Washington, D.C. September 21, 2020 – Today, the Consumer Federation of America (CFA) released a report – Real Estate Referral Fees: Do They Harm Consumers? – on referral fees paid by real estate agents to other agents and referral agencies. The report showed that these fees do not ensure the best customer service, often the opposite, and that the fees support high, uniform commission rates. The referral fees are typically 25% of the agent’s commission but are frequently higher, especially when charged by referral agencies.
“Referral fees are hidden from consumers yet reinforce high commission rates and provide an incentive for agents and agencies to make referrals only to agents willing to pay the highest fees,” said Stephen Brobeck, a CFA senior fellow and the report’s author. “At the very least, agents should be required to disclose these fees effectively to the consumers who end up paying them,” he added.
This required disclosure is supported by most consumers responding to a recent survey commissioned by CFA. On August 28-30 and September 2-3, 2020, Engine Insights surveyed 2,007 representative adult Americans online. The survey firm asked respondents whether they “think these referral fees are fair if they are not disclosed to the home buyer?” Only 29% of respondents said the undisclosed fees are fair while 51% said that they are unfair.
“Many consumers instinctively understand that a 25% or 30% referral fee paid by their agent discourages that agent from lowering their commission and offering the best customer service,” said Brobeck.
The report documents the widespread extent of referral fees. It also documents the high level of the fees, typically 25% (but often higher), which is a much higher rate than most referral fees in other professions and businesses as the report shows.
The report notes that these fees are most justified when the agent receiving the fee assists on the sale and helps ensure that the referred agent provides good customer service. The report, however, also quotes a number of real estate agents who see referral fees as often anti-consumer. These industry critics say that some agents and most referral agencies make referrals solely on the basis of receiving a high fee, which encourages reverse competition. When more than 1.5 million active real estate agents compete for customers in only 4-5 million home sales annually, many agents are willing to pay high referral fees to secure clients.
“All active agents would earn more income from commissions if referral agencies did not take a portion of this income,” noted Brobeck. “No or low referral fees would not only increase agent income; they would also appropriately reward those agents who secured clients through referrals from satisfied customers,” he added.
The report also shows that all referral agencies advertising their services in a Google search for agents in four cities – Portland, ME; Gainesville, FL; Midland, TX; and Spokane, WA – recommended some agents who had little recent selling success or who were based in other cities. The survey revealed that nearly two-fifths (38%) of 100 referred agents either had little recent sales experience – no or one home sale in the past year – or were located out-of-town. The out-of-town agents would likely have referred the consumer to a local agent while pocketing a portion of the commission. Referral agencies include topagentsranked.com (Referral Exchange), effectiveagents.com, daveramsey.com, myagentfinder.com, and homelight.com.
The report suggests that referral fees usually do not increase commissions charged yet do reinforce near-uniform rates in cities that most agents try to charge, thus discouraging discounting, rebates, and rate negotiation. Earlier CFA research (Hidden Real Estate Commissions, October 2019) showed that only 27% of 200 agents surveyed (in 20 cities) told a prospective home seller that they were prepared to negotiate their commission rate.
Given the reluctance of agents to disclose these fees, CFA advises home buyers and sellers to:
- 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 and could lower the quality of service received.
- Be especially wary of utilizing the services of referral agencies, which despite claims by some, usually make no effort to recommend the “best agents,” only those that are willing to pay the agencies a fee, often more than 25%.
- Undertake their own search for an agent utilizing information sources such as Zillow’s Agent Finder and interviewing several agents about their services, representation, commission level, and any other fees.
The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.