RETS: NAR's Unfunded Mandate

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Background

This brief, five page position paper by Clareity focuses on real world RETS deployment in MLS systems and examines the unexplored costs that are being generated by implementing the RETS standard. This paper also makes some suggestions regarding equitable cost recovery for MLS vendors and operators.

The Real Estate Transaction Set (RETS) standard has great potential benefit for the real estate industry; especially if it can reduce the brain damage and expense of making different technologies work together. Larry Colson eloquently summed up those benefits in his 1999 white paper^[1]:

REALTORS® should no longer have to deal with the problem of their favorite client software not being able to communicate with and acquire data from their MLS system. Client vendors will no longer have to spend development time custom coding interfaces for each host, and can instead concentrate on enhancing the features of the product, which will benefit the REALTOR®. Host vendors will no longer have to support multiple interfaces for each particular client that comes on the market, and can also spend that time on adding features ... A standardized transaction set is a win-win situation for REALTORS® and vendors alike.

Once initial installation costs are incurred, RETS allows vendors to more easily provide an integration point between the MLS and other applications, but the MLS vendor or operator incurs configuration and support costs for these integrations. MLS vendors are being asked to subsidize or absorb the costs of custom programming for RETS in order to put a system in place that facilitates the distribution of MLS data. As RETS becomes a standard, the larger number of participants and real-time RETS demands will result in higher support and infrastructure costs to support the integrations.

One vendor told Clareity that, “[NAR] strongly suggested that MLS vendors should provide RETS to their MLS customers for free. NAR was interested in seeing the rapid adoption of RETS and did not want to see pricing as a barrier to MLS adoption.” This request was confirmed by other MLS vendors. While Realtor.org now states that, “NAR does not expect software companies to implement the standard at a loss,” the standard and reference implementation were created with no means of creating custom data products based on login, or for tracking usage and billing for it. To be fair to those involved in that effort, they were concerned with the ideals of creating a standard for data transfer – believing that vendors would work out the rest on their own. The vendors however, responding to NAR’s request, did no such thing in their initial implementations, and the cost of RETS has been largely ignored.

Over the past two years, MLS software vendors, along with the MLSs that develop and host their own systems, have been discovering that the expenses of RETS have continued to be significant, including:

• The costs of development and re-development to accommodate the changing standard
• Implementation costs for configuring specific levels of data access and software vendor variations of RETS
• Operational costs, including hardware, operating systems, database software, and bandwidth

Further, it is likely that if a cost recovery structure is not implemented for RETS, these costs could rise and generate substantial losses for the host of the MLS. To provide a hypothetical example; a broker could decide that it would be a competitive advantage to run a private company MLS system that runs directly off the primary MLS data using RETS. This would provide the freshest data to the broker’s agents in a work environment where the broker’s ancillary products and services could be featured. RETS could even be used by the broker – or others with RETS access - to provide a real time view for consumers to MLS data. Once one broker or data aggregator develops and publicizes these types of applications, others would be likely to close the competitive gap and follow. This type of scenario would result in the offloading of database infrastructure responsibility and costs for many third party applications to the central MLS.

If these types of RETS application are developed, those who have implemented RETS without either imposing significant limits to RETS use or passing the costs to those that benefit from RETS will find themselves paying for NAR’s unfunded mandate. Clareity is using the term “unfunded mandate” to invoke the analogy to our federal and state government, where a point of order can be made against any unfunded mandate - any requirement imposed by Congress on state or local governments with no funding to pay for it. This federal rule was put in place to protect lower levels of government from paying for expensive requirements set on it by the federal government. A normal business, at least one that wishes to stay in business, would never design and implement a service without a business plan or mechanisms for cost recovery, but this is exactly what NAR has encouraged the MLSs to do.

Some people in real estate have little sympathy for the MLS software vendors or their local MLS service provider. These people generally do not understand the difficult environment of the MLS vendor space, and are under the mistaken assumption that developing and running MLS software is easy and that vendors are making too much money. In reality, providing MLS software is a very competitive business. The costs incurred by MLS vendors in research and development, along with system maintenance are large. Competitive pressures have resulted in low margin wholesale prices for MLS service. Several MLS vendors have left the business or sold out and many systems have been discontinued. The remaining MLS vendors are not in as strong a position as they should be to provide high-reliability, well-performing solutions for the industry’s most mission-critical business system. While competition on MLS software is necessary and good, the real estate community should understand the ramifications of putting too much pressure on what is already a fairly slim and fragile MLS vendor profit margin. Clareity is therefore writing this position paper to stimulate discussion of how RETS costs can be defined and equitably offset.

Offsetting RETS Costs Equitably

Most MLS vendors have invested a substantial amount of money on base RETS development. Assuming these companies are willing to never recover those costs, and continue to absorb the costs of base RETS development, the additional costs of providing RETS service can be broken down as follows:

• Base RETS development
• Initial RETS Setup and Configuration (creation of one standard data set)
• Cost for Additional Configurations (creation of additional or custom data sets)
• Initial Costs for Additional Hardware and Software
• Basic Internet Connectivity and Bandwidth
• Other Continuing Costs

These costs will vary widely based on many factors. To quote the RETS web site (www.rets.org), these costs will depend on the “age, configuration and capabilities of the present host computer; the current telecommunications infrastructure; the size and design of the listing database; the complexity and uniqueness of the governing business rules; and the contractual relationship between the parties.”

Clareity interviewed several leading MLS providers to determine what the real world costs for implementing RETS are. Here is what we discovered:

Initial Costs

The cost for the Initial RETS Configuration for an MLS averaged about $6,000. Additional configurations for the same MLS averaged about $3,500. Several MLS vendors have dedicated, full-time RETS programmers on staff and the bulk of the initial configuration costs are programming time.

The initial cost for additional hardware and software vary considerably based on the size of the MLS market, the operating system of the MLS, and the expected demand for RETS. Clareity has estimated that costs could be as low as $3,000 in some markets and $126,000 in others to provide the initial infrastructure.

Continuing Costs

Most MLSs already charge a fee for a dedicated high speed connection to the MLS database, such as a dedicated T1 line, and will probably need to charge similar fees for high-speed, dedicated RETS access as RETS use increases. If widely used applications depend on RETS for real-time data access, those costs could be hundreds or thousands of dollars per month.

There are annual support costs per configuration that most MLS vendors do not yet fully understand given the newness of RETS service and therefore have no idea what to charge for this support, but this cost must be recovered as well.

Single users of RETS, when acting in a manner consistent with MLS use (e.g. agent productivity software) are not likely to be charged an additional fee for RETS access since single user service may be considered part of an individual’s normal usage and basic subscription fee.

As one can see, even from the conservative figures mentioned above, the cost of RETS is significant and could cost the larger MLS vendor hundreds of thousands of dollars. The organizations that will be impacted the most are the MLS vendors with the most customers, and the small MLSs that may not be able to justify spending several thousand dollars for something only a few people will use. Does this mean the MLS vendor should absorb the costs of implementing RETS, making it a standard feature and build it in their pricing? Should every subscriber pay for RETS even if they don’t use it?

Equitable Cost Recovery Options

It is Clareity’s assertion that the cost should be borne primarily by those that directly benefit from RETS, given the truism that a use tax is a fair tax. Therefore, third-party software vendors or data aggregators that wish to integrate with the MLS database using RETS, or brokers who wish to make use of RETS for competitive advantage, should bear the main of the costs. The initial costs of deploying RETS should be negotiated between the MLS and those demanding it. If nobody is willing to pay a fair price for the set-up of RETS, does the market really need RETS? In large MLS markets, the initial configuration costs of RETS can easily be justified by a single large broker or third party software provider, but these costs may be prohibitive in smaller markets.

Some MLS vendors may choose to bear all future RETS costs and position “Free RETS” as a feature or competitive advantage, and hide the actual costs in their base price, but regardless, someone will be paying for RETS. In the case where the cost is included in the base subscription fee, it will mean that brokers and Realtors who are not utilizing RETS could actually be paying for their competitor’s RETS set-up fees and implementation!

Assuming actual RETS cost recovery is to be implemented fairly, based upon usage, an infrastructure of tracking and billing must be put in place. To the best of Clareity’s knowledge, nobody has developed the means to bill for RETS based upon usage. It’s not that difficult to track and bill RETS usage, but it is another hidden cost of RETS that most organizations haven’t even considered yet. RETS servers would need to include mechanisms for tracking the number of requests made to the RETS server by each specific login, and the bytes of data downloaded. Then, a formula using a combination of these two elements can easily determine responsibility for cost incursion and produce appropriate reports for billing and equitable cost recovery.

If RETS is too expensive of a technology to be borne in a local marketplace – and if no one wants to pay for it – then that market should make do with the data export mechanisms already set up via IDX or ODBC connectivity for incremental updates. It is perfectly reasonable to make a business decision that the local market doesn’t need to implement an expensive new technology. If NAR believes that putting RETS in every market is important and that the membership would support them in this, NAR should pay for or subsidize the cost of RETS implementation and maintenance. The funding of RETS infrastructure by NAR could be compared to the federal government funding for our interstate highway system. This could enable even the smallest markets to benefit from RETS enabled products and services.

Whether the MLS vendor charges for RETS directly or indirectly is a matter between the MLS vendors and their customers. Whether the MLS chooses to recover RETS costs based on usage is a matter to be decided at the local level.

Conclusions

Clareity has tremendous respect for NAR and the RETS working group in learning from the failure of DxM and providing RETS as a useful standard for our industry. Respects must also be paid to the MLS vendors and third party software providers that have invested substantial time and money in the development of this non-proprietary, open standard.

A service program must now be provided to support the RETS standard and ensure its ultimate success. RETS service involves programming, configuration, support and infrastructure costs that must be recovered so that MLS vendors remain profitable and will continue to be motivated to provide high quality RETS service. This type of “paid” environment will lead to faster adoption and much richer RETS applications than if RETS development and support remains unfunded, and is just a cost that vendors are expected to absorb.

Deciding how RETS should be paid for and putting the mechanisms in place to support RETS usage tracking and service billing needs to be done soon. The reason for the urgency is that Clareity, and virtually everyone we interviewed, believes that resource intensive applications will be developed based on the RETS standard. Nobody knows exactly what these future applications will be, or the costs they may generate. If RETS is paid for based upon usage, and cost recovery is ensured, then every new RETS application can be welcomed, versus being scrutinized for its potential impact. Again, this “positive” business environment will help the pace of RETS adoption nationwide and increase the depth and breadth of RETS applications.

MLS vendors should engage in good faith negotiations with their MLS customers to decide how cost recovery should occur. Again, to quote the RETS web site, “While NAR does not expect software companies to implement the standard at a loss, neither does it expect vendors to make windfall profits on the implementation.” In some markets, the local MLS may decide that the technology to support the standard is too expensive, but hopefully ways will be found to fund implementation of the standard nationwide.

The level of integration with the MLS that the RETS standard enables will improve the usability of new technologies like electronic Transaction Management, something that Clareity believes will play an important role in improving the professionalism and efficiency of the real estate industry. The full promise of RETS may even be fulfilled by an application that has not even been conceived of yet.

The paper was intended to stimulate discussion of RETS funding and the development of equitable cost recovery mechanisms. Please take advantage of this opportunity to discuss and decide how the RETS mandate should be funded in your market, so that the RETS standard may achieve its full potential nationwide.

About Clareity

Founded in 1996, Clareity continually strives to provide our clients a truly independent and unique perspective. Clareity has successfully executed a vast array of consulting projects for our clients, related to:

• IT Security Audit and business continuity assessment
• Development and analysis of RFPs for MLS systems, public records, broker systems, and TMPs
• Mergers and acquisitions and strategic alliances
• New product marketing and business plans
• Product integration specifications
• Competitive analysis
• Contract negotiation
• Project management and implementation assistance
• Quality assurance testing
• Market research including agent, broker, and staff electronic and telephone surveys as well as onsite focus groups

For more information please contact:

Gregg Larson
President and CEO
Clareity Consulting
(480) 368-8100 x201

www.callclareity.com

[1] Larry Colson, NAR MLS/Client Data Standards Whitepaper (“Summary”)

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