This post also appears on Notorious R.O.B.
It was coverage of a new brokerage, Suitey.com (pronounced “sweetie”), that opened this year in Manhattan. In the video, one of the founders David Walker gave one of their reasons for trying a new brokerage model, one that not only offers discounts to sellers and rebates to buyers but also helps “consumers avoid some of the headaches that its founders say come with using a traditional broker.”
In the video, Walker states (0:44 seconds in), “One of the major problems with clients when they’re buying a home is their agent is actually incentivized get them into the most expensive apartment [that’s New York speak for “condo” or “coop”] possible. Their compensation is higher when they (the buyers) pay more for their apartment.”
Brian Larson on Ending Cooperation and Compensation
In making this statement, David has resurrected an argument that has been bubbling on and off for years, going back to as early as 2006 when Brian Larson, noted former MLS CEO and now esteemed attorney in Minneapolis, penned a three part series entitled, “End of MLS as we know it” for Inman News. (The links to parts 2 and 3 on Inman.com were broken, so if you want to read the entire series, go to LarsonSobotka.com.) There were only a few comments from hard core blog readers and devoted MLS rules junkies. After all, the MLS is an institution, as important a pillar of Realtorism as the three-way agreement and RPAC. How could MLS possibly end? His redux publication of the series in 2010 got more notice. Perhaps more people had RSS readers by then.
Brian argues eloquently that “Interbroker compensation is an anachronism, and … should be eliminated.” He summarizes all the good reasons for doing so, as follows:
Getting rid of interbroker compensation improves the market in several areas:
- Buyers and their brokers have more options for structuring their relationships and the compensation that will flow between them.
- Buyer broker fees can be commensurate with the skill and experience of the broker and with the buyer’s needs.
- Brokers do not have to fuss with the accounting details and conflicts associated with paying each other.
- The market benefits from price competition for buyer broker services.
- Buyer brokers working in transactions with FSBO or unrepresented sellers can obtain additional compensation for the additional work and risk they assume.
- The question of buyer’s brokers “rebating” commissions to the buyers becomes moot. There will be no compensation from the listing broker out of which any rebate could be made.
- The dangers of price-fixing, and the claims by industry watchdogs that it exists now, will largely be addressed. Brokers will really be unable to tell what their competitors are charging for services, and there will be no incentive for commissions to be “standard.”
- Buyer’s brokers can achieve the type of relationship of trust with brokers that support a claim to being “professionals.” When the buyer knows what she is paying for broker services and what she is getting in return, buyer expectations and broker performance are both likely to be more refined.
But Brian’s title belies the underlying contention that if we did away with offers of cooperative compensation, the MLS itself, at least in the form we now know it, would die or soon be replaced by something else. It’s often been said that a large national consumer-facing real estate portal is “just one field away from being an MLS.” But most are afraid to name that field, perhaps fearing that saying the words aloud would somehow make something horrible happen. “Beetlejuice, Beetlejuice, Beetlejuice!”
Why? Surely the MLS offers something besides compensation offers that make it unique and absolutely essential to the transaction of real estate purchases, doesn’t it?
Suppose an MLS wanted to structure a data agreement with a website, but saw that website as a potential competitor. So they included language that specifically voided the contract if the website competed with the MLS. What would that language look like?
A good starting point would be the MLS definition from the NAR Model rules, which specifies that a multiple listing service is:
- a facility for the orderly correlation and dissemination of listing information
- a means by which authorized participants make blanket unilateral offers of compensation to other participants
- a means of enhancing cooperation among participants
- a means by which information is accumulated and disseminated to enable authorized participants to prepare appraisals, analyses, and other valuations of real property
- a means by which participants engaging in real estate appraisal contribute to common databases
Many (most?) national websites exhibit many of these characteristics already. They correlate and disseminate listing information (and other info too); they enhance cooperation among parties (tools for agents and consumers); they offer means of valuing property (AVM or RVM), and they collect information from users for the common good (agent ratings). The one thing they don’t do is convey offers of compensation between brokers. That’s the unspoken missing field: compensation; compensation; compensation!
Without it, the MLS becomes just another listing aggregator, no better and no worse than the others. And without MLS, NAR has a much more difficult time defining its value proposition as anything other than a government lobbying organization with no compelling reason to induce practitioners to join, particularly if they are of the alternate political persuasion.
Cooperation and Compensation Hurts the Consumer
Carrying that theme to its logical conclusion, albeit with a healthy dose of hyperbole along the way, Greg Swann of Bloodhound Blog fame authored and collected a series of articles advocating the demise of inter-broker compensation and its associated MLS as a way of ending the tyrannical rule of the NAR. But in doing so he clearly identified the core problem: coop compensation screws both the buyer AND the seller.
This is actually doubly insane. The person paying your agent to get you the lowest possible price for the home is the same person who is being paid by the seller to get the highest possible price for the home. You may start to think that you are getting screwed, having discovered that “your” agent is being compensated by the listing broker, but think about the poor seller: He is paying two brokers to pursue — at least in the abstract — antithetical goals. If you did a good job picking your agent, the seller will have paid the listing broker to pay your broker to pay your agent to frustrate the seller’s objective.
How could this possibly make sense?
The answer: It doesn’t make sense.
Until perhaps now.
Here we have a broker, not an MLS executive, not a lawyer, not an academic, not a consultant, an ACTUAL broker working within the system, saying aloud what until now has been mentioned only in hallway conversations at MLS conferences and on blogs mostly written by insiders: cooperative compensation through the MLS hurts the consumer.
And we have seen with the rise of the national portals who built their enormous followings by delivering to the consumer something that the industry was unable or unwilling to deliver. Consumers speak volumes and will eventually get what they want, because someone will give it to them. What remains to be seen is whether they will be equally vocal in demanding an end to the pain – the aforementioned “headaches that… come with using a traditional broker.“
For this post:
Cause: My head aches just thinking about it.
Effect: Take two aspirin and call me in the morning.