Hidden referral fees could cost you

Most professions restrict the payment of referral fees. But they run rampant, and are somewhat controversial, in real estate.

According to the latest report on the inner workings of the industry from the Consumer Federation of America, these fees can go as high as 50% of the sales commission — when the referring agent is a relocation company — to as low as 10% when a homebuyer’s exclusive agent refers him or her to another so-called “buyer’s broker.”

Typically, referral fees are hidden from buyers and sellers. The accounting and investment professions require disclosure, and most businesses in which referral fees are common do the same. But the National Association of Realtors’ code of ethics does not require their disclosure, and most agents don’t feel the need to do so. A handful of states require disclosure, but not always in writing or in a timely manner, and the CFA could find no evidence those laws are enforced.

In most other businesses, referral fees are in the 5% to 10% range. But the CFA found that 25% was the average for realty referral fees.

So, if you bought a $250,000 house using an agent referred to you by another agent, your agent would pay part of her share of the commission to the referring agent. If the commission was 6% and the referral fee was 25% of the agent’s half of the commission, she would send the referring agent a check for $1,875.

Earning referral fees can add up, too. According to a 2008 study cited in the report, nearly nine out of 10 agents received income from referrals, with more than half taking six paid referrals within the previous 12 months. Nearly half said they earned at least $10,000 in income from them.

Moreover, 8% said they made $50,000 from referrals over that period! Some agents go so far as to “sell” their referrals to the highest bidder, said Steven Brobeck, the report’s author. Pedaling referrals is “not a practice most agents would engage in,” he told me. “Nevertheless, it appears to exist.”

Still, it’s not likely that referral fees will cost either the buyer or seller any more money. Even though commissions are supposed to be negotiable, they are all but set in stone in real estate. Agents aren’t likely to raise their rates to recoup the fee, but they are not likely to agree to a smaller cut, either.

However, as the CFA report points out, these fees can cost you in other, more insidious ways — like in the quality of service you receive.

Or, since the referred agent will have to fork over a big chunk of his earnings, maybe he won’t provide the level of service he should. Or perhaps referred agents are willing to pay a fee because they are inexperienced or have a tough time finding clients.

Any of those are strong possibilities, said Stephen Brobeck, the CFA’s former executive director, who has been researching realty brokerage issues for nearly 30 years.

Here’s an example, from one of Brobeck’s footnotes to the report: “Many real estate professionals see referral agents as simply parasites.” Another: “Secret referral fees (result in agents) stealing billions of dollars from consumers.”

But the worst offenders aren’t realty agents themselves, but companies like relocation and referral agencies. The former are often hired by businesses to help relocate employees; the latter, by outfits like HomeLight, Rocket Homes, Clever, Yelp and Thumbtack.

To see how well 15 referral companies performed, CFA put them to a test. They didn’t perform well.

When asked to refer an agent, most of the companies provided names (via email) either immediately or fairly quickly. But two didn’t respond at all, and some did not offer their service in all four of the test cities. Overall, the names of 100 agents were received. But 18 were agents in other geographical areas, and two were agents not engaged in residential real estate.

Of the other 80 referred agents, 18 had one sale, at most, in the previous year, and 15 had at most one customer review. And every agency that supplied names included one out-of-town agent with five or fewer sales. Put another way, 38% of the referred agents were either based outside the designated search area or had at most one sale.

“Consumers cannot rely on agencies for referrals to experienced agents located in the geographic area of the home search,” Brobeck said. People “should be extremely wary of many of them. I can’t say all offer no value, but you are taking a risk” by using them.

Think twice about using the services of a referral agency. You’re unlikely to get what you pay for. Besides, you have the ability to search efficiently and effectively on your own for an agent at sites providing extensive information about a large number of active agents.