How real estate referral fees work

How real estate referral fees work

Referred Broker often pays 25%-40% of their commission for your information. You can save this money instead.

1. An agreement to pay a referral fee is a form of pay-to-play.

A Referral Fee Agreement is signed between Referring Broker and Referred Broker. Your Referred Broker is the broker you will be working with to close the real estate transaction, either buying a selling a home. But who is the Referring Broker? The Referring Broker is an online Referral Fee Network that will often advertise itself as “unbiased, 100% free, top real estate agent” platform.

You may see a lot of ads from such networks on Google and Bing. In order to participate in this scheme, your Referred Broker agrees to pay 25%-40% of the total commission to be received at the close of escrow. This process is highly profitable to Referral Network and Referred Broker because the entire referral fee is easily incorporated into your Representation Agreement with excessive commissions.

2. Referral fees are hidden in your representation agreement

Referral fees are agreed without you and prior to you entering into a Representation Agreement with your real estate broker. When a broker receives your information from Referral Fee Network, the Referred Broker knows that a hefty referral fee must be paid once the transaction closes. After the signing of a contract for a transaction resulting from a referral, the Referred Broker must notify the Referral Network and inform it of the expected closing date, how much the transaction generated and how much Referred Broker received in compensation. These fees are hidden in the form of an excessive commission.

3. Referral fees prevent real estate brokers from competing for you

When a Referral Fee Network is paid from the agent’s final commission in the form of a referral fee, this act removes any incentive for the Referred Broker to give you their best rates. The reason for this is that most real estate brokers do not advertise their rates, you have to ask them what they charge. This means that the Referred Broker will quote you a very different price knowing that they have to part with 25%-40% of their commission. Moreover, it doesn’t cost anything for the Referred Broker if they miss your business – there are no upfront costs to join or use a Referral Fee Network.

The Referred Broker has an incentive to quote you his worst rates because it yields the highest revenue without a downside. Economists refer to this process as reverse completion. Reverse competition is competition not for you as the consumer, but for the middle-man who steers the consumer toward its network of brokers and away from competitors. According to economists, reverse competition results in low quality of service and higher commissions.

4. All matched results provided by any Referral Fee Network are biased

Matched results provided by any Referral Fee Network only include real estate agents who have agreed to pay the referral fee after the transaction is complete. Referral Fee Networks often claim to find and rank real estate agents independently, but they will never match real estate consumers with agents who have not signed their Referral Fee Agreement. A typical Referral Fee Network will only have a very small fraction of brokers who have a signed a Referral Fee Agreement with it. This is the core of the pay-to-play methodology that requires the Referral Fee Network to hide their status as a broker.

5. Referral fees may be illegal kickbacks

RESPA (12 U.S.C. 2607) Section 8 narrowly allows payments pursuant to cooperative brokerage and referral arrangements between real estate agents and real estate brokers. This limited exemption on kickbacks only applies to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.

A Referral Fee Network never acts in a brokerage capacity, instead, it simply uses a real estate license to collect referral fees. This legal gap directly contradicts the Business and Professions Code, where licenses are only issued to professionals who engage in their professional capacity, in this case, real estate agents exist to help consumers buy and sell homes. This limited provision to allow kickbacks between brokers was adopted into RESPA because real estate is a local practice and brokers routinely refer business to others outside of their area.

The business of a Referral Fee Network is reversed because it is a licensed broker that simply exist to sell consumers as leads, instead of helping you to buy or to sell your home. Today, almost the entire RESPA prohibition against kickbacks and unearned fees is bypassed by Referral Fee Networks using their "blanket" real estate license as a loophole.

Until CFPB (Consumer Financial Protection Bureau) decides to take action to fully enforce RESPA regulations, your only guard against commission kickbacks are good research and common sense.

6. How to avoid paying referral fees

As a consumer, you have a choice to find your real estate agent any way you like, but if you want to avoid paying hidden referral fees, kickbacks, and unearned fees, the only way to do so is to avoid using any online Referral Fee Network. There are many Referral Fee Networks out there and many specifically hide their brokerage status, claiming to be impartial matching platforms.

7. A comprehensive list of real estate broker Referral Fee Networks

For your benefit, the following is a list of the most commonly known real estate Referral Fee Networks that in some way engage in consumer brokering in exchange for referral fees:

Zillow Premier Broker Program, Zillow Offers, UpNest, Rocket Homes, Realtor.com Opcity, Nobul, NAEBA, mellohome, Clever Real Estate, Xome, Sold.com, Opendoor, Landed, HomeLight, Redfin, Owners.com, and Open Listings.

Related to: referral fees,real estate,commission,no upfront cost,referral agreement

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First published: June 04, 2019
Last updated: November 03, 2019