Legal Theft - The Referral Fee
I am going to take a position that is going to be unpopular with a lot of agents out there.
Doug Quance at the Bloodhound Blog wrote an excellent piece on referral fees in the real estate industry and proposes that it is time to do away with the practice. I am going to join Doug out on his “limb” and agree whole-heartedly that the practice of paying compensation to another for the introduction to a potential client is not usually in the best interest of that client. Further, rarely if ever in my experience is this fee disclosed to the principal in the transaction. Therefore, the practice in many cases strikes me as being more than just a little sleezy.
As Doug points out, referral fees can be paid out to relocation companies, on-line lead generation sources, and other agents. Keeping in mind that I have both received and paid referral fees, it is not a practice of which I generally approve. There are agents who have business models built almost entirely on the practice (or aspire to the same), and I do not find the role of the interloper a noble one.
Disclosure, or lack thereof, simply offends my sensibilities. This is my biggest issue. Let’s take the company referral. The company gives the agent the name of the home buyer or seller which has been generated either through their company website or through their relocation department. I will use some typical numbers to illustrate what will happen. Let’s assume that the agent is on a 75% split with the Broker (25% of every commission check goes to the company). If the client is a referral client, the agent will agree to pay anywhere from 25 to 30% off the top for the privilege of being handed the lead. After that, the agent will agree to a reduced split of 50 or 60%. I’ll let you check my math, but the result is that on a $500,000 purchase or sale, the agent stands to “pay” approximately $5,000 dollars for this client.
The first unwritten rule in accepting the referral is that you never discuss the financial arrangements of this referral with the client. Now, in the case of many relocation company arrangements, the referral fee is obviously in place to offset the costs to the employer of paying the employee’s moving or selling expenses. If my real estate agent’s fee is covered by my company, this whole argument is really of no interest to me. But, fully-comped employer moves are becoming more of a rarity. For all of the other referred consumers, do you think that they might like to know that there was a $5,000 price tag on their head? Do you think that, armed with this knowledge, they might see a benefit to cutting out the referring middle man? You betcha.
Next is the agent to agent referral. This is carpet bagging at its worst and can even take the form of outright theft. Years ago, I received a “come list me” call from a homeowner in my area. At the meeting, they explained that they were relocating to Texas. They knew me through my marketing and reputation, their friends had highly recommended me, and they “always knew” that when they sold their home, they would call me. Prior to making the call, however, they had made an advance trip to Texas to look at homes. They explained to the Texas agent they found that they knew they would be calling me to sell their San Diego home when they returned, at which point he convinced them that he would facilitate the process (”get the ball rolling”) by making the referral on their behalf. And refer he did. When their home closed escrow, I received 50% less than I would have absent the Texas agent’s helpful facilitation, and that agent and my company took the balance. I couldn’t (wouldn’t) tell my clients this, yet it was their money that had been stolen. Sleezy, underhanded, and absolutely legal. The agent worked the system to his advantage and got the goods.
So, should we do away with referral fees altogether as Doug suggests? It will never happen. The answer is transparency, which will in turn allow the client to decide. It is, afterall, their money. The last time Steve and I referred a client to an out of area agent, we disclosed the referral fee to our client and credited them a portion in escrow. All above board, all discussed like big boys and girls, and to everyones benefit. More recently, I met with buyers relocating from out of state. Knowing they were a military family and knowing that USAA has a buyer rebate referral program, I made a preemptive strike. I acknowledged it and agreed to match the concession to avoid the whole referral system mess. We both win.
How we achieve the needed transparency is the question. Knowing that the agents either won’t disclose the extent to which your business is being bartered or that they reside in a company culture that discourages disclosure, I see much of the responsibility for change falling squarely in the laps of the consumers. It is unfortunate, but it is. Any time you as a home buyer or seller find yourself in a situation where a third party has a role, demand to know the specifics. You may not know it, but you could be leaving your money on the table for someone to steal.
January 28th, 2007 at 2:43 pm
Kris:
I will mildly disagree. Id an agent isn’t changing their fee structure to compensate for the referral fee, who cares?
The customer is going to pay X% for the sale of a home whether Bill Smith of Noerth Dakota refers the customer to that agent or not. If the listing agent is willing to work for X%(.7), and the customer is getting the consistent X% fee charged, what difference does it make?
Real estate agents should be able to spend the money they earn anyway they see fit (referral fee, car payment, advertising, etc). I can understand you or Doug making a personal choice to not accept referrals that involve a fee paid to another agent. Why call for abolition?
January 28th, 2007 at 3:02 pm
Brian,
That didn’t sound mild at all.
I didn’t call for abolition, just disclosure. When an agent gets away with referring a client to me through my company relocation network which was mine to begin with, that is theft, plain and simple.
January 28th, 2007 at 5:44 pm
Disclosure should happen more than it does, on the part of the agents but also on the part of the relocation companies. I was able to fight off paying a referral on a corporate relo this summer, but it was only because the client had found me off the Internet and I’d signed a buyer broker with them to avoid being a glorified taxi cab.
The corporate relo referral “request” didn’t come until almost a month later, a month spent previewing homes and sending information back to the buyers.
Corporate relo companies claim the employee will lose their benefits unless they play ball and choose an agent willing to offset the relo cost with a portion of their commission. Anecdotal evidence is this is so much caca de toro.
January 28th, 2007 at 6:05 pm
Why should we be hesitant to tell the client who is getting paid how much in a transaction?
The only option is to fully disclose the flow of commission dollars to the principles in the transaction.
In the interest of transparency, I always disclose to my clients how the commission dollars are flowing so they don’t think there is the appearance of backroom deals against their own interests.
In Idaho, we have a law against anyone (including relo companies) demanding an after-the-fact referral fee.
Which is why it’s a great idea to get a buyer rep agreement signed as soon as possible with a buyer.
January 28th, 2007 at 6:32 pm
Oh…sorry Kris.
How can disclosure hurt? never mind
January 28th, 2007 at 6:33 pm
“When an agent gets away with referring a client to me through my company relocation network which was mine to begin with, that is theft, plain and simple.”
Agreed…it’s blackmail
January 28th, 2007 at 9:35 pm
While I advocate that referrals be banished… I agree it will probably never happen. My only reason for tossing the bomb on eradication is that the abuse is so rampant.
Perhaps some serious disclosure laws will help, I agree. At least it would have kept that Texas thief from picking your pockets, Kris.
Great post. That’s why your at the top of the heap at BHB.
January 29th, 2007 at 5:54 am
I got a call from a past client/friend of mine asking if she should use a relocation service to buy a home. I explained to her that she would probably be referred to a newer agent, and that the agents would get about half of a comission out of the deal and that it is hard to be motivated to do all the extra work required when someone relocates for half of the pay. We just have too many people in this industry that want to make a buck off of someoen elses work.
January 29th, 2007 at 7:55 am
Kris,
I’ve been a lurker on your blog for some time and have always been impressed with your blunt honesty. I’ve been on one side or another of more than my fair share of real estate transactions over the last couple of years (for a non-realtor at least), and have found the lack of openess about the commission disturbing.
When hiring an agent, one of the first questions out of my mouth is about the commission (How much do you get? How much does your broker get? Do you dedicate a perecentage of your commission to advertising, etc? How much?) As a consumer, I feel like I have a right to know EXACTLY how I’m compensating the agent that I hire….even if I’m paying them indirectly through the purchase of a home.
Thanks for keeping us informed….and laughing
Erik in SR
January 29th, 2007 at 9:07 am
Disclosure is getting better in Canada. Today, many provinces require the use of a separate disclosure statement which clearly outlines what’s going on. It’s a positive move which may eventually force the issue of large referral fees.
I’ve had agents attempt to connect me to my own clients by way of referral. My postion is always clearly outlined; “beat it bottom feeder!” Fortunately, our system allows the listing brokerage to collect the entire commission shown on the listing agreement. We then pay out those we’ve agreed to share the commission with so there’s no danger of holding up the transaction over a commission dispute.
Unfortunately, the trend seems to be larger referral fees. Relocation companies are routinely charging 35%. I know many good agents who simply won’t take them. The buyer ends up working with a junior agent as a result, so these outrageous fees are certainly affecting the consumer and they have a right to know it.
Thanks for an excellent follow-up to Doug’s post.
January 29th, 2007 at 9:40 am
Erik,
Thank you for coming out of hiding! Your questions for the agent are all great and valid. Surprisingly, how my fee is split with my broker has never been asked of me. I’m not entirely sure how relevant it is except in the referral situations we are talking about here, but certainly nothing wrong with transparency in either case.
Teresa and Norm,
You hit on a point that almost begs for a new post: the agents who widely participate in relocation referral programs. Early in my career, I was a member of the relocation team because I had no other business. It was a great opportunity to establish clients and future, repeat business, which I did. The veteran agents typically find that relocation work doesn’t pencil out. Not only is the process infinitely more time consuming (particularly on the buyer side, where relocating clients hit town with “the world is my oyster” mentality, or arrive to look at homes as a part of the “should I take the job offer” process), but it simply doesn’t pay well. Consequently, you are both so right that many (most?) relocation agents are the newer, less experienced agents.
Jonathan and Phil,
Whether it is the BBA or a simple Agency, you have the answers to protecting ourselves and our interests, where referral systems and everything else “real estate” is concerned. Events lately have made me entirely rethink my position on BBA’s, but have certainly caused me to commit to have that Agency agreement signed fast and furiously. If I don’t value my time and my skills, my clients never will. Love the “glorified taxi” remark.
January 29th, 2007 at 6:51 pm
Something to ponder about the referral relationship as it relates to “playing in your sweet spot”, Kris:
http://activerain.com/blogsview/23572/Are-You-A-RainMaker
January 30th, 2007 at 9:55 am
My general policy, unwritten rule be darned, is that I disclose any and all referrals. That includes agent to agent and warranty and mortgage company or anything else I may end up with my fingers in.
Agent to agent referrals can be ridiculous at 30% or 35%. I generally will turn those down unless the person pretty much has the home picked out before I call them. Corporate referrals, with all their paperwork and duplicate phone calls to go along with very high referral fees are out of the question, in my mind.
I do take and pay out referrals. But I believe the referrals should be reasonable (varies on price of unit) and fully disclosed.
Great blog.
January 30th, 2007 at 10:09 am
Thanks, Chris, and great comment! I agree with everything you said. I think some people misunderstood that I find referral fees evil. Not so. It is how they are handled that I can find offensive.
January 30th, 2007 at 7:45 pm
Completely off topic…sorry Kris, but I just talked with Pat over at MyHouseKey and well…here’s the last response, enjoy!
“Hey guys! Pat, sounds like this little venture is progressing nicely. I am so sorry I have not been in the “game” with myhousekey, but I have been working the field and creating my own little ventures! I really can’t wait to start promoting my most recent piece of artwork…I have a feeling it will show my knowledge and give me some credibility throughout the blogosphere. I’ll be back guys! By the way, Kris Berg is really generating some nice articles for you…maybe you could feature her? Talk to you soon.”
I kept them Chargers in the back of my mind with that last line haha!
January 30th, 2007 at 8:04 pm
You can be “off topic” any time, Vince. Thanks!
(Last warning - Do not talk about “them” Chargers.
)
January 30th, 2007 at 11:49 pm
Referral fees can also incenivize agents to give clients to an agent who has a better knowledge of one particular area/field. For instance, I can sell real estate anywhere in the state of Utah, but I do not usually work outside of the Salt Lake valley, which I kow very well and have true value to offer my clients.
If a client wants to look for homes in Ogden, which is 45 minutes north- I can still show them homes and with my GPS, have no trouble locating them. And I even know the area some. But I’d rather take the referral fee and give the client to someone who specializes in that area and knows it very well.
I refer clients to all surrounding areas of the Salt Lake valley, but I have a lot of business. Many agents probably would not refer clients to areas that close if they did not get a referral fee, and the client would suffer because of it.
Transparency is good, but I’m not sure there is always a need. I do not tell my buyer clients if I am going to receive a 3% commission or a 2.5% commission because either way, they just want the best service from me they can get and either way it’s not going to effect the price or terms on the contract we negotiate so I’m not sure it matters.
January 31st, 2007 at 11:24 am
Greg,
You and others have beat up on me in such a civilized way, for which I thank you. I am rethinking my position on the whole referral thing. While I largely stand by my position, I can see situations where, handled properly, they are not the work of the devil.
I’m backing down.
(By the way, my own Steve didn’t agree with me, but knew better than to publicly question me).
February 1st, 2007 at 12:25 pm
Kris,
Your view is definately valid. I was only showing another side so everyone, especially the consumer, sees the whole picture.
You and Steve do a heck of a job telling the stories of our business with class, wit, and wisdom. There are definately some people out there who are basically just walking house-values clones, and in situations like you brought up where someone takes a referral fee when you were already working with that client- that agent should have disciplinary agent brought against them for being unethical. What they did is border-line fraud and if they did that once, I am sure they are doing it to many others.
February 1st, 2007 at 12:27 pm
BTW- It’s great being a Colts fan this week!
Colts- 27
Bears- 21
February 3rd, 2007 at 2:43 pm
Hi Kris,
I found your post to be quite interesting, as I am not (yet) a Realtor but have set up a referral network with a partner that is a Realtor. We help people find homes in walkable neighborhoods and then refer them to Realtors in those neighborhoods. It sometimes involves a decent amount of leg work up front for us (sometimes impossible!) and when we send on a referral to a Realtor, we try and educate them on the type of neighborhood our client is looking for. We try and establish a relationship with one particular Realtor in each community, so that our clients don’t get someone that refers them to sprawl suburban houses.
Of course, we take a referral fee from doing so. I think though when you weigh the service we’re providing, and the education of people on walkable neighborhoods (planting a seed in the minds of people about the importance of the type of community you live in), then in my mind it’s not such a bad thing.
I’d be curious to hear what you think about the system. Complete honesty is appreciated. You can view our site at walkableneighborhoods.com
February 3rd, 2007 at 2:43 pm
I also forgot to mention that it’s even better to be a Bears fan this week!
Bears 27, Colts 23
February 3rd, 2007 at 4:28 pm
Greg and Eric, Not so great to be a Chargers fan this week. Good luck to your teams.
I’ll check out the walkable neighborhoods. In the meantime, let me say I have taken a lot of heat for this post. So, I will back peddle and give you that all referral situations are not created equal. There will certainly be situations where in making the referral, the client is better served. I have been duly chastised and enlightened.
March 29th, 2007 at 6:33 pm
There are ways to win the relocation game; here’s a few:
http://activerain.com/blogsview/66324/How-to-win-the
March 29th, 2007 at 9:36 pm
Jim, Of course, that makes sense. On the other hand, I happen to work for a company that mandates that any time a relocation company is involved, the paperwork must be “processed” through them. The bottom line is that the agent split is severely compromised on top of the typical 35% referral fee. It happens all the time: Seller calls me, seller tells their relo company they want to use me, I have to “register them” with my relo people, I cough up a referral fee, I reduce my company split for the privelege of working with a client who wanted me to begin with, etc. In the end, it is just one more profit center for the Broker at my expense.
Broker-to-broker referrals are a different story, of course. Those can be handled as you suggest.
May 22nd, 2007 at 11:57 am
I am curious to know how much leads from these outside companies cost or if they are commission based? If I was a buyer and knew my lead was sold to one or more companies I would be reluctant to do business with any of them because it seems to me like its all about the money instead of making me happy and helping me get what I want.
May 22nd, 2007 at 1:39 pm
I have never been one to “buy” leads (obviously, from the tone of the post), but the referral fees typically range from 25% to 35% of the agent’s commission. In SD, 35% from relocation companies is the norm. Amazing, huh?
August 26th, 2007 at 1:38 pm
I agree that referrers are sometimes “crooked”, but overall I think it helps the real estate industry.
Tom Ellington
Knoxville, Tn