Real Estate Referral Fees: What are they and do they Harm Consumers?

A new report released by CFA last month examining real estate referral fees shows that these fees, typically representing 25% of the commission collected by an agent, do not ensure the best customer service and contribute to high, uniform commission rates across the industry.

Referral fees, the practice among real estate agents of collecting and paying fees to other agents for referrals of consumers who buy or sell a home, are controversial even within the real estate industry, according to CFA’s report. Some agents refuse to collect the fees on ethical grounds.

Yet, while this is a hot-button issue for the industry, most consumers — 60% according to the report — do not even know these fees are being charged.

The report, authored by CFA Senior Fellow Stephen Brobeck, finds that the practice of paying referral fees is quite prevalent, with nearly nine in ten (87%) of 1,200 agents surveyed in 2018 reporting that they received income in the previous year from referrals. In general, these fees range from 20–35% of the paid commission. Because the fees do not have to be disclosed, the industry has felt little need to justify the fees in terms of consumer benefits.

Other professions regard referral fees differently, the report notes. “Professions tend to restrict payment of referral fees to a greater extent than businesses. However, all professions and most businesses that permit these fees require or expect their disclosure. Typical fee levels, when representing a percentage of earned income, are usually below, often well below, the 25 percent fee typically paid by residential real estate agents.”

Whether real estate referral fees are harmful to consumers “depends on whether these fees tend to increase commission levels or reinforce their current high levels,” the report explains. “It also depends on whether the referring agent provides substantial value to the consumer in terms of useful information/advice and referral to an agent who provides good value.” While referral fees do not appear to have raised real estate commissions, they “clearly have supported, perhaps substantially, the current compensation system of high and relatively fixed commissions,” the report finds.

Consumers can be better protected and informed in three ways, according to the report: by decoupling listing and buying agent commissions, by having government play a role in investigating the practice of reverse competition, and by insisting on disclosure of referral fees.

Brobeck also offers some advice to consumers in dealing with referral fees and picking an agent:

· Consumers should be aware that any referral from an individual agent or referral firm is likely to generate a fee that will make it more difficult to negotiate a lower commission charged by the referred agent.

· Consumers should be especially wary of utilizing the services of referral agencies. Even if the referred agent is experienced and local, given the relatively high fees they are charged, they will be less likely to be willing to accept a lower commission.

Consumers now have the ability to search effectively and efficiently for their own agent. They can check out any agents suggested by friends and associates using information sources such as Zillow’s Agent Finder, which provides extensive information about a large majority of active agents. They can then interview several of these agents, asking a range of questions about representation, commission, and quality of service.