What Motivates Real Estate Agent Review Websites

Online Real Estate Agent Review and Referral
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The Internet has become a valuable source of information and services for the American consumer, including new real estate agent review and referral websites. Unfortunately, many consumers do take the Web at face value and they're happy to cut short due diligence in some cases to get services without much work or research on their part. Just look at Angie's List and HomeAdvisor competing and spending advertising dollars to get the chance to refer contractors (another discussion).

Without picking on any site by name, there are some logical reasons for their existence to refer real estate agents to consumers. Unfortunately, they all revolve around money.

There is a lot of money in real estate commissions: With the national average still running somewhere between 5 percent and 6 percent per transaction, surveys yield different results. But one recent report shows an average new home sale price nationally at $322,500. That's somewhere between $16,125 and $19,350 per transaction in commissions. In most cases, different agents are on each side of the deal, so the amount drops to half for each, but it's still a lot of money.

Real estate referral fees are quite hefty: In almost all states, referrals between licensed real estate professionals are legal. These referral fees normally run between 20 percent and 35 percent of the commission to the agent receiving the referral. Just using the middle, around $17,000 from above and dividing by half, that's some portion of $8,500.

At 20 percent, it's 1,700, and at 35 percent, it's $2,975.

Most referrals are simply a lookup, quick phone call, and a form: There are catalogs of agents who offer referrals with their desired percentage. In most cases, a referring agent simply chooses someone from the other area and sends them a referral contract form.

Once signed, they send contact information. It's a few minutes of time, some paperwork, and a nice hefty payment. In the case of the referral website, they've set up a system inviting agents to join and it becomes an online transaction. The agent receives the referral and has already agreed to a stated amount, often 25 percent they will pay for the referral out of their commission.

The "best agent for you" is not often accurate: Online sites spending lots of advertising dollars to get consumers to their site are expecting to make good money with their automated referrals. However, logic tells us that the most successful agents are often too busy to want to give up a big chunk of their hard-earned commission for a simple referral. Even if they're not busy, they value their service and will not pay referrals. So, it is highly unlikely that the consumer is being exposed to the "best" agent(s) in the area.

A flaw in the system is leveraged in some cases: The way most commissions are structured in listing contracts if the same brokerage/agent that lists the property also brings the buyer, they get the full commission, doubling the take. Just logically, there are many opinions that neither the buyer or the seller are going to be aggressively represented in this situation.

There is simply way too much incentive to keep that double-commission deal in play to closing. Now we have the referring/review website involved, offering referrals to both buyers and sellers, so they can also double their referral payment.

Virtually every facet and step of the process incentivizes the players, other than the consumers, to move the consumer through the system to the money at closing. The very best agents are not often signing up to pay referrals. In fact, it's often new agents with little experience who are willing to give up 20 percent to 35 percent because it's better than no business at all.

None of this is meant to imply that a consumer will be treated unfairly or get poor service or representation if they allow a website to review/refer a real estate professional. However, once you understand the motivations and compensation of all of the players, there is ample reason for caution.

While the consumer pays nothing to the website, they are paying for the services. Buyers, though they don't see the commission on their side of the closing statement, are paying more for the home to cover the commission.