More than half of nearly 2,000 consumers surveyed consider referral fees unfair if they’re not disclosed to the consumer, according to a new study released Monday by the Consumer Federation of America (CFA), a consumer advocacy non-profit.
The study claims that referral fees keep commissions high, lead to less commission income for real estate agents and do not ensure the best customer service.
“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, in a statement. “At the very least, agents should be required to disclose these fees effectively to the consumers who end up paying them.”
Referral fees within the industry can come in many forms. It can be an agent paying a fee — which often takes the form of a percent of commission — to another agent for the referral, or to a referral lead generation service.
“Many consumers instinctively understand that a 25 percent or 30 percent referral fee paid by their agent discourages that agent from lowering their commission and offering the best customer service,” Brobeck said.
The survey also found that since so many agents are competing for so few leads, referral fees in the real estate industry outpace other industries. Low or no referral fees would generally increase agent income and reward agents more for customer service, rather than paying a referral network or having a strong network among other agents, according to the report.
Referral agencies advertising their services on Google in four cities were analyzed by the Consumer Federation of America, which determined that 38 out of 100 referred agents had “little” or “recent” sales experience — quantified as having no sales or just one sale in the past year — or were located out of town. That out-of-town agent likely would have referred the consumer to a local agent, according to the CFA.
The study advises homeowners 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 lead to a lower quality of service.
It instead advises consumers to use agent searching services — such as Zillow’s agent finder tool — as data sources to conduct their own search and interview several local agents about their services, representation, commission level and any other fees.