Opinion: Referral Fees: The Golden Goose or the Rotten Egg of Real Estate?

In the real estate industry, referral fees have become a golden goose that stifles innovation, inflates the value chain and ultimately hurts both consumers and agents. Despite its prevalence, the current system is ripe for reexamination.

The Referral Fee Conundrum

Referral fees are a well-known practice in real estate. Suppose someone with a real estate license identifies a potential home buyer or seller. In that case, they can refer the person to a broker in exchange for a portion of the commission. This can amount to as much as half of the broker’s commission, with minimal effort from the referrer.

Consider this scenario: A home buyer clicks to connect with a real estate agent through Zillow. In no time, Zillow sells this lead to an agent for up to 40% of the commission. If the buyer ends up purchasing an $800,000 home, Zillow can pocket up to $9,600, while the agent assumes all the risk and does all the work. The agent has less room to negotiate fees because he has already given away a significant portion of his revenue.

Zillow’s $2 billion in annual revenue is largely fueled by referral fees. While these fees may provide some benefits, such as curated agent lists, these benefits are often overshadowed by potential conflicts of interest. Agents are encouraged to refer customers to the highest bidder rather than acting purely in the consumer’s interest.

Ethical dilemmas

The Real Estate Settlement Procedures Act (RESPA) prohibits agents from accepting kickbacks for referring customers to lenders or home inspectors. Violating this law can lead to severe penalties, including license suspension and fines. Yet referral fees between agents remain legal and largely hidden from consumers. This disparity raises an important question: If kickbacks to lenders are illegal, why are referral fees between agents allowed?

The Referral Fee Ecosystem

Many real estate portals, such as Rocket Mortgage, Realtor.com and Redfin, use a portion of their referral fees to offer consumers cash incentives or discounts. While this may seem beneficial, it often masks the reality that these incentives are funded by referral fees that drive up overall costs. Buyers essentially get some of their money back without transparency about the original cost.

Would buyers use Zillow if they knew the commission is high and that 40% goes to the platform? Greater transparency could change consumer behavior, leading to more direct negotiations, potentially lower consumer costs and higher revenues for agents who do all the work.

Impact on innovation

The dominance of referral fees also hinders innovation. With major companies fiercely protective of their high-margin business models, there is little room for new ideas that can reduce costs or introduce transparency. High referral fees contribute to rising advertising costs, making it harder for agents to connect directly with customers. High margins translate into higher customer acquisition costs, something that is critical as we try to reduce costs for consumers.

Agents and Referral Fees

It’s critical to understand that agents are often driven to accept referral leads because acquiring new customers is a challenge. Given the choice between no commission and paying a referral fee, many agents choose the latter. This system leaves agents with reduced revenue and limits their ability to control their own bottom line.

A call for transparency

The real estate industry needs to rethink its approach to referral fees. Greater transparency is essential. Disclosing referral fees to consumers would allow them to make informed decisions about the value of the services they receive. A co-brokerage agreement detailing the services provided and associated fees could pave the way for a more equitable and transparent industry.

If referral fees were made public and transparent, it would promote innovation and allow agents to regain control of their business practices. By eliminating hidden costs and ensuring that all participants in the value chain deliver tangible value, we can create a more efficient and consumer-friendly real estate market.

Final thoughts

Industry giants protect the golden goose from referral fees, often at the expense of consumers and agents. To create meaningful change, we must advocate for transparency and rethink the role of referral fees in the real estate industry. Only by addressing these issues can we hope to promote a fairer and more innovative marketplace.

Dean DiCarlo is the CEO of Homing.com.

This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners.

To contact the editor responsible for this piece: [email protected].