Download Report

Washington, D.C. – A 19-page report released today by the Consumer Policy Center (CPC) reveals that referral fees reinforce high commission rates and jeopardize the quality of consumer service. The report – Commission-Based Home-Referral Services: Consumer Impacts and Proposed Reforms – focuses special attention on referral companies, including Zillow and Realtor.com, that charge agents 30-40 percent for referrals leading to sales.

“An agent required to pay 40% of their commission to a referral company, and another portion to their broker, has a strong incentive not to negotiate down a 3% commission,” said Stephen Brobeck, a CPC senior fellow and co-author of the report.

“Most agents are fiduciaries obligated to represent the interest of their clients, but when these agents work with a referral company, they are often under pressure to sell quickly and market ancillary products,” noted Wendy Gilch, CPC fellow and co-author of the report.

Risks and Costs to Consumers

The extensively researched report begins by discussing the complex referral fee marketplace, noting that Zillow alone claims to facilitate more than 1.4 million buyer connections and 400,000 transactions annually. The chief goal of referral companies is to facilitate quick and profitable sales to consumers who are ready and able to sell or buy.

Sellers and buyers who prioritize a quick sale, not optimal sale price, may benefit from a referral. However, they and all others face risks and costs:

• Difficulty negotiating a buyer agent commission below 3 percent.
• Reluctance from agents, especially those told that the buyer was interested in a specific property, to explore a range of properties.
• The likelihood that buyers especially will work with a less experienced member of a real estate team.
• The likelihood that buyers will be subject to the marketing of ancillary products, such as mortgages, not just by one’s own agent but also by other parts of the larger company.

Fee Disclosures are Important to Require and Enforce

The report recommends that state governments require all referral companies and referred agents to clearly disclose, upfront, the fee and its amount. It notes that the National Association of Realtors Board approved a proposal requiring referral fee disclosures (later rejected by its Delegate Body), that state groups are taking action, and that companies including eXp and Benchmark have developed disclosure forms they are encouraging agents to use. But the report also indicates that required disclosures in states like California are meaningless unless they are enforced.

The public overwhelmingly supports required fee disclosures. In a recent survey of 1,016 representative Americans, 84 percent said they thought that referral fees should be disclosed upfront to buyers while only eight percent said they should not be (eight percent said they were unsure).

Advice to Consumers and Implications for Agents

“Because of the risks and costs, consumers should think twice about contacting a referral company or choosing an agent working with that company,” said the CPC’s Gilch. “Consumers would likely get better value by working with a local agent that they had researched and interviewed,” she added.

The report emphasizes that, to a large extent, the popularity of paid referrals reflects the fact that there is a surplus of agents (about 2 million) – far too many to provide most with adequate incomes given the number of homes sold (about 4 million annually). This glut forces most full-time agents to spend most of their time searching for clients, not servicing them. It also pressures them to join referral networks.

“Not only are agents competing for declining aggregate revenues; they are also sharing a larger portion of this diminished income with referral companies,” said the CPC’s Brobeck. “While the industry’s revenue pie is shrinking, referral companies are taking large pieces.”

View Report