I submit to you – the time has come. In fact… it’s long overdue.
As someone who has received more referral money than I have paid out – it has been good for me on a personal level.
But I fear that is has become disastrous on an industry level. Relocation companies, REO Asset Management companies, and online entities like Yahoo! and HomeGain are draining a ton of money out of the system without adding much value to it.
In an era of transparency, perhaps we need to shed some light on this subject.
Is it not odd that no other business operates in such a fashion? Do you think other licensed professionals seek to refer their clients out to the highest bidder?
I think not.
Do you think our clients would appreciate knowing how we’ve “pimped them out”?
I think not.
Do you think a buyer or seller would think twice if – IN BIG PRINT – they were told that the agent that they were being referred to has agreed to pay 35% of his commission to the referring party… especially if it was some online entity like Yahoo! or HomeGain?
I bet some might.
And with the Yahoo! and their relationship with Prudential, the plot thickens. Prudential has a franchise fee of 8% on top of that referral fee… and with the split between broker and agent… you can see how the agent is getting squeezed here.
Some believe that it’s just an issue of disclosure. Disclose and everything is okay.
NONSENSE! Have you read some of these disclosures? They seem so innocent and innocuous… while obscuring the real meaning of what is going on.
Here’s a disclosure in our Georgia Purchase and Sale Agreement:
“Broker hereby discloses that Broker may receive a commission, rebate, or direct profit for procuring a mortgage loan, insurance, or other services on behalf of Buyer or Seller.”
That’s no disclosure! That’s a C-Y-A!
A disclosure would spell out what compensation the Broker received from what service provider – and would require that disclosure prior to the Broker referring the client to said provider… not at the last minute when they sign an offer.
I don’t accept fees such as these. If my client wants a recommendation, I will provide a referral – and I expect nothing in return.
It’s time we did the same thing with referral fees.
It’s time to slay the relo/REO/lead aggregator beast once and for all.
Who’s with me? Bueller? Anyone?
[crickets]
Jeff Brown says:
Hey Dougie – Way to go out on the limb big guy! 🙂
I’ve probably referred for no compensation more than not. That said, I’ve paid out plenty, and gladly. I now have maybe a dozen clients because the local agents knew I was taking clients to invest out of state, and successfully. Their clients needed a guy like me, and the agent had confidence in my character and ability to perform.
For the most part I believe agents in general are a little too concerned about getting referral fees. However, I don’t have a problem paying or receiving if I think it’s appropriate.
For the record when it’s straight referral I refuse to take what’s become the norm here, which is a staggering (to me) 25%. When I first got into the biz it was 10%, and I just can’t make myself take anything over 20% I give the same.
Your logic when comparing our industry to others though – is at the very least very rational, and at most compelling.
Excellent post.
January 27, 2007 — 9:34 pm
Drew Nichols says:
I’m new, but do not see what the big deal is. I do think the no-value-added things like Yahoo and HomeGain are a bit worrying, though. I didn’t realize they made a chunk of any commission referred from their sites. But again, I’m new. 🙂
January 27, 2007 — 9:51 pm
Norm Fisher says:
I could easily go with you on this one Doug but we all have to stop at the same time. 🙂
I paid 9 referral fees in 2006, and like Jeff, I was happy to do it.
The relocation companies have really gone over the top, particularly when you consider that those “referrals” are rarely actually referrals. Over the past few years, I’ve declined any offer with a fee exceeding 25%. I have told a number of clients that I just can’t pay 30-35% referral fees.
Lead aggregators will never see a dime from me. These companies are simply trolling online, intercepting buyers and sellers, and selling them. They only care that the referred agent agrees to pay a fee and they bring no value to the transaction. It would be a different story if they actually qualified agents on behalf of the client.
The “disclosure” which you cited from the Georgia Purchase and Sale Agreement is indeed a joke. Timely and informed consent is essential to disclosure and I’m guessing most agents don’t spend a lot of time explaining that one to their clients.
As for “mortgage referrals” and other such fees that agents collect; they are not only a problem at the regulatory level and at common law, but collecting them could even have criminal consequences. There’s a section titled, “Secret commissions” in the Canadian Criminal Code and agents in this country should think twice about selling their clients.
From the Criminal Code of Canada
Secret commissions
426. (1) Every one commits an offence who
(a) corruptly
(i) gives, offers or agrees to give or offer to an agent, or
(ii) being an agent, demands, accepts or offers or agrees to accept from any person,
any reward, advantage or benefit of any kind as consideration for doing or forbearing to do, or for having done or forborne to do, any act relating to the affairs or business of his principal or for showing or forbearing to show favour or disfavour to any person with relation to the affairs or business of his principal
Hmmm.
January 27, 2007 — 10:14 pm
Brian Brady says:
For the sake of a discussion. What’s wrong with an agent allocating his “marketing costs” portion of his/her fee to a referral source.
eg- Julie sells 30 sides a year for GCI of $300,000 and spends $60,000 annually on advertising to obtain those transactions. Why shouldn’t Julie focus on paying out $90,000 in referral fees next year to increase her GCI to $450,000?
January 27, 2007 — 10:46 pm
Jeff Brown says:
When I refer business outside the industry, as I do often to lenders and a financial planner, I refuse any fee, and they do too.
January 27, 2007 — 10:51 pm
Doug Quance says:
I will jump back in soon… I am waiting for more responses… 🙂
January 27, 2007 — 11:02 pm
Marlow Harris says:
In our state, we are only able to pay referral fees to licensed agents. No referral fees can be paid to or received from lenders, title reps, etc.
The average amount agent-to-agent is 20%.
Cendant and other relocation firms charge as much as 45%
Needless to say, only the very hungry, new or inept accept those.
Personally, my whole business model is built on referral fees. I actually received more referral fee checks than actual commission checks last year, as I refer most leads from my website out, as I prefer to work by personal referral from my sphere than with strangers who contact me through the internet. But I’m glad to interview those buyers and sellers, perhaps send them listings, chat with them on the phone, and then introduce them to an agent who I think will be able to assist them. I’ve worked very hard on my website in order to attract buyers and sellers and I would feel very bad if someone said I had to change my entire business model because someone thought that was unfair.
January 28, 2007 — 12:33 am
Jeff Turner says:
I’ll jump in here, but first I need to understand what the objection really is. Is the objection to the concept of referral fee or the massive percentage?
Lots of industries pay referral fees, but most are between 5-10%.
January 28, 2007 — 3:32 am
marc says:
Not true. There is a small minority of lead companies who ensure the agents are qualified. For example, my website uses a ranking system to score each agent based on experience, sales, endorsements, etc.
Plus, we ask for 10%. Anything in the neighborhood of 35-45% is robbery. However, as long as agents pay, those companies will exist.
Here’s an idea: Instead of throwing baby out with bath water, how about creating levels of certification/seals for lead companies? For example Platinum, Gold, and Silver.
To earn Platinum, they must charge less than 10%, provide exclusive leads, etc. To earn Gold, they must charge less than 15%, send leads to less than 3 agents, etc. To earn Silver, they must charge less than 20%, send leads to less than 5 agents, etc. Once established, brokers/agents will know immediately when visiting the lead generator’s home page what to expect.
January 28, 2007 — 7:24 am
Nathan Hughes says:
As a Commercial Realtor, I find that I come across quite a few potential residential clients. These are only potential clients because they trust me, and, in a lot of instances, want me to benefit from their business. (Most of these potentials are friends and family that are trying to help me out.)
Even though I can legally represent them, I always tell them that I would prefer to get them in touch with an agent that specializes in residential. The reason is be sure that they get the best service they can — AND (the clencher, as I’ve found) that this way we can all benefit, because the agent that I find for them will give me a referral fee.
This way the client knows that their good-intentioned effort to help me out doesn’t go to waste, and they are getting the best representation that they can.
In other words, I don’t think that referral fees are all bad. From the posts here, I can certainly see where they can get out of hand, though.
January 28, 2007 — 8:06 am
Lisa Dunn says:
I appreciate referrals from other Realtors. I’m getting the referral because I’ve earned the business through my reputation, or particular expertise. I also appreciate being able to be the one to refer. However, I can jump on this bandwagon when it comes to RELO and Lead aggregator companies. I haven’t figured out what value relo companies add that a great agent doesn’t provide (other than offer a benefit package to employees that’s taken out of the agent’s hide).
I bet as the market tightens, the number of agents that count on these types of leads will increase.
January 28, 2007 — 8:15 am
Doug Quance says:
Jeff: Any monies I have paid out I don’t consider a bad thing. I wouldn’t take a referral which required some over-the-top payment.
I have been stealth-attacked by relo companies, however.
Drew: You see? You’re now in the biz, yet you didn’t know about those websites. And the average consumer doesn’t, either.
Norm: Wouldn’t it be nice if you received referrals just because you’re good? Great comment, btw. You might want to write a post on your blog. 🙂
Brian: That’s exactly how I used to look at it. Just part of the cost of doing business. Times have changed. We now have non-broker brokers that are only in the business of siphoning cash out of the industry.
Jeff: Me too. I don’t even co-op advertising anymore.
Marlow: You are obviously performing more of a service – and if we could restrict the referral concept to what you are doing… I’d be all for it. Unfortunately, every time an effort is made to do so – the beast slips back in.
Jeff T: I’m just being a bomb-thrower. Unless someone can come up with a better way to clean up the mess that referrals have become… I say do away with them. What say you?
Marc: A step in the right direction. Thought provoking, to say the least… especially if the consumer was aware of it.
There’s a lead aggregator here in Atlanta that does direct mail. They will only select top agents for each area, so that’s right in line with your “selection” process. And they charge the agent a 45% referral fee for any business they acquire with a mailing address on their list.
Translation – If Susie Agent gets a sign call on one of her listings on one side of town… and the customer has a home to sell that’s on the mailing list of the aggregator – Susie pays a 45% referral fee. Ouch.
Nathan: Commercial agents should refer their residential business if they are not comfortable doing it. Most commercial agents I know wouldn’t want to waste their time with residential, anyway.
Lisa: If you can think of a better way, by all means say it. 🙂
What prompted my thoughts on this was the discovery that Asset Management companies are in on this game, too. These are the companies hired by the banks. They beat up agents then pick their pockets.
Maybe we need a cap on the percentage.
Maybe we need a restriction of some sort.
But we certainly need change.
I’m glad I hear more than crickets chirping. 🙂
January 28, 2007 — 8:20 am
Brian Brady says:
“We now have non-broker brokers that are only in the business of siphoning cash out of the industry”
Other than being illegal, what difference is it? Seriously, if a referral source delivers you a motivated client that exceeds your minimum requirements to earn a referral fee, who cares if they’re licensed?
(we’re talking academically here; I don’t suggest that a licensee deliberately break the law)
January 28, 2007 — 9:03 am
Tony Arko says:
Great Topic. Definitely a can of worms. In the past when prospecting and marketing were very expensive and agents were extremely local, referral fees made sense. Now that the Internet has made it easy to market to home buyers in other parts of the country that are moving to your area, it doesn’t make as much sense. Couple that with the fact that a lead can cost a lot less if you are leveraging technology, referral fees make even less sense.
The fact that referral fees are paid because they always have been was an answer one agent gave me when I asked her why I should pay her 25%. When I said I wouldn’t pay it, she called my broker who had to explain to me how this business worked. That exchange convinced me it was not a good practice.
I’m ready to stop paying them immediately. Just say the word.
January 28, 2007 — 9:11 am
Doug Quance says:
Brian: When I mention “non-broker brokers” I simply mean brokers in license… but not in practice.
One day, this Internet jungle will be truly dominated by online behemoths that will snatch up most of the online business and sell it to the agents. They are well on their way, right now.
What would happen if the MLS’s did the same thing and charged a referral fee for every transaction? (actually, one of ours does, albeit relatively small)
Then you would have the online monsters taking their cut… the MLS’s taking their cut… the brokers taking their cut… and what would be left for the soldier in the field?
Tony: I’m already taking the stand. Welcome to the club.
January 28, 2007 — 9:32 am
Jeff Turner says:
What say I? It’s not the fee, it’s the size of the fee. Looking at it from the outside, it just seems silly. You don’t have to do away with it to fix it, just make it reasonable. It’s not right now.
January 28, 2007 — 4:23 pm
Jeff Brown says:
I come from the Milt Friedman school. We’re all free to do what we want within the law.
Who is forcing whom to take/give referral fees?
This is a non-issue, with the possible exception to the lead generators.
I’ve only dealt with them once, and told them to put the fee they demanded where the moon don’t shine. I’d already secured the client with my own efforts. When I dared them to follow up they went away.
Sometimes Darth Bawldguy comes in handy. 🙂
January 28, 2007 — 5:33 pm
jf.sellsius says:
IMO, the question should be: Do referral fees facilitate commerce and make for more transactions taking place? If so, I vote to keep them. If not, they should be tossed.
Is anyone aware of any studies on the subject?
January 28, 2007 — 8:15 pm
Marlow Harris says:
If someone’s going to move, they’re going to move. They’ll figure out how to do it, one way or the other. But it does make it EASIER if one has competent assistance, right from the get-go. Therefore, I believe it does make sense to assist a buyer or seller locate a sales professional who is an expert in their area.
January 28, 2007 — 9:21 pm
Brian Brady says:
“I come from the Milt Friedman school”
Afterall, he did make the phrase “There ain’t no such thing as a free lunch” famous
January 28, 2007 — 9:40 pm
Doug Quance says:
I know… I tossed out a grenade… but it is in the interest of discussion.
Of course referrals can’t be eliminated. It would kill my business model. 🙂
I am really referring to the relo/REO/lead aggregator beast.
It certainly does need reform, I believe we can all agree on that. It can start with full disclosure.
January 28, 2007 — 10:00 pm
Jay Reifert says:
Doug says, regarding doing something about referral fees, “It can start with full disclosure.”
That’s a great idea, and it mirrors the need for disclosure of the existence/ramifications of realtor procuring cause.
The idea of disclosing referral fees to affected parties is that it might change their perception of the value of that “free” advice, perhaps causing them to be more careful in their choice of whom to use.
Well, the disclosure of procuring cause to unsuspecting buyers may also change the perception of the value of their “free” look at any given property, perhaps causing them to be more careful in their choice of whom to use.
http://www.real-reform.org/pc.pdf
I’m all for the disclosure of both things. What about you, Doug. Are you willing to support the need for meaningful disclosure of procuring cause to potentially affected parties, before it can affect them?
Jay Reifert, Broker/Owner
Excel-Exclusive Buyer Agency
Madison, Wisconsin
January 29, 2007 — 8:58 am
Dudley says:
I’m not a fan of the Cendant/Cardis and other RELO monsters out there. I mean lets face it they are just too arrogant about how they do business. Not only do they charge crazy 35% referral fees, but they stipulate how to steer your clients to their lenders etc. I mean there are procedures they want you to follow to “save the deal” so the client will not finance through someone else!
I had this discussion with a client about why the chose to come through the relo company they did… They were getting a $1,500 rebate! I told them if they would have left them out of the deal I could have coughed that up easily to them. So what cost me almost $2,800 in referral fees gave them a $1,500 rebate. Needless to say they were not eve aware of the fact that I had to pay the 35% fee and felt bad about it when the did know.
I don’t blame my clients they were great to work with, but they asked a lot of questions about commissions and such because they wanted to make sure I was compensated for the great work I was doing for them. So I laid it out on the table for them!
And all the RELO did for me was give me a headache with all their updates, procedures, & protocol.
They can keep the RELO biz for all I care, but as long as there are agents out there who want to be spoon fed then there will be plenty of them ready to pay their 35%
January 29, 2007 — 1:32 pm
Calculator says:
Where do you draw the line? Aren’t Brokers and teams taking referral fees too?
Many brokers and teams have variable splits depending on if the lead was generated by the agent or came from the broker/team. Agents rightly pay a lower split for friends and family, and pay more for leads provided by the broker or team.
Further… a successful agent often brings on a buyer’s agent to handle the buyers calling on his or her listings. The buyer’s agent pays a referral fee for those leads. Should that be banned too?
Is there really a difference between leads provided by a broker, team leader, listing agent, agent from across town, agent from across the country, and HomeGain? Could you legally define different types of leads in a way that would stand up to the DOJ?
Personally, I’d like to see it happen. I just don’t believe it’s possible.
January 29, 2007 — 10:57 pm
ardell dellaloggia says:
I agree with Jeff Turner, as usual.
February 26, 2007 — 7:34 pm
ny agent says:
Do referral fees get paid out the agents end or does the company pay it off of the gross commission? Im an agent, the total commission is $50K. My split is $25K. Would I pay the 25% referral fee out of my own checkbook for $6250?
February 4, 2008 — 3:42 pm
Kelley says:
I couldn’t agree with you more. Between admin fees, brokerage splits, “luxury marketing” fees, “premier service” fees, and referral fees, it often ends up not being worth it.
April 15, 2008 — 7:56 pm