Realty Alliance, Franchise IDX, and Future of NAR

Earlier today, I was interviewed by Matt Carter of Inman News, who wrote a story about Realty Alliance sending a formal letter to NAR asking that the MLS Committee repeal the rule allowing franchisors to display IDX. It’s a good breaking news story on a potentially important topic. Read it in full.

I was quoted in the story as saying that one possible impact of this kerfuffle is that various brokers could decide to form a rival organization to NAR:

Another, more drastic course of action would be for brokerages to drop their NAR affiliation and form an offshoot group, Hahn said. While that might sound far fetched, Hahn said there’s considerable dissent over NAR’s proposal to raise annual dues by $40 a year to boost the group’s expenditures on political campaigns.

“Six months ago, I would have said The Realty Alliance is out of options,” Hahn said. “Given how the Realtor Political Party Survival Initiative is playing out, there is nothing standing in their way from creating their own NAR.”

Matt did a great job given very short amount of time, and I stand by those statements. But I did want to spend a bit of time expanding and clarifying the connection. This is not a correction of Matt Carter’s article; he was accurate and on point. It’s more of an expanded commentary.

As way of background, reading (or re-reading) this post from last year might be helpful.

The Un-Franchises Are Likely Screwed

First, let me expand on why it is that I don’t think Realty Alliance (and others like it) would have much success in pursuing a repeal of the NAR Franchise IDX rule.

For any organization to reverse policy this quickly (the Franchise IDX rule hasn’t even been in place for a year) is to admit that it screwed up. Organizations, particularly Associations, do not like to admit making a mistake. So unless there is a very compelling reason to repeal a rule or policy that was just passed/ratified, the chances are slim to none that the Association would do so. In fact, short of a real threat of not just litigation, but losing in litigation, would NAR just voluntarily repeal the rule.

What NAR is more likely to do is to expand and “clarify” a problematic rule so as to make complainants happy. Trouble is, in this case, expanding the Franchise IDX rule any further would literally throw open Pandora’s Box.

Right now, the rule limits the ability to compile and display IDX listings to “bona fide” franchises, defined as:

…a company granting real estate brokerage franchises under the franchisor’s trademarks pursuant to a franchise disclosure document meeting applicable Federal Trade Commission rules.

As I mentioned to Inman, this reliance on the FTC is a decently high bar to clear. There are a number of legal and regulatory hurdles a company has to clear — such as an approved Uniform Franchise Offering Circular (UFOC). Because each state handles such things separately, the UFOC likely has to pass muster in all of the states where the franchise hopes to operate. In many cases, there are further requirements, most of them time-consuming, onerous, and expensive.

The bogeyman of “straw broker” franchisors is really just that: a bogeyman that is rather unlikely to come true. If a company is going to go through the time and expense of meeting FTC (and state regulator) requirements of being a franchise, it might as well go ahead and become a real franchise. That’s how annoying and painful the process is.

This way, NAR accomplished what it likely saw as a very narrow franchisor exception to the MLS rule that non-participants cannot display IDX listings. We’re talking about maybe a half-dozen companies here, all of whom are seen by the public as being a single large operation — just like McDonald’s is seen as a single company, even though each store is independently owned and operated.

I don’t think NAR can expand that definition further to include Realty Alliance or Leading RE — for example, by removing the language about the FTC methodology — because now you do face the prospect of “straw broker” companies. You also face the daunting challenge of keeping companies like Zillow and Trulia from just harvesting the IDX feeds of its various subscribers and displaying that without the normal MLS rules applying.

If NAR goes with some sort of language like “marketing network”, every real estate portal qualifies. If NAR tries something like, “substantially like a franchise” without the bright-line rule of “approved by the FTC), then it’s basically buying a lot of litigation as various companies will claim that it is substantially like a franchise.

Requiring broker approval doesn’t help to limit the scope of the IDX Rule once it gets beyond “FTC-approved” franchisors, since just about any website can get at least one broker to approve.

I can’t see how NAR can expand the Franchise IDX rule, without it becoming essentially a “anybody anywhere can take MLS IDX data and display it without regard to the MLS rules” deal. And for the reasons cited, I can’t see NAR repealing the rule either. So my assumption right now is that the MLS Committee will consider the repeal proposal, and dismiss it more or less out of hand.

And if Century 21 — whose executives I spoke with at Inman NY — is correct about the kind of results they’re seeing from Franchise IDX (we’re talking double-digit improvement in conversion rates here), then all of the non-FTC approved franchises are screwed.

Normally, that would be the end of the story. Some marketing networks get screwed, they protest, they fail, and that’s that.

Enter REALTOR Party Brouhaha

In this case, it isn’t the end of the story because of timing. It just so happens that right now is when passions are running high about the REALTOR Party Political Survival Initiative (“RPPSI”), about which I wrote on this blog earlier this year.

The comments on the official feedback thread are overwhelmingly negative. And over the past couple of weeks, I’ve seen positions harden. Supporters of RPPSI dismiss the complaints of the opponents as a bunch of whiners who don’t get it, and who aren’t active in the Association anyhow, while opponents have started to dismiss supporters as NAR lackeys and kool-aid drinkers. Perhaps compromise is possible, but right now, it doesn’t much look like it.

Now throw the Franchise IDX into this volatile environment.

Realty Alliance and other companies in its situation, that provides some sort of a unified marketing/lead generation service, but stops short of being a “FTC-approved” franchise are going to be disappointed. (Well, the alternative is that literally every website will become a “franchise-lite” organization overnight, and MLS IDX rules can just be tossed out of the window.) Given that disappointment, are they likely to just lay down quietly and plan for winding down operations since they can no longer compete effectively with the Official Franchises?

I think not.

I think they’ll fight the rule, because for such companies, the Franchise IDX rule is an existential threat. There are two ways to fight the rule: bring a lawsuit, or engage in REALTOR politicking. The litigation path is an uncomfortable one, as their prima facie argument — that Franchises, as non-participants in the MLS, are not allowed to display IDX listings in violation of MLS rules — is pretty weak in front of any rational judge. The NAR rule is narrowly drawn to affect perhaps a half dozen companies, consumers see these franchises as a single company anyhow (the whole point of franchising), and the FTC-approval requirement means “straw broker” networks simply won’t form. And the MLS itself, as well as NAR and the MLS Committee, is a private organization that can make whatever rules it wants to make. I just don’t see a judge acting to force NAR to repeal the rule; there’s no legal theory I can think of that would allow a court to do such a thing.

Engaging in REALTOR politicking avoids the time, cost, and negativity of a lawsuit, but now the time horizon is years, not months, and by the time Realty Alliance can muster up enough support to repeal the rule, it might be out of business. So that’s a non-starter.

Rebellion?

The only other alternative, if you’re Realty Alliance or Leading RE, is to quit NAR and try to convince its member brokers to do the same, so that they can form a MLS that isn’t subject to NAR MLS Committee’s rules, and form an Association that could set its own rules.

As I mentioned to Matt, the very thought of something like that happening would not have occurred to me three months ago. I didn’t think there was any way such a rebel breakaway Association would draw any takers. Belonging to NAR, being part of Organized Real Estate, and being part of the MLS, were all so important that a broker would never withdraw over the issue of Franchise IDX. The easier path for the broker is to leave Realty Alliance and just join a franchise.

The passion unleashed by #RPPSI changes that calculus.

Now, the rebel group has moral cover as well as economic incentives to create the Contras, the Un-NAR. Now, it isn’t “We’re taking our ball and going home, because you guys are beating me up”. Now it’s, “This isn’t about the money, or this rule; this is about a National organization that has lost its way. It’s time for a new organization that doesn’t want to become a political party.”

Whether true or not, that sort of moral high ground is going to attract people. It’s going to put any sort of anti-NAR move in a very different light. Now, the Rebels are freedom fighters, trying to bring about reform to a broken system, rather than a small subset of a subset of industry interest groups. This situation has the potential to transform the Realty Alliances of the world from the Scottish barons arguing over the size of the land grant by King Edward the Longshanks into William Wallace fighting tyranny, at least in the eyes of many a disaffected member.

A Peaceful Solution

When I warned that RPPSI could either be the most brilliant thing NAR ever did, or the first step towards irrelevance, it was situations like this that I was worried about. Unless between now and the Mid-Year Meetings, when the RPPSI initiative is voted on, significant change in wider public opinion can be brought about, every otherwise-routine business dispute — like Franchise IDX — could take on far deeper significance.

For what it’s worth, some free advice — worth exactly what you paid.

One possible “negotiated solution” here is to remove the language in the Franchise IDX rules about “FTC Approved” and replace it with a subjective standard of some sort: “undertaking substantial online marketing on behalf of its member brokers” or some such vague thing. Whether a company/organization meets those standards will be determined by the Subcommittee on IDX Waivers.

This way, any decision to grant or not to grant waiver from IDX rules is within NAR’s control, with a committee whose proceedings are non-public, and whose decisions can be justified in a variety of ways. By providing “discretion”, NAR can then extend the Franchise IDX privileges to major companies like Realty Alliance and Leading RE, without necessarily having to extend it to the Zillows and Trulias of the world, not to mention the thousands of “We’re a Marketing Network Too!” companies.

I do hope the sides here find common ground. The alternative is unlikely to be positive for anybody involved.

-rsh