Referral Fees in Real Estate Brokerage

Pay Per Click Marketing
Pay Per Click Marketing. iStockPhoto

Definition: Referral fees in the real estate business are fees charged by one agent or broker to another for a client referred. They are most common when a seller client is leaving the area and their agent refers them to an agent or broker in the new area to which they're moving. Generally this fee is a percentage of the final commission received by the agent who accepts the referral.

Let's examine the current state of the real estate brokerage business and how referrals have become a market or business niche instead of a customer service when of value.

 The way free markets work is to reward value with income.  In other words, if I have a product or service that you value, that helps you in some way, then you will pay something to me for it.  In a straight one-to-one exchange, this works pretty well.  If my neighbor offers the same service or product at the same quality level but a lower price, the business will move from me to my neighbor.  That's how free markets work, or they should.

Am I about to go on a rant that real estate agent referrals aren't of value to the customer/client?  Not really, but with some commentary.  I personally do not ever request a referral for advising a customer or client to contact a specific broker or agent.  I will only do so if I know the agent/broker personally and know how they do business.  That limits my referrals to a local level, which means it doesn't happen often.

My problem with referrals is the value/reward ratio and how it can influence the services the referred customer/client receives.

 I'm not negatively commenting on any of these sites specifically, just giving you links to show what I found in five minutes on the first page of hundreds of results for referral groups/sites for real estate agents:

There were many, many more.

 The point is that there is some "excess" money somewhere when third parties are competing so heavily to get between referral real estate agents.

Let's think a minute as to why these sites believe they can make money in this niche that's not only between an agent and a customer, but between two agents with a single customer.  First, the referring agent is going to get paid for the referral, but a chunk of what is paid by the agent who gets it is going to the third party site in the middle.  So, what's left isn't huge.  How much effort is the referring agent going to expend?  Very little, as they just sign up with one of these sites and let the site do the work.  

That's the first clue that there is a problem with this model.  The referring agent isn't really doing much of anything for the client.  They are simply tossing them into a hopper with no idea who they'll get in many cases.  It's a few minutes effort to fill out an online form and a check later.  Even if they choose an agent off the site, and even if some qualifications are there, they don't know them, and they can't know their ethics or business practices.

Now let's go to the other end.  Is the customer going to get an experienced and effective agent?

 Unlikely.  The best will be busy and definitely not wanting to give up 25% or 30% of their commission for a lead.  Usually it's going to be a starving newbie or an agent who takes all referrals and isn't really going to be "all-in" service-wise for any of them.  The customer may get 75% of excellent service, but they want 100%.  

I don't pay or take referrals, never have.  I think that in some cases they are justified, but in most they are simply an indication of too much money in play for the services delivered.