You're checking into BestCuts Medical Center to have your gallbladder removed. In the administration office, the operations manager is discussing to whom they'll assign your surgery. It seems you were referred by Dr. Jones across town and he's getting a 25% referral fee.
"Let's give it to the new surgeon, Dr. Baker, as he's just out of internship and doesn't have much work yet. None of the top guys want it because they're busy and don't want to give up the 25%." Doctors don't do this type of referral business (well they do some) ... wonder why?
Real Estate Referrals
That's a pretty dramatic comparison to real estate referrals, but you get the point. While many agents make great livings doing few deals and many referrals, it's not a consumer-friendly activity in many cases. The only referrals I've ever given were to another agent in town to take a buyer to who was interested in one of my listings. You see, I don't like dual representation much either. Call me a dummy, but that's the way I am. If I can't give 100% aggressive representation to a client because I have both sides, then I'm not doing my job.
Now let's look at MegaBiz Realty Franchise, and their office in Fargo, SD. Sam Smith is an agent and about to refer a seller client to someone in Memphis, TN. He pulls out the MegaBiz referral catalog, with all the franchises in it. He doesn't know anyone in Memphis but looks through the franchise offices and agents there. He finds several with multiple prestigious designations and decides on the one that offers 30% for referrals instead of the others at 25%. Or perhaps he just refers to the office, to let them assign someone. Time for research - 30 minutes.
Once Sam gets their referral form, he fills in the information and signs it to seal the deal. Time for form - 15 minutes including faxing. Sam now has 45 minutes tied up in this endeavor, but the clients are looking at $400k homes. 30% of $12,000 (3% buyer side commission) is $3600. That's $4800 per hour or $80 per minute. Now, if you're Sam the agent, this is one great career! However, if you're the referred consumer, can you count on getting the same services and representation from the agent who has other clients with 100% commissions?
Online Referral Companies
Even more interesting, there are online referral companies now. One example in my research is a company that does the referral process, providing three-member real estate agents to the referrer's outbound client. From their website: "It’s straightforward. Send us your outbound referrals, excess leads or contacts and we work them on your behalf." Wow, you don't have to do anything. Of course, now there is yet another hand in the pot for a part of the commission. International referrals are also big business.
Why should this practice disappear? As with any product or service in our economy, huge compensation for minimal value is usually short-lived. Not so with this "referral money machine" in real estate. Proponents say:
- The receiver is happy to pay the fee for reasonably assured business for which they didn't have to market, nor expend resources.
- The sender is providing a service of value to the receiving REALTOR® and should be compensated.
- Don't shoot the messenger, but I recently saw this one in a discussion group - "The consumer client isn't paying for it and is receiving a service."
No argument, some value is added by the referral process. Some even follow up with checks on the client to be sure they're being handled well. But there are those who also say:
- Some referred clients end up with the least experienced agent in the house.
- No amount of follow-up can create enough real value to justify the compensation in many cases.
- The consumer absolutely does pay for it, as the commission is in the price.
- Some receiving agents/brokers have been known to provide a discounted level of service to this discounted commission referral customer.
The image of our industry agents and brokers can only be enhanced when we are perceived as providing valuable services for reasonable compensation. Though Realtors follow the Code of Ethics, it doesn't necessarily mean the customer gets full service when referrals are involved. The referral practice only introduces a middleman into the process, and the payment received is grossly out of proportion to the value added.