Editor's note:This is the first of a two-part report. Part I reviews the environment that gave rise to the VOW debate and the current proposal and presents the most significant potential impacts of the proposed policy. Part II details more specific impacts of the policy on various industry segments and identifies areas that may require further clarification.

On Monday, October 22, 2002, the National Association of Realtors® Internet Marketing Work Group released a new draft policy directed at virtual office Web sites or VOWs. The policy marks a dramatic change from the proposal that the same group offered in May. If adopted, it will standardize some of the practices of brokers operating VOWs and provide much-needed guidance for multiple listing services (MLSs) striving to regulate those practices reasonably.

The work group will present its proposal at the NAR’s November annual meetings in New Orleans. If approved by the trade group’s board of directors, the policy will carry a July 1, 2003, mandatory implementation deadline for MLSs.

For the text of the proposal, click here.

Neither fish nor fowl

Most commentators agree on at least part of the definition of “virtual office Web site:” display by one real estate broker on its Web site of another broker’s listings that is not compliant in some way with local IDX rules.

Proponents of VOWs argue they are merely an extension of traditional brokerage practices onto the World Wide Web. Opponents claim they are advertising, plain and simple. The NAR’s Code of Ethics and most state real estate brokerage laws require a broker advertising another broker’s listings to obtain the listing broker’s permission. IDX (also called Broker ReciprocitySM) permits brokers to grant and receive that permission on a blanket basis, subject to certain rules. In May 2000, the NAR mandated that all MLSs under its umbrella implement IDX. But listing brokers were, and still are, entitled to withhold their listings from the program.

Certain features of IDX have caused it to fall short of some brokers’ expectations: The opt-out right for listing brokers and local MLS limitations on what data fields could be displayed can substantially limit the data that can be displayed on an IDX site. Some brokers also desire to go beyond an IDX model that has remained essentially unchanged since it was invented by NorthwestMLS in Seattle in the mid-90s.

To go beyond what the IDX rules permitted, brokers who built VOWs asked visiting consumers to enter into brokerage relationships before showing them listing data. The brokers argued that their web sites then could share the same information with consumers that agents could have shared with them face to face, including all data fields and listings of brokers who had opted out of IDX.

Work group’s early effort challenged

Until May, the NAR passively endorsed the distinction between IDX and VOWs; it adopted no policy, but NAR documents suggested MLSs could not prohibit VOWs. Some brokers argued that MLSs could impose no rules specific to VOWs, but the NAR advised early on that MLSs could impose “reasonable” regulations. It formed the Internet Marketing Work Group in response to requests from MLSs for clarification of what NAR meant by “reasonable.”

The work group’s May 2002 proposal, at its core, would have re-classified VOWs as advertising and made them subject to the IDX rules. Listing brokers would have been able to opt out of display of their listings by other brokers under all circumstances. At the same time, the proposal suggested substantial changes to the IDX policy itself. Because of potentially great impact on the industry, the trade group’s multiple listing policies committee decided to seek input from the industry and take the policy up again in November.

Many in the industry, at least in public forums, did not support the May proposal. Several MLSs opposed it, some publishing their letters of opposition. The Realty Alliance (an association of large brokers) and some individual brokerage firms wrote letters advising change. Online broker eRealty.com wrote the NAR a letter essentially laying out the elements of an antitrust claim against the trade group if the May proposal were adopted.

Others championed imposing restrictions on VOWs to address areas of specific concern. Discussion lists hosted by the Internet Crusade, of San Diego, Calif., lit up with comments by agents and brokers concerned about free wheeling dissemination of sold listing and other off-market data, among other issues. Others, angered by the controversial relationship between eRealty and Yahoo.com’s real estate channel, expressed a more generalized frustration rather than offering specific proposals for regulation.

New effort is about-face

Since both the May and October proposals are about-faces from their predecessors, the result is a new proposal that affirms the NAR’s pre-May unofficial policy: MLSs cannot prohibit VOWs, but they can regulate them. The new proposal does retain some significant components of the May effort, as well as new elements identified during the process of gathering feedback.

There are at least three significant impacts the new proposal would have if adopted:

1. MLSs must allow VOWs, and on fairly uniform terms. The most significant development is formal adoption of NAR’s pre-May unofficial policy. MLS participants could have VOWs and display listings of other brokers, with or without listing broker permission. The distinction between VOWs and IDX, which was in danger of being erased by the May proposal, would remain intact. (In fact, the new proposal has no impact on or relation to IDX at all.)

2. The new proposal would go further, requiring that MLSs impose regulations on VOWs that are neither more nor less restrictive than those provided for in the proposal itself. This means that MLSs would not be able to use local regulation to discourage VOWs. It also means that brokers operating across multiple MLS territories should be able to build one VOW with one set of underlying business rules. This would no doubt please larger brokerages that have been clamoring for more consistent regulation.

3. MLSs must actively support VOWs with data feeds. The new proposal also would require MLSs to provide downloads of data to brokers to support their VOWs. In those MLSs where the technology supports such downloading, brokers may find that they can now build VOWs more easily and quickly. The data available for download from MLS for VOWs will be different in many MLSs from the data available for IDX.

MLSs may balk at the requirement to provide a new download, in light of complaints many of them made about the IDX download requirement. This new requirement would have a deadline just seven months away (July 1, 2003). More than 28 months after the IDX mandate was first imposed, some MLSs still have not complied.

The new proposal impacts only Web sites. The work group’s May proposal purported to regulate all “electronic displays” of listings, using technologies now known or later developed. Some observers expressed concern at the time that limitations on as-yet undeveloped technologies might prevent introduction of innovative business methods; they believed it was unwise to impose limitations arising out of web sites to practices that might use entirely different technologies. On the other hand, work group members may have been searching for an approach that would not put the NAR back at square one every time a new technology comes along.

The new proposal narrows its focus. It does not purport to regulate activities other than Web sites used for virtual brokerage. It further limits its own application to sites that host “active” listing data. (See Part II for a discussion of some remaining ambiguities on this point.) Presumably, brokers would be able to offer virtual brokerage services that do not use active listings and that are delivered via means other than web sites without falling under the new VOW policy. As such new approaches are developed, the NAR’s policy making bodies may have to return to the table to concoct regulations directly related to the methods being used.

In short…

The NAR’s Internet Marketing Working Group has offered a new policy proposal that imposes a consistent level of regulation on VOWs. Many MLSs and many brokers may welcome these narrowly-tailored rules. Some will oppose them because they believe that VOWs are an abuse of MLS privileges and that they should not be encouraged in any way. The VOW-owning brokers who have most pushed the envelope may be reigned in somewhat, but their freedom to innovate should not be significantly curtailed.

Brokers of all kinds, traditional and new-model, should find it easier to build powerful Web sites to serve consumers electronically to whatever extent the brokers wish. The requirement that MLSs now actively cooperate in this effort may spur innovation.

But some problems remain, and some questions remain unanswered.

Editor's note: See Part II (publishing soon) for a review of specific impacts the policy would have on various industry segments and the issues that remain unresolved in the proposal.

Brian Larson is an attorney in private practice in Minneapolis. He is also a principal at St. Paul-based Tendal/Larson, LLC, a consultancy serving the real estate industry. He can be reached at BLarson@LarsonLegal.com.