Few real estate industry topics have generated as much debate as the virtual office Website (VOW) controversy, but in taking sides, many have lost sight of the real issue - broker cooperation. The debate over VOWs has been obscured as a consumer issue. It isn't. It's about the right to share listings to get them sold - without giving cooperating brokers undue economic or marketing advantages.

VOWs are virtual or Internet-based brokerages that currently operate under the same MLS rules as brick and mortar brokerages. Virtual brokerages, whether they are a virtual company or a subsidiary of a traditional brokerage, do not have storefronts, and their lower operating costs enable them to pass savings to consumers. Proponents of VOWs say that these lower costs make them consumer-friendly, and that any attempts to control how VOWs do business, with whom they make advertising arrangements, and what services they offer to consumers, are efforts by traditional brokers to squash competition which would in turn hurt consumers.

Detractors of VOWs say that VOWs are typically operated by companies which meet official guidelines for brokerages in order to qualify for membership in the MLS and thereby gain access to brokers' collective listings, but whose true intent is to make use other brokers' listings, key to the virtual environment, to offer discount services to consumers or to provide the VOW with a referral business model.

They also argue that the intention of the MLS is to provide a neutral ground for the sharing of listing data and cooperative fees - never to provide a marketing advantage to any single broker, and the listings were never intended to be used by any broker to slam another broker's business model or fees. Further, they say, consumers already have access to listings. Just look at Realtor.com, which was developed to empower Realtors through their listings and to prevent this type of squabbling.

Where the traditional brokers went wrong was their lack of knowledge and imagination about the Internet and its marketing uses. Because they discounted the power of the Internet, they could not have foreseen that competitors within their own MLSs could have taken advantage of shared MLS inventory in new ways to create or strengthen discount and referral business models. Before they knew it, clever competitors were not only using their listings to advertise discount services, but they were using the listings to sell consumer leads back to the brokers as referrals. The listings were also being used in exclusive advertising arrangements with leading portals to exclude listing brokers as gateways to their own listings.

The horse was out of the barn. These e-brokers met existing standards for brokerage, even to the point of being licensed in the states where they did business and joining the appropriate associations and paying dues, making it extremely hard for other brokers to object through their MLSs without inviting litigation.

Where the issue began

At the heart of any VOW operation is the direct data feed of MLS listings that are used to attract and capture consumers. User agreements completed only when the consumer gives contact information assures that the consumer is legitimately looking for homes, but the device also allows the VOW the ability to contact the consumer for follow-up. VOWs claim that the listing data is exactly what would be shown to the consumer in a brick and mortar office, and that they should be allowed to offer the complete MLS listings database virtually to their clients.

That notion was first put to the test in Austin, Texas when e-broker eRealty was sued by the Austin Board of Realtors and its MLS partner, Austin/Central Texas Realty Information Service. The suit claimed that eRealty had published the MLS listings database without permission from other cooperating brokers.

What happened was that in 2000, eRealty put the MLS datafeed on its Website, and allowed consumers to access the data via user agreements that allowed eRealty to capture contact information from visitors. After receiving complaints from other members, the MLS and Board sued eRealty for copyright infringement of the MLS data.

Said Austin Board president Diane Kennedy at the time, "The original rules said that a compilation of MLS data could not be distributed to the public by any member by any means. They (e-Realty) have coined a phrase for what they are doing (an intranet,) and that gets around the rules. They say the site is password-protected because they request the consumer to be a buyer for their company. Anyone can click yes with very little obligation or responsibility."

eRealty countered that the MLS had changed its rules after eRealty joined the board, and won an injunction against the MLS and Board to be allowed to continue to post the listings. The threat of 'restraint of trade' hung in the air. Later, the two parties settled out of court, and the National Association of Realtors, already having swung into action when the legal train wreck began, instituted the makings of a new policy on Internet data display.

The policy suggested that brokers should be allowed to opt in or out of Internet listings exchange, also known as broker reciprocity, with an alternative form of data display called Internet Data Exchange (IDX.)

Explained Laurie Janik, counsel to the NAR, in 2002, "IDX is advertising with no strings attached. A VOW is a parallel to a broker's office, so a site where you have to declare yourself a bonafide seeker of property might deter some people. With a VOW, you have to qualify the prospect, obtain their identity, give agency disclosures before you tell them what type of property you can show them, find out what type of agency they are interested in."

As MLSs struggled over the next year to become compliant with NAR's new rules, the opposition to both VOWs and IDX heated up. According to Janik, most MLSs never did instigate an IDX policy, and the NAR deadline of January 2002 came and went with no reprisals. Meanwhile, most MLSs, reluctant to ink a policy that could land them in court, waited for the NAR to sort out the issues.

When it became obvious that many brokers, who still weren't introduced to the Internet or its ramifications as an advertising medium, didn't understand the issues of Internet data display, a new policy was sent back to the NAR work group for review. The group met this week to hammer out a new set of recommendations which will be forwarded to NAR leadership for review before being presented for a vote by the board of directors at the mid-year meeting in Washington this year.

"We had our final workgroup meeting on Monday, February 10, 2003," says Janik, "and we finished deliberations and decision-making. It will go to the leadership team for approval, and then we will get it in front of membership."

The real issue

What did they decide? While Janik would not disclose the work group's findings, she did say the group made "further recommendations."

"Our charge was to look at what had been distributed in November (after the work group listened to membership input at a meeting in New Orleans)," says Janik. "We addressed three things: data value and data security; access to VOWs through third-party portals on an exclusive and nonexclusive basis; and payment and receipt of referral fees based on information available and accessible through VOWs."

Judging from the agenda outlined by Janik, the brokers who didn't know what hit them earlier, certainly do now. VOWs will be allowed, but likely with restrictions that will prevent one broker from using the listings to hurt another's business model. When asked to confirm or deny, Janik politely declined.

Meanwhile, rumblings are beginning that if the VOW policy doesn't go some traditional brokers' way, they will simply pick up their toys and go home - meaning they will withdraw their listings from the MLS. Is there any broker who would share listings under current MLS guidelines if he or she thought those listings were going to be used by other brokers to slice into the listing broker's profitability?

Whether or not brokers could have foreseen that their listing data might be used in unintended ways is no longer the point. Whether the e-brokers are right that they should be allowed to use the data any way they want is also no longer the point. The point is - what are the providers of the listings going to do?

The law of unintended consequences first bit the traditional brokers when the e-brokers took advantage of cooperative rules to use the listings to support referral and discount models, pressuring profits for the providers of the listings. The brokers underestimated the importance of the Internet, but the law of unintended consequences could come back and bite the e-brokers, too.

If the NAR VOW policy allows e-brokers to use listings for revenue-generating activities other than the selling of homes, the brokers who provide the listing inventory aren't going to be happy. What no one has talked about is what they might do about it. Lie down and take it? Not likely.

Just look at any MLS that allows more than three days for listings input, giving the listing broker ample time to sell the listings themselves before inviting cooperation. Look at the broker-owned, not association-operated, MLSs that are already in existance. Any listing broker knows they have what everyone else wants - listings. What is going to stop them from withdrawing their listings from their local MLSs, leaving the e-brokers no one to complain to or to sue?

Imagine a world where brokers withdraw cooperation from the MLS. Imagine a franchise brand taking advantage of their brand identification to attract new franchisees with their own Internet MLS. Imagine familial franchise brands like Coldwell Banker and ERA cooperating. Most brokers have some entity they can affiliate with, from referral networks like RELO to luxury brands like Sotheby's and Christie's to their franchise headquarters. And if they don't, new organizations could form to support the new generation of cooperation among independent or small franchise brokers.

It's more likely that the NAR vote will go toward allowing VOWs but with provisos that prevent listing brokers from hurting themselves with the law of unintended consequences again. What those provisos are, we'll all find out in May when the NAR board of directors votes on the new policy at the Washington D.C. mid-year conference.

And that may be what the VOW controversy is really all about - saving the MLS system as we know it.

Published: February 13, 2003

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