Cendant, RE/MAX, Realty Executives and other franchise organizations are doing their best to discourage the NAR from allowing brokers to advertise other brokers' listings without permission (via virtual office Websites, VOWs.) What hasn't been asked is why brokers are doing this at all.

The answer isn't pretty.

There's an ugly competitive side to real estate brokerage, and the virtual office Website (VOW) issue is bringing this boil to a head.

The problem is that some brokers are giving MLS listing databases to third-party referral/media companies to advertise. So far, this is legal, because a few brokers have managed to convince others with the sleight-of-hand of semantics, say some, that they have the right to show other brokers' listings to consumers online in the virtual office environment without permission.

The reality, say others, is they are engaging in advertising relationships with referral/media companies using other brokers' listings to get new business.

While the franchise companies are focused on limiting competition from referral/media companies, franchise brokers are using the referral/media companies to get referrals.

In the rush to get business before their competitors, these VOW brokers don't realize how much they are empowering third-party referral/media companies to disintermediate the real estate industry.

VOW brokers are set up by referral/media company partners to receive consumer inquiries from VOW listings and in some cases, listings from other sources. The consumers aren't handed directly to the VOW broker - they are managed by the media partner as referrals. If a consumer comes through such a gateway, the VOW broker pays as much as a 35 percent referral fee to the media company at closing.

These third-party referral/media companies wouldn't be worth the cyberspace they take up if it weren't for brokers supplying them with listings. So why do VOW brokers give the most precious asset among competing brokers away? The short answer is to get business before their competitors do, no matter the cost.

Here's how such reasoning might work:

The Internet is a source for incremental, not primary business

Advertising real estate by the column inch is expensive, especially when lots of evidence suggests that a growing number of homebuyers are turning from newspapers to the far richer advertising technologies of the Internet. Why would consumers want to look at a blurry black and white front-door picture in the newspaper when they can take a virtual tour of the same home online?

But, unlike most local markets which can only support one newspaper, the Internet has dozens of sites where consumers can go to look at listings. If a broker chose every real estate portal to advertise a listing, she'd be broke. That makes many brokers leery enough of Internet media to continue putting their marketing dollars in the local paper, but they know they also need to find some kind of first-mover advantage on the Internet, too.

How to do it? Rather than risking advertising dollars on sites that may not deliver leads that close, some brokers might reason that it is the lesser of two evils to pay referral fees for closed Internet leads.

No up-front costs with referrals

Ready to accommodate the VOW broker are Internet media companies that also happen to have brokerage licenses. With names like HomeGain and Lending Tree, to name only a few, these companies showcase brokers' listings and offer gifts and rebates to attract consumers, then they charge VOW brokers between 25 and 35 percent in referral fees when the consumers come through their broker network to buy or sell a home. The VOW brokers finance the consumers' rebates and gifts, treating these media companies as affinity partners.

Why does it work? Plagued by consumers demanding lower commissions, VOW brokers are relieved to stop dickering with the consumer directly. That's taken care of by the affinity partner - the referral/media company. An affiliation with an affinity partner gives the broker permission to cut commissions and appear consumer-friendly for doing it.

Another reason it works is the broker doesn't have to pay anything until closing. Ironically, that's the same reason many consumers hire brokers, and are willing to pay higher fees on the back end, because they don't have to come up with cash on the front end. Needless to say, with this reasoning, referral fees are much higher than advertising fees in terms of cost of sales. That's the law of risk and reward.

Referrals are a competitive strategy

Does it matter that the same consumer is available through other means? Not in the least. The VOW broker is gambling a hedged bet. They win as long as any advertising medium delivers a client that closes.

A thirty-five percent referral fee is a lot to pay for what is, in essence, advertising exposure, but not for a sure thing, reasons such a broker - especially if the consumer purchases one of the broker's listings.

Think about it. Most brokers take listings for between five and seven percent commissions on the sale of a home. They pay a co-broker as much as half that amount, and sometimes more. If the broker is assured by a referral/media company that she will get the consumer instead of a competitor on her own listing, then she is very willing to pay 35 percent, because that is far cheaper than paying 50 percent to a competitor.

And if business should happen to come in from another broker's listing? Thirty-five percent of one side is little to pay for seeing to it that her competitor didn't get the consumer. And, by passing the consumer along to one of her agents, and demanding the agent pay the referral fee, the VOW broker gets business in the door for nothing.

That's why the VOW broker is highly motivated to not only give her own listings to the referral/media company, but her competitors listings, too. For free.

It's easy when the VOW broker ignores the big picture

Curiously, the VOW broker doesn't see the referral/media company as a competitor, even though the media company has acquired a brokerage license for the purpose of collecting referral fees. But just because representatives from Lending Tree aren't competing with brokers for listing appointments (unless you count HomeGain's forays into discount brokerage) doesn't mean they aren't very real competitors.

These affinity/referral/media companies are licensed to broker real estate, and fully capable of disintermediating other brokers from consumers. They get consumers to contact them instead of the listing broker. And if that's not competition, what is?

HomeGain was among the first and the largest companies to accomplish this feat. For years, the company has suggested to consumers that their network of brokers is willing to compete on commissions, among other factors. The message the consumer received was 'HomeGain is the one helping you to pay less.'

This was ingenious, because it effectively shifted the consumer's loyalty to HomeGain and away from the broker. It also disintermediated the broker from managing the consumer relationship.

Brokers aren't advertised on HomeGain, only the network is. So, an affiliation strengthen's HomeGain's brand, not the brokers'.

The long-term results no one wants to think about

To afford referral fees, agents of the broker have no choice but to concentrate on getting listings, and abdicating the responsibilities toward getting them advertised and sold to their broker and the media company. That puts the referral/media companies in a perfect position to "help" the broker by managing the customer from introduction to closing and beyond.

Some of these referral/media companies have relationships with transaction management firms and other ancillary service firms like title companies that can further help the consumer save money, again directing traffic away from the broker and the broker's agent, and their services.

To see the newest affinity/referral program in action, watch the Today Show in the mornings. Lending Tree has an ad that suggests that if a homebuyer fails to use one of the company's Realtors to buy a home, he could end up with airplanes flying inches from his roofline that shed smoking corroded parts onto the front lawn.

The Lending Tree model works a little differently than most affinity programs, in which members of a group get special pricing and servicing consideration from a broker in exchange for all relocation business from the group. In the Lending Tree model, any homebuyer or seller can get any participating broker to lower fees.

The danger of having any consumer eligible for affinity with a referral/media company is the potential that all advertised listings could come with a referral fee attached. Even if the consumer doesn't do business through a referral/media company, he knows enough to demand lower commissions, adding even more pressure to brokers' and agents' bottom lines.

VOW brokers who participate are naive to believe that they will be the only broker in their area to get referrals. While some referral/media companies offer exclusive territories, it is not in their interest to limit the network. The larger the broker networks are, the better chances the referral/media companies have to capture a referral fee. They don't want the prospect leaving the site to engage another broker who might not be willing to pay a referral fee.

The irony of this is that the listings that the VOW broker supplies could be used to bring in business initially, but if the VOW broker isn't in control of managing the leads, he or she might never know whether any leads went to another broker in the network. If this happens, the VOW broker gave away the farm for too high a price, because now competitors are getting leads, too. And all are paying referral fees.

Swimming upstream

Cendant, RE/MAX and other franchises are going to have a tough time convincing some brokers that doing business with these online referral/media companies isn't a great idea.

As long as a VOW broker sees Internet-generated transactions as "incremental" business, she may not care about the costs or the right or wrong of advertising other brokers' listings. After all, she knew when she gave her VOW to the referral/media company what she was doing. She knew she would be getting leads on other brokers' listings. She may not notice a subtle increase of referral fee-owed closings, which may cause her agents to begin applying pressure to her to find a less expensive means of advertising.

And that's because she forgot why she looked at Internet advertising in the first place. Isn't that where consumers are largely going - away from traditional print mediums? Doesn't it stand to reason that at the rate of Internet adoption by housing consumers, that referred business could shortly become a major, rather than an incremental amount, of the broker's income?

Poetic justice

It never occurs to the VOW broker that she's opened the door to a future where most or all transactions could come with a referral fee attached, because she doesn't recognize her own complicity in helping drive consumers to demand and get lower commissions from a third-party.

While she's getting short-term business, it is actually HomeGain and Lending Tree who are the heroes to the consumer. Without them, the consumer is led to conclude, would lower commissions, rebates and gifts have been possible?

What the consumer has yet to figure out is how much more of that 25-35 percent could have gone into his pocket instead of the referral/media company's. Blissfully ignorant that he gave away his right to negotiate the commission, he'll use and refer his cronies to HomeGain and Lending Tree and others - not to the broker. The reason? The consumer will believe that the broker is subordinate to the network, and he's right.

VOW brokers may never realize that they did a wonderful job building the referral/media company's business, instead of their own.

Any action has consequences, and using other brokers' listings to build a business has consequences, too.

Some brokers are threatening to pull their listings from MLS management if VOWs remain unregulated. This would divide and conquer the MLS. And without the MLS database of listings, VOWs have no value to any referral/media company.

And these referral/media companies will have no choice but to solicit all brokers to sustain their networks and their supplies of listings.

Published: April 11, 2003

Use of this article without permission is a violation of federal copyright laws.

Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. 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. To contact Blanche, email her at . For more articles by Blanche, click here.