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Referral fees charged by online real estate companies that are brokerages on paper but don’t actually buy and sell property inflate commissions to the tune of $15 billion per year and the federal government should eliminate them, a real estate tech firm executive told the Federal Housing Finance Agency on Thursday.
The FHFA, which regulates Fannie Mae and Freddie Mac, opened an Office of Financial Technology (“fintech”) in July and is currently asking for public comment through October 16 on the role of technology in housing finance, “broadly seeking to understand the current landscape of innovation throughout the mortgage lifecycle and related processes, risks, and opportunities.”
As part of that effort, the agency held a public listening session on Thursday and those who registered were invited to request a brief speaking slot at the session. Dmitry Shkipin, the owner and publisher of HomeOpenly, was allotted a slot.
HomeOpenly bills itself as an “open real estate marketplace” that connects real estate agents and consumers at no cost to either, including no referral fees, making its money through independent ads from lenders, home insurers, and other real estate-related companies.
In slides accompanying his remarks, Shkipin described broker-to-broker referral networks such as those operated by Zillow and Realtor.com as “kickback schemes” designed to bypass federal laws such as the Real Estate Settlement Procedures Act (RESPA), which prohibits giving or accepting a fee or kickback for referrals of business related to a settlement service involving a federally related mortgage loan.
“Broker-to-broker ‘referral networks’ … attempt to bypass these federal laws by establishing what is really sham real estate entities that do not provide tangible real estate services and instead use massive networks of third-party ‘partner agents,” Shkipin told the FHFA.
“These kickbacks and broker-to-broker collusion schemes actually cost consumers about $15 billion in overinflated real estate commissions annually.”
Shkipin said that the referral fees charged by the networks range between 25 percent and 40 percent of a real estate agent’s gross commission on a deal, leading those agents to charge higher commissions to pay for the fees, rather than allowing the agents to compete on offering consumers savings.
Shkipin’s remarks come at a time when the industry’s commission structure and rules are under attack on multiple fronts, including attention from the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC).
Companies that join a multiple listing service to obtain access to its IDX listing feed without providing brokerage services by directly representing a buyer or a seller in a transaction are sometimes described as paper brokerages. The practice has been controversial in the industry for nearly a decade, but has been quietly been adopted by several major real estate companies including Zillow, and soon, CoStar. Such firms often use IDX listings to capture consumer leads through websites or mobile apps and then send those consumers to agents at other brokerages for a referral fee.
“Nine out of 10 VC [venture capital] dollars in the last several years have actually been funneled into these types of schemes,” Shkipin said.
“IBuyers is a very good example. IBuyers systematically cost consumers over sometimes 20 percent of their net equity when transferring homeownership. And of course those kickbacks cost consumers tens of thousands per transaction. Unfortunately these fees are often hidden so they wouldn’t even know that exists.
“There are now dozens of VC-backed referral fee schemes across the United States that include some of the largest corporations that all of you probably know, including Zillow, Opendoor, Redfin, [and] many others.”
According to Shkipin, safe harbor provisions in RESPA allow real estate brokers to make cooperative brokerage and referral agreements between one another, but those provisions do not apply to “sham” entities or to agreements that restrain trade.
Shkipin alleged that broker-to-broker “blanket” referral agreements violate the Sherman Antitrust Act and told Inman they “carry exactly zero pro-competitive benefits.”
In his remarks to the FHFA, he singled out real estate tech firm HomeLight as a “sham brokerage” that has collected billions in “unlawful kickbacks” from more than a million transactions nationwide since its founding in 2012.
“HomeLight further admits in their own materials that it’s not a broker that provides genuine broker services,” Shkipin said.
“All brokers [that offer] referral services effectively disengage from actual genuine competition and allocate consumers to partner agents.
“This becomes a real challenge when it comes to massive mortgage lenders such as Rocket Homes, Better, loanDepot, Redfin and Opendoor utilizing this type of strategy. They essentially establish real estate entities to collect kickbacks and in effect bypass their entire RESPA prohibition.”
Shkipin and HomeLight are currently embroiled in litigation relevant to his remarks. In May 2022, HomeLight filed a trademark infringement and false advertising suit against Shkipin and HomeOpenly, alleging that Shkipin has made “false and misleading” and “defamatory” statements about HomeLight and other competitors.
“[Shkipin] claims that ‘[r]eferral fees may be illegal kickbacks,’ that referral networks are engaged in price fixing, and that certain businesses are committing antitrust violations. None of these claims are true …,” HomeLight’s complaint says.
In June 2022, Shkipin counter-sued HomeLight alleging restraint of trade and attempted monopolization in violation of the Sherman Antitrust Act, misleading trademark use, and unfair practices in violation of California law for the alleged practices he highlighted in his remarks to the FHFA.
Both sides have filed motions to dismiss and a motion hearing is set for December 13.
“[T]his is the case … the industry should really worry about because I can tie pretty much every single major brokerage into it once the claims proceed past HomeLight’s Motion to Dismiss,” Shkipin told Inman via email.
“HomeLight is represented by [the law firm] Fenwick… which is the only thing that can save them since they can just throw money at it and try to stop me, but, eventually, HomeLight will have to face me before a jury having to explain what ‘partner agents’ are and it won’t go well for them. HomeLight is a clear-cut hub-and-spoke cartel of about 28,000 third-party agents unaffiliated with them.”
HomeLight CEO Drew Uher did not respond to a request for comment from Inman.
Shkipin ended his remarks to the FHFA urging the agency to “enforce your mission and to address this problem on a bigger scale” and to disintegrate kickback schemes.
“FHFA can advance its mission to ensure that all real estate closing services entities are operating in a safe and sound manner in order to preserve the affordable housing options for all consumers nationwide,” Shkipin said.
“Building better technology is not enough: our federal laws must be fully enforced in order to facilitate transparency in the housing sector.”
Anyone can provide public comment to the FHFA on the role of technology in housing finance and how the agency can facilitate responsible innovation through a form on the agency’s website.
What do you think of Shkipin’s remarks? Let us know in the comments below.
An earlier version of this story incorrectly described Dmitry Shkipin as the CEO of HomeOpenly. He is the owner and publisher. Inman regrets the error.