In the real estate industry, referral fees have become a golden goose that stifles innovation, inflates the value chain, and ultimately harms both consumers and agents. Despite their prevalence, the current system is ripe for reexamination.
The referral fee conundrum
Referral fees are a familiar practice in real estate. Suppose someone with a real estate license identifies a potential homebuyer or seller. In that case, they can refer that individual to an agent in exchange for a portion of the commission. This can amount to as much as half of the agent’s commission for minimal effort on the referrer’s part.
Consider this scenario: A homebuyer clicks to connect with a Realtor through Zillow. In a flash, Zillow sells this lead to an agent for up to 40% of the commission. If the buyer ultimately purchases an $800,000 home, Zillow could pocket up to $9,600, while the agent assumes all the risk and performs all the work. The agent has less room to negotiate fees, having already given away a significant portion of their earnings.
Zillow’s $2 billion annual revenue is largely fueled by referral fees. While these fees might provide some benefits—such as curated lists of agents—these benefits are often overshadowed by potential conflicts of interest. Agents are incentivized to refer clients to the highest bidder rather than acting purely in the consumer’s best interest.
Ethical dilemmas
The Real Estate Settlement Procedures Act (RESPA) prohibits agents from accepting kickbacks for referring clients 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 concealed from consumers. This disparity raises an important question: If kickbacks to lenders are illegal, why are referral fees between agents permitted?
The referral fee ecosystem
Many real estate portals, like Rocket Mortgage, Realtor.com, and Redfin, use a portion of their referral fees to offer cash incentives or rebates to consumers. While this might appear beneficial, it often masks the reality that these incentives are funded by referral fees that inflate overall costs. Buyers are essentially getting a portion of their money back without transparency about the original cost.
Would buyers use Zillow if they knew that the commission is marked up, with 40% going to the platform? Greater transparency could shift consumer behavior, leading to more direct negotiations, potentially lower consumer costs, and increased revenue for agents who do all of the work.
Impact on innovation
The dominance of referral fees also impedes innovation. With major companies fiercely protecting their high-margin business models, there is little room for new ideas that could lower costs or introduce transparency. Inflated referral fees contribute to escalating advertising costs, making it harder for agents to connect directly with clients. High margins translate to elevated costs of customer acquisition, something that is critically important when trying to lower costs for consumers.
Agents and referral fees
It’s crucial to understand that agents are often driven to accept referral leads because acquiring new clients is challenging. Given the choice between no commission and paying a referral fee, many agents opt for the latter. This system leaves agents with diminished earnings and restricts their ability to control their own business outcomes.
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 empower them to make informed decisions about the value of the services they are receiving. A co-broker agreement that outlines the services performed and the associated fees could pave the way for a more equitable and transparent industry.
If referral fees were exposed and made transparent, it would foster innovation and allow agents to regain control over their business practices. By removing hidden fees and ensuring that all participants in the value chain provide tangible value, we can create a more efficient and consumer-friendly real estate market.
Final thoughts
Industry giants protect the golden goose of referral fees, often at the expense of consumers and agents. To drive 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 foster a more equitable and innovative market.
Dean DiCarlo is the CEO of Homing.com.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
The irony of RESPA is that it doesn’t stop lenders, if they have a real estate license, from referring clients to realtors and taking a referral fee. Online platforms such as Zillow and Realtor.com do not actually generate what most of us would call referrals, where a qualified prospect with communication and understanding of their wants and needs is passed on, but they are simply leads, many of them lukewarm or close to useless. With all the talk about transparency with buyer agent commission, where is it with these exorbitant fees for leads?
You are comparing a referral fee to the cost of a lead.
One is where a REALTOR has a client moving to another area and they research a REALTOR in an other area to assist their client. The fee is negotiable between the two partied.
The other is a cost paid by an agent to get leads from a “referral” company that does nothing more than scrape a fee from the commission in hopes the LEAD is viable.
A majority if my referrals result in a closed transaction.
I wonder what the success rate is for a lead.