Thursday, January 8, 3:50 pm – 4:35 pm MLS 2014: 5 things to do right now to get ready. Top visionaries share the 5 things you must be aware of to best position your MLS for the next 5 years. Moderated by Victor Lund, Partner, WAV Group. Panelists: Joshua Sharfman, CTO, California Association of Realtors®; Saul Klein, President & CEO, Internet Crusade / CEO, Point2 Technologies; Brian Larson, Attorney at Law, Larson/Sobotka PLLC; Mark Lesswing, Sr. Vice President & Chief Technology Officer, NAR.

I’m going to talk about three things that I recommend MLSs do starting immediately, one from each of three categories: (a) things I think MLSs can and will do; (b) things I think MLSs should but won’t do; and (c) things it may even be unreasonable for me to suggest that they do. See if you can guess which is which.

1. Help the industry state and develop its value proposition. Real estate brokers are not valuable because they have the best or most listing data (though there would be nothing wrong with them having the best and most); they are valuable because they exercise professional judgment. That is to say—given data, information, knowledge, whatever you want to call it, they apply their experience to any given circumstance to make a professional judgment. Addressing this value proposition question does not require the MLS to add new systems (though other objectives might support new systems ideas). To address this issue, MLS needs to (a) help consumers understand the value of professional judgment; (b) help brokers and consumers distinguish among the brokers who have it and the brokers who do not; and (c) structure learning opportunities to help brokers develop it where they lack it.

Part (a) probably means a public relations campaign, unlike the NAR one, which appears to cast real estate brokers as personal assistants (“While Bill is picking up his kids at school, his REALTOR was ordering title work on his listing.”), or worse, just encourages consumers to transact (“Now is a great time to buy a home.”) These programs do not tell consumers what it is brokers can do that the consumers cannot do for themselves. Unfortunately, Part (b) is very difficult…. Discussions about MLSs operating “agent rating” services that consumers and other brokers can use to evaluate the professional competence of brokers will be tricky, at best. And I’m not sure that’s the way to achieve the objective. Part (c) may be beyond the current competence of most MLSs and associations. We know from professions like medicine, law, teaching, etc. that professional judgment can be taught—but the pedagogies that are effective for doing so are missing in the real estate industry.

2. Encourage virtual brokerage among traditional brokers. The settlement of the NAR/DOJ lawsuit means that we now have the rules of the road regarding virtual brokerage (though much remains to be settled in practice). MLSs were worried about VOWs in the early years of this decade because of unknowns and because some of the most visible users of them were “new model” or “no model” firms, who appeared merely to be capitalizing on the MLS listings of other brokers. Rather than continuing to look for ways to limit and discourage VOWs, MLSs should be providing the raw materials for traditional brokers to build on the success of IDX using VOW capabilities, taking advantage of advanced customer relationship management capabilities, lead and referral management tools, and creative co-marketing opportunities.

This means MLSs and the brokers on their boards of directors should not be looking for every possible means to limit what they will deliver to VOW-operating brokers under NAR’s new VOW policy. They should be looking for ways to make it possible for broker web sites to provide a superb customer service relationship to consumers, combining aspects of IDX and VOWs.

3. Measure. MLSs need to make decisions based on data, not on vague perceptions and impressions. A lot of MLSs and associations fail to perform adequate business planning, partly because they do not understand the quantitative relationship of the MLS to the real estate market or measure the parameters they say they intend to change.

First, the MLS needs to understand its role and impact on the market in specific financial terms, not just in ‘feel-good’ terms. How many transactions did the MLS process last year? What dollar volume did that amount to? What approximate amount of commissions was paid to MLS participants on that volume? How much cooperative compensation was paid between MLS participants? How does the MLS and association budget relate to that total of facilitated commission payments? Too many members of MLS boards of directors cannot answer these questions about their organizations.

Second, MLSs should measure before, during, and after the launch of business ventures. Examples include core services like public-facing MLS web sites, showing scheduling services, etc. These may or may not be good choices for business activities, but the only way to find out is to measure the market. Doing so is expensive; if your MLS cannot afford it, join forces with others so you can, or doom yourself to making decisions ‘in the dark.’

Third, MLSs must view data not collected with their interests and interests of their brokers in mind with skepticism. Those pushing certain programs will often provide only measurements that confirm their views; decision-makers must think critically about the data they are reviewing.

Of course, doing just these three things will not make MLSs successful and relevant. They must still attend to the myriad other details of running a business. But these steps would position MLSs to function better as strategic partners to the brokerage community. What’s not to like about that?

MLS data is my life, so his comments naturally piqued my interest. Here is what I think he was saying, and some thoughts about how MLSs should consider it. (I cannot promise what I say here accurately captures what he said, but you can follow up with him if you want to be sure.)

Clearly, Fannie is struggling to deal with a vast number of troubled loans, especially on the following questions: Should it approve a short sale? How should it price an REO? What kind of workout should it offer a distressed owner? The only way to make these decisions confidently is to have high-quality valuation advice. Fannie regularly seeks valuation advice in the form of appraisals and broker price opinions (BPOs).

But Fannie wants MLS data in order to support systems on its end that analyze and confirm that valuations it’s getting from brokers and appraisers are in the right ball-park. It also wants to use the data for financial modeling, i.e., to make and test projections about what is and will be happening to real estate markets in coming months. It’s asking MLSs to license data to it. Mr. Bryar even shared a proposed contract for the licensing. I expect that Fannie prefers MLS data to merely using public records data for two reasons: (1) MLS data has a lot more rich feature data in it than tax records usually do; and (2) MLS sales reporting is faster than public record sales reporting. (And in some states, there is no public record sales reporting.)

It makes immense sense for Fannie to want to use the best data there is about housing market activity to confirm valuations and to plan its business activities. Does it make sense for MLSs to help? I think there are pros and cons, and if an MLS does work with Fannie, I’d suggest modifying Fannie’s contract to protect broker and MLS interests better.

First, the pros. I think a lack of checks and balances on the professionals in real estate transactions is part of the reason we are here. There’s plenty of blame to go around for the housing bust, but it did not help that Fannie and others had no independent way of checking the valuations on which it relied in a fast-moving market. Providing a tool for it to do so going forward might be (1) civic-minded, in that it might increase Fannie’s chance of success and survival without increasing the taxpayer’s bill for on-going bailouts; (2) smart for the brokerage community, in that it should generally result in Fannie giving more credence to properly prepared BPOs and appraisals; and (3) good for the MLSs, who may be able to call on Fannie for assistance in return down the road. In theory, I think Fannie’s strongest argument is that anything MLS can do to help liquidity return to the real estate market is good for MLS’s broker participants.

On the other hand, MLSs providing data to Fannie have to consider some potential downsides:

1. As a broker, would you want Fannie to tell you it disagrees with your BPO based on its calculations on data from your MLS?

2. How do we know whether Fannie will use the data in ways that actually deliver positive results to the market?

3. Do you trust Fannie Mae to use data only in the ways permitted?

4. Are there any potential unintended consequences here?

It seems to me that reasonable MLSs could decide either way.

But if an MLS does sign with Fannie Mae, I’d suggest revisions to a number of the provisions in Fannie’s proposed contract:

1. Limiting the scope of the license.

2. Stating use limitations more explicitly.

3. Cleaning up a couple problems in the “confidentiality” provisions.

4. Having it be terminable at will (with maybe a 60-day out).

5. Kicking out the clause where MLS indemnifies Fannie (as MLSs don’t create their own data, they really are not in a good position to warrant it against claims of infringement).

6. Changing the limitations on liability (which are mutual, but in the context of this type of transaction, they favor Fannie).

In fairness, I think Mr. Bryar said that Fannie would consider modifications to its agreement or using MLS’s standard license agreement, if it has one.

One other note: NAR policy says that your MLS cannot transmit your listings to anyone for a non-core use without listing broker permission. I wonder whether NAR would consider this a core use of MLS data. If not, the MLS probably has to give brokers notice that it’s sending their listings to Fannie Mae and give them the opportunity to opt out of that transmission. If many brokers were to opt out, it would affect Fannie Mae’s ability to rely on statistical algorithms run against the data it does get.

If your MLS is interested in discussing the matter, you can reach Mr. Bryar at marcel_bryar@fanniemae.com.

What do you think? Should MLSs provide data to Fannie Mae? Why or why not?

-Brian