Our former agent made the referral for a fee but never told us about the referral fee. Is this practice ethical?

July 21, 2019

Referral fees are a fixture in the real estate industry and they are legal. I disclosed that I earned a referral fee, but not all agents disclose it.

Reader Question: We sold our home and moved to a different state. Our old agent helped us find an agent in our new city. We have gotten to know this agent and become friends. He told us our former agent made the connection for a fee. He called it a referral fee. Our old agent never mentioned collecting a fee for making a phone call. She made a bundle on the sale of our old house. I am curious as to what the call was worth to her. Is this practice ethical?

Monty’s Answer: Referral fees are a fixture in the real estate industry. It is legal for your old agent’s broker to share commissions with any real estate broker in your state, or for that matter, brokers in other states. Those brokers share the revenue or expense with the agents involved in the transactions. Real estate agents cannot pay referral fees to individuals that do not hold a real estate license. I am unaware of any organization that collects data on referral fees. An educated guess is that somewhere between thirty and thirty-five percent of all real estate transactions involve referral fees. In my practice, I disclosed that I earned a referral fee, but not all agents disclose it.

Generating real estate referrals

Many real estate organizations are in the business of generating leads for real estate agents. Online real estate listing aggregators, such as Zillow.com, Realtor.com, and Homes.com gather consumer information that real estate agents pay to access. Individual real estate companies, online mortgage lenders, and a large variety of “Find an agent” companies also garner a share of the referral business. All of them have their philosophies, methods, and tactics for connecting consumers to a real estate agent. There is also agent to agent websites, referral exchanges, and direct agent to agent referrals. In many cases, the connected consumer is not aware that a real estate agent is somehow paying or collecting a fee.

Referral fee calculations

When dealing with referral fees among real estate brokers and agents, the first rule to understand is that nothing is normal. There are a variety of methods that brokers utilize because they operate under different business models. The typical referral fee is determined by dividing the gross commission into a listing side, and a sales side commonly called sides of sale (SOS). Then a percentage is established, typically twenty-five percent, but could be anywhere from ten percent to forty percent.

Due diligence on referrals

A common occurrence with referrals is the person receiving it accepts it on its face and throws due-diligence out the window. The bulk of referrals are not-informed, which means the referrer knows nothing about the new agent. Without comparing the referred agent with other agents, the recipient may end up disappointed. Receiving a referral does not eliminate the need to compare. Here is a link at http://bit.ly/2cnpI1v that demonstrates questions to ask three agents. They will all answer differently.