Russell Capper, CEO of eRealty, wants to revolutionize the way the real estate industry does business using the Internet, and with the Justice Department's (DOJ) help, he just might succeed.

His goal is to get the DOJ to force the NAR into removing certain restrictions from its virtual office website policy, adopted by NAR leadership in May, 2003. The policy was to go into effect in January, 2004, but the controversy, as well as member confusion over how to implement the policy, has forced the NAR to delay its adoption deadline to July 1, 2004.

This is a victory of sorts for Capper because the longer the NAR delays adoption of the policy, the longer he can operate his virtual office websites without the restrictions that the NAR policy would impose on VOW brokerages.

Capper's been a vocal, active opponent of the National Association of Realtors' virtual office website policy because of certain sections which are intended to regulate members' display of MLS data, data security and third-party use of MLS data downloads by virtual office website (VOW) operators.

The two sections in contention are the opt-out provision which allows MLS member brokers to "opt out" of sharing their listings via the MLS data download with other brokers for advertising purposes. Many of these brokers feel they have been given the right to control where their listings are seen by licensing statutes in most states which prevent brokers from advertising other brokers' listings without permission. He also doesn't like the restriction on third-parties to receive the MLS data downloads in advertising arrangements. That means that companies like Yahoo!, through whom eRealty enjoys exclusive status as a listings content provider, would be getting the MLS listings aggregate without making any payment to the MLS. Further, other third-parties could use the listings to extract referral fees from the listings brokers.

Anticipating battles from traditional brokers who may not operate VOWs or are operating VOWs in competition with his, Capper hired antitrust attorney Robert Butters back in 2000 when he was sued by the Austin, Texas MLS board and MLS for advertising MLS data downloads to consumers without permission. The case was settled out of court, allowing Capper to retain the listings, but others in the industry took note and pressured the NAR to come up with a policy that would allow all brokers to operate VOWs such as Capper's but with restrictions that protect listings brokers' rights to place their listings where they want to, hence the two provisions that Capper objects to.

When the NAR passed its policy in May 2003, after much deliberation and consultation with anti-trust attorneys of its own, Capper took his objections to the popular press, appearing in articles from the New York Times, Wall Street Journal, Houston Chronicle, San Jose Mercury News, L.A. Times, and more.

It was Butters who leaked to the press that the Department of Justice had opened an investigation into the NAR VOW policy, proving to some that it was Capper who had contacted the DOJ. He says he spoke to the DOJ about six weeks ago, but would not supply an exact date to Realty Times.

Capper says he first talked to the Federal Trade Commission when the NAR was considering the terms of its VOW policy before last May, but he insists that he was "invited" to share his views on what he felt to be the anti-competitive nature of some provisions.

He says he doesn't want to be viewed by other brokers as intimidating, and he ducks any direct questions that he was the one who played the antitrust card.

The outcome of the DOJ investigation could be either a vindication of the NAR, or a civil court injunction to remove certain provisions from the VOW policy. The repercussions, which could impact individual brokers, franchise affiliations, and the entire MLS system, can't even be guessed, but it is certain opposing brokers won't give up their views without a fight. Some have already declared that if the MLS isn't a safe place to share listings, they will no longer be members. Many of these brokers have significant market share, enough to cause the collapse of the MLS system, something Capper says he doesn't want.

"You get to solutions by talking to the other side," says a conciliatory Capper. "We are passionate about being Realtors."

He explains, "The MLS market exchange is a successful market exchange. I am a huge advocate. I don't like to think I am hurting it at all. The modern buyer looks at transactions as so significant they want to use the technology. We have been detailed readers and obeyers of rules as they exist today."

Then what is causing such dissension?

"When you have innovation and new ways of doing business," says Capper, "there are those that resist change and don't want to make the investment to do it. The old-fashioned way is fine, the new way is VOWs. VOWs are a popular venue for today's buyer."

He agrees that new rules were necessary for the display of MLS data in VOWs, but it is the opt-out and referral fee provisions he doesn't like. "At one time, Laurie (Laurie Janik, general counsel to the NAR) agreed with us," says Capper. "It might be the referral fee issue that points out the value of technology to the consumer more than opt-out. We aren't participants in the referral fee debate. If I were to step back and analyze why that is happening, that there is a huge consumer marketplace that is looming on the web and using these tools and the industry hasn't satisfied that demand, in my opinion if brokerages were a little more progressive, that wouldn't happen.

"It is the market that is driving it," he insists. "The industry should go to where the consumers are."

Why pull the DOJ card?

"I was invited to be part of FTC industry overview on e-commerce," insists Capper, "when the opt-out thing was being discussed, and a major part of the focus was legacy state law that was preventing e-commerce, so when I was presenting, it was a rule change that was pending. I have to think that kind of attracted their (the DOJ's) attention. There is a lot of communication between the FTC and the DOJ. You never see an investigation handled by both of them, so you have interagency discussion on who is going to handle things.

"We have talked to the FTC for a long time," he says. "They were interested and the interest has moved over to the DOJ. I have been consistent in saying that it was expected that it would be looked at."

One of the criticisms of VOWs is that in order to give consumers access to MLS data, they have to click through a daunting agreement, which many don't bother to read. They just want to get to the listings. For some, this raises questions of data scraping, security issues for sellers, and other areas of concern on how the data is being secured and who should be responsible for the expense of securing MLS data. Some MLSs have complained that they can't bear the costs of creating a NAR-mandated data feed for VOWs and police them all, too. Other concerns are that the consumer is unwittingly signing an agency agreement instead of a user agreement, and that eRealty might come back to haunt other agents in procuring cause hearings.

"They are not signing an agency agreement," says Capper.

And furthermore, he says, "I don't agree with the term VOW. We operate a traditional brokerage. We join associations. All we did differently is we have integrated Internet technology into the process, and it creates an efficient process. In the debate on listings, you would conclude that all these were built to capture customers but that isn't accurate. We have an extensive back-end desktop to see what our clients are doing and what they need and how to contact them. We integrate their activity with the agent's activity."

But Capper and eRealty want changes from their peers. Does Capper feel entitled to special treatment and access to listings because he operates in a virtual environment?

"A lot of people operate virtually," replies Capper. "E-mail is virtual. We haven't done it, but there are a lot of private VOWs that are making clients the old-fashioned way but when they agree to work together, they say, 'here is my private Website,' then they start feeding them neighborhood information, and it is a real efficient way. All we have done is streamline the process."

The NAR argues that all they are doing is making what eRealty does available to all brokers.

"What they are doing is good," says Capper, "that all MLSs give a data feed to members, we get it the old-fashioned way. We made huge investments to get it, we are very careful, more than anybody, and we have association's data feed, but the new VOW rule makes it mandatory that the association has to give all of us direct feeds, and it will be easier to have a VOW.

"The problem is the anti-competitiveness of the opt-out issue," says Capper. "The way the MLS market exchange is so effective is rules and regulations that have been existent and they have worked so well, that participants shall put all their listings in MLS and share their listings with bona fide buyers and sellers. Now someone has said you can't do that unless you do it the way VOWs do it."

VOWs as conduits to advertising is a sensitive issue for Capper.

"We have a difference of opinion in what is advertising and what is not," he says. "Eighty percent of the people who come to our VOW don't sign up. People don't think of that. We don't want anybody who is just surfing for listings. We want our customers or clients to be there."

But 20 percent do get through to eRealty, giving them a distinct marketing advantage in advertising relationships with companies like Yahoo!, something that would be unthinkable at the local newspaper level, where no single broker offers gateway access to all the listings and is allowed to capture 20 percent of the contact information for follow-up.

Capper is unmoved. "I don't advertise that when I show listings. We tested this at length of what other trouble Realtors go to share their listings, and most don't get them to agree to anything, and they pass out all kinds of information. I think there have been a lot who say use me instead of eRealty."

But other brokers aren't using the listings as a come-on to a discount environment. In fact, one of the cardinal rules of sharing listings in the MLS is that broker discussions of commissions are off limits for fear of appearing to price-fix. eRealty, on the other hand, boasts about the hundreds or thousands of dollars it saves consumers on home transactions right on its front page.

"We aren't supposed to talk about others' rates," says Capper. "We are evaluating what makes sense for our business."

But discounts don't work. If they did, eRealty wouldn't need MLS listings so badly. It needs to be able to advertise access to the MLS. But if all brokers have the same advantage what is the competitive advantage for eRealty? eRealty is far from the lowest of the "discount" companies. At 4.5 percent it is easily beaten by others who charge four percent, three percent, or a price just for putting the listing in the MLS of only a few hundred dollars. It's an unwinnable race to the bottom.

"We aren't heading lower," vows Capper. "We have learned about our business and from cooperating agents. I have a whole lot of agents who are on the other side of deals who love us because we have a strong buyer or a strong listing. One stat we have found is that we are strong on incubation. That's important because the modern buyer is involved with Realtors. When it comes to market awareness, an agent can't do as well as a system that the VOWs have. A lot of our closed buyers in 2003, as of September 30th, were with us over a complete year before they bought. We have measured this over our history. Internet buyers look at fewer homes and buy more quickly. We noticed that was true. Four to six percent buy in 30 days and then 20 percent buy in 30-60 days, and 30 percent buy in 60 to 90. It has a long tail, we have showed our model they get real interested in real estate early."

What would eRealty do if the NAR was forced to take out the broker opt-out provision and some brokers, as they have threatened to do, pulled their listings? Would Capper come after them with a lawsuit?

"I don't see agents or brokers feeling good about it," says Capper. "The market exchange was successful, I bring them buyers. I've never sued anybody. We don't sue. We are the suees not the suor. We invested a lot to come up with an improved process. I didn't change the rules, the rules have changed."

If Cendant and RE/MAX brand brokers left their MLS, and simply made their own listings available to the public, eRealty wouldn't sue them?

"When you have an MLS, you have everybody's listings, " says Capper. "A lot of people wouldn't be happy, and it would be a less effective marketplace."

But remaining in the MLS could be considered too dangerous by some brands. What if other brands decided it isn't worth it to remain in the MLS if the MLS listings are no longer under control by the listing broker? Remaining in the MLS system has already attracted unwanted attention to Cendant and RE/MAX International, who are both now part of the investigation by the Department of Justice. Both have been outspoken opponents to an MLS data download without an opt-out provision, and both have been asked to supply documents to investigating attorneys. Why wouldn't they decide it would simply be easier to opt out of the whole MLS system than put up with this kind of scrutiny? Is that what Capper wanted?

"I'm not equipped to answer," says Capper. "I would love for this all to go away, it isn't easy for anyone to try to adjust to the web. The NAR made the rule change and I was upset with NAR, it was a bad move for the effectiveness of the MLS market exchange.

"The way to solve this is to reach out and talk to the other side, and I will do that with anybody on the other side," says Capper. "I think there has been so much misinformation, I know how emotional this can be, and it was effected by innovation, but it is part of free enterprise, and the last thing in the world that I want is that NAR lose effectiveness."

Then why not be happy with IDX listings to use in advertising? Why force brokers to share their listings in VOW environments against their wills?

"VOWs are not advertising," insists Capper. "I operate one and 80 percent don't come in and there are so many others that offer listing data, and the ones who register want to use us as their brokerage.

"I've learned you have to keep your eye on the future and innovate and your offering has to be competitive.

"I am not the lowest commission today and I don't plan to be lowest," says Capper. "What I strive for is to offer a high enough level of service that I can charge a fee that I can hit my target returns. I have done this long enough to think that rates and fees are not that important in grabbing new clients."

No matter what the outcome of the DOJ investigation, all brokers will be treated equally and have access to the same competitive advantages. What will be eRealty's competitive advantage?

"The whole world is geo-coded," says Capper, "and it has a dot that can be related to other dots. There is a whole world of information that the modern consumer wants to look at. There will continue to be this race. The company that can provide the relevant information around the property, automated information, school reports, it will continue to skyrocket, and its value and availability. It will make us laugh at how careful we wanted to be with certain fields.

"We have some cool ideas, I see cool stuff all the time," says Capper. "Geo-coded services, that kind of stuff will become more important, not who has the lowest rate. I got to find this perfect home, where is it in relation to where I work, we want this kind of school, what is in front of it, what is behind it. Those are the kind of things we need to learn about every buying decision, we got to know all that stuff.

"I contend we still don't appreciate what has happened to us. The distinguishing feature is information. You can mark my word, if you see my prices go up."

Published: November 20, 2003

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