Price Fixing in Residential Real Estate (Part 2)

Price Fixing in Residential Real Estate

Price fixing is a form of anti-competitive practice where a referral network begins to set prices and service levels for independent service providers.

For the last two years, HomeOpenly team has been building a unique product called an Open Marketplace for the benefit of competitive real estate agents and risk-averse home buyers and sellers across the United States. This challenge brought me up against many different inefficiencies of the real estate industry that include: “standard” rates and services, pay-to-play referral fees mentality, bait-and-switch instant offers that run on a 2% success rate, and what I consider one of the greatest threats to the modern free market economy - price fixing marketplaces.

The gig economy and price fixing are in their prime and today, with household names such as Uber, Lyft, DoorDash, and many others. Billions have been invested and made with these models, yet neither the US Federal Trade Commission nor the US Department of Justice has done little to stop it, until now. Recently, antitrust awareness has become more prevalent.

A number of price-fixing lawsuits have begun to pop-up in 2019. Many people have begun to realize that price fixing comes at a cost of free competition and eventually degrades not just the experience itself, but it also begins to creep into our local social and socioeconomic concerns. Antitrust and employment laws are there for a reason. It now seems what was promised and advertised as a marketplace, has never actually operated as a marketplace. The glory of network effects claimed by some of the unicorns turns out to be nothing more than a massively scaled pay-to-play price-fixing scheme.

In residential real estate, this process is a little different, but the form of price fixing is the same: referral networks that set prices and rebates for other brokers as a way to collect kickbacks on service fees. An Open Marketplace cannot effectively co-exist in such an environment because it operates on fair and transparent terms.

In my latest 2019 Residential Real Estate Directory (RRED) I reviewed various business models in the industry, some are large and powerful VC-backed Goliaths such as Zillow Offers and Opendoor, others are small and progressive brokerages built with consumer focus in mind. I also published reviews for a number broker Referral Fee Networks that I believe engage in price fixing services of others, or collude on commissions and rebates with other brokers as a way to earn referral fees.

The driver behind this effort was the fact that Yelp! has recently removed hundreds of negative reviews of Opendoor, making it harder for consumers to communicate their experience. HomeOpenly editorial reviews add unique value to consumers because they are truly independent - HomeOpenly is not a real estate broker and we never receive any compensation from agents.

Examples of Price Fixing in Real Estate

It all started with Redfin. Redfin Corporation has recently stopped its price fixing strategy, where a statement on the company’s website now reads: “Since Partner Agents aren’t employed by Redfin, we can’t guarantee our 1%–1.5% listing fee or offer a Redfin Refund for customers who work with a Partner Agent.” Redfin now advertises rates only for agents it employs, but in the recent past Redfin has been setting rates and rebates for its Partner Agents in exchange for 30% referral fees (about 3,100 independent agents across the United States, according to the company’s public filing.)

For years Redfin website used to claim that: "When you work with a Redfin partner agent to buy your home, you’ll receive up to 15% savings on their commission, subject to a minimum commission of $2,500 and approval by the lender." No Federal agency has yet taken legal action against Redfin, as of this time.

Redfin has paved the way with this practice to battle the 6% “standard” commission, but it couldn't gain the scale needed to solve this problem without resorting to price fixing and referral fees as a way to get there. Redfin simply cannot employ enough agents on its own to compete with 2,000,000 real estate professionals in the US, to date, it still resorts to feeding leads into its Partner Agent Referral Network.

Similar price fixing practice now gains an alarming scale across the industry. Open Listings uses price fixing when it matches consumers with random independent agents on the condition that the agent rebates 50% of their commission to the home buyer. Open Listings only employs a very few agents itself and it hides the exact referral fee it receives in this process, likely between 25%~35%.

One of the worst modern examples of a price-fixing scheme in real estate is built by a broker referral company called Clever Real Estate. Clever Real Estate doesn't represent consumers at all, instead, it price fixes services listing fee of $3,000 for homes sold under $350,000 and 1% listing fee for homes sold over that amount; for home buyers Clever Real Estate price fixes a rebate at 1% of the commission referred agent receives. Clever Real Estate hides the exact amount it gains in referral fees as well.

These types of price fixing propositions have a common theme: consumers seem to get the benefit of lower rates. However, such savings are fabricated. Consumers eventually suffer from lack of transparency, referral fees, and lower quality of service. All genuine savings must come directly from service providers, negotiated competitively.

Why Bring Transparency to Price Fixing

Be that as it may, companies like Uber make it cheap and easy to order a ride, they also place a burden of low pay and high risk on the independent drivers. Drivers are working for themselves, take the risk and expense of running a very small business, but the “big daddy” is all too happy to superimpose their rates for them. This practice is un-American.

Price fixing is easy. An Open Real Estate Marketplace is the next BigTech Enterprise because it is hard to build. In order to unseat the "broker referral" mentality, I must show consumers the real cost of paying referral fees - overpriced commissions. HomeOpenly estimates that an Open Marketplace will help consumers save $10-$15 Billion in excessive fees each year when buying and selling 6,000,000 homes across the United States.

Competitive savings individually transpire into thousands and tens of thousands in cash-positive experiences during the transaction of one of the most difficult and expensive items - home. This isn't like calling an Uber that may or may not cost a few dollars more, taking the wrong process of selling a home could cost consumers 20%-30% of home's equity (such as a Direct Cash iBuyer) leaving the net equity of almost nothing. This same process can also easily take place on the open market with an openly negotiated fee structure, and subject to 0% kickbacks. A cash-positive transparent user experience, or losing a major chunk of equity due with excessive fees – the right choice is only going to become stronger.

Related to: price fixing, antitrust, real estate, gig economy, real estate agents

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