnson nor Cohen represents FastStart, the firm’s broker of record (also known as qualifying broker, designated officer, or broker in charge) is also the licensed broker of record for another real estate brokerage in the state.

In Florida, for instance, a broker named Robbert Gaarlandt represents a total of seven firms, including FastStart, in the state. (Florida does not limit the number of licenses a broker may hold, according to the state’s professional regulatory agency.)

It is more common for such multibrokerage licensees to be affiliated with just one other brokerage besides FastStart, however. In California, for instance, FastStart’s designated officer, Philip Eric Simons, also represents San Jose-based Orchard Valley Realtors, where he has three salespeople listed under him. Simons has no salespeople licensed under him for FastStart. Indeed, in a state-by-state review of licensee records, Inman News did not find a single salesperson licensed under FastStart.

Jim Harrison, president and CEO of Silicon Valley-based MLSListings Inc., said Simons applied to be a member of the MLS as a broker for FastStart about three years ago, but the MLS did not approve the application because FastStart does not meet NAR’s definition of an active MLS participant.

MLSListings doesn’t have procedures for enforcing the MLS participant rule when someone applies, Harrison said, but in this case, “it was very public that this guy was a broker for RealEstate.com.”

“He’s already a broker for his legitimate company in our market, but RealEstate.com is an aggregation website; it’s not a real estate brokerage website,” Harrison said.

Simons declined to comment for this story.

Unlike MLSListings, most MLSs contacted by Inman News for this story did not have a system in place to enforce the MLS participant rule among its broker members. MLSListings audits members’ IDX websites twice a year.

“If somebody joins and they stated that they’re actively endeavoring to list and sell real estate and we suspect that they’re not, we look and see what their practices are, if their website is actively soliciting business, if they’ve logged into the MLS,” Harrison said. “It’s rather obvious when you go to a company’s website whether they’re actively soliciting business.”

MLSListings doesn’t require members to do deals within a certain time period.

“A big flag is if they have a California broker license but they’re located in Maryland. That’s a big flag that they’re probably not doing business here,” Harrison said.

Harrison said he’s seeing more referral sites sprouting up now than, say, five years ago.

“Business is coming back and there’s a lot of people with a lot of ideas for how they can generate money in real estate without actually selling any,” he said.

“(There’s) a lot of (venture capital) money out there. Now that the market is hot again I think there’s going to be a lot more investment money out there for fresh ideas.”

He said MLSListings does not have any opinion on new business models emerging and joining the MLS “as long as they actively list and sell real estate.”

“We’re seeing a lot of creative people coming into the business. We never want to discriminate against somebody’s business model,” Harrison said.

He noted that not all MLSs have the resources to monitor rule compliance that MLSListings does. The MLS has 52 employees, including software developers, and its compliance staff goes through training provided by the California Association of Realtors.

Not all MLSs are created equal. We do know what we’re doing and our job is to make this utility as efficient … as possible so our customers can support their clients with the best tools available,” Harrison said.

The referral model

In January 2011, ZipRealty launched its “Powered by Zip” program with Better Homes and Gardens Real Estate Metro Brokers in Atlanta as the company’s first referral partner. The agreement coincided with ZipRealty’s announcement that it would shutter 11 company-owned and operated brokerage offices — part of a series of moves intended to put the company on a path toward profitability.

That summer, ZipRealty announced it would take Powered by Zip nationwide after pilot tests in Atlanta and Tucson, Ariz. The company has since expanded its referral program to 17 markets. All but two — St. Louis, Mo., and Nashville, Tenn. — are markets where the company previously had brokerage operations. The company maintains brokerage offices in 19 markets, where it does not operate its referral program.

In 2012, Powered by Zip revenues made up less than 5 percent of the $73.8 million in revenue ZipRealty took in, the firm disclosed in its annual report to investors.

But ZipRealty CEO Lanny Baker told Inman News this year that the firm hopes to expand the Powered by Zip business so that it will eventually represent 50 percent of the firm’s yearly revenue. In June, ZipRealty brought in ex-Microsoft exec Xavier Zang to run Powered by Zip.

“We believe that demand for the (Powered by Zip) (software as a service) offering is strong, and we are investing in people and systems to drive this expansion,” the company said in its 2012 annual report.

ZipRealty is aware, however, that the Powered by Zip model could run up against MLS rules.

“To expand the Powered by Zip network into additional markets, and to service those markets through our online URL, we will need to obtain MLS data in those markets, which the local MLSs may not be willing to provide because we will not be the brokerage that is using that data to service consumers,” the annual report said.

Company executives say ZipRealty.com qualifies as an approved IDX site even in markets where it is not in the brokerage business, because when the website displays listings supplied by other brokers, the branding of the partner broker is prominently displayed, as required by IDX rules.

“We’re not a franchisor,” Baker told Inman News last year. “It’s the partner’s relationship with the MLS” that allows the display of IDX listings on ZipRealty.com, he said, even in markets where ZipRealty is not an IDX participant.

Baker says ZipRealty has two “clear and separate” lines of business: the owned and operated ZipRealty brokerage and Powered by Zip, where the company’s role is “ultimately that of a technology and marketing provider to our partners.”

An Inman News review of how ZipRealty obtains IDX listings in its Powered by Zip markets reveals a more nuanced picture. As of May 2012, the IDX listings ZipRealty displayed on its site in Powered by Zip markets came primarily from 17 MLSs. In at least nine of these MLSs, ZipRealty obtained the listings as a broker member of the MLS, despite closing down brokerage operations in those markets. (The company has since added a 17th brokerage partner in Charlotte, N.C., where it used to have brokerage operations.)

ZipRealty maintains brokerage licenses in states where it has both Powered by Zip partners and its own brokerage offices — Arizona, Florida, Virginia — but also in those where it says it has shuttered its own offices: Georgia, New York, North Carolina, Pennsylvania and Utah.

Most recently, the company procured a brokerage license in Wisconsin in February and joined the Western Wisconsin Association of Realtors, a participating association in that area’s major MLS, St. Paul, Minn.-based NorthstarMLS. That same month, ZipRealty announced it had acquired a new Powered by Zip referral partner, Century 21 Premier Group, in Minneapolis, within NorthstarMLS’s coverage area.

ZipRealty’s Minnesota brokerage license expired in June 2011 after it shut down its brokerage operations in Minneapolis earlier that year. But the company’s new license in Wisconsin allows it to display NorthstarMLS’s IDX listings on its national site as a broker member with its Powered by Zip partner co-branded — although not a single listing from Wisconsin appears on the site.

Michael Bisping, NorthstarMLS’s director of consumer relations, said he could not comment specifically on an MLS participant or their site, but said the MLS generally reviews listing and selling statistics at the time of application for each IDX feed request and, if the MLS does not find activity within the last year, sends a version of a model letter from NAR indicating that the broker does not meet the revised definition of an MLS participant.

After a participant receives the IDX feed, the MLS continues to monitor through yearly audits whether the brokerage actively attempts to list or sell real estate on NorthstarMLS on a continual basis, Bisping said.

In at least five Powered by Zip markets, ZipRealty displays IDX listings via its status as a vendor partnering with a local brokerage: Long Realty in Tucson; Prudential Utah in Salt Lake City; William E. Woods and Associates, Realtors in Virginia Beach, Va.; Bob Parks Realty in Nashville; and Coldwell Banker Gundaker in St. Louis.

Given that each NAR-affiliated MLS sets its own individual rules, subject to NAR’s governing rules and policies, ZipRealty works with each MLS “on their terms,” Baker said. That is why in some Powered by Zip markets, ZipRealty functions as a vendor for the real estate brokerage partner, and in others the company holds broker licenses and may have a broker referral relationship with the local brokerage partner, he said.

“Ultimately, that arrangement is driven by local MLS policies. By staying flexible and keeping our relationships iterative (meaning, that if something changes on their end, we work with MLSs and our partners to accommodate fully on our end), we’re able to maintain productive relationships with individual MLSs across the country, and thereby serve our local Powered by Zip brokerage partners and their agents and customers,” Baker said.

Baker did not respond to a request for comment on whether ZipRealty has plans to represent buyers or sellers in the firm’s Powered by Zip markets where it is a broker member of the MLS.

MLS antitrust fears

At the beginning of this year, a broker for FastStart applied to be an “MLS only” member of Summit MLS in Summit County, Colo., according to Jason Brewer, chairman of the the MLS’s board of directors.

“MLS only” members can get access to MLS listing data for a small fee, as long as they are members of a board somewhere else, Brewer said.

In doing its due diligence, a committee that approves MLS membership found that FastStart likely didn’t qualify to be an MLS participant because the firm did not appear to be representing buyers or sellers. The MLS sent the brokerage a letter asking questions to that effect and received no response, Brewer said.

He said he sent an ethics complaint to the Colorado Association of Realtors, but the association said the brokerage did not commit any violation.

“It’s almost like you have to wait for them to do something wrong,” Brewer said.

The Colorado Association of Realtors declined to say whether a complaint had been filed, calling such information confidential.

A CAR spokeswoman noted that neither the FastStart broker who filed the application or anyone at FastStart was a member of the association. That means any complaints against FastStart would be outside of the association’s jurisdiction, the CAR spokeswoman said.

Because of antitrust issues, Brewer said, legally, the MLS needs to let paper brokers like FastStart join the MLS and then kick them out later if they aren’t “actively endeavoring to sell real estate.”

“Whatever that means. No one knows what that looks like,” he said.

To discourage applications from paper brokers, the MLS is considering raising the cost of an MLS-only membership to equal the cost of a full membership in the MLS, Brewer said.

He declined to comment further, saying fellow board members did not want media involvement “for fear this thing goes to a court battle” — voicing a frequently cited fear among the more than two dozen MLSs Inman News contacted for this story.

Beth Gatlin, director of member services at the Austin Board of Realtors, sent RealEstate.com a cease and desist letter last fall noting FastStart had not had a closing in the last 12 months and explaining that MLS participants need to be actively engaged in the brokerage business.

“That’s really to keep referral sites from joining the MLS and selling the leads back to the members,” she said.

Gatlin said a member had called in and complained about FastStart’s broker trying to sell the member a referral.

“Members hate that — when people aren’t really in the business and just gathering leads and selling them back to them,” Gatlin said.

In response to the letter, FastStart responded that it’s “developing the market” and planning to represent buyers and sellers, Gatlin said.

For now, ABOR plans to check up on that claim at an indefinite future date.

“We’re trying to be respectful of their plea that they were trying to become active in the market. I think we’re in a really awkward position,” Gatlin said.

She worried that FastStart could target the company for an antitrust lawsuit, she said.

“I think they could say we’re trying to discriminate against their business model over others. So we do try to be careful and we do try to be fair,” she said.

One particular concern for Gatlin is that ABOR’s MLS membership includes some investors who are licensed brokers but do not represent anyone other than themselves in real estate transactions. These investors do not have IDX websites.

“The only difference is (the investors) are not public. They haven’t said, ‘Let me help you buy a house and sell that lead to a legitimate Realtor.’ They’re just quietly watching the market and deciding what house to buy,” Gatlin said.

NAR’s Janik said Gatlin is right to be concerned.

“The MLS needs to be consistent in the application of its rules. The definition of a ‘participant’ does not contain an exception for brokers who do not list or sell to be participants because they are investing on their own behalf,” Janik said.

Nonetheless, Brian Larson, a former MLS executive who’s now partner at the law firm Larson/Sobotka PLLC, said antitrust claims would be harder to make given that the MLS participant rule has the DOJ’s blessing. He does not know of an MLS that has tried to enforce it and been seriously threatened over litigation.

“MLSs are fully within their rights enforcing the participant eligibility provisions of NAR policy,” he said.

“If you enforce it as NAR and DOJ settled, there should be no problem,” he added.

Larson did advise, however, that any MLS looking to enforce that provision consult their attorney.

Only one MLS Inman News contacted, First MLS in Atlanta, said it was considering possible legal action against ZipRealty and RealEstate.com, as well as other firms, related to violations of the MLS participant rule and IDX display rules.

Nonetheless, First MLS President Cantey Davis said the MLS had “no immediate plans” to pursue legal action and declined to comment further.

Wanted: more guidance from NAR

Inman News asked several MLSs whether they enforced the MLS participant rule. Only three said they had procedures in place to do so (Trend MLS, NorthstarMLS and MLSListings), while four said they enforced the rule to a certain extent — for instance, if a member complained. Eight MLSs declined to comment, while six said outright that they did not have procedures in place to enforce the rule.

The most commonly cited reasons were fear of lawsuits, a lack of staff members to police the thousands of IDX websites in their coverage area, and a lack of clarity on how to implement the rule.

Several MLSs expressed a desire for more direction from NAR on enforcing the rule.

“Our (board of directors) has discussed this in the past and were not able to agree on what the criteria would be and decided to table the discussion until more research can be done to see how many any change would impact and also take into consideration not only large but also small brokerages,” said Shayne Fairley, director of initiatives and data services at My Florida Regional MLS.

The board’s discussion centered on what constitutes actively trying to obtain a listing and whether to require an active or sold listing within the past year, two years, since joining or some other time period, he said.

“MFR strives to protect our members’ data and is concerned with these types of operations that gain access to MLSs just to get the data and have no plans of trying to buy or sell real estate. It would be great if NAR had something definitive that we could then enforce, but that’s not the case right now,” Fairley said.

NAR’s Janik said the MLS participant definition provides “quite a bit of guidance” to MLSs.

“The first thing to keep in mind is that this requirement is imposed on participants, who are the principal brokers joining the MLS. It does not apply to each and every agent licensed with a broker,” Janik said.

“We know that brokers may have agents licensed with them who do not engage actively in the listing or sale, while others are top producers. This requirement applies to the brokers, not their agents.”

Secondly, MLSs need to apply the requirement evenhandedly, Janik said.

“In my view, all applicants for MLS participation should be required (to) affirm to the MLS that they do (or) will actively endeavor to list or sell property in the MLS’s market area. Sending referrals in to brokers in the MLS’s market area does not constitute listing or selling listings,” she said.

“We also recommend that MLSs respond to questions raised about brokers’ continuing eligibility to meet the participant requirement be handled evenhandedly. They must follow up with all such inquiries in the same manner.”

The policy itself states the requirement should be applied “in a nondiscriminatory manner,” Janik said.

“We do not want anyone to believe that they have been singled out by the MLS,” she added.

She recommended MLSs use a model letter from NAR, to inform brokers who may not qualify of the revised MLS participant definition and of the documentation required to verify they do qualify.

Janik said MLSs should ensure that those applying to be participants meet the requirements for membership.

“I also recommend that the MLSs review the sales activity of participants every 12 to 18 months to identify those participants who have no record of any sales. A communication similar to the letter should be sent to those brokers with no sales to determine whether they continue to satisfy the membership requirement,” she said.

Larson said that  if MLSs want to prevent brokers from participating in the MLS by invoking the participant clause, they have three options:

  • Ask them if they do or plan to represent buyers and sellers. If the answer is no, then the MLS can say, “Sorry,” and cut them off.
  • If someone complains about them, then the MLS can look at their website and what it says about them. If the website says, “We never represent buyers or sellers,” the MLS can say, “Change it.”
  • Otherwise, an MLS would have to poll their members in an objectively determined category, such as not appearing on the listing side or selling side of a transaction in the last 12 months, and then send a letter asking if brokers are actively seeking buyers and sellers.

“That’s a big pain in the butt,” Larson said.

Unless a broker member complains about paper brokerages, then MLSs don’t have enough incentive to enforce the rule — costs exceed the benefits, he said.

Some MLSs believe enforcing the rule is too complicated to do effectively and therefore have not put enforcement mechanisms in place, he added.

“If it were easy to enforce, MLSs would do it quite readily,” Larson said.

“In short, many MLSs consider this ‘win’ by NAR in the DOJ settlement to be of little practical value,” he added.

He added, however, that his firm had advised and helped some MLSs, which he declined to name, develop plans for enforcing the rule fairly aggressively.

Coming Wednesday in Part 3: Are website operators that obtain Internet Data Exchange (IDX) listings complying with MLS rules governing their display?

Inman News reporter Paul Hagey contributed reporting to this series.

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