Why Real Estate Referrals Are Rarely Good for Consumers

Real Estate not like Doctor Referrals
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First, just what is a "real estate referral" and how do they work? The buying and selling of homes means that someone is moving, both buyer and seller. When they're moving locally, a good job means that their current real estate professional will likely work with them if they want to buy or sell another home. However, if they're leaving the area, especially changing residence states, the agent working with them will not be doing so at their new destination.

The advertised reason for consumers to ask their agent to refer them to someone at their new destination is that the agent will do research and refer them to a highly qualified agent in the new area with expertise in the type of representation they need and the type of properties they seek. Indeed, many agents actively ask for referrals. The consumer is not charged for this service, so it seems both logical and beneficial. The problems lie in the actual practice of real estate referral and the services received by the referred customer/client.

The Usual Real Estate Referral Process

This isn't an every case description, but the practices and motivations explained are the most common in the business. Some referring real estate professionals actually do spend a significant amount of time in research, even personally contacting agents to discuss their customer referrals. And, some of the agents receiving the referrals are fully qualified and devote their full attention to the referred customer.

However, in many cases, there is a different process for the referred consumer.

The Research Process

The referring real estate agent goes to a franchise or other "referral directory." If it is prepared by a franchise, it is going to have only agents in the new area that are working at franchise brokerages.

While there will assuredly be qualified people, this takes the majority of practitioners out of the game. Other referral directories are online, and they are often businesses that make money by connecting two agents. More on the money later. The point is that in many cases, less than 15 to 30 minutes is spent in research to choose an agent to receive the referral. They're simply chosen off a list, and rarely is there a conversation of significance about the consumer's needs or preferences.

The Money

In referral directories, there will be an entry for the "referral fee" or commission. The whole process is set up around a sharing of the ultimate commission between the two agents involved. Typical referrals run between 20 percent and 35 percent of the commission received by the agent in the resulting transaction. The agent who receives the referral will sign a referral agreement to pay the referring agent after the deal closes and they're paid.

The Motivations

Human nature does enter into many of these referral situations. The referring agent, especially if just making a fast selection from a referral directory, will be carefully examining what they're going to get as a fee. There will be some motivation to select an agent who is willing to pay 30 percent instead of one only willing to pay 20 percent.

On the other side, newer agents who are not busy and seeking business will often advertise high referral payouts to attract business. They may be honest and do a good job, but they're often new and trying to build out their business. Their experience level may be insufficient for the needs of the consumer. The busier and more established agents are likely to pay lower referral fees, as they do not need the business as much.  

As far as the motivation to devote their very best efforts and the necessary time to the referred customer, the agent is working at a discount. If they are busy or get busy, are they going to value the referred customer at 70 percent of their regular commission as much as others they're working with for a 100 percent commission? It isn't necessarily a conscious or malicious decision, just a matter of trying to allocate time resources where the most value will be received.

Assigned Referral Leads

When the referral leads come into the brokerage office to be assigned to agents, it adds yet another entity into the process. The broker who assigns the referral may give the lead to an inexperienced agent to help them get their career off to a faster start. Again, experience will be a factor. On the other hand, they may want to reward a producer and give the referral to a busy agent working many deals. We're back to the time available to work with the consumer customer/client.

Using Technology for Self-Referral

The Internet has changed the real estate business a lot. Much more information is available to the consumer online. Starting months before moving, the consumer can visit local real estate agent websites in their new residence area and start doing MLS searches and asking email questions. Quickly they will find the agents who are responsive and who know what they're talking about. This self-referral process puts the research to work on behalf of the party most benefited by doing it well... the customer.