Market Allocation in Residential Real Estate

Market Allocation in Residential Real Estate

Consumers are often "sold as leads" for referral fees. This act results in significantly higher real estate commissions.

Consumer brokering is an act of selling information of potential home buyers and home sellers (paid referrals) between real estate brokers, in exchange for a cut of a broker’s commission. Brokers on each side of the adopted scheme, cause direct damage to the real estate representation market with reverse competition, anticompetitive market allocation, price fixing, lack of competition, limited choices to consumers, unnecessary high commissions, and improperly negotiated fees. A referring broker in such a scheme effectively agrees not to compete with referred brokers, or to only compete with referred brokers on a limited basis.

RESPA (12 U.S.C. 2607) Section 8 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.

A RESPA cooperative brokerage exception does not allow for kickbacks between brokers as means and/or for the purpose of consumer brokering. In fact, kickbacks in real estate industry are what RESPA aims to resolve, be that as it may, between real estate brokers and mortgage companies. Real estate transaction is a rare, high value, and high risk-avoidance experience – it is easily subjected to kickbacks, especially with the use of the Internet. Referring brokers, herby mentioned, actionably choose not to engage in a competitive representation as a means to attract other brokers into their “network.”

In 2017-2019, some of the largest real estate brokers grew by means of NOT to provide legitimate representation services to consumers. These referring brokers typically offer consumers a matching service with brokers who actually perform the service required by local Business and Professions Codes. The offered premise behind such matching is often different, but the result is always the same - each transaction is silently subjected with a hefty referral fee. A referring broker licensed in one State may systematically refer brokers to consumers in other States, attempt to steer consumers toward mortgage products, and engage in any number of questionable practices, since the consumer does not actually engage a referring broker in their transaction. A referring broker owes absolutely no duty of care to the consumer and takes no responsibility for the transaction, despite receiving a direct financial benefit from the sale.

The incentive is so great in fact, that for a referring broker a referral fee revenue generally surpasses any competitive force to provide an actual representation service to consumers. Referring brokers who are able to successfully trade consumers for referral fees do not have to invest resources into building own quality representation service – why bother? Instead, these schemes massively allocate consumers in various markets because it is much easier and much more profitable to engage with local brokers who already offer services locally.

Referring brokers typically capture consumer information via Big Five media advertisement channels (Google Ads, Bing Ads, Facebook Ads, Apple App Store, but not yet Amazon), traditional advertisement channels such as TV ads and billboards, and various organic search index results aimed at potential home buyers and sellers in the United States. The act of consumer brokering is much more lucrative than having to compete for the actual commissions and every ad produces an immense ROI (Return on Investment) on a referral fee from an excessive commission.

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 or a subsidiary registered as a licensed broker captures consumer information and attempts to steer consumers toward brokers who have a signed referral fee agreements under a premise of a “top match.” This is a form of a market and a consumer allocation scheme because the MLS aggregator is a licensed broker that effectively agrees not to compete with referred brokers for any leads that pass through it.

  2. The licensed referring broker promises of a lower commission listing fee, or a buyer’s commission rebate, in an attempt to steer consumers toward brokers who have a signed referral fee agreement. This process is, in effect, a simple price-fixing scheme and a market allocation scheme because the referring broker effectively agrees not to compete with the referred brokers for any leads that pass through it.

  3. The licensed referring broker captures consumer information with a promise of a better outcome of the home sale or purchase with a vetted referred broker, subject to an elusive back-box matching algorithm. Only brokers who are willing to pay a referral fee are recommended. 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.

  4. The licensed referring broker captures consumer information with a promise of an instant offer to buy their property for cash, dubbed as iBuyer. With only a 2% success rate, 98% of consumers who engage in this scheme are steered toward listing their home with referred brokers who have a signed referral fee agreement. This is a bait-and-switch tactic designed to steer consumers acting to fulfill a promise of a “market cash offer” on their home. 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.

  5. The licensed referring broker captures consumer information from a parent mortgage company. Referring broker attempt to steer consumers who have engaged with a parent mortgage company toward a network of brokers who have a signed referral fee agreement. This is a process designed to by-pass RESPA prohibition on kickbacks between brokers and mortgage companies. 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.

  6. The broker exchange, registered as a licensed broker, sets up organized pools where other brokers are able to trade consumer information. Brokers post their leads within network hoping another broker is willing to pay a cut of their commission in a form of a referral fee. Broker exchange that operates these pools typically receive a cut of the transaction as well and operates as a licensed broker. This is a process is designed to trade consumers as a commodity. This is a market allocation scheme because the broker exchange effectively agrees not to compete with participating brokers for any leads that pass through it.

  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. 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.

  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 market allocation scheme because the referring broker effectively agrees not to compete with the referred brokers for any leads that pass through it. In some cases, a broker will set a specific listing rate or a rebate for “Partner Agents” as a price-fixing strategy.

  9. Brokers submit bids via a licensed referring broker as a way to “compete” for consumers. This is a form of pricing collusion. 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.

There are approximately 2,000,000 real estate professionals in the United States that aim to provide a great service for consumers buying or selling approximately 6,000,000 homes each year. Real estate brokers must and, generally, are eager to compete with each for the service to represent consumers. It is not an occupation of a licensed real estate broker to promote other brokers, or to allocate consumers among brokers, or to collude with other brokers on commissions. It is certainly not appropriate for a licensed real estate broker to set service levels, commissions, and rebates for other brokers.

These antitrust and consumer protection violations are not harmless. Real estate brokers who attempt to compete for consumers on fair terms are at a massive disadvantage in this environment. As a result of broker-to-broker collusion, consumers end up getting steered toward a limited pool of agents and overpay for commissions. Consumers’ private transaction information is always shared with a referring broker that requires it to be disclosed in order to calculate the referral fees to be paid at the close of each transaction.

Consumers in these schemes typically have no idea that referral fees are paid on their transaction since most referring brokers claim that their service is “100% free and impartial.” Referring brokers often hide their status as a broker, it takes exigent research to establish their actual brokerage license number. The referral fees amounts are often not disclosed, or proposed as a “standard referral fee” in as an effort to conceal referring brokerage as an “independent and free matching platform.” In some cases, referral fees are disclosed with an effort to discredit the significance to consumers as “standard.”

As part of this experience, consumers become a commodity to be sold between brokers. Referring brokers have a direct incentive to steer consumers toward higher-priced brokers because such steering increases referral fee revenue from each transaction.

The telltale of each market and consumer allocation scheme is that a referring broker partially or fully refuses to participate in the act of representing consumers as a way to build their referral network of agents. Brokers are only willing to pay commission kickbacks into the scheme, knowing that the referring broker is NOT in direct competition with them. Such referring brokers strategically choose not to act in a real estate brokerage capacity and simply use a real estate license as a way to collect referral fees.

As long as referring broker market and consumer allocation schemes are allowed to operate, brokers looking to represent consumers are naturally encouraged to participate in the scheme. “There are no upfront costs, only pay us once the transaction closes,” is an attractive proposition to a broker who acts on this proposition by simply increasing a quoted commission to any consumer who comes as a referral. Any broker who chooses not to participate in such schemes risks to lose “free business.” Such an environment is highly poisonous to a healthy real estate market.

What is most concerning is that all major online MLS aggregators have recently adopted consumer brokering practice, turning the bulk of the real estate representation market into a massive commissions kickbacks scheme. Zillow Group, acting as pay-per-click advertisement platform for many years in the past, now aims to collect Billions of USD each year in referral fees since it has begun to operate a Premier Broker referral program in 2018. Realtor-dot-com has made a similar move by acquiring a referring broker Opcity that same year. Redfin Corporation has traditionally relied on a massive "Partner Agent" network, where it has engaged in the price-fixing of independent agents' services in the past and has recently made massive market allocation agreements with competitors such as RE/MAX (no longer active) and Opendoor.

This is copy of the request that officially asks the United States Federal Trade Commission (US-FTC), the United States Department of Justice (US-DOJ) to investigate each and every one of the following licensed real estate brokers on the grounds of alleged violation of Federal Trade Commission Act of 1914, and alleged violation of Sherman Antitrust Act of 1890, 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, and price-fixing practices.

The following is a partial list of licensed real estate brokers who I believe to engage in sizable market and consumer allocation schemes in US residential real estate representation market:

  • Zillow Premier Broker Program (DBA Zillow Group Marketplace, Inc.)
    1301 2nd Avenue, Floor 31
    Seattle, WA 98101
    Phone: (206) 470-7000
    California DRE License: 01980367

  • Realtor-dot-com Opcity (DBA Opcity, Inc.)
    6800 Burleson Road, Bldg. 312, Suite 125
    Austin, TX 78744
    Phone: (512) 233-6530
    Texas TREC License 9005100

  • Redfin Corporation
    1099 Stewart Street, Suite 600
    Seattle, WA 98101
    Phone: (844) 759-7732
    Washington DOL License 9081

  • Opendoor (DBA Opendoor Brokerage LLC)
    5307 E Mockingbird Lane, Suite 220
    Dallas, TX 75206
    Phone: (214) 378-3667
    Texas TREC License 9008105

  • Opendoor (DBA Opendoor Brokerage, Inc.)
    405 Howard Street, Suite 550
    San Francisco, CA 94105
    Phone: (888) 352-7075
    California DRE License 02061130

  • Rocket Homes (DBA Rocket Homes Real Estate LLC)
    701 Griswold Street
    Detroit, MI 48226
    Phone: (855) 200-2001
    Michigan LARA License 6505346028

  • mellohome (DBA mello Home Services, LLC)
    5465 Legacy Drive, Suite 450
    Plano, TX 75024
    Phone: (888) 946-3556
    Texas TREC License 9006745

  • HomeLight (DBA HomeLight, Inc.)
    255 Berry Street, #315
    San Francisco, CA 94158
    Phone: (855) 999-7959
    California DRE License 01900940

  • Open Listings (DBA Open Listings Co.)
    2000 Hyperion Court
    Los Angeles, CA 90027
    Phone: (800) 501-2077
    California DRE License 01966242

  • UpNest (DBA UpNest, Inc.)
    856 Mitten Road, Suite 106
    Burlingame, CA 94010
    Phone: (800) 692-5010
    California DRE License 01928572

  • Clever Real Estate (DBA Clever Real Estate Inc.)
    911 Washington Avenue, Suite 207
    St Louis, MO 63101
    Phone: (833) 225-3837
    Missouri MDPR License 2017042277

  • Sold.com (DBA Ten-X Finance, Inc.)
    7700 Irvine Center Drive, Suite 760
    Irvine, CA 92618 US
    Phone: (844) 680-7653
    California DRE License 01937601

  • Landed (DBA Landed, Inc.)
    148 Townsend Street
    San Francisco, CA 94107
    Phone: (415) 200-0050
    California DRE License 01988003

  • 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

What is the author’s role in the situation in question?

I currently serve as a CEO HomeOpenly. HomeOpenly is an Open Real Estate Marketplace™ designed to provide home buyers, home sellers and real estate agents with a transparent home and representation search experience. The core feature of the platform allows home buyers and sellers to receive live and actionable savings from local competitive real estate agents, including listing rates, home buyer’s refunds, and flat fees. Our service is absolutely free and does not tax our users with referral fees. HomeOpenly does not lock anyone into any specific rates or rebates — competitive market forces guides the process. HomeOpenly doesn’t fix prices, instead, we maintain the fair and open competition at the core of our platform. Our neutrality is secured by the fact that HomeOpenly is not a real estate broker, and we never intend to become one. HomeOpenly is always a technology company. With my request to the Department of Justice and the Federal Trade Commission, I am seeking a fair and open competitive environment to develop our service. Successful implementation of an Open Marketplace™ platform requires full enforcement of existing antitrust laws that are enacted to protect US consumers. As long as referring brokers are able to practice market allocation and price-fix services of independent brokers in exchange for referral fees, an Open Marketplace™ operates at a competitive disadvantage and suffers damages as a result.

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

Potential violations of federal consumer protection financial laws, including RESPA, can be reported to the Office of Enforcement of the United States Consumer Financial Protection Bureau

Related to: real estate, referral fees, kickbacks, RESPA, antitrust, price fixing

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First published: July 15, 2019
Last updated: November 03, 2019