Where Off-Market Listings Lead

The MLS provides an efficient, transparent, fair market. The industry needs to make that case, or watch the system unravel.

September 17, 2014

When you think of the U.S. stock market, it’s the New York Stock Exchange or NASDAQ that comes to mind. But as Michael Lewis’s new book, Flash Boys, reveals, there are more than a dozen exchanges—and that doesn’t even count the “dark pools,” the private systems operated by most major U.S. investment houses for the benefit of their big-money clients.

Real estate has its own dark pools—top producers using “off-MLS” networks or “coming soon” previews. Some agents market off the MLS at the seller’s request. Others say it helps them avoid working with ineffective agents. And some do it to capture the full commission. Sellers have long permitted this option, and not many brokerages or MLSs have taken strong steps to discourage it. A few brokers have issued stern language about duties to seller clients. NAR General Counsel Katherine Johnson issued a similar warning in her June 16, 2014, realtor.org article, “Coming Soon: Is It in the Seller’s Best Interest?” Still, the promotion of off-market listings seems to be expanding.

Now, after years of tight inventory and consolidation of market share by top agents, third-party aggregators are getting into the act. One online portal’s move to accept “coming soon” listings from agents who pay for the company’s services creates the potential for a new housing marketplace outside the control of the producers of the listing data.

Multiple listing services were created, first and foremost, as a consumer service—a complete, accurate picture of homes for sale. Where a formal MLS doesn’t exist, consumers must go to numerous sources to learn what’s available.

Cooperation and compensation were baked into the MLS. Want to know how important those practices are? Think about commercial brokerage, where everything is subject to negotiation right up to the closing, and imagine fighting over commission splits in front of home owners at a closing table. Then read Flash Boys to find out how securities traders game the system.

Does the MLS benefit real estate professionals? Absolutely. Does it also benefit consumers? Absolutely. Is it perfect? No. Systems like the MLS can always be improved. Yet, if off-market listings become the norm, here are consequences that may follow:

  • More double-ended deals
  • Fewer listings available to agents working with buyer clients
  • Less information for sellers and buyers about current sales activity
  • More disruption to the system of cooperation and compensation
  • An increase in litigation by sellers who discover that only some buyers were aware of the sale

 The broker-agent relationship will be strained further as some brokerages insist that their agents not use “coming soon” tactics, while some agents do so anyway. And the REALTOR® organization will be weakened by a decrease in membership or avoidance of REALTOR® and MLS rules.

Where Do We Go From Here?

One portal’s move into off-market listings only formalizes what has long been going on among many top-producing agents. And the reality is this: Entrepreneurs will continue to come along seeking to challenge the current producer arrangement. We face the possibility of a future with multiple marketplaces, each with its own rules, services, and costs. For those who have relied on just one, the MLS, this is wrenching to contemplate.

The MLS is the most accurate, complete data set of homes for sale. The process of cooperation and compensation is the fairest to consumers and the most transparent. The system provides the most benefit to the most parties in housing transactions. Why has there been so little emphasis on this point? Perhaps the time has come for the incumbents to compete on the basis of these advantages.

This commentary was adapted from a June 2014 article in REAL Trends.

Steve Murray is editor of REAL Trends and president of REAL Trends Consulting Inc.