They are so common we hardly think of them.
That unthinking may be unwise.
Right now, regulators and litigators are feeling around real estate’s soft underbelly, trying to find exactly where they can stick the shiv that mortally wounds an industry they increasingly view as anti-consumer.
The examination is currently taking place around buyer agent commissions (a form of referral fee themselves, really), who gets MLS and lockbox access, and how listings are or are not shared.
But ask yourself this:
How much of each year’s $80 to $100 billion in real estate commissions is simply money moving around between agents, through their brokers?
And how much is going to “paper” or referral brokers like Zillow, Realtor.com, HomeLight, ojo/Movoto, and many others? Or to big lenders like Rocket or Loan Depot, who have agent networks or panels to which they refer business?
I don’t know exactly. But it’s a big and growing number that marks another area of vulnerability for organized real estate.
Just to do a little super-rough, back-of-the-envelope math on this: If you estimate that 10% of all real estate transactions have some sort of referral fee attached to them, assume an average referral fee of 25%, and take half (one side’s worth) of an estimated $80 billion in annual commissions, you’re looking at $1.2 billion in referral dollars each year. I think my assumptions here are conservative.
Whether or not buyers or sellers involved even know that large sums of money are moving around their real estate experience is hard to know. Some states require disclosure in writing, some only verbally, and in some areas it is left to ethical judgement. Sometimes the agent doing the referring will give some or all of their referral fee to their client as a rebate, but mostly not.
That’s money people are paying that’s not, strictly speaking, for real estate services rendered. Looked at more critically, from the point of view of, say, a “consumer advocate” or regulator, you might see a big, gratuitous cost exacted from largely unknowing consumers. A systematic inefficiency in need of remediation.
Maybe, someday soon, someone over at the CFPB thinks hard about why, if it isn’t OK for agents to receive compensation for referring business to a mortgage broker, it is OK for them to do so when referring business to another agent. Or whether a portal collecting 35% of the gross commission dollars a consumer pays just because said consumer filled out a showing form might be inflating the cost of real estate transactions.
Referral fees have been a foundational part of this business for eons. Agents refer business out of market, they refer deals they just don’t want to do, they refer out buyers that want to write an offer on their own listing. Plenty of good agents generate retirement income referring business from their sphere long after they’ve stopped practicing actively.
This is a system of claims, power, and settling up that most inside the industry take for granted.
And, personally, I don’t have a problem with any of it. But my opinion doesn’t matter. It’s the opinions of those with power that we need to think about.
Now, some agents don’t actually practice real estate, but simply get a license in order to collect referrable contacts from a chaise lounge at their country club, or at coffee hour after church. Thus, a significant number of Realtors don’t even really help people buy or sell homes (take a drag off that pipe and ponder that fact relative to the “Realtor brand” for a while).
Yeah, that kinda makes my skin crawl.
Anyway, my point: numbness born of assumptions and inertia is dangerous. Be alert. Because people are coming for your status quo.
Those who strategize accordingly will come out ahead.
Enjoy the weekend.