Real estate brokers who are working with sites like ForSaleByOwner.com to place flat-fee listings from around the country on Realtor.com may find themselves at loggerheads with state regulators if they are accepting listings from states they are not licensed in.
Regulators in Nebraska and Alaska have issued cease-and-desist orders against a California broker who advertised properties from those states on Realtor.com by placing them in a multiple listing service (MLS) or services in another state.
In a July 20 cease and desist order, the Nebraska Real Estate Commission maintains that only licensees are permitted to negotiate the listing, sale or purchase of property in the state, or assist in procuring prospects.
The broker, Leslie Rae Young, sued the Nebraska Real Estate Commission in federal court on July 29. Young claims recent changes to the Nebraska’s licensing laws are unconstitutional, and that the state has no jurisdiction over her.
Young also maintains that she is only providing advertising services for homeowners who wish to sell "without the use of a commission-charging Realtor" — an activity that does not require her to be licensed in the state.
Young "does not provide any other services to the homeowner regarding the negotiation, sale or closing of any sale. These activities are all handled by the homeowner," her attorneys said in her defense.
In Alaska, Young successfully argued that the state’s definition of what constitutes a real estate listing was overly broad. But an administrative law judge ruled that Young had nevertheless violated Alaska’s licensing laws, because the advertisements for Alaska properties she placed on Realtor.com via out of state multiple listings services identified her as a "broker" and "agent."
Realtor.com uses templates that include language for each property such as "This listing brokered by," "agent’s other listings," and "e-mail agent." Young maintained she had no control over whether she was identified on Realtor.com as a property’s broker or agent, when she was only providing advertising services.
But in a June 24 decision, Administrative Law Judge Christopher Kennedy ruled that "There is no question that the ads hold her out to be a broker of real estate, and to be brokering the property featured in the ad."
"Young gets her clients onto a Realtor-only database by, in essence, pretending to be their Realtor. In nearly all respects she is not, in fact their Realtor: the references in the advertisement to her as ‘broker’ and ‘agent’ for the properties concerned are not accurate," Kennedy wrote in his decision.
"But by assuming the mantle of a broker and agent in the advertising she places, Young violates the Alaska prohibition on holding herself out to be in the business of doing activities requiring an Alaska license when she does not in fact hold one."
Because of the way Realtor.com and other similar websites operate, Kennedy said, "there does not appear to be a way around this problem. It seems unlikely that she can pursue her business model with respect to Alaska properties without becoming licensed here."
Young’s attorneys have appealed the decision, adopted by the Alaska Department of Commerce on Aug. 11, in Alaska Superior Court.
In Nebraska, the commission’s cease and desist order cited seven Nebraska properties listed on Realtor.com under Young’s name, all of which provided toll-free numbers allowing interested parties to contact the seller directly by entering a four-digit code into an automated phone system.
Young’s attorneys have obtained a temporary restraining order against the Nebraska Real Estate Commission while they argue her case for a temporary injunction. But the restraining order pertains only to Young, and the state may take action against other brokers if the case drags on long enough, said Nebraska Real Estate Commissioner Greg Lemon.
Other state regulators, including the California Department of Real Estate, have asserted the same right to take action against brokers and agents who accept listings in their state without obtaining licenses, and Young’s legal battles could have larger implications for flat-fee brokers who seek to be players on the national scene.
"There are a number of other states that say they can fine people for doing the work of a real estate broker or licensee without a license," Lemon said. "This is the first challenge (of that power) that I’m aware of in federal court. Since the challenge is based on federal law, I think it will be applicable to other states as well."
The practice of real estate brokers taking flat-fee listings from homeowners in states they are not licensed in stems at least in part from the desire of "by owner" websites to gain exposure for their clients on Realtor.com, one of the most popular listing portals on the Internet.
Realtor.com — the official site of the National Association of Realtors (NAR) — is popular with consumers because it has information on nearly all residential properties for sale nationwide, thanks to relationships with hundreds of multiple listing services. Realtor.com accepts property listings from MLSs, most of which are also affiliated with NAR.
To get what it describes as "for sale by owner" listings to appear on Realtor.com, ForSaleByOwner.com works with a network of brokers who offer flat-fee listing services, which are often "MLS only," meaning the brokers enter the listing information into an MLS but provide no other service to the seller.
ForSaleByOwner.com pays brokers to list properties in MLSs outside of the seller’s market, a company executive told Inman News in November 2008, after the company boasted that it was the first "by owner" website "to enable home sellers to advertise their home on Realtor.com without appearing on a local multiple listing service (MLS)."
At the time, Realtor.com operator Move Inc. objected to such listings being characterized as "for sale by owner," because only properties that are represented by an agent or broker can appear on Realtor.com. A Move spokeswoman said that remains the company’s position.
"We receive listings from the MLSs, and if a listing comes to us from an MLS we have an agreement with, and the listing adheres to that agreement, it is displayed on the site," said Move spokeswoman Julie Reynolds.
Listings displayed on Realtor.com cannot state "for sale by owner," and cannot include the property owner’s name or contact info, Reynolds said.
Although Young and ForSaleByOwner.com declined a request for comment, Young links to ForSaleByOwner.com as "our partner" on her own website, eList.me. ForSaleByOwner.com is not named in the Nebraska and Alaska cease and desist orders or as a party in Young’s lawsuits.
Two other brokers who work with ForSaleByOwner.com and other "by owner" websites to place flat-fee listings on Realtor.com had different takes on how Young’s legal battles might affect their business.
Dana Point, Calif.-based broker Carl Wuestehube, who has more than 600 listings from around the country on Realtor.com, said he’s obtaining licenses in states where he is challenged.
"I admire Leslie a lot," Wuestehube said. "But I think a better way to handle this is to cooperate with real estate commissions. Any commission that sends me a letter, we are getting licensed (in that state)."
Wuestehube, the broker of record for Tri-Star Realty, said he’s currently licensed in three states and is in the process of obtaining a license in three others.
"Fast forward five years from now, and you’re going to need 50 licenses and belong to 50 MLSs to provide coast to coast coverage" as an MLS-only listing provider, Wuestehube predicted.
Wuestehube said he works with "every FSBO site in the country," including ForSaleByOwner.com, and also offers flat-fee real estate services through his own sites, MLSHomeListers.com and IowaBySeller.com.
IowaBySeller.com proclaims on its homepage, "Our liberties we prize and our rights we will maintain," and Wuestehube said the site was inspired by an attempt by Iowa Realtors to "bring me up on ethics charges in Orange County."
He said IowaBySeller.com — which offers $395 Internet marketing packages with listings on Realtor.com and Trulia with "no local MLS listing or commission" — has been "blessed by" the Iowa Real Estate Commission.
"Our problem is not with the (regulatory) commissions, but with these misguided Realtors trying to shut down" the ability of brokers to offer MLS entry-only services, Wuestehube said.
Jeffery M. Ashby, a Roanoke, Texas-based broker who also helps ForSaleByOwner.com and another "by owner" site place listings on Realtor.com, said he views the MLS as the biggest threat to his ability to continue providing that service.
Together with his wife, Dorie Michelle Love-Ashby, Ashby has nearly 900 listings from homeowners around the country posted on Realtor.com.
Like Young, Ashby and Wuestehube’s Realtor.com listings provide toll-free numbers allowing potential buyers to contact sellers directly by entering a four-digit code into an automated phone system.
Some the Ashbys’ listings are Texas property owners who found them through his brokerage’s website. Other listings the Ashbys have placed on Realtor.com come from ForSaleByOwner.com and another "by owner" site, which Ashby refers to as "finder sites" because they attract sellers.
Ashby’s brokerage, The Best Choice Realty, offers flat-fee MLS listing packages that start at $29.99 for 30-day MLS listings in the Dallas, Houston, San Antonio and Austin markets, or $79.99 for listings that appear on Realtor.com.
ForSaleByOwner.com, which also offers the option of working with discount brokers who place sellers’ properties in their local MLS, offers Realtor.com showcase listings as part of a $539 "silver" package.
The Realtor.com listings are good for six months, and "no local MLS listing (is) required," the company says on its website.
Ashby says MLSs are generally controlled by full-service brokers who may seek to change their MLS rules when they catch on to what he and other brokers are doing.
MLS execs, he said, "are going to squash this — they will get pressure from all these bigger brokers … and find ways to take it away, unless (the entry-only brokers) are licensed in all 50 states."
Young, who Alaska regulators estimated was at one point handling between 1,000 and 2,000 listings, appears to have drastically scaled back her placement of out-of-state listings on Realtor.com.
On Friday, Young had only 22 properties listed on Realtor.com. Most were in California, but she was also listed as the "advertising broker" for properties in Ohio, Louisiana, Michigan, Florida, Alabama, and New Mexico.
Young’s primary local board, the Amador County Association of Realtors, is a member of California’s fledgling statewide MLS, California Regional Multiple Listing Service Inc. (CRMLS), which serves 23 Realtor associations.
CRMLS CEO Art Carter said Young has an agreement with Amador County Association that "she does not input listings from out of state into the database." The association executive at Amador County Association did not respond to requests for comment.
Carter said Young also belongs to a number of other real estate associations that are CRMLS members.
"We allow our brokers and agents to input listings wherever it is that they garner those listings, with the caveat that they are offering compensation to agents in the CRMLS system and CARETS," another regional MLS serving 30 Realtor associations in Southern California, Carter said.
Federal regulators have taken steps in recent years to protect the right of real estate brokers to provide flat-fee and limited-service offerings to consumers.
A long-running legal battle between the Department of Justice and the National Association of Realtors resulted in a settlement that protects the right of brokerages to operate "virtual office websites," or VOWs.
In addition, the Federal Trade Commission has sought to force MLSs to rescind policies that it claimed discriminated against limited-service brokers.
NAR’s model MLS policy — guidelines NAR expects MLSs affiliated with the group to use as the basis for their own rules — has permitted brokers to accept MLS entry-only listings for years, where state law permits (some states, including Texas, have enacted minimum-service requirements that preclude MLSs from accepting MLS entry-only listings).
But Ashby — who said he’s licensed in two states and plans to obtain licenses in others — fears that there’s nothing stopping MLSs from moving to restrict the geographic areas in which they will accept listings.
Many MLSs currently allow brokers to submit listings from any state, and some even accept listings from other countries.
Brian N. Larson, a Minneapolis-based attorney who represents MLSs and writes a blog, mlstesseract.com, about MLS issues, said some of his clients have already decided to stop accepting listings outside of their service area.
"The question of limited-service listings is resolved," Larson said. NAR-affiliated MLSs can’t restrict limited-service listings or discriminate against brokers who employ them without attracting the attention of federal regulators, he said.
But MLSs can can limit the geographic area in which they will accept listings if they decide that would be in their members’ best interests, Larson said — as long as they aren’t consulting with other MLSs to carve up territory amongst themselves to restrict competition.
"This problem has been one MLSs have been aware of for some time," Larson said. "Some have chosen to discuss the issue and not take any action because they don’t think it’s happening on a wide enough scale. Others are limiting (geographic service areas) to address a perceived issue."
So even if Young wins her federal challenge of the Nebraska Real Estate Commission’s attempts to assert jurisdiction over her — and her challenge is upheld by higher courts — MLSs could institute geographic service areas to prevent brokers from taking listings from sellers nationwide.
That would force brokers who want to provide MLS-only listing services nationwide to do exactly what Wuestehube says he plans to do — obtain licenses, and join MLSs, in all 50 states.
That’s an expensive, time-consuming proposition, Ashby said — although he said he’s currently studying to take California’s licensing exam.
Advertisement or listing?
In Nebraska, Young’s case rests largely on the premise that recent changes to the state’s licensing laws are unconstitutional, because they make anyone who allegedly undertakes even one of 22 actions performed by licensed brokers subject to Nebraska’s jurisdiction.
The changes gave the Nebraska Real Estate Commission the power to issue findings of guilt and impose a fine of up to $1,000 a day on those who are served with cease and desist orders and don’t request a hearing within 10 days.
That’s placed Young in a "Catch-22" situation of either submitting to the commission’s claim to have jurisdiction over her by appearing at a hearing, or face the threat of substantial civil penalties, her lawyers said.
Attorneys for Nebraska, in a brief opposing Young’s request for a temporary restraining order, said at least 27 states have similar "any act" or "single act" language allowing them to take action against unlicensed individuals.
Lemon said the changes to Nebraska’s licensing law were made at the commission’s request, with the full support of the Nebraska Association of Realtors, in order to give regulators more teeth to enforce the law.
In the past, when the commission sent cease and desist letters to out of state brokers who were handling Nebraska listings, some would respond by getting licensed. Others would ignore them, and some wouldn’t even sign for the letters, and the commission was largely powerless to take further action, he said.
As she argued in Alaska, Young also maintains that she is not providing brokerage services in Nebraska — merely advertising. The Nebraska Real Estate Commission would not expect newspapers and other companies that run seller’s advertisements to obtain a real estate license, her lawyers argue.
ForSaleByOwner.com made a similar argument in a successful 2003 lawsuit against the California Department of Real Estate when California regulators attempted to do just that.
In 2001 and 2002, the California Department of Real Estate sent letters to ForSaleByOwner.com and other Internet companies that operated websites advertising properties for sale in California.
California regulators asked the companies to identify the broker’s licenses under which they were operating, claiming the companies were soliciting or obtaining listings of residential real property in exchange for compensation.
ForSaleByOwner.com sued, saying attempts by regulators to assert their authority over websites violated free-speech rights.
In a 2004 ruling, a federal district court found that California’s real estate licensing requirements did not constitute an unconstitutional restraint of speech, but that attempting to extend them to ForSaleByOwner.com amounted to "unconstitutional content and media-based regulation."
Young’s lawyers made similar arguments in Alaska, which the administrative law judge found convincing.
Alaska regulators, the judge said, had not explained how "a person who places an advertisement in the MLS is involved in marketing, but a person who places an advertisement in a newspaper … is not involved in marketing the property. The fact that the MLS owners have privately restricted their service so that only people holding various kinds of licenses in various states can place advertisements is not sufficient, without more (evidence), to turn this advertising into a listing."
Attorneys for Nebraska hope to limit arguments in Young’s federal court challenge to the constitutionality of the state’s licensing law. Federal courts, attorneys for the state argue, should leave it up to the Real Estate Commission and state courts to decide whether properties Young is advertising on Realtor.com are listings.
Federal courts "should avoid this sort of fact-finding so it does not become a parallel body for determining whether a violator has engaged in a ‘broker’ activity," Nebraska argues. "A parallel body may encourage forum-shopping by violators."
Larson said that when challenged, Nebraska and other states may argue that the authority they have to regulate property transactions gives them jurisdiction over people involved in the transactions — in the same way that a state might demand that a bridge being constructed in the state be designed by an engineer who is licensed there.
States like Nebraska can argue that Young and other brokers are doing more than advertising properties, Larson said. That’s because in order to place properties on Realtor.com, they must presumably enter into listing agreements with sellers, and enter property listings into an MLS. By definition, MLS listings must include an offer of compensation to a cooperating broker who brings a buyer to a transaction.
"The key is if the listing is in the MLS, there must be (an) offer of compensation," Larson said. "It’s a sort of threshold where it’s not just advertising anymore. The newspaper isn’t making the offer of compensation."
Many of ForSaleByOwner.com’s clients have no intention of working with a cooperating broker, but the company acknowledges that they must make an offer of compensation in order for their listings to appear on Realtor.com.
"In order to be featured on Realtor.com, you must indicate that you are willing to pay a buyer’s agent 1 percent of the sale price of your home," the company informs customers on its website. "However, by entering this agreement, you are not obligated to accept any offer or pay any commission."
Speaking in general, and not about the specifics of Young’s case, Lemon said that, "If they are merely advertising, that’s different than representing someone as an agent or broker. If it’s merely advertising, we’re not concerned about it. If you put it on the MLS, that indicates you have a listing, and you are representing them in a real estate transaction."
Since Nebraska’s licensing law was changed on July 15 to allow the commission to institute fines, it had sent out three cease and desist orders to brokers, including Young, Lemon said. He said Young was not intended to be a test case, although further orders are on hold for now.
California regulators have also sent desist and refrain letters to out-of-state brokers handling California listings without a California broker’s or salesperson’s license, although not recently, said Tom Pool, a spokesman for the California Department of Real Estate.
He said California will continue to do so when such listings are brought to the Department of Real Estate’s attention.
California defines a real estate broker as anyone who solicits prospective sellers or purchasers of real property, or who solicits or obtains listings, in exchange for compensation.
Asked if California’s real estate licensing laws work the other way around — if a broker licensed in California would be violating their license by taking listings in states where they are not licensed — Pool said that would depend on how the listing agreement was worded.
"Brokers in this state do have a fiduciary duty to clients, but they can limit their liability by crafting language saying, ‘This is what were going to provide to you for X dollars, and once we put your listing on the MLS, we have no other obligation,’ " Pool said.
"They can do that, that’s perfectly fine. But if they don’t narrowly craft the listing contract, they still have all the other unspoken requirements of that fiduciary duty."
Ashby said it’s not fair for states to try to have it both ways. California and some other states are taking the position that the brokers they license can handle listings that originate in other states, he said, but object when out-of-state brokers try to do the same.
But Ashby’s biggest concern about Young’s legal battle is that it will raise the profile of flat-fee MLS providers who are taking listings on a national basis, and that MLSs will respond by limiting their geographic service areas.
"A lot of people don’t know this is going on," Ashby said. "MLSs try to create little rules that are only applicable to people like me."