This article is now published at https://homeopenly.com/guide/Price-Fixing-in-Residential-Real-Estate
The argument at the recent SF Marketplace Conference was made by Pete Flint, Trulia founder: “the future of real estate is in quality.”
I couldn’t agree more.
For that “vision for quality” to transpire into reality, the real estate industry must forgo pay-to-play, commission kickbacks, bait-and-switch schemes, price fixing, and a consistent urge to violate RESPA. As long as the industry continues to focus on poor lead generation strategies, the quality will continue to evade the process. Today, the bulk of the industry operates under the assumption that “no up-front costs” referral fee networks aren’t costing the industry anything. The truth could not be further from reality. Referral fees degrade both, the service quality and the price competitiveness. It is a proven economic fact: kickbacks result in lower quality of service and higher prices for consumers — the industry eats itself alive from both ends. From one end, having to consistently pay 25%-40% of agent’s commission in exchange for successful leads, the referring real estate agent loses competitiveness and effectively works for someone other than their client 40% of their time. From another end, the referral network is inherently biased with pay-to-play and cannot provide anything but a subjective match. There is a perfect storm brewing for massive industry disruption, we are in the eye of it right now in 2019.
What does disruption require?
1. Scaled exposure of added costs and pay-to-play bias proposed by every referral network and house-flipper that operates in the United States.
2. Live and scaled consumer-focused alternative, an Open Marketplace.
HomeOpenly aims to deliver both of these pre-requisites in our upcoming release in April of 2019, an absolute implosion of information that actively guides consumers out of the broken process.
What if such disruption cannot be achieved? Can we just forget it all and move towards how the things used to be? Implementing a scaled and sustainable consumer-focused approach in residential real estate transaction is going to happen. In the era of marketplaces such as Airbnb and Amazon, there is simply not enough incentive to bypass the biggest consumer asset class in the World, it will be disrupted. Consumer-focused real estate agents have already made a splash into the industry and a series of scandals will continue to bring havoc on the Zillow Group and realtor-Opcity kickbacks scheme — the largest MLS aggregators in the country. Zillow Offers will continue to be exposed with its 1% success rate, where 99% of all users are converted into leads and sold in exchange for kickbacks, to be precise, $20 Billion in fees, as the new CEO claims. Realtor-Opcity will continue to suffer as their “lead generation pipeline” continues to steer consumers toward random real estate agents, without any merit, other than whoever is willing to pay 30%-40% of their commission back into the process. These referral fee networks will be disrupted not because these employ terrible business models, but because they consistently took to adopt pay-to-play in lieu of consumer-focused UX.
What is quality in real estate?
You would have to imagine it because today we have only bits and pieces brewing into what will eventually become an Open Real Estate Marketplace. This process doesn’t just reduce kickbacks, it illuminates it. This process doesn’t just generate leads for agents who have agreed to pay 40% of their commission for the privilege, it allows consumers to make an educated choice and work with whomever they choose. This process doesn’t just expose price-fixing, it allows an individual agent to determine their own price levels and service offerings. Most importantly, an Open Marketplace lowers home transaction costs organically by establishing an open and transparent process for all parties involved.
Why the resistance?
Over 2,000,000 real estate agents in the United States are fighting to help buy and sell what is only about 6,000,000 homes each year. When an average volume of transactions completed by any one agent is only a few homes per year, there is a market for broker mentality: “we buy leads with 40% of our commission, jack up the price on our commission, otherwise we are going to miss out on half of our sales.” Be that as it may, this isn’t what anyone in their right mind would call “quality.” Such logic is justified in a broken market, but it is directly contrary to consumer-focused UX.
What is the solution?
At HomeOpenly we have come up with a guidebook that simply spells: absolutely free leads. There are no costs to real estate agents to join into the network, before or after the successful sale. In this live experiment, we aim to change the existing logic into the consumer-focused approach. By the time we are done scaling this idea, the real estate logic will spell something like this: “we receive free leads in an Open Marketplace, able to set competitive commissions and fairly advertise service offerings, and this is how we make half of our sales.”
In this context, the concept of “quality” seems simple enough.
This article is now published at https://homeopenly.com/guide/A-Big-Enterprise-Is-Built-on-Trust
This article is now published at https://homeopenly.com/guide/Fair-Play-Is-a-Hard-Line-in-Residential-Real-Estate
The Agency co-founder Mauricio Umansky had an interesting discussion with Eric Eckardt, CEO at Purplebricks USA in New York this Tuesday at an Inman real estate conference.
“If you want to hire a plumber for the most important transaction of your life, go for it,” Umansky said.
I find this analogy interesting because the actual “plumbing” in US real estate process is something else entirely. A referral fee network Opcity systematically calls its lead generation process a “Referral Pipeline”
Opcity operates as a licensed real estate brokerage in Texas under TREC License # 9005100, but it does not produce any services that are typically offered by real estate agents and does not represent consumers when buying or selling real estate in any State. When consumers submit information to Opcity via Realtor.com, this information is simply sold to real estate agents who are willing to pay for it with a lion’s share of their commission. Opcity pipeline process suffers from pay-to-play bias because the network never matches consumers with agents unwilling to pay a set percentage (estimated at 25%-40%) of their commission to Opcity.
Opcity audits all transactions and requires agents to update the status of each transaction on the continued basis because it needs to find out how much money real estate agents receive in commissions and when these fees will be due, inevitably collecting private details of consumer’s agreement for home purchase or sale.
Opcity further calls it a “dispatch process that matches agents to available leads based on lead’s proximity, lead’s price points.” The main qualification for real estate agents who participate with Opcity is their willingness to pay a referral fee. Opcity is a subsidiary brokerage for Realtor.com — what used to be more or less an independent MLS Aggregator, now acts as a plain middle-man broker.
Realtor.com had acquired Opcity in 2018, making this scheme one of the most scaled and damaging referral fee networks in the United States. Today, Realtor.com Opcity scheme is the low point of a transparent real estate process. From Opcity’s own description of the service, the nature of the process could not be clearer: “We send a lead alert via text or mobile push notification to the agent 1st in the queue. That agent has approximately 5 seconds to click-to-claim the lead alert before the 2nd agent receives a lead alert and can also click-to-claim the lead. 5 seconds later, another agent is alerted, and so on.” In this process Opcity “qualifies” and “dispatches” consumers, where consumers are no longer in the driver’s seat, but instead, are traded as a commodity.
It has been estimated that referral fees are 32x more expensive than typical ads, but Opcity plays these hidden fees down, claiming there are “no upfront costs.” Opcity does not publicly disclose the exact amount of referral fees it charges each agent, but it rigidly locks every participating real estate agent into a referral fee attached to the back-end of every contract. As a licensed real estate agent that doesn’t perform any real estate services or takes any responsibility for the transaction, it is not entirely clear how this process works under the Business and Professions Code and RESPA. Clearly, real estate agents only sign-up into Opcity “pipeline” because the heavy price of a referral fee can be easily incorporated into their client’s agreement in a form of excessive commissions.
The question now stands: who are the real “plumbers” in the real estate process? What exactly do consumers pay for with referral fee networks?
VC-backed iBuyers, Traditional Agents, Flat Fee Agents, Cash-secured Buyer Solutions, Concierge Listings, and FSBO. These are the six trendy home selling and buying options in the United States, entering the Winter of 2019.
House-flipping, or iBuyers, is highly fragmented and is mostly unavailable as a legitimate service across the United States. Companies like Opendoor lobby for being referenced as iBuyers, but it is an exact same process offered by WeBuyUglyHouses (HomeVestors) for close to 20 years, now expanded onto nice and easy suburban homes. Today, the buy-and-flip process is highly fragmented with only about 0.003% of all homes in the United States being sold with this mega-VC-backed approach, despite Billions USD already invested into a massive real estate flipping Goliath. Such service is highly ineffective, where, for example, 99 out of 100 people who receive an Instant Offer from Zillow Group, ignore it. Due to such a low success rate, consumer’s information is often used by companies like Zillow Group and Opendoor to turn their seller requests into selling-leads-for-fees to a local agent willing to pay for consumer’s information.
Due to inherent risks and added costs, house-flipping is one of the most expensive propositions to sell a home. After the flipping difference and fees, a homeowner can expect to walk away with only 80% of the potential market sale price before any outstanding mortgage payoff. For example, Opendoor charges fees that usually work out from 6 percent to 12 percent of the sale price, while making an average of 90% of the market offers to homeowners based on analysis of past transactions. These models are so greedy because the flipping process is naturally risky and cumbersome, taking a highly involved approach to buy and resell a wide range of homes. Unlike a real estate agent, house-flippers do not have a duty to represent consumers in their best interest, their only duty is to shareholders. This distinction translates to both buyers and sellers transactions, where RESPA and States’ real estate laws that typically apply to local real estate professionals do not necessarily apply to private investors in the same way — consumers are not fairly represented by the house-flipper unless they hire an agent directly, for an additional cost and not a commission kickback paid by the flipper.
The upside of selling a home this way is that consumers are able to receive fast and easy cash, be that as it may in only 0.003% of very select cases. By selling a home to a flipper, a consumer avoids a 1–3 months process of listing a home and showings. It may be worth it to some people, but such a sale has a price — instead of dozens of people seeing a home and making potentially multiple offers for the property, house-flipping is largely a single-offer proposition. It is difficult to see how and why these services would rapidly flourish into an instant on-demand process across an aggregate of 6,000,000 homes bought and sold in the United States each year under such limited terms.
Buying and selling with traditional agents is a great option in 2019, with over 2 Million real estate agents in the United States. Unfortunately, today this option is often associated with a standard 6% commission. Among new competitive models out there, it becomes more and more difficult to justify concepts like a standard commission — the standard by whom? The other problem with this option is referral fees imposed by online middle-man brokers. Typically, these fees are incredibly high, charging 25–45% of the agent’s net commission. Such fees make it impossible for traditional agents to offer their services at competitive prices — they have to pass these fees to consumers and are less likely to negotiate for better rates. This is why HomeOpenly aims to resolve these two problems with an Open Marketplace concept that allows local agents to advertise their best rates and services subject to 0% referral fees. HomeOpenly makes the traditional listing process a lot more attractive and transparent. At HomeOpenly there are no set rates, so all agents are able to offer their best savings along with value-added propositions for their service. Unlike any other portal that depends on Realtor kickbacks, HomeOpenly operates on Privacy by Design principle and never trades consumer information with anyone other than intended recipients.
Flat Fee Agents
Flat fee listings and buyer’s refunds are rocking the real estate market and will continue to grow in 2019. HomeOpenly is now able to advertise better aggregate savings across 147,000,000 homes in the United States than does Redfin, mainly due to wide-spread adoption and deep savings offered by flat fee listings and refunds models. Redfin does not currently offer flat fee options. Being able to list a home with a quality flat fee agent provides similar savings compared to a 1% listing fee and as well as transparent and easy-to-understand pricing. Some flat fee models are also offering overall savings when using them as a dual agent, saving 2.5%-3% in buyer’s agent commissions for self-represented buyers. Many competitive buyer agents now offer 100% of their 2.5%-3% buyer’s agent commissions as a refund to buyers, minus a flat fee, returning tens of thousands back to the buyer. Buyer’s refunds are a legal incentive only in 40 States, but the US-DOJ continues to advocate for this incentive among the remaining States in consumers’ interest. HomeOpenly allows agents to advertise buyer’s refunds only where allowed by law. Flat fees are one of the best real estate innovations that happened for consumers in the last few years and 2018 saw the rise of this trend like nothing before it.
Cash-secured Buyer Solutions
2018 has been a subject to an extremely hot residential real estate market, leading to the development of several solutions able to provide cash security to buyers competing against cash offers in exchange for an added fee. There are only relatively few companies that offer this solution and the success rate is difficult to establish with such low volume. This is not a trend per-se, but it is a business model to watch entering 2019 market, as a potentially value-added option for buyers making offers in what survives as a hot seller’s market. Ribbon and Flyhomes are one of the first to begin operations in this space.
Concierge Listings is a brand new proposition, currently, a pilot tested for mass adoption by Redfin in Seattle, Washington. Redfin offers consumers a concierge-style home listing option that includes cleaning, painting, staging and landscaping for 2% listing fee. While this process is more expensive than a flat fee proposition, it includes a great variety of value-added services. Concierge Listings is a great proposition to consumers thinking about selling a home to a house-flipper because the company effectively offers to turn the home into showcase condition without any upfront costs to the seller. The seller is still able to receive multiple market offers by properly listing their home. HomeOpenly now has an option for Concierge Listing service offerings for agents, as optional when advertising their services. We hope to see more companies follow Redfin Concierge model in 2019 as a proposition.
FSBO (For Sale by Owner) trend continues to decline as one of the worst methods to sell a home. More people are using real estate agents right now than ever before. Among flat fee listing models and properly negotiated commissions, the risk and cost of trying to sell a home by the owner almost always works against all parties, including the seller, buyer and any real estate professionals involved in a transaction. The real estate process is not as easy as ordering a pizza, it is actually very involved. At HomeOpenly we advocate for prudent and competitive input from industry professionals. Comparing FSBO and flat fees options, it is difficult to make a case for FSBO as a better route. The upside here is almost non-existent fees — typical FSBO fees are only a few hundred USD.
Transition into 2019 Residential Real Estate Market
In 2018, VC mega-rounds are fanatically focused on high-expense real estate models, such as Opendoor and Compass, but at HomeOpenly we see an opportunity to fix standard 6% commission myth with a sensible Open Market approach for Realtor services, similar to that of an Airbnb for local accommodations. Removing excessive referral fees allows agents to easily make a living in a competitive environment, while consumers are able to see and evaluate their local options without hidden traps and having their information traded as a commodity. The best process in real estate for mass adoption does not necessarily require mega-funds, but it needs a sensible revenue model, UX, adaptability, scalability, security, and privacy. In 2019 HomeOpenly will continue to offer our users UX with Privacy by Design, instant LIVE local results, 100% open market rates and unbiased coverage for over 147,000,000 homes across the United States.
Any Internet service is personal, despite the distance and physical disconnect between users and admins, people choose services that speak and work for them on an individual basis. This commentary focuses on the pure distinction between two concepts: an Open Marketplace and a Referral Network as two methods to deliver information. We will speak about why these concepts are so different and why sometimes one works as a much better proposition than the other. We will use UBER and Airbnb as examples of the competing concepts that are outside the real estate space, and then discuss some of the real estate options.
Marketplaces have existed for as long as humans have engaged in trade, a place for people to shop for whatever the service, or product they needed at that time. An Open Marketplace does not have barriers, it does not set rates, it does not collect kickbacks, it does not promote pay-to-play bias, or trade consumer leads as a commodity. An Open Marketplace exists to establish a convenient and open process for negotiations between parties.
Modern Referral Networks is a very different form of establishing trade, they largely rely on economies of scale and almost always collect some sort of kickbacks in the process. Economies of scale sometimes even make sense, but ultimately, all referral networks work by suppressing competition, which lowers service quality and increases tolls imposed on all participants.
Airbnb vs. UBER
In this commentary, for ease of use, two popular and highly successful participants are examined, Airbnb and UBER, as a way to distinguish one as a Marketplace and the other as a Referral Network. The reason UBER is used as a Referral Network example is because of its success and because it was able to overcome the flaws of a typical Referral Network with scale. Airbnb is used as a Marketplace example to point out how this company utilizes the strengths of an Open Marketplace concept.
UBER operates a successful Referral Network (it is classified by the State of California, where it was born, as a Transportation Network Company). The Referral Network approach works for UBER because people generally consider cab rides to be a ubiquitous, low-risk process — there is no need to evaluate each individual driver before they show up, the need is to get from A to B safely and at a low cost. UBER does a basic check to pre-qualify drivers and their vehicles to a set standard — this is generally is good enough for consumers not to care who the actual driver is that they will be matched with. This type of approach creates an environment where kickbacks (fees drivers pay to UBER) are transparent and highly distributed, the increased cost is replaced with savings due to economies of scale. While great for consumers, it also places a high burden on drivers, where most drivers work with UBER for only a year before they systematically quit.
Yes, the “blind” referral approach works for ride-hailing, but at the same time, it works poorly for exclusive, high-value services. Connecting consumers with local professionals such as Attorneys, Doctors, Contractors, Designers, Accountants, Financial Planners, and my current favorite, Realtors, takes a lot more than a Referral Network — it takes an Open Marketplace.
Airbnb is a service distinctly different from any other booking service (this statement ignores the possible illegality of short-term rentals and the socio-economic impacts on communities.) Airbnb’s success is largely attributed to an open approach, at first an odd-ball collection of random apartments and flats, now blossomed into a well-maintained marketplace for a variety of local travel accommodations. This process is actually very different from UBER’s Referral Network approach because each location, host, and guest are unique — the value exchanged goes beyond a blind match.
Airbnb also charges a fee from hosts to list their property. The difference is that it is structured as a processing fee where Airbnb does not claim to provide unbiased matches, it simply lists properties for hosts, making it a fee-for-a-service proposition. A successful Open Marketplace separates the quality of information from the revenue.
Both UBER and Airbnb are great examples of novel ideas able to proceed into the market of cabs and short-term rentals with an entirely new opportunity. Still, UBER and Airbnb models are not the same, their inherent differences remain — one was scaled as a Referral Network and the other is an Open Marketplace.
Why an Open Marketplace is not a Referral Network?
Identified below are two major distinctions between Open Marketplace and Referral Network concepts. Each one of these distinctions carries one lowest common denominator: User Experience (UX).
First, Transparency. Consumer choice of service is not just about money — people naturally operate on the principle of utility and competitive overall value. One of the biggest UX disadvantages of a Referral Network is that it tends to provide “blind” results. Generally speaking, UBER blindly matches riders with drivers because riders don’t care, but Airbnb can’t blindly match guests with hosts. Open Marketplaces utilize transparency as their main UX value-added proposition.
Second, Referral Fees and Payment Bias. A Referral Network operates on a pay-to-play bias, the company always steers the consumer toward its own network and away from competitors. UBER overcame this flaw due to relative indifference of who does the driving, but this bias becomes prominent with high-value services. Referral Networks often claim that their service is free to consumers since no checks are written by the consumer directly to the network. The checks, however, are eventually written by the service providers that participate with a Referral Network. This difference is negligible with UBER due to economies of scale, but that is not the case with high-value low-occurrence services, such as real estate transactions.
Open Marketplaces do not operate on the referral fee basis, making them a much more competitive alternative to Referral Networks, ironically, due to organic properties of better network effects. Without referral fees, Open Marketplaces are able to deliver a much broader coverage and scale with open use of Internet technologies.
Today, prominent real estate Referral Network fee examples include: Redfin, 30% kickback; HomeLight, 25% kickback; UpNest, 30% kickback; OpCity/realtor, 30%-35% kickback. For example, HomeLight, claims to match consumers without any bias based on the historical performance of each Realtor, but only rates local Realtors who have agreed to pay the kickback. Open Marketplaces do not possess this flaw, making all results free from this type of pay-to-play bias.
Open Real Estate Marketplace
Over the last year, HomeOpenly has built the first online Open Marketplace for Realtors in the United States, designed to connect Realtors together with consumers based on service levels and price. During the first stages of this massive task, we have included tens of Millions of public property records and countless system updates, all designed to counter a systematic abuse of trust in the industry exhibited by a wide variety of Realtor Referral Networks. The Property Technology (PropTech) industry is still in its infancy, it is historically slow to adopt changes and consumers are generally risk-averse, but this trend is ripe for disruption with an Open Marketplace concept.
HomeOpenly connects for free Real Estate Service Consumers with Real Estate Service Professionals with competitive service terms and flexible rates, including reduced rate and flat rate services. This process allows Real Estate Service Consumers to receive all local competitive representation options for any homes in the United States. Instead of being subjected to Realtor Referral Networks, any Real Estate Service Professional who wishes to offer competitive terms is able to participate with an Open Marketplace concept without any kickbacks.
There are over 2,000,000 Realtors in the United States that are now forced into the position of having to compete with a lot of well-funded flat fee transparent pricing models while having to pay a noncompetitive 25%-45% of their commissions in referral fees. This leaves the majority of Realtors to question their position and security in the market. Referral fees are a real estate practice built as a house of cards on the backs of Realtors stuck between paying referral fees or leaving the business entirely. In such toxic industry environment, HomeOpenly is not just a slightly different idea when compared to Referral Network models — it is designed to completely eradicate pay-to-play bias on a mass scale as it moves to organically establish a truly revolutionary practice in the real estate industry: healthy competition.
Online Real Estate Industry in 2019
The largest online companies in the world are beginning to enter the real estate marketplace, including Facebook Marketplace and Amazon Home Services. It is still unclear just what form these giants will take as they enter the field, but with their massive resources, they are well positioned to dominate.
Facebook Marketplace is a great example of what is possible in 2019 for real estate. Yes, it is still in its infancy and the company is careful not to overstep itself into a massive new opportunity, but it is clear in its intent to keep away from becoming a Referral Network. Amazon Home Services, on the other hand, have opted into UBER route, with a clear focus on a small referral fee basis for basic home services such as basic installation, appliance repairs, and home cleaning — all moderately suited for a Referral Network approach when scaled.
The Best of Both Worlds
HomeOpenly is taking on both routes. While developing an Open Marketplace for Realtors, it is positioned to expand into a transparent value-added Referral Network for Mortgage, Refinance, Home Insurance, Remodeling, Design, Staging, Home Inspections, Home Security, Moving, Home Maintenance, Title and Escrow verticals. We see an opportunity to an Open Marketplace concept into all major aspects of home-ownership life-cycle with proper Internet principles to help us archive great economies of scale.
Building a massive Open Real Estate Marketplace in the Internet industry dominated by paid ads is a challenge and requires an entirely new way of thinking — Consumer Focus, Privacy by Design, Open Systems, Transparency, UX and Security by Design. Building a Referral Network isn’t easy either, but due to inherent limitations of referral fees approach, the only successful Referral Network model is that of a low-risk service transposed on a mass scale. Building a Referral Network for a unique experience or a custom service, such as that required in real estate representation, is only possible in a short term until an Open Marketplace for the same exact process takes reigns to expose high referral fees models as biased and wasteful.
This article is now published at https://homeopenly.com/guide/Compelling-Residential-Real-Estate-Market-into-Transparency
In the first half of 2018 the online real estate market has been radically reshaped with massive investments into new broker-less platforms, home-flipping proposals, and flat fee real estate agents. One of the main drivers behind this change is a pressing need for consumers to manage the new reality of excessive housing budgets. These trends have also been largely driven by venture investments with a clear focus on select companies and a promise of high returns due to rapid market share conquest. These developments, consequently, leave out the traditional representation model from the mix and beg the question: what can a traditional real estate agent do right now in order to adapt?
The answer is both a simple and a difficult one. The Internet, as a driving force, is unstoppable by numbers. There is no magic here, a highly effective tool with giant information aggregators such as Google guiding its users to find exactly what they ask for. Over the last ten years consumers are able to search for previously hidden, now up-to-date MLS information using highly-popular online aggregators such as Zillow and Trulia dominating the online landscape in an open information environment. Meanwhile, a new flat fees trend has been catching up with the online real estate that has been traditionally silent on real estate brokers’ fees. With savings platforms rapidly appealing to consumers, the simple part of the survival equation for a traditional real estate agent is to compete on better service and pricing while using the Internet to that advantage. Alas, such change is a major challenge for a traditional real estate agent accustomed to a 6% “standard” commission.
Flat Fees Model
VC-funded flat fees and other savings models, such as Reali, Open Listings, Door Homes, Trelora and others are armed with a ground-breaking financial bridge to lower the closing fees gap in their select real estate markets. These companies use low fees to market their services as “revolutionary” instead of being frowned upon as “discount.”
For a traditional local real estate agent, it is a tough opponent to beat on numbers alone, but it is possible to match these VC-funded players. In order to do so, it requires a number of adjustments to be made by the traditional real estate agent, including the shedding of wasteful lead-generation strategies. One of the first things a traditional real estate agent must do in order to remain competitive is to let go of the idea of paying 25–40% of their hard-earned commission in referral fees. Having to rely on sourced leads originated by middle-man brokers, greatly hampers an agent’s competitive capability because it removes an option to advertise competitive rates to others. “A lead is a lead is a lead” mentality may have worked with a “standard” 6% commission structure, but it greatly fails in the current competitively-driven market. It is a mistake to continue paying fees for referrals because the real estate consumer is now able to effectively bypass this practice by turning to flat fee brokers and other referral-free alternatives. Instead, competitive real estate agents may actively opt into to referral-free platforms.
The traditional real estate agent in the current market is not immune to the fate of a travel agent. On the other side, there is a big difference between these two industries — real estate transactions do not nearly equal to a hotel booking process. Unlike the demise of a travel agent, the consolidation in US residential market will be established with competitive agents winning the consumer majority because the next secret is out — buyers are able to get thousands in commission refunds in most States, while sellers can easily negotiate much lower rates everywhere. Under these market conditions the broker-to-broker referral fee process is only a matter of time to completely disappear, and so will the real estate agents who rely on such leads for their business. Traditional real estate agents willing and able to adapt to this reality will not only survive, but also secure a more effective real estate process to their benefit, their clients’ benefit, and overall health of the market.
Since early 2017, with help from early adopters practicing decisive savings models, HomeOpenly OPEN marketplace now delivers to consumers information valued in Billions in closing costs savings compared to 6% “standard” fees. Such savings can no longer be ignored. HomeOpenly is a revolutionary proposition for the online real estate market that delivers free leads to real estate agents, but it only works for those agents willing to compete based on price. The OPEN marketplace is still new, but it consistently gains traction to make ground against its main competitor — Redfin. In 2018 HomeOpenly OPEN marketplace is able to outperform Redfin across all States for buyer’s refunds and listing savings to consumers on an aggregate scale. This fact alone does not yet make HomeOpenly superior to Redfin in volume, but it does make it an alternative business model in an Internet environment able to take on the next challenge.
The Redfin model is a wild card in 2018 — it is not entirely clear how and if it will be able to complete against flat fee real estate savings models. The major flaw of a Redfin model is that it is a stopgap savings broker solution. Redfin is well-represented in urban areas where the company is able to hire agents to work full time who can deliver sizable savings to consumers, however, most of the Redfin coverage is provided using their Partner Agents. Redfin Partner Agents are independent local agents who choose to take leads from Redfin at a 30% referral fee. This process only works as long as there are no competing services locally able to offer better savings without the burden of such fees. Referral fees are a huge gap in consumer savings, specifically when flat fee real estate agents are able to offer much greater savings, to begin with. A traditional real estate agent can easily opt into the Redfin model, but this process yields little benefit in the long-run. As a result, Redfin consistently delivers lesser savings and will continue to suffer in the years to come under a barrage of flat fee model alternatives.
One of the toughest challenges for the US real estate consumer, other than finding a new home, is to select a single real estate agent to represent them out of many. The same is true for both sellers and buyers of real estate. There is a large number of real estate agents out there and all of them seem to promise the best service with little risk. All of this information is objective, ultimately leaving the real estate consumers to make their final decision in the dark. This fact has been an important revenue generation factor largely exploited by MLS aggregators such as Zillow and Trulia. With the arrival of online MLS-sourced databases of real estate properties across the United States, something else came hand-in-hand — best real estate agent suggestions. Today, most consumers looking to buy or sell real estate begin their search on the Internet. This is a logical first step that can help identify similar properties, pricing budget and other questions that will ultimately help the consumer to make the correct decision about buying or selling real estate. Zillow, as the largest MLS aggregator, analyzes property values, aggregates data, and displays results that make sense to seasoned real estate professionals as well as new buyers and sellers. Zillow and Trulia both had opened up the MLS databases to the public over ten years ago and were able to provide a piece of unique and relatively accurate information regarding a significant number of addresses in the US. Both Zillow and Trulia, as it stands, have also been dominating the market with an Achilles’ heel and its beginning to catch up with them in 2018. While Zillow provides great MLS data, it clearly generates revenue by tempting consumers with its traditional real estate agent recommendations. It would seem that such recommendations are compiled and sorted just as well as the aggregate property data, but are they? Zillow would like consumers to think that its real estate agent recommendations are unbiased, after all, these are based on user reviews and recent listings. However, with little doubt, such results are not impartial. Zillow does not immediately identify how real estate agent search results are compiled in its Terms of Service, but it states on its web site that real estate agents that sign-up for their Premier Agent program “get in front of buyers and sellers in the largest online real estate network.” This fact ultimately means that recommendations provided to US consumers by Zillow are biased because those agencies that pay them to show up first in their recommended results. Thus, an agent shown at the top may or may not be the best, yet Zillow implies to its users that they are. More importantly, these recommendations completely disregard the pricing and services offerings provided by the agent, leading to “the cat in the bag” search results. While successfully aggregating MLS data, Zillow has done so at the general expense of a consumer conditioned into a “standard” 6% commission structure. Consumer savings trends do not allow for this revenue source to sustain at the same rate, making both Zillow and Trulia highly vulnerable to the current developments in the real estate market. It is no secret that in 2018 Zillow is rapidly looking for a way out.
Referral Fee Model
It is important to state that any referral fee real estate agent search is, by default, always biased. Zillow has been pushing biased real estate agent results on US real estate consumers very successfully since its IPO in 2011, but it is not the only company to do so. The trend of promoting select agencies based on fees and referrals is wide-spread within the real estate online tech industry because it is incredibly lucrative. One example, a recently funded company led by Google Ventures called HomeLight, proposes a method to help consumers to find their best real estate agent recommendations. On paper HomeLight provides its users with a free list of “most effective” real estate agents that they have analyzed across the board, meaning real estate agents who facilitate better offers for sellers and better terms for buyers. HomeLight states that “our service is 100% free, with no catch. Agents don’t pay us to be listed, so you get the best match.” In reality, HomeLight is a California middle-man real estate broker that collects a 25% referral fee from all of the real estate agents that would like to participate, hardly a free service for anyone. More importantly, HomeLight applies this referral bias towards all of its results, hence only real estate agents that have agreed to pay a referral fee are displayed in search results. Such services cannot exist in competitive environments and are at a very high risk of being phased out as the market moves toward transparency.
One of the few mainstream services that actually provide unbiased referral-free results to users is Yelp that is able to do so because it is a general review web site, and does not receive mandatory fees. Over the years Yelp has developed a reputation for integrity, allowing businesses to advertise at will instead of “pay to play”. The reason for its success is simple — Yelp clearly identifies businesses that decide to advertise. When it comes to recommendations, this platform has one main problem — Yelp is not a real estate platform and does not specifically provide the best overall data for real estate consumers. Of course, many consumers rely on Yelp for reviews, but it still lacks the pricing and service offering comparison options provided by dedicated real estate platforms.
One of the loudest 2018 real estate trends is a VC-funded home-flipping model. The direct buyer, as it likes to be known, buys and holds property for a very short time in order to place it back on the market with an added mark-up. Zillow Offers, Perch, and Opendoor are the main players in this game. This process is disguised to deliver genuine benefit to consumers by making the real estate transaction process easier. Unfortunately, this trend is one of the tell-tales of an overly hot market and is largely dependent on the real estate market to continue its upward trend. The massive amounts of data collected over the years by Zillow make it possible to effectively identify weak points among consumers willing to sell their home below market and targeting them on a great scale. While home-flipping companies claim to “re-invent” the real estate process by buying homes directly, it is clearly evident that such companies are highly selective about what markets they work in and what homes they actually buy and flip. If the deal doesn’t make sense to a home-flipper, they will simply move on to the next one, making this a fragmented solution, if any. The scale of investment into this process is an alarming side effect of an over-exposed real estate market. This latest home-flipping trend further damages consumer trust and undeniably leads to a loss of equity for both real estate buyers and sellers.
Restoring Consumer Trust
The US real estate consumer is one of the sharpest in the World. With the emergence of closing cost savings trends in 2018, suddenly, the “standard” transactional fees of 50,000 USD are magically lowered to 5,000 USD, for what was essentially the same transaction just a few years back. It is becoming increasingly clear that this trend factors in a breach of trust between real estate agents and US consumers. Consumers are now becoming largely aware that they have been paying an excessive 6% “standard” commissions for decades: buyers are now able to get sizeable cash refunds from any number of competitive real estate agents when buying a home and sellers can easily find competitive agents willing to sell homes on a flat fee basis. This comes both as a shock and a relief to a large segment of US consumers, now actively looking for ways to gain back equity in their homes. This breach of trust has been further accelerated with propositions of direct buyer programs and now requires a complete overhaul. The solution to repairing this trust comes in the form of transparency. Granted, there are great benefits to services such as Zillow that work tirelessly to assemble real estate property MLS data, but that alone does not transfer to their ability to help the consumer to make correct decisions about finding their best choice for a real estate agent. In 2018 industry leaders, have either forgotten or choose to turn a blind eye on the fact that the best user experience is only possible with unbiased results. It is why ideas such as OPEN marketplace are here to help save the real estate representation process and to repair damaged trust of the US real estate consumer. Real estate trends in 2018 are a perfect storm of alternative real estate models landing on the heels of a traditional approach. Without any doubt, flat fee savings and OPEN marketplace models are now among the most beneficial alternatives available for the US real estate consumers.