Editor’s note: This is the first 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. Part 2 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 would undermine participation in IDX, and the MLS system itself.

“Paper brokerages” — companies that join multiple listing services in order to access and display MLS listing data online, but don’t provide brokerage services to consumers — could be the next big thing in online real estate. But only if the traditional brokers who control the nation’s MLSs continue to tolerate them.

Traditional brokers can opt out of providing their listings to national listing portals like Zillow, Trulia and realtor.com.

But website operators who become paper brokerages — either by obtaining a brokerage license, or partnering with a licensee who can be their “broker of record” — are able to display Internet Data Exchange (IDX) listing “feeds” compiled by MLSs.

IDX is typically an all-or-nothing arrangement: Only brokers who have entered into reciprocal agreements allowing other brokers to display their listings may display IDX listings themselves.

Since most or all brokers in a given market typically participate in IDX, consumers searching broker and agent IDX websites can see virtually all of the homes for sale in the MLS — not just those represented by one brokerage.

For technology companies, multiple listing services are the holy grail of the real estate listing information that underlies many of their products. MLSs are also gatekeepers, often deciding who gets access to which types of listing data.

But the reality is that the gate is full of holes, and industry experts do not agree on what that means for the future of the industry.

“There is a gap in policy and enforcement here that is permitting businesses to enter the IDX and the MLS world without really being in the real estate business, in the business of buying and selling homes,” said Brian Boero, partner and co-founder of real estate marketing, design and consulting firm 1000watt.

“The reaction to this — or the lack of reaction to this — is going to be worth watching because it kind of gets to this core question of ‘What is a real estate brokerage in two years, in five years?’ That’s really what is at the heart of this.”

In many markets, paper brokerages seem to be flying under the industry’s radar, an Inman News investigation has found. They do so with the help of licensed real estate brokers who, in some cases, serve as the broker of record for multiple companies.

Companies that have employed the paper brokerage model, or aspects of it — including RealEstate.com operator Market Leader, and Emeryville, Calif.-based ZipRealty Inc. — say they are driving innovation by finding new ways to deliver real estate information to consumers and connect them with agents.

But Inman News has learned that many MLSs are struggling to interpret whether their rules, which typically follow policies established by the National Association of Realtors, allow them to provide listings to websites operated by companies that aren’t actually representing buyers and sellers in their market.

At the crux of the issue is deciding who qualifies as an “MLS participant,” and how to treat those who don’t meet the definition.

A NAR policy stipulating that individual brokers and real estate firms must “offer or accept cooperation and compensation to and from other participants” to be considered MLS participants is aimed at excluding brokers who don’t list or sell properties from joining the MLS.

But just because a brokerage isn’t representing buyers and sellers now doesn’t mean they aren’t making good-faith efforts to do so in the future.

Further complicating the equation is that while traditional brokers may object to paper brokerages obtaining IDX feeds, MLSs could run afoul of antitrust regulators if they are too quick to reject companies that employ the business model (see Part 2).

In some markets where companies employing the paper brokerage business model have obtained IDX feeds, MLSs also seem to be having difficulties enforcing rules that govern the use and display of IDX data, Inman News has learned.

NAR General Counsel Laurie Janik told Inman News that portions of both RealEstate.com and ZipRealty.com appear to be out of compliance with NAR policies governing the display of shared listing feeds. But Janik also said that it’s up to individual MLSs to make such determinations and enforce their rules (see Part 3).

Even if MLSs decide to let paper brokerages poke their noses into the IDX listings tent, there’s yet another obstacle to more widespread adoption of the business model.

If the paper brokerage business model does take off, it could end up destroying the listings pipeline by undermining participation in the century-old MLS system.

If MLSs can’t or won’t shut paper brokerages down, traditional brokerages that object to their listings appearing on paper brokerages’ websites might decide that they have only one option: pull out of IDX, the system that allows MLS members to publicly display each other’s listings, altogether (see Part 4).

Often taken for granted today by consumers and real estate professionals alike, IDX was considered revolutionary when MLSs began to adopt it to help brokers compete with national listing portals that began to spring up during the 1990s dot-com boom.

The IDX system was created to aggregate listings of “MLS participants” — brokers and agents — in individual markets, and provide a listing feed they could display on their public-facing websites.

The IDX system allows any participating brokerage — and even individual agents with no listings of their own — to operate websites where homebuyers can search a comprehensive set of listings in a given market or region for homes that meet their criteria.

Brian Larson, an attorney and consultant who was the chief staff executive for Minneapolis-based NorthstarMLS when it helped pioneer IDX in the late 1990s, has written that the “purpose of IDX is to ensure that brokers are unsurpassed as a source for real estate listing information on the Web.”

If brokers decided to pull out of IDX in significant numbers — perhaps leaving the MLS system behind altogether in the process —  that would deprive MLSs of one of their most important roles: providing members with the most comprehensive and accurate set of public listing data available.

Because they are not MLS participants, national “third-party” websites like Zillow, Trulia and realtor.com can’t receive IDX feeds.

Although third-party websites can obtain non-IDX listing feeds directly from brokers, or from MLSs and other listing aggregators, brokers usually have the right to “opt out” of having their listings appear on those sites (thanks to its ties to NAR, realtor.com gets listings from most of the nation’s roughly 950 MLSs, although a few brokers have opted out of providing listings to the site).

In the summer of 2012, Market Leader — a company that provides leads and marketing software to real estate brokerages, franchisors and agents — startled some industry players by announcing that it had revived RealEstate.com, a website the company had purchased the year before from a national brokerage, and that more than 150 MLSs were providing IDX feeds with information on about 1.6 million listings to the site.

Market Leader CEO Ian Morris told Inman News at the time that although the company was not providing brokerage services, 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 discovered that Market Leader obtained listings through a Georgia-based subsidiary, Fast Start Real Estate Services, that has obtained brokerage licenses in at least 38 states but has no sales agents (see Part 2).

Boero blogged at the time that by continuing to operate RealEstate.com as an IDX site, Market Leader was in effect “raising a giant middle finger to MLSs, the spirit of IDX and, most significantly, to operating brokers.”

Unlike Zillow, Trulia and realtor.com, “which have spent gazillions negotiating for voluntary access to listings from MLSs and brokers,” Boero wrote, “Market Leader, by virtue of its brokerage licenses, simply grabs the IDX feed.”

Brokers in markets where Market Leader had obtained IDX feeds could not prevent listings they represented from appearing on RealEstate.com, unless they pulled out of IDX altogether. If they did so, they would no longer be able to display IDX listings on their own websites.

(Market Leader has since been acquired by Trulia, which has pledged that it does not intend to operate RealEstate.com as an IDX site. See Part 4).

ZipRealty — a national brokerage that operates a listing portal that gets more traffic than any other brokerage or franchisor website  — has taken a more varied approach in bringing IDX listings to ZipRealty.com in markets where it does not provide brokerage services.

As a cost-cutting measure, ZipRealty has closed down brokerage operations in 16 markets since January 2011. But the company has found a way to continue offering IDX listing search in many of those markets, providing referrals to other brokers through its “Powered by Zip” program.

In some Powered by Zip markets, ZipRealty gets IDX listings by acting as a vendor for a partner brokerage. In other markets, ZipRealty has maintained its status as a licensed broker member of the MLS — despite the fact that it no longer represents buyers or sellers in those markets.

Today, ZipRealty continues to represent buyers and sellers in 19 markets, while also offering IDX listing search on ZipRealty.com in 17 additional Powered by Zip markets.

Other tech-focused startups like Seattle-based Estately and Washington, D.C.-based Homesnap (which did business as Sawbuck Realty before rebranding) operate similar referral-based models.

Estately, for example, does not represent buyers and sellers in all the markets where it is an MLS participant — just in those where MLSs required it to do deals to access their feeds, Estately CEO Galen Ward told Inman News in March.

Ward said Estately prefers to refer deals to partner agents, receiving a 30 percent referral fee, but it is exploring adding in-house agents in some markets.

Gregg Larson, president and CEO of real estate consulting firm Clareity Consulting, thinks more brokers should be making noise about paper brokerages, if only to spur their MLSs to enforce their own rules. Many MLSs’ laxity in enforcement undermines the IDX system itself, according to Larson (no relation to Brian Larson).

“They built the IDX rules for a reason,” Gregg Larson said. The whole premise of IDX, he said, is that everyone agreed to share their listings and create the most up-to-date, richest set of listing data available.

But if paper brokerages are allowed to skirt MLS and IDX rules, “Why would you hold ZTR (Zillow, Trulia and realtor.com) to a higher standard? Why should brokers play by IDX rules?” Gregg Larson said.

Victor Lund, founding partner of consulting firm WAV Group, also thinks the paper brokerage business model goes against the spirit of IDX rules, and that brokers should be concerned.

“The rules and regulations are written in a way that permit lots of interactions with the listing data that were never intended. What (ZipRealty) is doing and what RealEstate.com is doing is not what IDX intended,” Lund said. The creators of IDX “didn’t anticipate somebody from Washington borrowing their listings in Florida,” he added.

Boero has blogged that IDX has always been “the lifeblood of little brokerages that generate buy-side leads from big broker listings,” but it now also supports a growing number of paper brokers.

“These companies have brokerage licenses, but do not actually broker property. They are, in reality, technology companies that build websites and apps powered by the listings provided by the ‘real’ brokers. They then sell the leads their websites or apps generate from the listings to — you guessed it — agents working for these ‘real’ brokers,” he wrote.

“If anything is going to blow up the MLS, this is it.”

Inman News reporter Paul Hagey contributed reporting to this series.

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