Competition in the Real Estate Industry – This Entrepreneur’s Perspective

John Pasalis in Toronto Real Estate News, Real Estate Trends

In case you missed the headlines earlier this week, after a two-year investigation into Canada’s real estate brokerage industry, the Competition Bureau concluded that Multiple Listing Service (MLS) rules established by the Canadian Real Estate Association (CREA) restrict consumer choice and limit the scope of alternative business models.

To really understand what this decision means we need to step back a few years to see how this investigation started.

Several years ago, the real estate industry started to take a closer look at a new kind of discount real estate brokerage that was making its way into the market.  These new brokerages were charging sellers a flat fee to upload their property listing to the MLS, but were doing very little outside of simply posting the listing.  In many cases, the real estate agent responsible for uploading the listing hadn’t even visited their client’s house before uploading the listing to the MLS.

The industry argued that these minimum service brokerages were compromising the integrity of the MLS trademark. In 2006, CREA decided to put an end to these upstart brokerages by changing the MLS rules to set minimum services standards that all realtors must meet before uploading a listing to the MLS. These minimum service standards included:

  • Inspecting the property
  • Posting the listing
  • Maintaining a continuous agency relationship while the contract is posted on an MLS system
  • Receiving and advising on offers
  • Sharing compensation by and through the listing broker

The minimum service standards CREA put in place put an end to the brokerages that were running under the minimum service discount model.  The former discount brokerage RealtySellers launched a $100 million lawsuit against CREA and the Toronto Real Estate Board for introducing rules that effectively put them out of business.

Three years later, the Competition Bureau has determined that the minimum service standards CREA put in place to curb these upstart brokerages are anti-competitive. 

The press has characterized this decision as a big victory for consumers – one that will drive much needed change in the real estate industry. 

In reality, this decision underscores why competition in the real estate industry needs to be a stronger priority for those with the power to change the industry.

The first problem with the Competition Bureau’s decision is that it’s three years too late.  It does nothing to help the entrepreneurs who lost their businesses three years ago as a result of CREA’s new policies.

When the National Association of Realtors (NAR) in the US tried to introduce new policies that would have put an end to lower cost internet brokerages south of the border, the Department of Justice (DOJ) didn’t sit idly for three years, allowing the NAR to put these upstart brokerages out of business before the DOJ decided that the new rules are anti-competitive. 

The DOJ acted swiftly by suing the NAR which effectively prevented any rule changes until the case had been settled in court. 

The other problem with the decision is that it does very little to encourage innovation in the real estate brokerage industry. 

There’s nothing terribly innovative about charging someone a flat fee to upload their listing to the MLS.  This business model may certainly appeal to a small segment of the market, but it’s definitely not going to have a big impact on the way most people buy and sell homes.  If cost was the only thing consumers cared about, existing discount brokerages would have had a much larger share of the market. 

From my perspective, real innovation in the industry can happen in one of two ways.

A brokerage can either focus on using improved business and/or service models or technology to dramatically improve the client experience or they can use the same to realize savings which are then passed onto consumers as savings.

The US internet brokerage Redfin is a good example of a company that is taking the latter approach.  Redfin has streamlined the buying and selling process by building innovative websites and tools for their clients.  Redfin passes these savings onto their clients. (Read a previous post on Redfin’s business model.)

Our brokerage, Realosophy Realty, has opted for the former approach.  We have focused our resources on researching housing statistics for every neighbourhood in Toronto so our clients can make smarter real estate decisions

There was a time when our team flirted with the idea of opening a brokerage modeled after Redfin, but these kinds of brokerages are not allowed to operate in Canada.  What the recent Competition Bureau ruling doesn’t challenge is that CREA (along with local boards) successfully restrict access to the MLS database. Allowing access to this data would allow internet brokerages to build an alternative to the website, a key component of the internet brokerage’s business model.  (Learn more about the internet’s role in the real estate brokerage from the DOJ.)  

Happily, we feel we have chosen the analytical and technology value-add path that best capitalizes on our strengths and addresses the most critical concerns that consumers have. But there is no doubt that as entrepreneurs, many of our choices were made for us by an outdated approach to the industry.  If we are ever going to realize pro-consumer change in the real estate industry, industry regulators need to be more proactive about confronting the gate-keeping behaviour of real estate boards in an age of growth enabled by the free exchange of information.

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John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy Realty focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions.

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