Legal Theft – The Referral Fee

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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.

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