Editor’s note: In this three-part series, we talk to some new entrepreneurs on the real estate block, and find out what they’re doing, what they’re doing differently and how the industry has reacted to them. They’ll talk about what it takes to launch a real estate company and barriers to innovation the industry puts up along the way.

Editor’s note: In this three-part series, we talk to some new entrepreneurs on the real estate block, and find out what they’re doing, what they’re doing differently and how the industry has reacted to them. They’ll talk about what it takes to launch a real estate company and barriers to innovation the industry puts up along the way. (See Part 1: Breaking the business model mold and Part 2: Up at 3:30 a.m.)

The Greater Lansing Association of Realtors slapped Michigan real estate brokerage Tomie Raines with a $125,000 fine when it displayed home listings online in a virtual office Web site format. Discount broker Home Quarters, also in Michigan, felt a sting when its MLS cut off access to local home listings because of the broker’s alleged misuse of home data online. Texas discount broker Aaron Farmer has been battling his state Realtor association for nearly two years over a proposed rule that he says essentially would close his brokerage doors.

ERealty, ZipRealty, Catalist Homes, LendingTree and HomeGain are among a long line of companies that have faced anti-competitive attacks on their businesses. Before this current generation of innovators felt the wrath of an entrenched industry, firms like RE/MAX in the 1970s and Help-U-Sell in the 1980s were prevented from putting their home listings on the MLS, and Microsoft in the 1990s was prohibited from putting MLS listings on the Internet.

This is how the cutthroat nature of the real estate business rears its head: blackballed home listings, sizeable fines, racked up attorney’s fees and months of business lost due to frozen for-sale listings access.

Between each state’s own real estate laws, complicated online home listings display policies and a general dislike of new business models that challenge the old value chain, the industry makes it difficult for new entrepreneurs to enter the space. As history shows, to be successful they’ll have to fight the industry along the way.

Here are some examples of how the industry can prevent innovation:

1. Department of Real Estate warnings:

A state’s Department of Real Estate handles complaints pertaining to real estate brokers or agents who violate licensing laws. Sometimes these complaints can lead to restrictions on innovation.

Consider a situation brewing between California and online for-sale-by-owner marketing Web site ForSaleByOwner.com. In 2001, the DRE began sending stop-it-or-else correspondence to operators of Web sites that sell classified advertising of FSBO houses, claiming the FSBO Web site operators practice selling real estate without a license.

Hear what realty entrepreneurs have to say during the Inman News Audio Conference “Alternative Real Estate Business Models” on Thurs., Sept. 23. Click here for more information.

But ForSaleByOwner.com claims it’s a classified advertising service that shouldn’t be forced to obtain a brokerage license. The company lists for-sale-by-owner properties nationwide and doesn’t operate a real estate brokerage in any state.

In 2003, ForSaleByOwner.com filed a lawsuit against the California DRE, alleging the state’s law that requires the FSBO company to obtain a real estate broker’s license to legally conduct business in the state is unfair. The state does not require newspapers to obtain a license.

That suit is still ongoing.

Does the real estate industry make it difficult for entrepreneurs to succeed? Take a survey.

2. Adverse commission splits:

Real estate is a business of cooperation. But as history shows, not all competitors wish to play fair. In 2003, online brokerage eRealty, now owned by Prudential Real Estate Affiliates, received a letter from a Chicago-area broker stating that eRealty would get only 1 percent of the purchase price on any of its listings. Other brokers typically get 3 percent.

The practice is known as adverse commission splits and is legal because listing brokers have the right to determine how commissions will be shared with the buyer broker.

Another example of an adverse split goes back almost 20 years and ended up in litigation between traditional brokerages RE/MAX and Smythe, Cramer Co.

In the RE/MAX vs. Realty One and Smythe, Cramer Co. case, which went to trial in April 2000, RE/MAX alleged that brokers associated with RE/MAX’s franchisees received lower commissions on split-commission transactions, and that this practice was “designed to drive RE/MAX out of business in Northern Ohio by deterring its agents from doing business there,” according to court documents.

The splits were typically 70/30 or 75/25 in favor of Realty One and Smythe, Cramer, according to court documents, and the practice began in 1987.

The jury initially “returned a verdict finding that Realty One and Smythe, Cramer had illegally agreed to restrain trade,” according to court documents, though a mistrial was declared after the jury began deliberations to consider additional elements of RE/MAX’s claims. RE/MAX settled the case with Smythe, Cramer in July. The settlement process with Realty One became contentious, though those parties eventually settled for $6.67 million.

RE/MAX collected about $10 million in total from its two competitors related to the settlement, according to court testimony. In November 2001 the U.S. Court of Appeals in Cleveland affirmed the settlement agreement, which limited Realty One’s ability to set adverse splits for RE/MAX franchises.

3. No rebate rule:

A number of states prohibit real estate agents from rebating a portion of their commission to home buyers. So far, there haven’t been any high-profile challenges to rebate practices among discount real estate firms, but many companies such as online brokerage ZipRealty have used rebates as a way to differentiate themselves from the competition.

4. VOW policy:

The National Association of Realtors in May 2003 implemented a policy for online listings display with regards to VOWs (virtual office Web sites). The policy includes a provision that permits brokers to opt out listings from other brokers’ VOWs on a blanket or selective basis. That same provision has been the focus of an ongoing U.S. Justice Department investigation since last November.

Real estate brokers whose business plans include using VOWs to display listings online and attract consumers could be negatively affected by this provision of the policy. Local brokers with a large market share could keep cooperation with these brokers at a minimum by effectively keeping their listings off that broker’s site.

5. State real estate laws:

Most real estate laws must go through a state Real Estate Commissioner. Often the state Realtor association will lobby with that commissioner to have certain rules and policies passed. One example of how this entity can put restrictions on innovation takes place in Texas. In 2002, the Texas Association of Realtors proposed a rule to the Commission that would require a minimum level of service for discount brokers.

Aaron Farmer with Texas Discount Realty claimed such a rule would put him out of business. Farmer’s company offer consumers the option to choose and pay for only the specific realty service they want. Often, a seller will pay a limited service broker a flat fee to have his or her home listed in the MLS, but the seller will choose to represent himself or herself in negotiations with buyers.

Realtor association’s proposed rule would’ve required brokers to provide assistance developing, communicating, presenting, accepting and understanding purchase offers and counteroffers. Farmer, whose limited service listings comprise three-quarters of this business, has been fighting the Realtor group’s effort to get the rule passed since 2002. Last year, he won a court order that halted implementation of a prior version of the proposed rule. So far, no such rule has passed, but the topic has been discussed at Texas Real Estate Commission meetings throughout the year.

6. MLS listings display policies:

Because all MLSs are different, real estate companies with a national reach have to adapt their businesses to each of the MLS policies in each market they intend to serve. This gets complicated when considering a company that wants to display listings online using Internet data exchange (IDX).

For example, Rob Emerick, president of PlanetIDX, relayed a story about a real estate broker in Utah who approached PlanetIDX to help him display listings data on his brokerage Web site. PlanetIDX specializes in providing IDX and VOW services to the real estate industry. The only problem was that the broker’s MLS didn’t have an IDX policy at the time, so it had no way to provide him with a way to receive the data.

After three years, the MLS–which Emerick wouldn’t specifically identify–finally implemented a policy and the broker is on his way to displaying homes-for-sale information online. But this innovator’s plans had to hold while the industry caught up to him.

Emerick also pointed out certain markets in which the MLS allows only brokers to display listings online. Agents who want to show listings on their own Web sites in those markets either can link to or frame the broker’s IDX in their Web sites, or they need the broker’s permission to utilize IDX. Such markets include parts of Connecticut and San Diego, Emerick said.

7. The unwritten code of silence:

This can be the most damning strategy to prevent new business models. Realtors team up and ignore home listings that are not full commission and do not follow the exact rules of the industry. They do not show buyers these listings and conspire to wreck the innovators.

***

Send tips or a Letter to the Editor to jessica@inman.com or call (510) 658-9252, ext. 133.

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