All it takes is the hiring of a broker of record and any dot-com can become a "broker" with a referral business model. That way they can neatly avoid all the time, trouble, and expense of building a real brokerage business. And why would they want to? Traditional real estate brokerage is proving more inefficient everyday, as evidenced by softening commissions and rising liability costs.

Brokers seem confused about their role in modern real estate, and are busy trying to limit responsibility because the bottom line doesn't make it worth it anymore - should they be agents, or avoid agency altogether? Should they provide leads to their agents, or let them find their own leads? A referral company, on the other hand, can sidestep these questions. The referral company can use technology, Internet relationships and traffic-building strategies (including using the broker's own listings and those of his/her fellow brokers to bring traffic to the referral company.) and charge a big, fat referral fee for what is essentially Internet advertising. Only instead of paying upfront, the agent or broker pays on the back end - at closing. For many agents and brokers who don't understand and don't want to learn other methods to get found on the Internet, a referral partner must be a godsend.

The reason the Internet works for referral fee companies is that brokers understand referrals, and they don't understand the Internet. They don't want to learn about such things as keywords, search engine optimization, pay-for-click, or other ways to get their Websites found. Referrals are simple. You agree to a referral fee. You get a phone call or e-mail from the referral company. You pass the referred client and the full cost of the referral on to your agents.

Referrals are, therefore, basically free advertising for the broker, except it really isn't. You've heard the term 'nothing is really free?' Well, the referral scheme has a huge downside.

The broker isn't ever advertised until the referral is given to him/her. And therein lies the rub. By participating in the referral network, the broker transfers brand awareness to the referral company because that is what the referral company is marketing. It collects "certified" agents and brokers who pay referral fees which allows the referral company to offer a rebate, discount, or gift to the consumer. But the broker hasn't done any brand-building. It is the referral company that gets all the credit because the consumer is led to believe that those discounts, gifts, and rebates would never have happened without the largesse and power of the referral fee company.

The consumer doesn't know that s/he could have gotten the same discount or gift certificate to Home Depot simply by negotiating with a broker directly. In fact, the consumer could have gotten more. After all, the referral fee isn't passed in full to the consumer, only a fraction of it is. The consumer could have gotten the whole enchilada, only s/he doesn't know it because the real estate industry isn't telling him/her. This complicit silence only empowers third-party referral fee companies even more.

The traditional real estate industry isn't telling consumers that once they have selected a broker from one of these companies, they can't negotiate the commission again. They aren't telling them that the referral company gets half or more of the commission before it passes on a rebate to the consumer. They aren't telling consumers that using one of these referred brokers could nullify their employee benefits if they are being transferred. And they certainly aren't telling consumers that all commissions are negotiable - and that the consumer could have gotten the same or better deal by going directly to the broker.

Does anyone else see the danger to the traditional brokerage industry of supporting these third-party referral companies? There are a growing number of companies whose business models are based on aggressively obtaining as much of the real estate industry's commissions as possible.

Internet consumer growth in referral fee companies's favor

In 2003, the National Association of Realtors' Profile of Home Buyers and Sellers Survey underscored the point that the Internet is the place to market Realtors and their services. Nearly 90 percent of Internet searchers also used an real estate agent, compared to 79 percent of non-Internet users, said the NAR. Seventy-eight percent of Internet homebuyers purchased their home through a real estate agent, and a whopping 11 percent found the home they wanted to buy online, compared to 2 percent in 1997.

Even better, 93 percent of Internet homebuyers go online to find listings, says the NAR. As a result of their search, 18 percent of those found an agent to search or help them buy a home. However, only four percent of Internet homebuyers intend to use the Internet to find an agent.

This is a definite message by Internet homebuyers to online real estate agents - you'd better have listings. And thanks to the NAR's IDX and VOW policies, agents and brokers with few or no listings can look like they have a lot.

The referral fee companies can't compete directly with other portals like Realtor.com for listings (2.1 million and counting,) but they do encourage brokers to share their IDX and VOW solutions so that the referral fee company can obtain some critical mass in listings - enough to attract consumers.

The incredible irony of this is that the brokers are supplying referral fee companies with their listings solutions in order to help provide the companies with the traffic they need to attract consumers. The companies then turn around and charge the brokers (or their agents) a 25-35 percent referral fee - for helping build the referral company's business!

Here's how it works on some referral fee sites. The referral fee company advertises on TV, financial planning portals and anywhere they can get people to click on their sites. As NAR proved, most want to see listings, not find real estate agents, so when the consumers find a home that interests them, the referral site refuses more information on the listing unless the consumer "registers." The consumer may then get a call or an e-mail from an agent who will supply more information about the home. Only they can't because they don't know which listing prompted the referral. All they know is that they got a referral from their referral partner. They don't know or care how they got it.

What some would call bait-and-switch, others call a growth industry.

LendingTree's plan to get as much of the real estate industry's commissions as possible

While there are many referral fee companies, LendingTree is the only major player that is publicly held, making leadership's comments about their intentions in the marketplace a matter of public record. For purposes of this story, LendingTree is simply as an example of the strategy behind most referral fee models - to get a significant piece of the Realtor's commission, a $67 billion industry.

It's interesting to note what LendingTree's attitude is when it is talking to the investor community instead of to the real estate community - the target to supply the company with revenues.

In a conference call on May 5th, just after the announcement that USA Interactive was merging Realtor referrer and mortgage lender LendingTree, media mogul and CEO of USA Interactive Barry Diller told callers, "We really like what LendingTree is doing in this real estate sector....We think this strategically is probably the most important strategic point we have put down certainly in the last more than a year, sometime between a year or two, and we're very excited about it."

Doug Lebda, CEO of LendingTree told callers, "In 2002, real estate commissions were over $67 billion."

Lebda admits that last year Lending Tree had "essentially an insignificant market share of total real estate commissions. However, real estate is the fastest-growing part of our business."

LendingTree plans to "grow earnings and cash EPS at about a 70 percent growth rate for 2006." The company is also planning to spend $60 million in marketing this year to convince consumers to let lenders compete over them, and to get a "certified" Realtor.

They can accomplish that goal is by capturing a greater market share of real estate commissions.

Did you ever think you'd see the day when capturing a piece of real estate commissions from brokers would be the goal of a publicly-held company? And one-third of the commission, at that?

There's method to their madness. USA Interactive owns a property called Citysearch, an ideal place to cross-pollinate USA Interactive's other businesses like Hotels.com, Match.com, and Ticketmaster. All that is missing is a robust source of listings - which Realtors will presumably be willing to provide in order to get leads. Enter LendingTree.

Interestingly, Diller and Lebda downplay the importance of listings even while soliciting every broker in their 650-large network to please supply their IDX or VOW solutions to the site. This way, they can obtain listings without paying MLSs (you) for them. Your giving them the listings also slaps their greatest rival in the face - Realtor.com.

Says Lebda, "if you want to go see homes, there are lots of places on the Internet you can go, but if you want consistent value-added service where you get choice and empowerment and turning the tables and have Realtors seeking you out and getting your business, you come to Lending Tree."

Is that what Realtors really want to do - help consumers "turn the tables" on them?

He continues, "While everybody else is focused on real estate merely in terms of listings, we think that we can build a differentiated value proposition in a totally different way, where listings are something that is nice to have, but you can integrate it not only with our core service but with other things like property valuations and other services as well."

Further, Lebda says the LendingTree isn't a referral model. "Our model in real estate is that of getting paid for closed transactions. It is a model where the consumer fills out one form, gets a choice of Realtors and gets a discounted service that is of higher quality from named local brokers in their markets."

So, while Lending Tree had "essentially an insignificant market share of total real estate commissions," and "real estate is the fastest-growing part of our business," LendingTree really isn't in the referral business. Okay.... But if LendingTree is successful, obviously many more closed transactions will come with a 35 percent referral fee attached. Only they won't be called referrals. They will be called "success-based advertising" or something euphemistic like that.

There is still hope for the traditional real estate industry to stop themselves from turning their industry over to the LendingTree HMO network (just ask any doctor whether it was a good idea to allow HMOs to take over their billing.) Just don't sign up for their network. That's the biggest threat to LendingTree's success, according to Lebda. He told his investment banker callers that the company's "major competition is essentially off-line local providers....the off-line Realtor who is not a member of our real estate exchange. Off-line, he says, "is where most of our consumers go, and that is the number one reason why loans don't close and consumers don't use our Realtors."

Lebda doesn't mention it, but there are also hundreds of thousands of brokers who are online, but have found other methods of getting found by consumers than giving away one-third of their commissions.