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Zillow’s Coming Soon Feature: The Future of Off-Market Listings

How does Zillow’s “Coming Soon” product impact the industry?

Written by Steve Murray, REAL Trends publisher

I recently read Michael Lewis’ new book, “Flash Boys,” and among the many interesting things I learned is that, while we think there are two stock exchanges, NYSE and NASDAQ, there are actually more than a dozen—and that is just here in the United States. That doesn’t even count the ‘dark pools’ operated by most of the major U.S. investment-banking houses. Essentially, there are dozens of private MLS systems that process stock and bond trades in this country alone.

Now, after years of tight inventory markets and consolidating shares of business done by the most productive agents, “coming soon,” off-market and pocket listings have been formally embraced by Zillow. It is not so much that this hasn’t been going on for some time, and with increasing frequency (according to several MLSs around the country), but one of the leading online portals has formally announced that they will accept and promote these kinds of listings, hence the potential formation of an entirely new housing marketplace outside the control of the producers of the listing data.

Brokerage firms have known their agents are offering off-market listings for some time now, and sellers have been permitting this option for years. Few brokerage leaders have taken strong steps to discourage or stop this practice with their own agents. Some agents are shifting to a model where they market listings to their own private networks before sharing it with the MLS; others are sharing it online with one or more listing portals. Some are doing so because the seller requested this approach; some are taking this step to avoid dealing with ineffective or inexperienced agents (and theoretically improving service delivery) and some are doing this in an attempt to capture the entire commission. Most brokerage firms and MLSs have an awareness of who is choosing to use the off-MLS approach and to what frequency their agents are doing this. Some have issued stern language about the duties agents have to their seller clients as a means of slowing or stopping the practice. Yet, the promotion of off-market listings seems to be expanding, not shrinking.

The MLS Premise
The entire premise of the MLS was one of consumer service. The idea was to create a complete and accurate picture of homes available for sale by getting brokerage firms of all shapes and sizes to share inventory with each other. While there are few still around who remember when such was not the case, there are markets in the United States where formal MLS does not exist. Most countries around the world do not have MLSs. It is not pretty when a consumer has to go to numerous sources to find out what may be available. The MLS was first and foremost a consumer service.

Then, to make it easier for consumers and real estate professionals alike to process a transaction for the seller and buyer, the practice of ‘cooperation and compensation’ was built to increase the efficiency of getting a transaction completed. Want to know how important cooperation and compensation as a practice are? Check out the commercial brokerage business where everything is subject to negotiation up to and including at the closing table. Imagine agents fighting over commission splits in front of homeowners at a closing table—not a pretty picture. Check out “Flash Boys” and find out how securities traders continue to game the system of trading in stocks and bonds.

Does the MLS benefit consumers? Absolutely. Does it benefit real estate professionals? Again, absolutely. Has it created an efficient way for people to buy and sell and to be sure that they are getting the best price for their homes? Yes, again. Is it perfect? Not at all. Systems like the MLS can always be improved for all participants.

The Downside of Off-Market Listings
Should pocket or off-market listings become the norm rather than the exception a few things may happen:

  • More double-ended deals for listing agents;
  • Fewer listings available to agents working with clients who may be interested in purchasing that particular property;
  • Less information for sellers and buyers about current sales activity, hence less liquidity in housing markets in so far as pricing is concerned;
  • More disruption to the system of cooperation and compensation—once freed from MLS rules about such things. How long do you think it will be before counselor* agents start dictating their own splits on their transactions?;
  • The slow demise of MLSs and Associations as the arbitrators and mediators among brokers and agents in the conduct of business;
  • An increase in litigation by sellers, whose agent forgot to mention that only a portion of buyers were aware the home was for sale. How many agents or buyers are going to check multiple sites to insure that they have seen everything that is available for sale all of the time?
  • The broker agent relationship will be strained further as some firms will insist that their agents not use this “coming soon” feature while some of their agents will do so anyway despite broker instructions to the contrary. Agents may feel that this is a good move for them and their clients and competitively they may feel the need to offer it as an option.
  • One last implication is that anything that weakens the MLS may also weaken the Realtor® organization. Whether it is a decrease in membership or avoidance of Realtor and MLS rules, the move away from the MLS as the primary, most reliable source of listing and sold data will affect the entire organization negatively.

Surely there are other implications from a significant increase in pocket or off-market listings.

Where Do We Go From Here?
In his book “Blown to Bits,” Dr. Philip Evans, then director of the Media Laboratory at MIT said, “The Internet will rearrange every relationship between producer and consumer. No longer will there be a trade-off between richness and reach.” This trend, Evans said, will affect every corner of the economy, whether it is public or private, commercial or non-profit, business or education. None will be immune to the changes the Internet will bring to us all.

Zillow’s move to offer agents the ability to market their off-market or pocket listings only formalizes what has already been going on with a segment of agents in the business under rules that we wrote. In the work for our new book, “Game Changers,” we interviewed several top-producing agents who were doing just that (and some very successfully). Others said they wouldn’t think of doing so and that the MLS was still a hugely important marketplace for their clients.

It occurs to us that we will have to deal with a future where there is going to be more than one marketplace, more than just the MLS. This is wrenching to contemplate. We have come to rely on having just one. Now, it is entirely possible there will be more than one—and even more than two. Each with its own rules, set of services and costs.

A Final Point
What is interesting to us is that everyone seems to know that the MLS is the most accurate and complete data set of homes for sale. Even the listing portals acknowledge that they are woefully short of being complete and accurate. The processes of cooperation and compensation are the fairest to consumers and most transparent. The overall system provides the most benefit to the most parties in housing transactions. Why has there been so little emphasis on this point? Why have the powerful interests that support the system been so quiet on this topic?

For the first time in years, there is competition for MLS. The industry has the high road with its accuracy and fair processes. Perhaps the time has come for the incumbents to compete on the basis of these advantages. They are numerous and powerful from a consumer point of view.

Make no mistake, Zillow’s move is not the first and not the last time a company is going to challenge the current producer arrangement (as discussed at the start of this article). That leaves only the question: How will the industry respond? After so many years of no competition for the operation of the housing market place, now there is some.

*The term counselor agent comes from the new book “Game Changers” which dedicates a whole chapter to the implications of such changes.

This article originally appears in the July issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc. Copyright 2014

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