Consumers are actively exploited by so-called Referral Services or Referral Networks.
A copy of the author’s request that officially asks the United States Federal Trade Commission (US-FTC), the United States Department of Justice (US-DOJ), and the United States Consumer Financial Protection Bureau (US-CFPB) to investigate real estate brokers in the United States on the grounds of alleged violation of the Federal Trade Commission Act of 1914, alleged violation of the Sherman Antitrust Act of 1890, alleged violation of RESPA (12 U.S.C. 2607) Section 8, as well as any other possible violations of antitrust and consumer protection laws currently ratified and enforced in connection with possible market allocation, consumer allocation, price-fixing, and other unlawful restraints of free trade.
Attn: Antitrust Division Office of Operations
Department of Justice
950 Pennsylvania Ave., NW Room 3322
Washington, DC 20530
Attn: Office of Policy and Coordination
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Ave., NW Room CC-5422
Washington, DC 20580
Attn: CFPB Regulatory Implementation
Consumer Financial Protection Bureau
1700 G St., NW
Washington, DC 20552
Consumer Federation of America has recently published a report outlining the damage referral fees create on the residential real estate industry and how these fees affect consumers.
“Referral fees are hidden from consumers yet reinforce high commission rates and provide an incentive for agents and agencies to make referrals only to agents willing to pay the highest fees,” said Stephen Brobeck, a CFA senior fellow and the report’s author. “At the very least, agents should be required to disclose these fees effectively to the consumers who end up paying them,” he added.
Referral fees are kickbacks on brokers’ commissions and they have become exploited by so-called Referral Services or Referral Networks. These entities are registered as real estate brokers, but they don’t do any real estate representation work for consumers - they neither list homes nor help anyone buy homes. These “paper” brokers do not merely “occasionally” refer their clients to other brokers, but instead, they form networks of independent brokers and utilize “blanket” referral fee agreements with them.
In these schemes, consumers are traded between brokers as a commodity. Such pay-to-play incentives do not bide well when we are talking about one of the most important financial transactions in peoples' lives.
Broker collusion in the industry is now largely organized via massive VC-funded efforts, including Zillow Flex, realtor.com Opcity, Redfin Partner Program, Opendoor Brokerage, HomeLight, Rocket Homes, and several other online referral sites. Their combined efforts produce about $15 billion in junk fees and overpriced commissions for consumers each year when buying or selling anywhere between 5 and 6 million of homes in the United States each year.
Unlawful collusion has no place in the most important transaction of our lives, and it has no place in e-commerce. However, the payout is so great that these companies simply don’t care of the law is breached or consumers are harmed. Every time a Referral Network refers a consumer to a random broker, tens of thousands in kickbacks are generated.
The Internet scales these referrals with the use of Google Ads, Facebook Ads, Nextdoor Ads, and similar “gatekeeper” products. An ad worth a few dollars on Google is easily converted into thousands of referral fees. These fees are hidden into consumers’ mortgages and often advertised as “100% free, unbiased.” Not only are these services not “free,” consumers pay mortgage interest on these hidden junk fees as well.
If we examine other professions like healthcare and legal industries, similar kickbacks problems do exist, but at a much lesser degree because most of these three these "multipliers" are less exigent.
For example, patient brokering in healthcare and addiction recovery industries can be highly profitable, but it is actively prosecuted and doesn’t occur as a matter of fact. Some parts of the healthcare industry are more susceptible to kickbacks than others, but overall the practice of kickbacks is typically contained.
With the legal profession, the same thing, the code of conduct and the law generally requires lawyers to “produce” a service, not merely “produce” a client. Kickbacks and referral fees in the legal industry are more contained because court cases have an unknown outcome and very high initial investments. Lawyers have to do actual work to win cases, sometimes for years. Having to pay kickbacks of 25%-40% of the entire gross revenue seems ludicrous in this environment. Consumers are rarely subjected to "blanket" referral fees in legal professions, at least not on a mass scale.
First, the real estate asset class is the largest consumer market in the world. Second, consumers do not pay commissions directly – commissions are built into the mortgage. Third, brokers like to operate on a “standard” commission structure. Fourth, brokers “don’t mind” paying referral fees after the fact. Fifth, each “additional” sale made by a broker can result in tens of thousands in fees earned – for some brokers a single sale can mean the difference between profit and no profit for the entire year. This is a prime environment for "getting leads at all costs" where brokers would rather increase their listing rate with a referral fee than to offer a lower listing rate (or a buyer's rebate) directly to their client.
The most important thing that I can describe with regards to the act of paying and receiving referral fees is that there is a very big difference between two independent agents exchanging referral fees on a specific transaction and a “paper” broker receiving pre-negotiated referral fees as a matter of capturing consumers’ information and feeding into their referral network of brokers. These are two very different propositions.
For example, if our local San Francisco, CA agent has a client who wants to move to Washington, DC they can make a recommendation to another agent in DC and get a referral fee for doing so. This legal permission was made in RESPA because real estate is a local business, and agents often refer business to another agent as a matter of their regular business. In this case, the San Francisco agent will sign a referral agreement with the DC agent on this specific transaction, where a referral fee is negotiated for this specific transaction, not some other transaction, not a "blanket" agreement.
The business of a Referral Fee Network is reversed because it is a licensed broker that simply exist to sell consumers as leads, instead of helping anyone to buy or to sell your home. Today, almost the entire RESPA prohibition against kickbacks and unearned fees is bypassed by Referral Fee Networks using their "blanket" real estate license as a loophole. Blanket referral fees 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.
More importantly, the referral fees in these schemes are “pre-negotiated” as “blanket” agreements. This means that the Referral Fee Network simply says: “you will pay me a standard referral fee for all clients that I refer to you.” This type of agreement is an antitrust violation.
Section 1 of the Sherman Act states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce … is declared to be illegal.” This means that (1) there must at least two parties agreeing to take action, and (2) the agreed-upon action must restrain free trade.
Sherman Act effectively requires all active real estate brokers to proactively compete for consumers. An agreement or an understanding between brokers not to compete for a mutual profit is a "per se" violation of antitrust regulations in the United States.
The colluding parties, in this case, are Referral Fee Network registered as a real estate broker and any broker they refer a consumer to. These two independent parties are carrying out a common course of action by allocation consumers and/or markets with the use of blanket referral agreements for mutual financial gain. Referral Fee Network wants to steer consumers toward Partner Agents and Partner Agents want the Referral Fee Network to steer consumers toward them.
These schemes vary in their approach, but the common theme is always the same: (1) blanket referral agreements exist (2) consumers are traded for a referral fee (3) some excuse is offered to lure consumers into using the scheme.
Consumers, of course, pay for this abuse with higher costs of commissions that eventually make it directly into their mortgages. Consumer brokering schemes in the United States are now generally divided among several models:
(1) The online MLS aggregator. These are massive schemes, the most damaging, by far, largely because consumers are unaware of what is happening to their information. MLS aggregators receive millions of visits each year from consumers in all 50 states and Washington DC.
(2) The licensed referring broker promises of a lower commission listing fee. This process is, in effect, a simple price-fixing scheme because the referring broker effectively agrees not to compete with the referred brokers for any leads that pass through it. Instead, the referring broker sets rates for brokers in their network as means to lure in consumers into the scheme.
(3)The licensed referring broker captures consumer information with a promise of a better outcome. This is a market allocation scheme because the referring broker effectively agrees not to compete with the referred brokers for any leads that pass through it. The “better” outcome is highly questionable, since the referring broker is interested in receiving the highest fee possible from the transaction with questionable motives.
(4) The licensed referring broker captures consumer information with a promise of an instant offer.With only a 2% success rate of typical "instant offers," 98% of consumers are steered toward listing their home with referred brokers who have a signed referral fee agreement. This is a bait-and-switch tactic.
(5) The licensed referring broker captures consumer information from a parent mortgage company. Referring broker attempts to steer consumers who have engaged with a parent mortgage company toward a network of brokers who have a signed referral fee agreement.
(6) The broker exchange, registered as a licensed broker, sets up organized pools where other brokers can trade consumer information. Brokers post their leads within the network hoping another broker is willing to pay a cut of their commission in a form of a referral fee.
Radius Agent (DBA Agentdesks Incorporated)
315 Montgomery Street, 8th Floor
San Francisco, CA 94104
Phone: (415) 829-4200
California DRE License 02051216
ReferralExchange (DBA ReferralExchange, Inc.)
588 Sutter Street, #350
San Francisco, CA 94102
Phone: (415) 653-5590
California DRE License 01426453
(7) The licensed referring broker offers an incentive service of some sort, such as down payment assistance or a similar incentive, on a condition that a consumer uses a referred broker from a network of brokers who have a signed referral fee agreement.
(8) The licensed referring broker advertises independent brokers as “Partner Agents” on their web site in the areas where they have no or limited representation. This is a consumer allocation scheme because the referring broker effectively agrees not to compete with the referred brokers for any leads that pass through it. These schemes are particularly evil because they often price fix services of other agents and can gain scale without investing resources to build their brokerage, yet pose as offering savings to consumers. Redfin Partner Program accounts for 40% of all Redfin transactions are processed by Partner Agents, not Redfin Agents Redfin consistently argues that has consumer interest in mind, but in reality, it is one of the most successful referral schemes. In the past, Redfin had openly price fixed service rates for Partner Agents.
(9) Brokers submit bids via a licensed referring broker as a way to “compete” for consumers. All “savings” are tainted by a referral fee and “steering” toward the network and away from an open market. Under a premise of genuine competition, consumers are sold into a broker-to-broker collusion scheme.
All of these schemes are working in the dark, some collect billions with a "B" in kickbacks. Products such as HomeLight have hundreds of millions in funding helping them turn ads into referral fees.
MLS aggregators have massive traffic. For example, Opcity is directly tied into realtor.com traffic – there is no better lead generation for a referral fee scheme than millions of hits on their web site.
Rocket Homes has recently revealed itself with the IPO filing of Rocket Companies one of the largest lenders in the US.
VC funding is a major source of scalability. HomeLight, Opcity, OJO Labs, Opendoor Partner Program, Redfin Partner Program, Zillow Flex Program, Open Listings, Landed, Radius Agent, Rocket Homes, mellohome, HomeStory, Clever Real Estate, Sold.com, and many others are all VC-backed schemes. Some of these, such as Opendoor, are mega-funded by SoftBank.
There are dozens and dozens of small-time referral fee services that all have a common scheme: "No Obligation. No Fees. 100% Free! Personalized Service. Trusted Realtors. Top Local Agents. Expert Vetted Agent. Experienced Realtors. Great for Buyer or Seller. Only Top Realtors. Unbiased Results." These are all small-time schemes when compared to something like Opendoor. Nonetheless, all of them are working that same angle - fooling consumers into hiring two brokers, instead of one. For example, random web sites such as effectiveagents, topagentranked, and myagentfinder are just as damaging for the overall ability of genuinely competitive agents to succeed.
In the last two years, MLS aggregators such as realtor.com Zillow and Trulia (that in the past have only collected advertising revenue from agents) are now collecting a cut of the brokers' commissions. OJO Labs, for example, just purchased a major MLS aggregator Movoto to transmit their referral fee scheme in scale – all of this is done with VC money with a sole purpose to cash in on the massive "blanket" referral fees revenue.
Our Real Estate Directory does a very good job of identifying the good, the bad, and the ugly among the real estate propositions. HomeOpenly does not receive any payments of incentives to rate companies - all results are unbiased. These ratings fully comply with Google Critic Review Guidelines and consumers leave their feedback independently.
We give the best five-star ratings to agents who genuinely offer great savings and service. These are the real agents who work for consumers and deliver value.
Slightly lower four-star ratings are offered to companies that have some drawbacks. Still, these products offer great value and the four-star rating is very difficult to receive.
Mid three-star ratings are offered to products that may or may not serve consumers well (such as Redfin vs Redfin Partner Program.) Three-star ratings mean that there may be benefits, but also may be a draw-back. For example, rent-to-own products and semi-referral-fee-networks typically receive three-stars.
Two-star ratings are assigned to products that rarely serve consumers well. These almost always have some kind of referral fee pay-to-play scheme.
One-star ratings are reserved for particularly deceptive schemes that offer savings disguised as referral schemes and generally portray themselves as “consumer-focused” yet acting to collect kickbacks. These one-star companies not only hurt consumers, but they also hurt the entire market and five-star companies.
For example, Door.com is a five-star company that advertises savings to consumers as a legitimate agent and helps consumers to buy and sell homes, but Opendoor Brokerage is a one-star scheme that merely price-fixes services of random agents in exchange for kickbacks and does not produce any service at all
As a technology company, we require a clear mission to succeed. If we can justify our mission to consumers, consumers will let us improve their experience with their most valuable asset. For this effort to be successful, we require full enforcement of antitrust regulations in the housing industry.
"Blanket" referral fees between brokers and referral fee networks are not the same thing as "traditional" referral fees between active brokers who occasionally referring consumers outside of their business area. This issue has yet to be addressed by the courts, mostly because it is relatively new, and the abuse is well hidden. Companies like Opcity, Opendoor, and Zillow Flex have just begun to utilize blanket referral fees. Redfin Partner Program operates on a background, and hardly anyone knows that 40% of all Redfin transactions are farmed out to Partner Agents.
It is much easier to promote brokers in massive groups than individually, and if brokers can promote each other and organize into referral groups, there is no legitimate competition between them, and therefore the competitive marketplace becomes unnecessary. In such a scenario, a handful of brokers (such as what we have now: Opcity, Zillow Flex, HomeLight, Opendoor Brokerage, Redfin Partner Program, etc.) effectively steer consumers in self-interest to their respective participants, replacing competitive forces with forces of collusion. This is exactly what has been happening for the last three years in the industry.
As far as the legal basis, the two main laws that protect competition and consumers in America: RESPA and the Sherman Act.
RESPA (12 U.S.C. 2607) Section 8 and the U.S. Code of Federal Regulations 12 CFR Part 1024.14(g)(v) narrowly allows payments pursuant to cooperative brokerage and referral arrangements between real estate agents and real estate brokers. This limited exemption on kickbacks only applies to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.
It is a per se violation of the Sherman Act for real estate brokers to agree on a “standard” referral fee that will be paid for producing a client. Real estate brokers may discuss or negotiate the referral fees compensation only with respect to an individual transaction. Real estate professionals are not allowed to enter into “standard” referral agreements because such agreements always restrict free trade.
For example, Rocket Homes is a classic case of what happens when companies begin to form "paper" brokerages. Rocket Mortgage cannot receive kickbacks directly from brokers due to RESPA, so it purchased In-House Realty referral fee brokerage and renamed it Rocket Homes. Rocket Homes has a real estate license, so technically, it can enter into broker agreements with other brokers and collect kickbacks. The only problem with this is that the Sherman Act prevents it from entering into “blanket” agreements. Incidentally, Rocket Homes can act as a broker and help consumers buy and sell homes, but it cannot farm consumers out to other brokers. This is why Redfin and Redfin Mortgage can co-exist under the same company, but Redfin Partner Program is illegal. Without this distinction, the only thing a mortgage company must do to by-pass RESPA is to form a paper brokerage, and viola - unlimited kickbacks. The antitrust law does not allow for this, and neither does RESPA. Rocket Homes must compete with other brokers, not collude with them.
Only when this process is broken down, brokers will start to genuinely compete with one another based on service and fees. Until then, companies like Rocket Homes will steer consumers in self-interest toward brokers who pay them the most, which is, incidentally, brokers who charge the highest commissions.
As long as brokers CAN enter into blanket referral fee agreements, some of them will, and this is all it takes to break free-market competition. Brokers must only enter into agreements with other brokers to refer a client in a specific transaction, not as means of consumer brokering. This is the basis of a competitive marketplace protected by federal laws in real estate.
The Consumer Federation of America report on hidden referral fees is correct to argue that the fees are not properly disclosed to consumers. However, the use of “blanket” referral fees must be further addressed by the federal and state authorities, as well as the real estate industry as a whole. Unless the use of “blanket” referral fees between brokers is prosecuted, it is unlikely that the real estate market will be able to function competitively. The following facts express full severity of this issue:
(1) Referral fees are distinctly different from advertising because they do not have any "upfront costs." Referral fees between brokers are only legal when discussed with a relationship to a specific transaction. "Blanket" referral fees are prohibited by antitrust regulations.
(4) Referral Agencies - there is no such thing in real estate. Any referral agencies registered as brokers cannot legally exist because they are simply brokers entering into blanket referral agreements with other brokers. There are referral agencies for lawyers, for example, and they have a distinctly different classification and they get paid a small fee by consumers typically, and not lawyers. All brokers must genuinely compete with each other.
(5) Brokers such as Clever Real Estate dictate commissions and rebates that brokers must offer to clients, which is a price-fixing scheme Price fixing is a per se violation of the Sherman Act, and a felony.
(6) Opendoor Brokerage is also a price fixing scheme, but with a lot more VC mgea-funding Opendoor Brokerage has recently announced plans to go public via SPAC merger, making this price-fixing scheme even more dangerous.
(7) Disclosure of referral fees is not sufficient. The government must enforce the antitrust law and prevent brokers from organizing their operations into referral fee networks. Brokers such as HomeLight do disclose their "standard" referral fee, yet they quietly collect billions by organizing a massive broker collusion scheme. The only way for brokers to start competing is to stop them from entering into blanket referral agreements. An average broker would rather lose 25% of their commission and think of it as a "marketing expense" than offer it to a client. Blanket referral fees between brokers are not a legal marketing expense. Unless these schemes are prosecuted, brokers will be happy to continue entering into these networks because there are no up-front costs to collusion - collusion is free, and action of competing for consumers requires taking a risk.
The jury is still out if HomeOpenly Open Marketplace can save consumers billions each year from these schemes, but brokers like HomeLight are thus far winning: broker-to-broker collusion has earned them and their investors billions in kickbacks since 2012. This number is frightening, and to promote these schemes in any way does a disservice.
HomeOpenly truly advocates for open market user experience in the real estate industry. We see an opportunity to build a product where consumers feel safe and can trust us. This way we can sell value-added "auxiliary" products such as mortgages and insurance much more easily in the future. This product thrives by design when antitrust regulations are enforced.
Consumers must never be subjected to "typical" rates of any kind. All home sellers are free to offer any amount of buy-side commission they like and can freely negotiate listing rates individually with real estate agents. In 40 US states, buyer rebates are currently legal, but they should be legal in all states.
Referral fee brokering schemes have been praised for "sitting on a goldmine" because each lead is worth tens of thousands in commission kickbacks, but this is plain abuse of the antitrust law, the Internet, and consumers.
It is essential not to merely expose and inform consumers about these schemes, but to stop them entirely.
If you have a question or comment about an antitrust issue, you may submit it to the Bureau of Competition at the United States Federal Trade Commission and/or to the Antitrust Division of the United States Department of Justice.
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