Fair Play vs. Pay-To-Play in US Residential Real Estate

Fair Play vs. Pay-To-Play in US Residential Real Estate

Kickbacks cost US consumers about $10-$15 Billion each year, quietly charged in for pay-to-play broker recommendations.

Almost all home buyers in the United States begin their home search online. Today, with MLS aggregation widely available, Internet-based MLS listings offer a convenient way to shop for new homes and give sellers better listing exposure to potential buyers. The dark side of this process is the pay-to-play dynamic that subjects consumers to high transaction costs, price fixing, standard rates, flawed advice, and highly biased recommendations, all in an effort to steer consumers toward a limited pool of agents who are willing to pay part of their commission in kickbacks.

Pay-to-play networks rely on hidden fees, omissions and misleading statements associated with the most expensive transaction in people’s lives — homes. In this overview of the residential real estate market, some of the major referral fee networks are briefly discussed giving consumers an understanding of how each model operates.

Whatever the “story” a pay-to-play network offers to consumers as a clever excuse to use their service, the real proposition of the referral fee model always results in reverse competition. Pay-to-play models systematically mislead consumers into expensive propositions that end up costing thousands, tens of thousands, and in extreme cases, hundreds of thousands in pointless fees. Referral fee networks are licensed real estate brokers that utilize a real estate license to collect kickbacks.

Brokers who recommend other brokers for a fee can never function as independent and unbiased platforms.

A home buyer or home seller who uses a referral fee network effectively hires two real estate brokers — a broker who is getting referred and a broker who collects a referral fee. The referral network does not provide a tangible real estate service to consumers but instead uses the real estate license to collect what is typically a 25%-40% in referral fees from each transaction.

This fact inevitably means that any real estate agent who uses these networks either systematically overcharges their clients, or provides a service equivalent to the 60%-75% reduction in their quoted commission rate. Subjected to these fees, real estate agents are unwilling to negotiate buyer’s refunds or market-rate listing rates with their clients — any potential savings consumer are lost to the network they have been referred by.

Kickbacks cost US consumers about $10-$15 Billion each year, quietly charged for biased pay-to-play recommendations. Typical schemes offered by referral fee networks include some of the following propositions:

1. Match with the best (top) local agent.

This referral fee proposition is always flawed because the referral fee network will only match consumers with agents willing to pay a certain portion of their commission as a kickback, which makes all results biased. These fees are predetermined and referred agents must account for that when quoting their rates. By using a referral network in this case, consumers simply subject themselves with hidden fees added to their transaction. Some popular middle-man networks that utilize this scheme include NAEBA, Xome, HomeLight, and others.

2. Match with the best options to sell a home.

This referral fee proposition is always flawed because such networks have an incentive to steer consumers into whatever process yields the best revenue for the network. If an option is bad for consumers but benefits the network with kickbacks, kickbacks always win. Sold.com is one of the newer referral fee networks that aims to utilize this scheme.

3. Match with an agent who charges a certain rate, or will provide a “bid” within the network.

This referral fee proposition is always flawed because brokers can’t discuss rates with each other, or collude on pricing due to US antitrust law. Each referral fee network is required to maintain a real estate license in order to collect kickbacks, which makes it a real estate broker like any other. This also means that by fixing prices of other brokers or discussing their rates, the referral fee network and the referred agent are both breaking an antitrust law due to price fixing and/or collusion. Despite these laws, a lot of different models utilize this scheme, including companies that never represent consumers and others that “farm out” leads to “Partner Agents” for a referral fee. Such networks include UpNest, Nobul, Clever Real Estate, Redfin Partner Program, Owners.com Partner Agents, Open Listings Partner Agents, and others.

4. Cash offers to buy homes, aka iBuyers.

Most iBuyer propositions are designed to see if a seller will take a low-ball offer on a home. If a seller declines a cash offer on their home, iBuyer will act as a referral fee network and attempt to recommend “the best” agent to use for the transaction instead. In most cases, only a very small fraction of people accept such an offer, but the referral network greatly benefits from a large number of leads that can be sold to agents. Consumers are effectively sold in exchange for not getting what they came for — a market offer on their home. This sales tactic is known as bait-and-switch, where the company’s real motivation is to farm out consumer leads to agents, not actually buy homes. Companies that run such schemes include Zillow Offers Partner Agents, Opendoor Partner Agents, and most other VC-backed home-flipping models. For example, in 2018 out of 40,000 Zillow Offers requests, less than 700 were accepted. Zillow Offers, in this case, operates on a 98% fail rate, but actively promotes the program to consumers in order to sell these failed requests as “hot leads” for undisclosed referral fees to Zillow Premier Broker Program participants (likely around 30%-40% of agent’s entire commission.)

5. Match with an agent from a mortgage company’s affiliate.

This referral fees proposition is designed to bypass RESPA regulations that were enacted to prohibit kickbacks between mortgage companies and real estate brokers. To by-pass this US Federal law, a mortgage company will typically set up an affiliate referral fee network that matches consumers with brokers for kickbacks. Such networks include mellohome and Rocket Homes, as subsidiaries of loanDepot and QuickenLoans. Section 8 of RESPA allows for the statutory exemption for fee divisions when all parties are acting in a real estate brokerage capacity, but neither mellohome nor Rocket Homes help consumers buy or sell real estate, which means that they do not act in a real estate brokerage capacity.

6. Consumers qualified as leads for the cut of agents' commissions.

This referral fees proposition is designed to take advantage of the fact that kickbacks command 32x more in revenue than typical advertising costs. This also means that the entire cost of the referral is burdened on the consumer who ends up getting subjected to the scheme; eventually, all these referral fees are paid by consumers with inflated commissions. As of 2018, this scheme is now a primary revenue generator for two major US-based MLS aggregators: Realtor.com Opcity and Zillow Premier Broker Program. Zillow Group alone intends to make $20 Billion in revenue each year using this tactic, where all broker commissions combined in the US are worth about $78 Billion. These added fees are eventually included in mortgages, making, owning, buying, and selling homes more expensive.

Fair Play vs. Pay-To-Play

There are many different ways consumers are subjected to these pay-to-play schemes, some of them are more elaborate than others, but all referral networks tend to proclaim that their service is free and unbiased. The perceived value of the scheme, however, falls apart with a realization that none of these qualifications are true — all referral fee network matches are biased and all of them end up costing consumers thousands in hidden fees. This is the nature of pay-to-play, it cannot be escaped.

The true cost to consumers becomes highly evident when people begin to compare rates from competitive agents, including listing rates and tax-free buyer’s refunds. To help home buyers and sellers compare rates and connect with competitive agents subject to 0% referral fees, HomeOpenly operates a unique Open Real Estate Marketplace™. Open Marketplace™ is as an alternative to referral fee networks, where agents compete for service and rates without any added fees.

HomeOpenly is the next generation real estate process that allows consumers to qualify agents easily in full privacy, instead of getting “sold as leads” in the process. This is how HomeOpenly helps our users to make the opportunity of homeownership transparent, affordable and open experience.

Genuine relationships can’t be bought with kickbacks. Hidden transaction fees shouldn’t burden buying and selling consumer experience. Pay-to-play in residential real estate negatively affects the entire transaction, because it undermines two Heavenly Internet Pillars: trust and user experience.

Fair play is how the next generation of consumers will buy and sell homes efficiently, with help from an Open Marketplace.

Related to: real estate,referral fees,home buying,home selling,find realtor

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First published: May 10, 2019
Last updated: November 03, 2019