You’ve heard the saying “there is no free lunch.” However, if you have been searching for homes online, then you have probably seen a few of these eye-catching titles:
“We will find you the best agent…for FREE!”
“Get matched with agents for FREE“
“Get free recommendations for top real estate agents in your neighborhood.”
Like most consumers, we initially looked at these platforms and thought they looked like useful resources. But, as we started to research how they work, we learned that a lot of these platforms are taking a cut of the standard commission that sellers are paying, without most even knowing it’s happening. In fact, these types of platforms are so popular, that last year, they made billions of dollars from traditional real estate commissions.
It makes you wonder if consumers would be able to negotiate better traditional commission rates with agents if these referral platforms were not a part of the system?
We reached out to our friends at HomeOpenly
, who have spent years advocating for an open market place where consumers can compare commission rates, not based on pay to play or referral systems. Their years of research uncovered what goes on behind the scenes in many of these referral systems. To help give you a better understanding of how they work, they are sharing some key points with us on how these programs work, and also a detailed directory
of different companies within real estate and if they participate in these referral practices.
What consumers need to know about referral platforms.
1. An agreement to pay a referral fee is a form of pay-to-play.
A Referral Fee Agreement is signed between Referring Broker and Referred Broker. Your Referred Broker is the broker you will be working with to close the real estate transaction, either buying a selling a home. But who is the Referring Broker? The Referring Broker is an online Referral Fee Network that will often advertise itself as “unbiased, 100% free, top real estate agent” platform.
You may see a lot of ads from such networks on Google and Bing. In order to participate in this scheme, your Referred Broker agrees to pay 25%-40% of the total commission to be received at the close of escrow. This process is highly profitable to Referral Network and Referred Broker because the entire referral fee is easily incorporated into your Representation Agreement with excessive commissions.
2. Referral fees are hidden in your representation agreement
Referral fees are agreed without you and prior to you entering into a Representation Agreement with your real estate broker. When a broker receives your information from Referral Fee Network, the Referred Broker knows that a hefty referral fee must be paid once the transaction closes. After the signing of a contract for a transaction resulting from a referral, the Referred Broker must notify the Referral Network and inform it of the expected closing date, how much the transaction generated and how much Referred Broker received in compensation. These fees are hidden in the form of an excessive commission.
3. Referral fees prevent real estate brokers from competing for you
When a Referral Fee Network is paid from the agent’s final commission in the form of a referral fee, this act removes any incentive for the Referred Broker to give you their best rates. The reason for this is that most real estate brokers do not advertise their rates; you have to ask them what they charge. This means that the Referred Broker will quote you a very different price knowing that they have to part with 25%-40% of their commission. Moreover, it doesn’t cost anything for the Referred Broker if they miss your business – there are no upfront costs to join or use a Referral Fee Network.
The Referred Broker has an incentive to quote you his worst rates because it yields the highest revenue without a downside. Economists refer to this process as reverse completion. Reverse competition is competition not for the consumer, but for the middle-man who steers consumers toward its network of brokers (and away from competitors). According to economists, reverse competition results in low quality of service and higher commissions.
4. All matched results provided by any Referral Fee Network are biased
Matched results provided by any Referral Fee Network only include real estate agents who have agreed to pay the referral fee after the transaction is complete. Referral Fee Networks often claim to find and rank real estate agents independently, but they will never match real estate consumers with agents who have not signed their Referral Fee Agreement. A typical Referral Fee Network will only have a very small fraction of brokers who have a signed a Referral Fee Agreement with it. This is the core of the pay-to-play methodology that requires the Referral Fee Network to hide their status as a broker.
5. How to avoid paying referral fees
As a consumer, you have a choice to find your real estate agent any way you like, but if you want to avoid paying hidden referral fees, kickbacks, and unearned fees, the only way to do so is to avoid using any online Referral Fee Network. There are many Referral Fee Networks out there, and many specifically hide their brokerage status, claiming to be impartial matching platforms.
Click here for Homeopenly's detailed directory of most real estate companies to understand how each work and how they make money.
Disclaimer: Selling Later does not participate in referral platforms, nor does it sell or share user information. While everything on our platform is free to use, we do ask that you donate to a small nonprofit in exchange for using our platform.
This is not an ad or paid sponsorship for Homeopenly. We have been following them for some time now and have really learned a lot from their research. We appreciate them for advocating so that consumers can have a better marketplace that benefits them, not other companies.