Real Estate Referral Fees: The Good, the Bad and the Ugly

The Common Business Arrangement could be Improved with Transparency

  • Helping a homeseller find the perfect agent adds value to the transaction.
  • Consumers have a right to know if their agent is paying a referral fee and whether a referral constitutes a recommendation.

The real estate event of the summer

I just love it when a check comes in the mail a few weeks or months after I referred a friend, family member or client to a Realtor in another market. I try my very best to find the perfect match. Sometimes I even turn leads away (insert gasp here) with instructions on how to find an agent and what to look for.

There are times when I accept clients from other agents and pay them a referral fee. Usually it works well, and I don’t mind paying the fee for a client who is ready to buy or sell now.

That’s the good. However, referral fees are also territory for abuse, and the practice can leave consumers in the dark about who’s paying who.

More leads than home sales

Agents and other industry players “capture” leads so that they can sell them. The internet has made it easier than ever to do so. (Indeed, there are far more leads than there are home sales.)

We get emails and phone calls about leads who are looking for an agent in our market. Apparently, these leads wait patiently for their captor to sell them to an agent. Maybe that’s what happened to all the homesellers this year.

Referring agents can become the middlemen that come between middlemen without adding value. The captor adds no value to the transaction; the client remains in the dark, unaware of the exchange.

One improvement: Transparency

Consumers often confuse referrals with recommendations. They may not vet the agent but assume that the referral is a vote of confidence.

The weakest kind of referral, of course, is the lead capture. The person who captured the lead knows nothing about potential clients and whether they’re qualified to buy or ready to sell. If the agent who accepts the lead is able to convert him or her into a client, and that clients buys or sells real estate and the transaction closes, the referrer expects a fee.

Some of the agents who refer business to me found me on the internet. They don’t know me or anything about me. They don’t know if I will do a good job. Most of the time they do not know the lead either. They acquired contact information, and they want to get paid for it.

Consumers who click on the wrong link or call the wrong agent may end up paying that agent indirectly as their contact information is given to another agent. I wonder about the people who get captured and sold because they cannot find a Realtor — not finding a real estate agent would take some effort.

The system could be improved by requiring the person making the referral to disclose the fee (and who knows who and how they know each other) to all parties.

In Minnesota, we must disclose who is paying us a commission and how much, but we do not have to disclose how much (or who) we are paying for the business.

The law says that I can only pay licensed brokers for a referral. The first thing I do when a referral comes in is check to see if the person making the referral is licensed and if they are active.

Calls about a ‘business opportunity’

People I don’t know will occasionally call with a “business opportunity.” They want share the name of a person looking to buy or sell a house, and for me to pay for it.

Most agents have heard relocation horror stories from clients. Let’s say Big Box Brokerage (BBB) has a relocation department. BBB refers persons who are relocating to BBB agents. Often, the agents with the least amount of experience will agree because they do not yet have enough business and they need the experience and the money.

BBB takes 40 percent of the new agent’s commission and charges a 35 percent referral fee. The buyers or sellers end up with an inexperienced agent who is working for almost nothing. The consumer ends up with an inexperienced agent tasked with navigating a cross-country relocation.

What consumers have a right to know

We need to do more to educate consumers. They need to understand that if they get referred to an agent, they should interview that agent like they would any other and ask the same questions. They need to understand that in their real estate search, they may get captured and sold, or end up being referred by one agent to another for a fee without ever knowing.

I don’t think leaving contact information on a real estate agent website is wise. I have a hard time understanding why people do it and why they enjoy drip email campaigns and having agents keep in touch with them.

I won’t leave my contact information on any website, and I block advertising campaigns or opt out of them. I am just not lead material.

Helping a homeseller find the perfect agent adds value to the transaction. It is wonderful when a friend or a past client thanks us for introducing them to that amazing agent.

Referring business to others (even if we don’t know them) just because we can add value to our bank accounts could be part of the reason why people don’t trust real estate agents.

Email Teresa Boardman.