During the research for my last post about the Compass lawsuit, I had to spend more time going over the Butters Report, a massive 600+ page report by the FTC 1983 whose official title is "The Residential Real Estate Brokerage Industry." It provided a great deal of context for explaining the present state of affairs where the largest real estate company in America is suing the largest MLS in America.
Take that together with some of the other historical facts I learned and knew already and I thought there was a coherent explanation of how and why we got here. That in turn would at least point to the decision before us as an industry – the hard choices we are going to have to make. If we do not, then the choice will be made for us.
So perhaps it is worthwhile to do a brief (and compared to the volume of material, this will be brief) overview of the rough general history of how we got to where we are today. Maybe it will be worthwhile only to me as I think through the issues, but I share it in the hopes that at least a few of you would benefit as well.
Let's get into it.
The Early 20th Century
One of the biggest benefits of the Butters Report is that it describes what real estate was like prior to the MLS taking over. In other words, before the entire system we all know and have worked in came into existence. These are just facts that I did not know about, though I guess I could have asked Saul Klein what things were like back then? 😃 (I kid! Love you Saul!)
The most eye-opening thing was learning that in the pre-MLS era, open listings were the default and the exclusive listing was rare:
The concept of multiple listing was based upon the need to devise an
efficient method for marketing exclusive listings. With an exclusive listing
only one broker had direct rights and incentives to sell the house . By the
1920's, however, sellers had become aware of the advantages of obtaining exposure through many brokers. For this reason exclusive listings had become nearly impossible for brokers to obtain. The open listing was the general rule.
From the broker's point of view, open listings were associated with a number of problems. These problems related to competition among listing brokers, competition with sellers , and duplication of effort by brokers . (p.110) [Emphasis added]
That this is the system that still prevails in many other countries should not be lost on anyone. Sellers do not hire one listing broker; they hire as many of them as they can.
As the Butters Report details, the open listing era led to two problems for brokerages:
- Commission competition (obvious)
- Lack of cooperation (kinda obvious)
Second, competition among brokers was associated with the inability to cooperate in marketing listings. Brokers with open listings were reportedly afraid to tell other brokers about properties for fear that these other brokers would go straight to the sellers.
(Of course this would be the effect, which is why CRMLS claiming Compass could just do open listings if they want to market properties is such a joke.)
Furthermore, even if brokers did want to cooperate, there allegedly were frequent disagreements over how a broker originally received information relating to a house for sale and over how any resulting commission should be divided — broker A might allege that broker B got the information from him or her, while broker B might insist that the information came straight from the seller.
Finally, with open listings as opposed to exclusives, no particular broker was absolutely assured of a commission upon sale. Any one of several competing brokers might spend time, effort, or funds to advertise and promote sale of a property, claim to be the sole procuring cause of a sale, and try to claim the entire commission. But the seller might claim that he or she had found the buyer on their own. The general use of open listings was, therefore, believed to make both cooperation and predictable success in obtaining a commission very difficult.
The MLS was created, basically, to solve these two problems. In the words of H. Nightingale in the April 1924 California Real Estate magazine (a publication of the precursor to the California Association of REALTORS), "They [the MLS] have replaced the old spirit of competition for one of cooperation, and it has brought peace where there was strife, and harmony where discord reigned." [Emphasis added.]
So from the very start, the MLS was an explicitly anticompetitive institution. There is no denying that. Sellers did not want to sign exclusive agreements; they wanted brokerages to compete, resulting in lower commissions and one presumes, higher level of service. Imagine not returning the seller's phone call instantly in an open listing system!
Why then was the MLS even allowed to form and exist?
The Real Benefits
In the Butters Report, we get the rationale: the MLS might be designed explicitly to reduce competition, but it brought real benefits to consumers and to some kinds of competition as well.
With no MLS, open listings allowed sellers to substantially increase exposure on their properties. However, the market was so fragmented that, even with open listings, both sellers and buyers faced the inconvenience of trying to deal with many brokers and the uncertainty of not knowing whether they were reaching the entire market. One of the primary selling points of the MLS system for buyers and sellers was the convenience of being able to reach the "entire" market by dealing with only one broker.
The market-making function was especially important for the smaller broker. In fact, some commentators at the time felt that it was a saving factor for such a broker. Some felt the small broker could not continue to survive without the MLS. In a fragmented market, large brokerage offices are presumed to have an advantage because of their size. With each firm being, in effect, an independent market, those with the largest inventory have the best chance of having an appropriate property for a particular buyer. [Emphasis added.]
In other words, while the MLS might be anticompetitive by its very nature and design, the increased convenience to both buyers and sellers as well as the increased ability of smaller firms to compete against larger firms justified its continued existence. The Butters Report notes that using the MLS doubled the likelihood of a property selling, because the MLS made it so much easier to sell.
In addition, the MLS provided housing value information in one place. In an open listing no-MLS system, that task would be enormously difficult and costly if it is even possible. Quoting Butters report:
As one broker wrote in 1925 , "If we are to meet direct dealing successfully, it is desirable to pool all of our knowledge so that every Realtor may know infinitely more about value and trends than the readers of the daily papers." (p.114)
That these paragraphs resonate in the current CRMLS v. Compass fight should be obvious as well.
