Why the Data Ownership Thing Worries Me

Human nature hasn't changed, and incentives matter

Photo by Ahtziri Lagarde on Unsplash

As many of you have seen by now, HousingWire has reported on the chaos resulting from REcolorado’s new participant agreement. I wrote about it here, and the reporter quoted from it — thanks for paying attention!

I have gotten a number of questions and inquiries since I posted my initial interpretation, especially since I have been working on an alternative MLS. This is not the time to talk about that effort in detail, but I thought I would lay out why I am so concerned about what’s going on.

Consider this a public answer to those who reached out to ask, “Why are you doing this?”

I have discussed this issue in podcasts, and in live presentations. But I thought it worthwhile to express my concerns with all of you here as well.

An Encounter at Blueprint

In the latest episode of Industry Relations, I discussed a meeting I had with an OG of the real estate data and technology space at the Blueprint conference in Las Vegas. As I said on the podcast, he said something that really shook me, but also resonated with me, as I’ve said similar things in the past.

Our view is that the MLS as we know it is already dead, but the industry doesn’t know it yet because it will take time for the world to understand what is visible to some of us. So let’s lay that out clearly.

The insight that my OG friend had was as follows:

1. The MLS has always been about the unilateral offer of compensation.

2. The reason why brokerage members of the MLS are called “Participants” is that they participated in the unilateral offer of compensation.

3. The one thing the MLS can no longer do is to have anything to do with compensation.

4. The only remaining value of the MLS is as a central repository of data.

5. That central repository of data goes against the interests of big brokerages. Those interests were outweighed by the benefit of guaranteed compensation, but compensation is now history.

6. It is a matter of time before the entire MLS system dies. That future will suck for anyone who is not a big brokerage, but it is what rationality dictates.

The first three points are undoubtedly true.

The NAR MLS handbook used to state that the MLS was a vehicle for compensation outright. Read the entire Section 1 “Multiple Listing Service Defined” from the 2023 MLS Handbook, linked to above:

A multiple listing service is:

• a facility for the orderly correlation and dissemination of listing information so participants may better serve their clients and customers and the public

• a means by which authorized participants make blanket unilateral offers of compensation to other participants (acting as subagents, buyer agents, or in other agency or nonagency capacities defined by law)

• 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 for bona fide clients and customers

• a means by which participants engaging in real estate appraisal contribute to common databases (Revised 11/04)

Entitlement to compensation is determined by the cooperating broker’s performance as procuring cause of the sale (or lease). (Revised 11/94) While offers of compensation made by listing brokers to cooperating brokers through MLS are unconditional,* a listing broker’s obligation to compensate a cooperating broker who was the procuring cause of sale (or lease) may be excused if it is determined through arbitration that, through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission pursuant to the listing agreement. In such instances, entitlement to cooperative compensation offered through MLS would be a question to be determined by an arbitration hearing panel based on all relevant facts and circumstances including, but not limited to, why it was impossible or financially unfeasible for the listing broker to collect some or all of the commission established in the listing agreement; at what point in the transaction did the listing broker know (or should have known) that some or all of the commission established in the listing agreement might not be paid; and how promptly had the listing broker communicated to cooperating brokers that the commission established in the listing agreement might not be paid. (Revised 11/98) [emphasis added]

For that matter, the reason why brokerage members of the MLS were called “Participants” is because they all participated in the offer and acceptance of cooperative compensation. From Section 2:

Mere possession of a broker’s license is not sufficient to qualify for MLS participation. Rather, the requirement that an individual or firm offers or accepts cooperation and compensation…

The key is that the participant or potential participant actively endeavors to make or accept offers of cooperation and compensation with respect to properties of the type that are listed on the MLS in which participation is sought.

Points 1 and 2 are supported by history and facts. Point #3 is obvious in light of the settlement agreement. So let’s talk about the second half of what he said, which goes into the future of things.

The Self-Interest of Brokerages

Five years ago, my friend Andrew Flachner wrote a LinkedIn post titled, “How Market Share is Creating Competitive Superpowers in Real Estate.” It was an incredible article, and I criticized it from the MLS-consultant standpoint back in 2019 in this post. However, everything Andrew wrote in 2019 is still in play.

Here are the key passages from his 2019 work.

To reach a position of dominance and compounding growth, companies must first reach a tipping point in market share which enables two critical superpowers:

• Superpower #1: With enough market share, companies can literally make the market because they control so much of it.

• Superpower #2: Dominant market share also enables a company to leverage data to differentiate and dominate.

He talks about how AirBnB and Google leveraged market share to dominate.

Andrew then pointed out that due to the existence of the MLS, residential real estate hitherto had not seen the creation of a dominant company, but that dominant company can emerge because of buy-side data:

The real estate industry hasn’t yet encountered a company that’s captured enough market share to reach the market share tipping point. One key reason is that the MLS has leveled the listing data playing field so that no one has been able to gain a competitive advantage with data. In other words, supply side is visible to everyone.

The demand side, on the other hand, has been largely invisible, because consumer behavior is either not captured by the brokerage community (see below)–or, when it is, it remains proprietary.

As an example, Andrew discussed Compass:

Compass has realized that market share makes their brokering power bigger. With more listings and more buyers, they can bolster your exclusive “coming soon,” “off-market,” and “in-house” transactions that the competition can’t match, creating a “FOMO” (“fear of missing out”) effect in both customers and agents.

If you’re a consumer or an agent looking at the screen below from compass.com, which shows Compass’ exclusive off-market and coming soon listings, how could you not work with Compass?

These tactics fuel the incentives for buyers to work with Compass because Compass has the exclusive listings. And that means sellers have to work with Compass because they have all the active buyers working with their brokerage. And finally, agents will have to work with Compass because that’s where the action is. Boosting agent recruitment then brings in more listings and buyers, fueling that superpower growth loop.

Read that last highlighted paragraph again.

Exclusive listings —> Buyers —> Sellers have to work with Compass —> agents have to join Compass —> agent recruitment brings in more listings and more buyers —> Exclusive listings… wash, rinse, repeat.

It is, I think, difficult to argue that the self-interest of large brokerages who have significant market share is to create this superpower. Exclusives lead to consumer attention which leads to recruiting.

And real estate is all about recruiting and retention.

The Value Proposition of the MLS

Back in 2019, as an MLS consultant, I wrote in response to Andrew’s post that the MLS is not a birthright and is not a suicide pact. I suggested that the MLS might exclude brokerages like Compass who engaged in what is effectively a separate MLS.

But that was when the MLS guaranteed compensation. That was when the core value proposition of the MLS was strong enough to overcome the self-interest of big brokerages in creating a separate superpower-loop. Even Compass would lose agents left and right if Compass were expelled from the MLS, which guaranteed payment.

Now?

The MLS no longer guarantees payment. A buyer agent has to contact the listing agent to ask about compensation, whether he is or is not a member of the MLS. And given the trends of the last couple of months, since the new settlement came into effect, the mantra is, “Put it in the offer!” Listing agents will shortly cease offering compensation off-MLS; they will instead tell buyer agents to include the request for payment in the offer.

That becomes the new norm whether an agent or a brokerage is or is not part of the MLS.

So now, the risk-reward analysis for big brokerages is completely different.

Now the value proposition of the MLS is that it is the central repository for all of the listing inventory. That is counterbalanced by the self-interest of big brokerages in creating a superpower that leads to massive competitive advantages in recruiting and retention.

We have seen hints of this dynamic in recent weeks with all of the hoopla over Clear Cooperation Policy. But let’s play that out with a thought experiment.

A Thought Experiment

Let us suppose that no real changes to CCP are made. We need to acknowledge that very influential real estate leaders, like Leo Pareja of eXp, have made very clear statements in support of CCP because it creates a better consumer experience and may have Fair Housing implications.

However, let us further acknowledge that Pareja has said publicly that if CCP goes away, eXp will be the biggest beneficiary because it is the largest brokerage by far by agent count. (Franchise brands like RE/MAX and KW are not brokerages.) So eXp supporting CCP is in spite of its self-interest. It is a noble stance to take.

Nobility often runs headlong into cold hard reality. So here’s the thought experiment.

Say CCP remains, or is strengthened. In response, Compass and Howard Hanna (who also opposed CCP) decide to simply pull out of the MLS altogether. If you’re not part of an MLS, you don’t have to worry about CCP or any MLS policy, right?

Compass agents can no longer login to the local MLS to find out what’s for sale. But Zillow still exists. Redfin hasn’t gone anywhere. Realtor.com is still in operation. Compass agents only have to go search those, then call the listing agent for any details. Calling the listing agent is something they would have had to do anyhow to find out about compensation so… it’s not a big additional burden.

Non-Compass agents, on the other hand, can no longer find out what Compass listings are for sale at all. Buyers have to go to Compass.com or to a Compass agent directly. Those listings might be on Zillow, but they won’t get to Zillow via the MLS. They will get there through direct syndication by Compass, under whatever terms Compass and Zillow might come to. Maybe those listings get there the day the listing agreement is signed; maybe it’ll be a month later. Who can say?

Other than the obvious: Compass listings will only be on Zillow when it is to Compass’s benefit/advantage for them to be on Zillow, not before.

Now do the same for Howard Hanna. Do it for any locally dominant brokerage across the U.S.

The FOMO superpower loop that Andrew Flachner described years ago is now in effect.

Leo Pareja realizes that he may have won the battle of CCP, but the war has changed. Compass doesn’t want to be in the MLS? Why is eXp in the MLS? As he said, eXp would be the biggest beneficiary if things go to private silos of data. Why in the world would he not do as Compass did and pull out of the MLS? (And frankly, since eXp is a publicly traded company with shareholders and a Board, would Leo even have a choice? If pulling out of the MLS increases the value of eXp’s shares, he kinda has to, no?)

Now apply the same pressure from shareholders to Anywhere, to HomeServices of America, to RE/MAX, to Real, to Fathom… to anybody who is publicly traded and subject to shareholders.

Do you really think that won’t happen when self-interest is so clear for big brokerages?

In the aftermath of that implosion of the incumbent system, how will small brokerages hold on to agents? How will they compete for buyers and sellers?

That world looks a whole lot like commercial real estate, where three big firms utterly dominate the entire industry. A handful of tier-two firms take up huge chunks of market share, and there really isn’t such a thing as a small commercial brokerage that does any significant business. They get to do the business that the big guys don’t want to bother with.

When’s the last time you saw some two-man commercial brokerage do a $400 million tenant rep deal in downtown Chicago? Name the last big industrial deal that a local mom-n-pop brokerage did. Those don’t happen.

Does that world suck for consumers? Yes, yes it does.

Is it the logical endpoint of the current path? Yes, yes it is.

When idealism and nobility confront shareholder value and dominance and compounding growth, which would you bet on? Human nature has not changed since August 17th. Competition remains fierce. FOMO superpower unlocks dominance and compounding growth for the bigger players, and decimates the smaller.

The Data Ownership Issue

This is why I am so concerned about the data ownership issue.

The MLS may think — and I understand why they would — that their value proposition now that compensation has gone poof is in the data. So they want to assert ownership over that data, thinking that it will force brokers and agents to keep subscribing.

The reverse is more likely to be true. If the choice is between joining an MLS and handing over ownership of your data, or leaving the MLS and creating a FOMO superpower that leads to total market dominance… I don’t think that’s a difficult choice to make for big brokerages.

Here’s a statistic that few people talk about: in every MLS I have ever worked with or looked at, it takes 2% or less of the brokerages to get to 51% of listings. I have seen fairly large MLS systems where six brokerages control over 60% of the listings. Small brokerages do not matter for listing count; only the bigger firms do. And those are precisely the brokerages who have the self-interest in exiting the MLS system.

The HousingWire story mentions that eXp has signed the new Participant Agreement from REcolorado but is monitoring things. I sincerely hope for their sake that REcolorado maintains the old policy of the listing data belonging to the broker and promptly sends eXp its own data via PDAP feed.

If not… then eXp has bought itself a very expensive lawsuit. Because eXp signed the new agreement with both eyes wide open. It is now impossible to claim they were duped or didn’t realize what they were signing. The claim going forward has to be a fairly complicated contract law claim, based on complex intellectual property claims, and that is not going to be cheap.

Frankly, it would be cheaper to just leave the MLS altogether and institute Project FOMO Superpower.

The Alternative is Not the Status Quo

What we built in Nexus is, I think, the only real viable alternative to Project FOMO Superpower. This is not the time to pimp my project out, so I won’t. But I want everyone to understand why we built it.

The reason we built what we did is the recognition — that very few people have grasped — that without the unilateral offer of compensation, the value of the MLS has collapsed.

Trying to replace that value by taking intellectual property of brokerages is a doomed ploy. It might work in the short-run because brokerages are desperate and often don’t read what they sign, but all that does is buy the MLS a lawsuit in the next few years. The strategy of “What was yours is now mine” does not work in the longer run. What the MLS has to do instead is create new value propositions that are strong enough to counter the Project FOMO Superpower doom loop. We think we have done that, but who knows? Maybe we have not.

Or maybe we have, but the industry must suffer the inevitable fracturing we will see in a few years’ time before the pain is severe enough for anyone to take action.

Little has changed on the surface since August 17th. Apart from REcolorado, we really haven’t seen much happen. Human beings have a tendency to believe that things will go on as they have in the past. MLS executives are happy to party in Milan at the International MLS Forum and continue to have the same panels with the same people with the same vested interest in the status quo.

And as my podcast partner Greg Robertson pointed out, the whole “death of the MLS” thing has become a meme. So maybe I and my OG friend are completely off-base. We’re just wrong about what we’re seeing. That is a possibility.

We certainly won’t see massive change and disruption in the next couple of years. Things don’t change that fast.

Yet… human nature has not changed. Competition remains fierce. Incentives matter. The incentives for big brokerages in the post-compensation world are completely different from the incentives in the cooperative-compensation world. Competition in real estate is not about high ideals, but about recruiting and retention. Exclusive inventory leads to superpowers that increase value and compounded growth for big brokerages. How do things play out in a few years?

We humans overestimate the impact of changes in the short term, and underestimate them in the long term.

Let’s return to Andrew Flachner’s quote from 2019:

Now, with the examples of Airbnb and Google Assistant fresh in mind, let’s turn to the residential real estate market.

The real estate industry hasn’t yet encountered a company that’s captured enough market share to reach the market share tipping point. One key reason is that the MLS has leveled the listing data playing field so that no one has been able to gain a competitive advantage with data. In other words, supply side is visible to everyone.

What if the MLS no longer levels the listing data playing field? What if the supply side is no longer visible to everyone?

The alternative to FOMO Superpower is not the status quo.

Get your own data back from the MLS. You can always keep it there, as long as you have a copy that is indisputably yours. Find out who is offering a value proposition strong enough to counter FOMO Superpower Doom Loop. Get your local MLS to come up with one, or drop me a line if you’re curious.

But please, for your own sake, understand what has changed.

-rsh