Are broker-to-broker referral fees next in the hot seat?

3 days ago 5

When the National Association of Realtors’ (NAR) agreed to implement mandatory buyer representation agreements as part of its commission lawsuit settlement agreement, the trade group said it was in the name of increased transparency. 

“Northwest MLS has been working on this issue for nearly a year,” a spokesperson for NWMLS told HousingWire via email. “Disclosure regarding referral fees was the next logical step to continuing to enhance transparency for consumers.”

NWMLS announced the changes last week, stating in a press release that the changes were designed to “provide buyers and sellers with complete transparency regarding referral fees their brokers pay or receive in connection with their clients’ transactions.”

Increasing transparency

Broker-to-broker referrals occur when one broker connects a consumer with a business partner who serves a geographic area or market segment that the referring broker does not.

At some brokerages, if a transaction is successfully closed, the broker will pay the referring broker a portion of their commission as a referral fee. While consumers are not required to pay anything beyond the compensation they agreed upon with their agent, NWMLS takes issue with referral fees since they are frequently not disclosed to the consumer. 

“Disclosure of referral fees at the outset of the broker’s engagement with a buyer or seller, rather than at the closing or sometimes not at all, is essential,” Justin Haag, the president and CEO of NWMLS, said in a statement about the new disclosures.

“Some referral fees can be as much as 50% and may impact a buyer’s or seller’s decision about which broker to engage. Buyers and sellers should have complete information when hiring a broker regarding any fees paid to the firm, including any referral obligation of the firm.”

Wendy Gilch, a fellow at the Consumer Policy Center, was pleased to learn of NWMLS’s new disclosures.

“Before last year, there were no conversations about buyer agent fees, so I don’t think consumers even realize what is going on behind the scenes,” Gilch said. “But here we are now where agents and consumers have to talk about fees and negotiate them, and I think consumers are aware that they are on the hook for this money, so I feel like it is fair for them to have a say in who is getting paid from that commission.

“If 40% of the commission is going to someone, that could add to the commission they are being charged, or harm negotiations, and consumers should be aware of this.” 

More harm than good?

Although it can be argued that referrals help consumers find agents who can better help them buy or sell a property, Gilch argues that this referral and the associated fee could harm consumers by driving up the minimum commission that an agent will accept. 

“Even if you tell a consumer that you have to pay a referral fee, I don’t think they realize how much money we are actually talking about,” Gilch said. “They might assume $100 or $500, but it can be well over $5,000 sometimes, and I think that is going to be shocking for folks in Washington when they start seeing this on paper.” 

Doug Miller, an attorney at Miller Law PLLC and an executive director at Consumer Advocates in American Real Estate, has a similar take.

“Say a client sells their home in one part of a state and then gets a referral from that agent for another agent in a different part of the state they are moving to,” he said. “They build a rapport, and then they go to negotiate their buyer’s agent fee, and because of that referral fee the buyer’s agent is going to have to pay, they aren’t willing to negotiate it with the buyer.

While there is a chance a broker may refer a client to a top agent, Miller does not believe agents properly vet other professionals before making a referral. 

“There is a financial interest in that referral, so you’re not getting a referral that is based on expertise — you are getting one that is being done for financial incentive,” Miller said. 

The fiduciary duty of it all

For Miller, the primary issue with referral fees in real estate is that agents are supposed to be fiduciaries for their clients.

“If you look at common law, referral fees are fine when you are not dealing with fiduciaries, but fiduciaries can’t do it,” Miller said. “Attorneys are fiduciaries, and they can’t collect referral fees for referring a client to another attorney who is better suited to handle a case. The only way they can is with proper disclosure upfront and if they do actual work on the file.”

Zillow is one of the largest lead referral engines in the real estate industry. But while any changes to broker-to-broker referral fee rules may raise some eyebrows when it comes to Zillow’s Premier Agent and Flex business models, Miller said he’s less concerned about referral fees in these instances because Zillow isn’t a fiduciary.

“They are in the business of marketing and advertising, essentially, and the referrals they do are more on a customer relationship than a fiduciary relationship,” Miller said. “Yes, Zillow is a broker, but it is not a situation where the broker has developed this fiduciary relationship of trust and confidence with the consumer. It is a very different situation. Zillow is acting as a referral company.” 

More to come?

Gilch believes this might be the tip of the iceberg for referral fee disclosures. And because Washington state and NWMLS were early adopters of mandatory buyer agency agreements, precedent is on her side.

“There is a lot of talk about the utility of MLSs and trade groups right now, but I think that a lot of them are trying to educate consumers about their usefulness,” Gilch said. “It is with disclosures like this that they can increase awareness and work on improving consumer protection without stepping on their members’ toes too much.

“They are probably only going to upset people whose business relies on buying leads, which is typically a team or a newer agent. So you still have the bulk of agents who don’t rely on buying leads who will be happy about the disclosure.”

As for the ultimate impact of the disclosures on the industry, Gilch believes the ball is in the consumers’ court.

“I think when they see that referral fee on paper, they are going to rethink working with that agent,” Gilch said. “Those are going to be some interesting conversations.

“It is going to be messy for a bit, but in a good way. I think if your company can’t survive on being totally transparent about how you make money, then you are not in the business to help consumers.” 

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