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Free Advice to The Broker Public Portal

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Much in the news of late is the Broker Public Portal, a project/concept that has been in the works for months, if not years, and appears to be on the verge of happening at last. Victor Lund of the WAV Group has been publicizing the project, which had been shrouded in secrecy for quite some time. From Victor’s post:

The national broker portal project continues to gain momentum as brokers and MLSs agree to participate in the formation of the company to explore the launch of a national MLS consumer facing website with broker governance. Although only a month into the funding period, the group is well on its way to raising the $250,000.

After the holiday, the Council of MLSs hosted two online webinars on the topic. The Realty Alliance and The Leading Real Estate Companies of the World also hosted two webinars. This activity was followed by the delivery of information at the CEO Summit as part of the Real Estate Connect conference. Leading franchise organizations including Home Services of America, Realogy Franchise Group, RE/MAX and Keller Williams have also had executive briefings on the project.

Let’s assume for the sake of discussion that having a national portal controlled by the “industry” (more on this later) is a great idea whose time has come. With Move/Realtor.com now part of a giant multinational media company, and Zillow and Trulia’s merger imminent, it may be a great time for a new competitor to enter the scene.

From that premise then, there are a few major issues that really stand out to me. So this is my free advice — worth what they paid for it — to the folks trying to get the BPP project off the ground.

Start with Some Facts

So we’re not shooting completely in the dark, let’s establish a few facts. From the BPP website:

It’s time for the nation’s leading multiple listing service providers to deliver something new. A national portal displaying MLS data – timely, comprehensive, and accurate. A website that adheres to the Fair Display Guidelines. A website that is controlled by brokers and delivers the greatest possible value to consumers.

As the title of the website (“National MLS Consumer Facing Website”) suggests, however, this isn’t a strictly broker-centered program. This is a joint effort between MLSs and brokerages. From the presentation on the website, we learn the following facts:

  • BPP will be funded by MLS dues
  • It will be governed by brokers and MLS executives
  • Obviously, it will follow Fair Display Guidelines
  • If launched, BPP will build a website (RFP to build is mentioned)
  • Governance is patterned after the MLS/Association model with:
    • 4 Large Brokers
    • 3 Medium Brokers
    • 3 Small Brokers
    • 3 MLS executives
    • 2 Others
  • BPP as a “company” will have two classes of Members: MLS Members and Broker Members. (Wouldn’t that be a membership cooperative, rather than a “company”? But I digress….) Brokers are broken down into Large, Medium, and Small, with that being determined by listing count. It does not appear that MLSs are broken down by size or listing count or anything like that. See below for more on that.
  • Right now, BPP is attempting to raise $250,000 as seed funding for corporate formation, consultant fees, legal fees, accounting, and the like. BPP is looking for 50 companies to donate $5,000 each for this seed round. There is no actual equity from this donation.
  • The actual launch of a minimum viable website is budgeted (currently) at $15 million although both technology and marketing costs are “significantly variable”.
  • Ongoing budget will be provided by a monthly MLS dues of $1 – $3 per subscriber of member MLSs.
  • BPP is relying on, among other things, 200 million monthly emails sent by MLSs today to various consumers. (You know, those “saved search” emails and such?)

Those are the major salient facts. As the presentation explains, MLS dues can be used to fund this BPP since NAR rules changes from last year mean that creating, operating, and promoting a MLS public facing website can be a “core service” of the MLS and therefore part of the mandatory dues/fees of the MLS to all subscribers.

With the above incontrovertible facts — taken straight from the horse’s mouth — let’s get into the opinionating and strategery.

The Easy Advice: Don’t Build, Buy

Let’s knock out the easiest one of all.

$15 million to build a national website is, in a word, bupkis. Zillow spent $21.3 million on Technology & Development in just three months ending 9/30/14. It’ll be difficult enough to be competitive with the reigning champions; it’ll be well-nigh impossible trying to do it on the cheap.

Besides which, what exactly is going to be built that is worth $15 million just to launch into the marketplace? BPP isn’t breaking new ground technologically; it isn’t a “we discovered a way to beam listings directly into people’s minds and we need $15 million to develop it” play. It’s a tried-and-true website play.

The easy advice, then, is to spend the money on buying an existing real estate portal. $15 million in cash can easily be leveraged… let’s say 2:1 (66 LTV). The companies involved — large MLSs and major brokerages — can easily get the financing. So $15 million in equity + $30 million in debt/outside investors = $45 million in capital.

I’d look at Homes.com or Movoto.com as acquisitions, since this BPP group can apply some unique pressure. See, it’s really difficult to pull listings off of Zillow, Trulia and Realtor.com — the top three websites for homebuyers. Not the same difficulty with the also-rans like Estately, Homes, and Movoto. Zillow is 6.5 times larger than Homes.com, and 16.7 times larger than Movoto. Either of those Top 20 websites have no choice to play ball with a group of major MLSs and brokerages. “Here, take $10 million for your website, or we’ll pull all our listings off your site” is one of dem plata o plomo deals.

Starting with an existing website, with existing traffic (top 20 is nothing to sneeze at), with an existing team that knows what it’s doing, is infinitely easier than trying to start something from scratch.

The Not So Easy Advice: Adopt a Corporate Governance Model

The central flaw with the plan, as revealed thus far, is with governance. I realize that at this early stage, the BPP group has formed a Governance Committee and the above outline may not be the final recommendation.

But from the very start, when I first started hearing rumors about this national MLS-broker portal project, one thing that has remained fairly consistent is a governance model patterned after large regional MLSs and large REALTOR Associations. That way lies certain failure.

It’s one thing to adopt the Association model for a membership organization; it’s a totally different thing to adopt it for an entity that wants to compete with nimble tech companies in the lightning-fast cut-throat dotcom arena. A consensus-driven governance model of the MLS world, with multiple different “classes” of members and Board representation, is wholly unsuited to the mission at hand.

Consider the timeline of the BPP project, as per the website. The “organizational meeting” was in November of 2014. January of 2015 is when financial support and commitment from brokers and MLSs are to be garnered. Then in March/April timeframe, the company will be formed with the $250K seed funding. And then consultants and the Board will get into the RFP process, which will take a few months, and then they have to select vendors, and then finally start building. Along the way, they also have to secure the $15 million in startup funding.

If the first line of code for BPP is written before the end of the year, it will be a miracle.

Meanwhile, Zillow and Trulia did a $3.5 billion merger in six weeks from the first phone call to signing the merger agreement. The News Corp acquisition of Move was a few months from start to finish (although word is that discussions have been happening for a lot longer).

Slow-and-steady, consensus-based decision making is fine for Associations and rule-making. It’s a death sentence for commercial competition. Even large corporations move much, much faster than does the world of Associations and MLSs.

Then consider operational governance. Say that somehow, auctions become really popular in large urban markets. (Not crazy, since Google invested in Auctions.com….) Rolling out an auctions-oriented product at Zillow goes something like this:

Product Manager: “Hey, we really should think about building an auctions-oriented product.”

Spencer Rascoff: “Yeah, good idea; make it happen.”

And it happens.

That same decision in the MLS/Association world goes more like this:

Product Manager: “Hey, we really should think about building an auctions-oriented product.”

CEO: “Yeah, good idea; write up a detailed proposal with budgets, and I’ll get it to the Executive Committee to see what they think.”

After vetting the proposal with the Executive Committee:

CEO: “They approved the plan, but with these seven changes that need to be made. Revise the plan, and I’ll get it in front of the whole board at our next board meeting, which is in two months.”

Product Manager: “Okay… but um… you know Zillow already launched the auction product, right?”

CEO: “Yeah, it doesn’t matter; I need board approval before I can do anything.”

After Board meeting, assuming it goes through on the first try and there isn’t a holdout from one or two Directors who think the auction concept is “terrible for REALTORS” and should be fought as hard as possible:

CEO: “Okay, so the Board tentatively approved the plan, but with these eleven changes, and policy modifications, which the Rules Committee is considering. So we can start prototyping, and we’ll show the Board in three months.”

The point is that the MLS CEO is often a CEO in name only. She doesn’t set strategy, doesn’t have operational control, often doesn’t have budget control, and in some cases I’ve personally witnessed, can’t even change the color of a website without getting the Board’s permission. That isn’t a CEO; it’s more of a Chief Administrative Officer.

Again, this setup might work fine for a membership organization like a REALTOR Association, which is more about comity, professionalism, rules disputes, and code of ethics adjudications. There is no competitive pressure for such organizations, neither MLS nor Association, as both are more or less functional monopolies within their respective spheres.

It simply does not work for a marketplace with competitors.

So the not-so-easy advice is for BPP to adopt a corporate governance model, with a small Board of Directors that only gets involved with major corporate decisions, coupled to a powerful chief executive who has both strategic and operational control. The Board just holds the CEO accountable to goals and metrics.

Word is that most of the people driving the BPP are successful brokers who understand a thing or two about the business world, and are not necessarily huge fans of the Association model of governance. Well, in that case, let me strongly urge the people of BPP to adopt as close to a corporate model as possible.

That… isn’t easy given the motivation behind doing a national MLS-Broker portal in the first place: control. And brokers, as we know, do not think that contractual language is enough control; they want ownership. Which then leads to the most difficult problem of all….

Hard, Hard Advice: Establish Clear Measurable Objectives

What is the motivation for Zillow to do what it does? Answer: USD. Piles of it. Preferably mountains of it. All of the investment, all of the risk, all of the products, services, industry outreach, etc. etc. all serve one goal: shareholder value. Metrics of success are easy as well — revenues, profits, enterprise value, etc. (Of course, the Zillow bears all point to lack of profits and jeer, but that’s inside-Wall-Street talk. The metrics of success are well understood by everybody.)

What is the motivation for the BPP to do what it does? It really isn’t clear.

“Protect our data” is one motivation. But how would anybody measure success or failure on that? “Control” over listings is another motivation. But again, how do you measure that?

Looking at the Fair Display Guidelines, which is baked into the whole concept of the BPP from the start, one gets the strong sense that the motivation is… well… not fully explained. Look at the eight guidelines and what do you come away with?

#1simply says brokers can opt out. That pretty much applies to MLS public facing websites only, since syndication as a rule provides for opt-out unless otherwise agreed on in bi-lateral contract.

Guidelines #2, 3, 4, and 5 all go towards making any sort of business model other than passive banner ads impossible. No featured listings, no buyer agent ads, no fees for leads, no diversion of leads, etc.

#6 and #7 are sort of add-ons about reporting stats to the broker and not resyndicating data (there goes another business model).

#8 allows for display ads approved by the brokers… so Mercedes-Benz is probably OK, but Wells Fargo Mortgage is probably not, if brokerages have affiliated mortgage businesses.

So when you get down to it, the basic premise, the fundamental motivation, is that only the listing broker/agent should benefit from the listing.

That’s… fine, I guess, since listings are where everything starts, and listing agents do put in work to get those listings in the first place. I’m entirely nonjudgmental about business people pursuing business goals through legitimate means. I understand entirely why brokerages would want Fair Display Guidelines everywhere at all times.

The trouble comes when you try to combine the goals of Fair Display with issues of beneficial ownership. Cui bono? is going to be a real issue for BPP.

More on the Ownership Question

The $250K seed funding that BPP is seeking to raise is not a “friends and family” round of funding. The website and materials make clear that the $5,000 initial contribution is a gift. There is no equity attached to it, because there is no company that can issue equity. Presumably, the $250K is just to pay consultants to setup the company and so on (that a quarter-million seems like a ton of cash just to do that is a whole different issue altogether). The real nut, the real investment, comes when BPP needs $15 million to start things up for realz.

Are small 10-person brokerages and 700-member MLSs able to pony up that kind of capital? Will Realogy write the same check that Joe Bob Brokers will? It’s inconceivable.

So if the bigger companies and bigger organizations provide the bulk of the funding, won’t they get the bulk of the ownership in the BPP enterprise? Should that happen, will the hundreds and thousands of little brokerages and small MLSs that are required to make BPP a national portal be perfectly fine with six companies owning 75% of the equity of the company?

Perhaps BPP will be setup as a non-profit, like many an MLS, in which case the financial benefits of BPP go almost entirely to staff and vendors. And if that’s the incentive structure, how well could a non-profit BPP compete with the Zillows of the world? How do you attract top talent when one company can offer stock options that could make them fabulously wealthy, and the other one can offer… job security?

For that matter, if Realogy and HomeServices of America provides half of the $15 million in funding, will they really be thrilled with having one of twelve Board seats? Maybe. When the annual operating budget comes from ten of the largest MLSs (remember, the revenue mechanism is $1-3 assessment on dues), will they be satisfied with having one seat out of the three MLS seats, because the small MLSs clamor for control and say-so and so on?

This is nothing close to easy, primarily because the simple answer (maximize shareholder value) goes against the generalized, hard-to-measure success metrics, like “protect data” or “give control back to listing agents”.

Back To That Difficult Advice…

For these thorny reasons, my advice is for the real principal players — the largest of large brokers and large MLSs who will be funding the effort — to establish clear mission objectives that can be measured effectively. It doesn’t much matter what those objectives are, but they need to be clear, measurable, and create proper incentives.

Without that, BPP will quickly get mired in internal politicking and Board jockeying in the name of “control” while its nimble, focused commercial competitors will outmaneuver them time and again. That isn’t competition; it’s symbolic gestures of defiance at best.

One Last Concern

This is getting too long, so let me clarify one last concern about the BPP effort.

Suppose we avoid all of the above pitfalls and BPP launches with the proper capital structure, proper governance, proper incentives, and clear mission objectives. The heart and soul of the BPP effort remains — and it’s not really possible to imagine things otherwise — the establishment of the Fair Display rules as the norm for online real estate.

Every single one of those rules is designed to protect and benefit the brokerage, particularly the listing brokerage.

At some point, especially if BPP achieves its goals of being a top competitor to Zillow and the other major portals, there is the likelihood that it will attract the attention of our betters in state capitols and Washington DC.

On the one hand, you have the industry regulators who have oversight into what is a regulated, licensed industry of real estate agents and brokers. Would they — could they — avoid getting involved to make sure these licensees are acting “appropriately” in their superior regulatory minds?

On the other hand, you have legions of government regulators whose mission is “consumer protection” both from themselves and from rapacious corporate interests. (My tongue is planted firmly in my cheeks there.) Whether we’re talking about HUD, CFPB, Dept of Justice, State Attorney Generals, or whomever, when you have a combination of the largest brokerages and MLSs joining together to impose its guidelines on the industry… I imagine that those folks are going to get mighty interested in said rules, guidelines, and said company.

Yes, BPP can rely on the political muscle of NAR to protect it from government regulators, but NAR isn’t perfect, nor is it God. It has enormous power, but that power is not limitless as we have seen time and again.

The core question then is this: What is the consumer benefit of Fair Display Guidelines? The benefit to brokerages and listing agents is clear as day. The benefit to consumers is as clear as mud. People with vested interests make all sorts of arguments as to why Fair Display is great for consumers: data accuracy, go to the source, etc. etc. But the one argument that has to be made, that the regulators will focus on, is around price.

Key question: Does Fair Display Guidelines reduce the cost of real estate services to consumers?

At first glance, one cannot see how that would be the case. Yet, on that question, the entire thing will turn.

As a libertarian, I do believe that “I’m from the government, and I’m here to help” is a frightening set of words. Yet, the BPP effort almost invites the government to take a look-see. The result of such a look-see might be pretty damn unpredictable.

That isn’t an argument against BPP or against Fair Display Guidelines; it is a concern, and one that the strategists involved really need to at least consider.

Conclusion?

Don’t think I have one. I suppose if there were to be one major takeaway, it’s this:

Settle the issue of ownership, incentives, and governance before doing anything else. That’s the weakness of the real estate industry’s consensus-driven cooperative model.

Again, this advice is worth what you paid for it. Disregard as you wish! 🙂

-rsh

13 COMMENTS

  1. The whole problem of private (not board controlled mls’s) has been overlooked. hey have 0 incentive to open up this competition to themselves. I also agree that there is no way that a Realtor association can move and survive in these waters without stepping on a regulation third rail. Since they are about 15 years behind the market right now how can they think that they can take on the competition. The model does not reward success. There are no profits from referrals that close…no leads to be sold. Its a lemonade stand in front of Walmart. If it comes from Silicon Valley with a for profit model I will bet my paycheck on it.

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