Compelling Residential Real Estate Market into Transparency

Compelling Residential Real Estate Market into Transparency

Traditional real estate agents have been operating on an inflated 6% commission, often promoted with high referral fees.

Today, the word “transparency” is often used as a gimmick, assigned randomly, often without substance. This commentary explores the ample power of the term, as well as direct effects on the real estate market that either succeeds or fails to adopt this philosophy on a mass scale.

In 2018 real estate agent community is engaged in a battle: some agents want to “guard” their commissions, others argue that there is no “standard” 6% figure to set a foot on. Neither of these views is directly challenged in this discussion. Instead, these terms are replaced with the following proposition: real estate commissions battle is not about the price of service — this battle is waged for transparency.

Traditional brokers with a “standard” commission model have a limited ability to advertise their rates; flat fee and similar next-generation brokers are able to advertise their rates at full degree. The disagreement is born out these two very different principles because the real estate is governed by the Internet that commands near-absolute transparency and both sides want to claim the weather gage.

Can a “standard” commission broker advertise their rates? No.
Can a flat fee broker advertise their rates? Yes.
Can a referral fee platform be open about its 30% added fees? No.
Can an open marketplace advertise 0% referral fees? Yes.
Can a house-flipper be honest about its below-market-rate offers? No.

There it is, in a nutshell. To understand the implosive power of transparency to turn the largest market into transition, we must further take a hard look at the 2018-2019 real estate market in the United States: invested neck-deep into house-flipping schemes and middle-man broker kickbacks.

In 2018-2019 traditional real estate brokers heavily rely on networks of referral fee brokers that generally result in what antitrust experts label as “reverse competition”—a competition not for the consumer attention but for the attention of middle-man who steers the consumer toward its network of brokers and away from competitors. Such steering leads to lower quality of service, higher commissions, and superfluous fees. While these referral portals often advertise themselves as “free, fair and private” the actual process is quite different: referral fee services are never free, always biased and often require referred real estate agents to disclose client transaction details so that the middle-man is able to collect its fees. With the wide use of the online direct marketing approach, such as Google’s pay-per-click AdWords program, referral fee brokers are able to make consumers a commodity that the referral broker is selling to another agent. By paying a small price per click on Google the referral broker earns tens of thousands in referral fees paid back to the portal once the transaction closes. Obviously, this model is flawed, however, it is also highly lucrative. A number of VC funds have invested tens of Millions into such processes over the last four years despite many inherit inadequacies of the model itself. Referral fees fail to work for agents who systematically offer competitive rates to consumers, such as flat fee models. Referral fees further fail with the mass use of an alternative open marketplace approach that is able to deliver 0% referral fee user experience on a greater scale, a status most US consumers have yet to experience.

Referral Fees are Not Service Fees

Referral Fees are Not Service Fees

Referral fees are kickbacks, these are never service fees. The big distinction between these two formal notions is the cost of a referral fee is passed right back to the consumer using the referral service without direct disclosure, while service fees are generally direct charges fairly negotiated. Referral fees are almost always hidden in Terms of Service of the platform that charges them—no platform to date has advertised their referral fee prerequisite as bold as it claims everything else.

Service fees are usually charged up-front and are generally reasonable. Referral fees are negotiated quite differently: a real estate agent who wants to use a service with a 30% referral fee only does so with the knowledge that any prospects who come thru are effectively “added free business” and a referring agent can simply adjust their commission to compensate for the cost of referral.

Imagine for a second having to book a hotel room on a booking web service and finding out upon arrival that the hotel’s listed prices for that room are 30% less. In this example, it is obvious that the booking web service has added on 30%, so hotels are forced into absorbing these costs. Alas, real estate agents using referral platforms do not show that they have added a referral fee (typically 30%) to clients.

Traditional real estate agents have traditionally operated on an inflated 6% commission, often promoted as “standard.” Every single commission in real estate representation contract is actually negotiated, or at least, meant to be negotiated. An agent who uses a referral service is willing to represent consumers at a much lower rate if a consumer approached them directly, but here comes a client from a referral service and that agent can now simply quote an inflated commission that includes the added 30% and see what happens.

No harm, no foul? Unfortunately, this model is a highly disadvantageous proposition in real estate. Highly competitive agents with the best service offerings who actually care about their client relationships cannot use referral services due to the high fees and lack of privacy in the client’s transactions. These truly competitive agents end up representing fewer clients and consumers end up missing out. The fact is that anyone who ever used a referral broker to find another broker has overpaid for their representation service and could have easily found a much better deal in the open market. There are, of course, numerous advantages to using a 0% referral platform to find real estate representation online.

Common Referral Fee Models Operating in 2018-2019

Broken referral fee models

Referral portals. These are Internet sites that are registered as real estate brokers but do not provide services typical of a broker. Instead, referral portals work in various markets with a network of participating real estate agents to which they refer customers. The most heavily self-advertised portals in 2018-2019 are HomeLight and UpNest.

Due to referral fee limitations, such services are always biased and do not provide any actual benefit to the consumers, although they often claim to do so. For example, HomeLight claims to match users with the best agents, but it won’t match users with agents who have not agreed to pay the referral fee. Naturally, each referral portal wants to steer consumer toward its own agent network and preferably toward an agent who will yield the highest reward back to the portal. These services typically charge a 25%-35% referral fee and use that revenue to fund expensive Internet campaigns in order to attract more users.

Partner agents. These are slightly different referral models that include companies such as Redfin and Movoto. Technically, these are the same referral brokers who receive a referral fee on the back end of a transaction when one of its referral agents closes a deal, but these companies sometimes employ and/or contract agents in certain areas. Such a process is a hybrid between a middle-man referral portal and services typical of a broker. From the consumer perspective, it’s a distinction without a difference because this process does not provide transparency and is most likely costing thousands in added fees over the market rates. Redfin and Movoto both ask for a 30% referral fee from their partner agents.

Redfin Partner agents cannot advertise savings because this act violates antitrust laws, but this model relies heavily on local agents who are, otherwise (without the referral fee), may be willing to work with consumers on much better terms directly. As a result, Redfin delivers consistently higher prices in areas where it doesn’t have its own agents to represent consumers.

Agent-facing portals. These portals are Internet services utilizing various schemes that either qualify and/or re-distribute leads from other sources or let real estate agents who have received leads trade them with other agents. Most prominent portals in 2018 include Referral Exchange, Opcity, Agentology, recently-funded Radius (formerly Agentdesks) and some others. These portals are not consumer-facing, instead, they allow brokers to “trade” leads with one another, usually accompanied by a 30%-35% referral fee that must satisfy both the broker selling the lead as well as the portal itself. This business model is, unfortunately, one of the least beneficial to consumers since no reasonable consumer would want their “leads” traded, but it happens anyway. These schemes are highly profitable since the platform doesn’t actually have to produce leads and is only required to maintain the service. An educated consumer is the only force that stops these schemes in practice by refusing to deal with anyone any of these platforms come to recommend.

Mortgage broker referrals. These are one of the most controversial and damaging to consumers. RESPA has outlawed mortgage companies and real estate agents from collecting kickbacks from one another for a very good reason?—?this process needlessly increases closing costs and provides zero added benefit to consumers. Recently, several prominent mortgage brokers have found a very loose loophole to by-pass these regulations. LoanDepot has acquired a company called MelloHome and QuickenLoans works with In-House Realty that has acquired a referral fee broker called AgentAce a few years back and is now re-branded as Rocket Homes. The process for these companies is to refer consumers who have originated a mortgage to their respective referral “pet” agent network. These companies further use their real estate license to collect a referral fee from participating agents, who in turn return approximately 30% of their commission as a kickback. This process rests on the idea that brokers can share referral fees with one another, but also breaks down in its application of real estate law, since neither MelloHome nor Rocket Homes actually perform any duties required by a real estate agent. Consumer Financial Protection Bureau (CFPB) has not yet taken any actions against either of these schemes, but consumers should avoid using these services since there is no actual benefit, except for parties running the kickback scheme.

Referral-free Real Estate Experience

referral free real estate experience

Both Xennials and Millennials exhibit our usual carefree optimism and subscribe to the idea of the best technology. These generations see the Internet as a solution to everyday life problems as well as a social phenomenon. On-line real estate processes have traditionally ignored these generation’s buying ability and dug themselves into quite a hole over the last decade with heavy referral fees and pay-per-click advertisement schemes.

The Generation X, Baby Boomers, and our beloved Traditionalists, of course, are accustomed to the 6% commission simply because the need to negotiate that rate was not there with the cost of home-ownership steadily low. Having to pay fees seemed like a reasonable proposition, so why bother? Over the last twenty years, the cost of home-ownership had steadily increased, prompting the development of tools to help consumers find and sell homes as well as quality representation. Today, consumers must take proactive measures to cut out the middle-man schemes and actively negotiate better closing costs simply because the price of a 6% commission has turned into a sizable expense.

Real estate is a difficult and highly complex process, it is unwise to proceed into the largest purchase of one’s life without proper representation. In fact, 40 States and Washington, D.C. allow consumers to receive a buyer commission refund only if represented by a buyer’s agent, otherwise, seller’s agent is entitled to the entire commission. It’s a common misconception that buyer’s agents work for free — no real estate agent works for free, but some competitive buyer’s agents offer refunds to their clients as a way to compete for their business. The following is a list of great service models that stand out among many propositions to disrupt the referral fee industry by saving on fees, bringing transparency, and better technology to the next generation of real estate consumers.

HomeOpenly

HomeOpenly

HomeOpenly advertises competitive real estate representation savings for over 147,000,000 properties in the United States. Invented in 2017, HomeOpenly is the first OPEN marketplace platform that matches consumers with competitive agents without any added fees. The project already offers a great number of local real estate agent results with competitive rates and services in all States. HomeOpenly derives its revenue from independent sources instead of fees from real estate agents. This process allows the platform to concentrate on the quality of results and facilitate free leads to the agents who advertise competitive savings.

HomeOpenly users are in full control of their privacy because leads are never re-sold, instead, buyers and sellers send electronic leads only to agents they like. Consumers receive 100% of the savings that are advertised in this competitive environment and are able to compare many different pricing models side-by-side, including competitive commission rates, flat fees, and any combination thereof — all offered directly by local agents. HomeOpenly results are instant, making it an easy comparison tool without any obligation, or risk. As of Summer 2019, HomeOpenly offers better aggregate savings than does Redfin across the United States, however, the platform continues to operate in an early stage of development, known as the “bootstrapped” phase and does not yet enjoy a mass scale use. As the platform reaches out and becomes more prominent, HomeOpenly users will benefit from a near-instant understanding of their local real estate representation market including savings available and competitive agents offering them.

HomeOpenly actively disrupts high referral fees bias with a user-friendly open marketplace alternative.

Owners.com

OwnersDotCom

Owners.com is one of the most widely-available services that offer savings to sellers (1.5% listing fee) and buyers (50% rebate where allowed). Owners.com is an established VC-backed brokerage that operates in 50 States. This service may or may not meet everyone’s needs, especially if a local competitive agent is available, but consumers should not ignore it by any means. Owners.com consistently offers sizable savings and has great financial backing to support its efforts.

Purplebricks

purplebricks

Purplebricks is one of the most well-funded savings agents in the United States. The service mainly operates in Southern California and New York, however other areas are also available such as New Jersey, and Connecticut. Purplebricks offers consumers a very attractive $3,200 listing fee. However, its refund policy for buyers is a bit weak — Purplebricks only offers a $1,000 to buyers and keeps the rest, typically 2–3% buyer’s commission. Owners.com, for example, offers a much better 50% refund. Purplebricks has also suffered some initial problems entering the US market and it’s not yet clear if these have been fully resolved. For sellers, the listing fee is charged up-front and is non-refundable, although that is a very minor setback compared to thousands saved over a typical 3% sellers’ commission. Purplebricks should be near the top of the seller’s list, but for buyers, there may be better local options. Still, $1000 buyer’s refund is better than zero refund offered by traditional buyer’s agents who claim to work for “free.”

Reali

Reali

Reali is a California real estate agent that offers savings to sellers (4,950 USD flat fee listing fee) and buyers (100% rebate minus 4,950 USD flat fee). Reali uses a tiered flat fee pricing depending on the home price and it is generally able to complete well with 1% listing fee to sellers and easily beats 50% refund proposition for buyers. This model offers consistently better savings, although in some cases competing flat fee agents come up ahead of Reali. Reali is a VC-backed real estate agent with a limited service area in California, however, they are also actively adding new locations and enjoy great customer feedback.

Trelora

trelora

Trelora, a Denver-based full-service real estate agency, charges sellers and buyers a flat fee ($2,500). Trelora is a local service, but it has made national headlines with its simple and effective approach. Trelora is one of the best competitive options available for consumers in and around Denver.

SimpleShowing

SimpleShowing

SimpleShowing is a fairly new accelerator-backed full-service agent founded in 2017 that operates in select cities in Florida, Georgia, and Alabama with plans to expand to North Carolina. SimpleShowing offers a generous 50% buyer’s refund and an easy $5,000 listing flat fee at closing. This company shows great potential with a well-balanced business model that benefits both buyers and sellers alike. SimpleShowing relies on technology to help clients schedule showings more effectively.

Door Homes

Door Homes

Door Homes, a Dallas-based savings agent, charges sellers a flat fee ($5,000) and refunds buyer’s rebates (17%-50% rebate). Door Homes does not always offer the best savings, specifically for buyers, but it offers a transparent and quality real estate experience. Door Homes could still use a more balanced approach to savings for buyers, especially with the recent entry of Open Listings into Texas market. There are a number of savings options available for Texas real estate consumers and Door Homes is certainly near the top of the list.

Open Listings

OpenListings

Open Listings offers savings to buyers (50% rebate) in select cities in California, Washington, and Texas. Open Listings is a VC-backed savings agent that only focuses on buyers. Currently, Open Listings does not offer any services for sellers. Open Listings’ main approach is designed to reach buyers by advertising newly listed properties online based on local MLS data, prompting buyers to use the service and receive a refund. Buyers who do not use a buyer’s agent with such an arrangement are certainly leaving money on the table. Open Listings has a $5,000 minimum commission, while Owners.com offer a lower minimum commission of $3,000 under the same 50% refund proposition. Still, unless a flat fee service or a local competitive agent is available, Open Listings should be at the top of buyer’s list.

Conclusion

The disruption of referral fees and the standard commission models is actively taking place, largely driven by the skyrocketing cost of home-ownership. This process is primarily driven in “compression” with an open market approach, coincidentally, opening real estate representation to transparent pricing.

Once fully implemented, buyers and sellers will begin to receive representation services at a competitive price. Competitive agents can then focus on what they do best — guide their clients thru a real estate process instead of chasing leads. HomeOpenly estimates that once the real estate representation moves into transparent pricing, out of $72 Billion spent each year in commissions and referral fees, US consumers will save at least $10-$15 Billion annually in exchange for a much better service.

Related to: real estate,transparency,broker commissions,referral fees

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Last updated: November 03, 2019
First published: August 04, 2018