The real estate industry, unlike the legal, medical and other licensed professions, has allowed the practice of referrals and the collection of referral fees for decades. Now that third-parties have entered the real estate industry by getting affiliates licensed, or hiring brokers of record, and charging for "success-based" lead generation, the term "referral fee" is controversial, especially if Homestore subsidiary Realtor.com were to start a business model that results in "closed-lead fees," lead generation fees or "success fees."

If a rose could be called by another name, would it still be a rose? Or, if Realtor.com could charge closed-lead generation fees without calling them referral fees, would Realtors embrace the concept?

There's evidence that despite Realtor.com president Allan Dalton's march across the country denouncing the referral fee-based "tariffs" charged by competitors such as LendingTree that the topic of having NAR allow Realtor.com to charge closed-lead, or lead generation fees is quietly being introduced in some circles.

But first, a little background.

How LendingTree works is the company advertises its own brand as a consumer solution; it puts participating brokers into a network; it qualifies the online consumer with some questions, and then; it passes the consumer-lead on to the broker for closing. Participating brokers typically funnel the lead through their relocation departments for further qualifying before handing them to an agent to close. At closing, the broker pays a referral fee or "success-based fee" to LendingTree.

A number of brokers and agents like this approach to lead generation because they are used to paying referral fees to each other, so the process is familiar, but the real reason is that they don't have to pay anything up front for lead generation. They can justify the hefty amounts (up to one-third of their commissions) as secondary, not primary source, income. This is the same justification they use when approaching sellers - the brokers take the risks and take on the expenses of bringing buyers in exchange for a fatter fee at closing than if they provided advertising services to sellers.

At the same time, Realtor.com offers a different kind of lead generation - advertising. With this method of lead generation, brokers and agents pay up front on their credit cards for exposure with their names, brands, Websites, emails, etc. big as life for all the world to see.

But Realtor.com has some limitations on its success. As mandated in Homestore's operating agreement with the National Association of Realtors, Realtor.com must advertise members' listings for free. This is designed to break the advertising stranglehold by local newspapers, but the model doesn't work unless agents and brokers are willing to enhance their listings and pay Realtor.com advertising fees for those enhancements.

Some Realtors find it difficult to pay for a cow they can milk through the fence. Also, advertising puts the pressure on Realtor.com to prove its worth in a way that LendingTree doesn't have to because the consumer-Realtor has already paid his/her money. They want results, yet ironically, many of these same agents don't bother to pick up the leads they get from the Internet and Realtor.com because they don't regard them as serious leads.

According to Bob Goldberg, NAR's senior vice president marketing and business development and president and CEO of RIN, a wholly-owned subsidiary that has responsibility for the operating agreement with HomeStore, as many as 55 to 70 percent of Realtors never bother to follow up on leads that they get via e-mail. This contributes to a vicious circle - the number one complaint by consumers is that Realtors don't respond to their emails.

The upshot is that Realtors aren't embracing Realtor.com the way they should. They haven't given up newspaper advertising as anticipated, and sales are flat which Goldberg didn't deny when Realty Times suggested as much. Commissions are down and competition is up with the influx of 250,000 new members in less than five years. New members don't typically have listings to contribute, and they are also in dire need of leads.

Which brings us to an interesting conundrum - what business model can Homestore introduce for Realtor.com that is similar to its competitors but not, produces different results than its advertising model, and gets the blessing of the NAR?

"I have been a part of meetings, focus groups, agent groups, seminars," says Goldberg, "and I attend a majority of those, and one thing we have seen, and one thing that has been asked, is would Homestore consider a success-based lead management program. We don't view it as referral model because we would be running it for the benefit of Realtors. When a third party runs it, that is a tariff model. They are outside companies who aren't involved in real estate transactions. Realtor.com is the Realtors' site, and it has the listings."

Does that mean the NAR would be open to altering its operating agreement with Homestore to allow previously forbidden kinds of marketing like lead-selling to Realtors?

"What we have looked at is that we would never allow Homestore to change the model or eliminate the current model," says Goldberg, "what we would consider is another option, so that Homestore can't say 'This is the only way we work.' If you want to add another model, it would have to be what the brokers want, that they are saying, 'I don't want to do it the way I've been doing it.' The issue that we are hearing is that if a majority of agents don't follow up on leads they are getting from emails, what is happening to those leads? When you ask consumers, lead management has been a problem. We know Realtor.com generates leads, but they aren't managed well. If there is a way for Realtors to have a lead management system that better helps brokers and agents manage leads, if Homestore can help, then they should get compensated."

So NAR is open to another option?

"If you provide another option," says Goldberg, "we would be open to listening to it, so that our members can have a choice. Keep in mind that Realtor.com works for tens of thousands of agents, the question is - is there something else?"

If Realtor.com isn't going to abandon its advertising model, how would a door to another kind of lead generation work on the site?

"Because we haven't been in formal discussions," says Goldberg, "I can't really answer that, but my thought is you want to provide a program where the lead could be managed on behalf of the agent or the broker that those leads were intended for to start with. All that has to be vetted. If the Realtors are saying 'We want someone to help us manage our leads,' then the answer is a lead management system. Then, you are doing something of value."

Published: April 27, 2004

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