There's a marketplace truism that seldom changes - once you start discounting you can almost never go back. Just ask Best Buy when the last time was that they sold a computer that wasn't financed in-house at zero percent for a year. And what about the automobile industry? Pundits predict that low interest rates on cars will last several years, mainly because manufacturers fear that consumers will give the cold shoulder to new car purchases otherwise. And real estate pundits are arguing that as soon as mortgage interest rates rise, the country will see a real estate bubble burst as buyers wait for favorable interest rates to return.

Rates have been low for so long that people come to believe that is the norm. And now the nation is seeing real estate commission rates go lower. Will consumers ever be willing to pay six to seven percent commissions again?

What's strange is that the real estate industry is willingly assisting in the lowering of commission rates, to the point of driving down profitability, too. How? Instead of paying up front for advertising, they are willing to pay more on the back end of a closed transaction for leads and third-party discount/referral services are helping them do it.

1. Brokers are willing to share their listings with third-party discount/referral services to entice consumers
2. They are willing to discount their fees or pay rebates to the consumer to get the business
3. And they pay referral fees to the third-party discount/referral services that brought them the discount lead

On the face of it, this makes no sense.

• If the brokers own the listings, why aren't they keeping tighter controls?
• Why do they cater so easily to these companies which wouldn't exist except through their cooperation?
• Why don't they drive a harder bargain?
• Why don't they feel confident enough to attract buyers or sellers through the channels they have already built exclusively - their MLSs and Realtor.com - neither of which can charge referral fees by law?

Referral fees on top of rebates? And to benefit third-party referral services? You gotta be kiddin.'

There are two reasons these brokers agree to these deals - greed and shortsightedness. It's hard to tell which comes first, but let's take them one at a time:

Greed - Brokers who engage with third-party discount companies are trying to get consumers before their competitors do and are willing to pay big fees for first mover advantage. Nothing wrong with that. Couple that with a plan that gets their fees back, and it is hard to resist - especially if they close their eyes to the big picture - that their capitulation to lower fees might impact full service fees down the road until they erode the entire industry's ability to charge full service fees for full service.

But shortsightedness prevents them from looking that far into the future. Instead, their minds are on how to get "incremental business" and get their referral fees back. Easy. Get their agents to pay for them.

The broker takes in the lead through its relocation department where the business is then passed on to a participating agent. The agent pays the referral fee back to the broker at closing.

Here's how it works, according to one San Diego-area Coldwell Banker broker working with Lending Tree, a third-party provider of "leads." The broker says that they provide Lending Tree with listings, and in return they are the preferred broker to receive Lending Tree referrals. The inquiry comes in through a listing on Lending Tree (it doesn't appear to matter that the listing does not belong to the broker, brokers are told in advance that their leads may not come from their own listings and that their listings may be used to provide leads to other brokers.)

Instead of providing the consumer with much information on the listing, the consumer is invited electronically to learn more by agreeing to become a member or otherwise the "MLS listing" isn't viewable. The listing, it turns out, is not an MLS listing at all, but a Residence One listing, according to a right-click on the listing photo. Residence One is a lender. After clicking through and finding no further information on the listing, the consumer is then invited to contact a representative. The representative, of course, is a Lending Tree real estate broker.

In this case, "Gabby", the representative for the Coldwell Banker firm, contacted Realty Times, seeking personal information so that she could refer "the inquiry" to an agent. When questioned, Gabby admitted that she had no idea which listing brought the referral, and that she thought the inquiry was about finding an agent. She also said that the agent would indeed be paying the broker back the Lending Tree 35 percent referral fee.

Shortsightedness

Discounting is learned behavior as surely as Pavlov's dog learned to salivate at the sound of a bell. Once consumers realize how easy it is to get brokers to discount, they feel they never have to go back to paying full service fees again. In fact, they evolve. Pretty soon, they are trying to figure out how to cut the discount third-party referral service out of the deal.

Isn't that funny?

One Dallas-area broker has a relationship with Costco, a discount homebuying and selling service now operated by Lending Tree. This broker provides leads to any agent who will accept them through the Internet, including discount leads. The broker knows that the Costco customer will receive a rebate from the commission, and that the agent who accepts the listing will pay the referral fee.

The problem is that this same broker tells agents that the brokerage does not discount commissions, which is clearly not so. When agents are doing listing presentations, they are told that they are not to discount their fees. This backfired one day when a seller told an agent that her best friend just bought a home through the Dallas broker using Costco, why can't the seller get the same discount without using Costco? The agent was forced to match the Costco deal to get the listing.

Consumers are going to talk to each other. There is no way to keep them from it, so that left the agent no way to obtain the listing otherwise. We'll never know if she could have because the consumer insisted on the "going rate," and the going rate had been set by the broker in a previous transaction. The agent was blindsided.

Did the broker come out ahead? Some brokers consider business from referrals to be incremental - but as soon as the discounts bleed into regular business, then it isn't incremental anymore, is it? It's detrimental. And why is it good for agents to make less money on business they "wouldn't have had otherwise?" Who says they wouldn't have had it by other means?

From a cost standpoint, lead generation by using a third -party discount/referral companies is expensive compared to advertising, but isn't advertising the only real service the discount/referral company is providing? At 35 percent per transaction, any agent could instead buy out the real estate section of their local newspaper, or own a Web site from every top vendor on the Internet. Why make a competitor (and isn't a referral always from a competitor) rich?

Yet, these are not dumb brokers who are participating. According to Lending Tree, the referral service is aligned with over 650 real estate companies and 2400 offices covering all 50 states, with over 6,500 real estate professionals represented by large independent real estate companies and members of major franchises including Coldwell Banker, Century 21, Prudential, ERA, RE/MAX, GMAC (formerly Better Homes and Gardens), and Realty Executives.

Lending Tree isn't alone. There are several big discount/referral companies online today working with some of the most famous brokerages in the land. One boasts a membership of over 25,000 agents. With the proliferation of referral services, more consumers are learning that they don't have to pay full sticker on commissions. And brokers see to it that they don't.

There isn't an agent in the land who hasn't faced commission pressures that begin with taunts from consumers about high commissions. Buyers and sellers routinely want rebates and/or discounts to do business. Few sellers pay sticker anymore unless they are extremely motivated. While some brokers and agents are able to bluff their way back to full commission, most admit that it is getting harder to do so with increased competition from discount brokers.

The irony is that many of these same brokers also discount - they just don't see themselves as discounters.

So the next time your seller or buyer asks you to cut your commission, ask yourself if that "incremental" business was worth it.

Published: March 4, 2003

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.