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The MLS, the Competition Bureau and Being Half Pregnant - Friday, November 27 2009

Before continuing, I have to make several things clear. First and foremost, this will be a lengthy process that is far from concluded.  Some consumers have been confused by recent – and sometimes inaccurate -- media coverage and are now under the false assumption that changes to the MLS are imminent.  Far from it.   If and when changes occur, they will not be implemented anytime soon.  Buyers and sellers holding off on their decisions as they wait for the change to ‘kick in’ could be doing themselves a great disservice.  Right now, and for the immediate future, its business as usual.   

That being said, let’s move on to get some other things clear.  Let me start by saying I am a realtor and I am a big believer in the MLS system.  I have seen numerous other databases that purport to compete with the MLS but I have found none that have the accuracy and quality of data in the MLS system. Second, I am a big believer in competition.  I believe competition is good for the consumer and provides the consumer with choices and options. A lot of competition will almost always provide the lowest prices to the consumer.

There seems to be a lot of misunderstanding in the press as to what is being required by the Competition Bureau.  In my opinion, the proposed changes are not about competition.  They are only about representation.  Let me explain:

In the GTA (Greater Toronto Area), there are almost 29,000 realtors who are independent contractors competing with each other for the business.
Each independent contractor has the ability, by law, to set his own fees i.e. commissions.  These fees are fully negotiable (yes, you could list your property for a $1 listing fee if you could find a representative who will do this). The Competition Bureau has levied, and continues to levy, significant fines if real estate commissions are non-negotiable. There are very few services that are non-negotiable on a real estate transaction. Real estate commissions can be a fixed fee or a percentage of the sale price, for example it can be 1% or $1 or any multiple of this. Probably most importantly, real estate is one of the few professions where the compensation is typically tied to successful completion of  a transaction.

The Competition Bureau has been very effective at promoting competition in the real estate community.  The average guy on the street is able to negotiate how much commission will be paid, how it will be paid and which services will be provided.  In my view, competition is not the issue here.  If not, what is the focus of the Competition Bureau’s proposed ‘remedies’ to the MLS ? 

What has the Competition Bureau requested?  I believe that it comes down to basically three things:

Any property on the MLS system would not require a realtor to help conduct any part of a real estate transaction. Any offers would be presented directly to the Seller without the involvement of the realtor. All Seller information would be clearly stated on the listing so that the public could contact the Seller directly to make a deal.

So, if implemented, what would all this mean?  Basically it comes down to representation.  It is important to note that the Competition Bureau is not suggesting that the public can directly put their own listing on the MLS system without the involvement of realtors. The Competition Bureau seems to see the benefit of having the realtors be responsible for collecting and vetting accurate information on the MLS. The Competition Bureau in its wisdom feels that allowing any consumer to jump in and out of the MLS system at anytime is in their best interest. I disagree.  Let me explain why. 

Representation stated simply means that someone is responsible for protecting your interests.  In our client relationship a realtor has fiduciary duties, which means the real estate agent is responsible to protect their clients’ interests above their own interests at all times.  It appears that the Competition Bureau feels that the client should decide how much representation they want and when they should get it.  I have a problem with this.  Either we represent the client or we don’t; either you’re pregnant or you’re not. 

To help prove the point let’s look at a large real estate brokerage operation in Ontario that recently went out of business.  This company, and other similar companies, initially proposed a model, which was a partial representation model where a property is listed for a small flat fee and the client was left to their own devices to put together a transaction.  This approach often resulted in a great deal of confusion and frustration on the part of the Seller who thought that the sales representative was going to protect and help them.  Too frequently this also resulted in the buying representative (who represented the Buyer) being forced into a dual agency role.  Dual agency is a legal nightmare where one representative is giving advice to two competing interests on the same transaction.

Let me use an analogy to help explain this point.  Let’s pretend for a moment that you want to buy a coffee shop in your local neighbourhood.  You have talked to the owner who says they will sell it for $10,000.  It sounds like a good deal so you go to your lawyer.  In a typical transaction the lawyer will represent you and give you whatever advice he can to ensure you make a smart decision.  The lawyer will give you advice on how to find a valuator for the business (to make sure you didn’t pay too much), will prepare the legal documentation to purchase the property and help conduct a negotiation to a successful completion.   To ensure that you get the benefit of the lawyer’s expertise, you agree to let the lawyer be the point man and be responsible for the negotiations.

In this example, the client has decided that he or she wants to be represented by the lawyer.  This means that the client will agree to conduct all negotiations through the lawyer.  The benefits of this are obvious.  The lawyer cannot protect his client if he or she is not apprised of what is happening.  The lawyer cannot negotiate a deal in which the client is conducting separate negotiations with the same client at the same time.  But there are bigger problems.  Specifically:

 
The concept of full representation is commonly misunderstood.  It is a complex issue, even for the most experienced realtors. Needless to say, the public is usually quite confused as to what this means.  At exactly what point in a very detailed process does the representation end, and the consumer become wholly responsible for the outcome?  As you can imagine, the ‘dividing lines’ are often not clear, and may be subject to dispute.  That’s why partial representation is a legal powder keg.
Representation may seem like a waste of time, particularly if you do not know anything. If you do not know what you do not know, then how can you make an informed decision as to how much representation you need?
The courts have consistently and clearly defined that the role of the representative is to protect the interests of their clients (buyers and sellers).  I believe that The Competition Bureau has not considered how their proposal will fit into our current legal framework.
The real estate industry in Ontario is based on a fiduciary relationship as part of our Code of Ethics.  This means that our Code of Ethics requires that all real estate representatives act in the best interest of their clients.  This is very difficult in a partial representation model.

In my view, the message is clear.  If you want to provide quality service to the consumer, you cannot do it with partial representation (and you cannot be half pregnant).  History has shown this.  Clients should choose a model where they get proper representation or a model where they get no representation at all.   If they choose a model with no representation they should sign a clear disclaimer that no one will be helping them in this process at any stage and they will be left to their own devices.   When confronted with this bleak reality, very few clients would choose a non-representation model.

In my opinion, the Competition Bureau has a faulty understanding of the role of a realtor and how they assist their client in a transaction. The purpose of the Competition Bureau is to improve competition – clearly these proposed sets of changes do not accomplish this.

If the Bureau really wants to promote competition and benefit the consumer, I suggest they could better spend their time looking into gas prices!

Andrew C. Zsolt, Ca, Mba, Fri, is the founder and Broker of Record of Coldwell Banker Terrequity Realty, Brokerage – the number one Coldwell Banker franchise real estate brokerage in Canada. Andrew has made appearances in The Globe & Mail as well as The Toronto Star as a notable real estate expert.