Lew Sichelman
Most homebuyers don’t realize it, but when they search for houses on popular listing sites such as Zillow, Homes.com and Realtor.com, they become leads that are sold to any agent who wants to pay good money for the chance to land a sale.
Known as referral fees, the charges won’t cost buyers or sellers any more than they agreed to pay their agents in the first place. But because buying a referral cuts deeply into agents’ earnings – which are already shared with their brokers – those who pay them are far less likely to bargain over their commissions with consumers.
That’s the point of a new report from the Consumer Policy Center, a Washington think tank. The group found that referral fees “reinforce high commission rates.”
“An agent required to pay 40 percent of their commission to a referral company, and another portion to their broker, has a strong incentive not to negotiate down a 3 percent commission,” said Stephen Brobeck, a CPC senior fellow and the report’s co-author.
Big Business for Portal Sites
The referral fee marketplace is complex, rarely discussed, and massive: “Zillow alone claims to facilitate more than 1.4 million buyer connections and 400,000 transactions annually,” according to the CPC.
“Sellers and buyers who prioritize a quick sale, not optimal sale price, may benefit from a referral,” Brobeck and co-author Wendy Gilch wrote. But there are “risks and costs” for all involved.
According to one estimate, up to 80 percent of all sales involve referrals. About 40 percent of buyers and sellers found agents via their friends or family, according to estimates from the National Association of Realtors.
Generally, no one is compensated for these kinds of referrals. But paid-for referrals “are an increasingly important part of the residential real estate industry,” Brobeck and Gilch wrote.
Agents have long paid each other for successful referrals; about 7 percent of buyers used an agent referred to them by another agent, per the NAR. Another survey reports that nearly half of all agents earn between $10,000 and $50,000 annually from referral fees alone.
Lately, though, national listing sites have begun horning in on the referral horn of plenty. A 2024 NAR survey found that a third of all agents did at least some business through these third-party lead generators – and they are paying a big price to do so.
For example, on a $300,000 sale with a 6 percent commission, the selling agent would take half the $18,000 fee. Of that $9,000 share, they’d then pay the referral company 40 percent ($3,600). And they’d split the remaining $5,400 with their broker – generally, but not always, 50-50 – leaving them with just $2,700 for their efforts. All this takes place behind the scenes, which is why referral charges are sometimes called hidden fees.
A Controversial Practice
There are numerous referral fee outfits, but Zillow is dominant. Redfin, another big player, said it generates nearly 40 percent of its revenue through referrals.
“The chief goal of referral companies is to facilitate quick and profitable sales to consumers who are ready and able to sell or buy,” said the CPC report. Consequently, they seek leads who will move fast to buy higher-priced houses. And they look for agents who are most likely to convert a referral into an actual sale.
Referral charges have always been controversial, inside and outside the realty business, the report noted. At NAR’s most recent convention, its board approved an amendment to the group’s Code of Ethics to require greater consumer disclosure of the fees, only to be shot down by the delegate body.
Referrals fees have their good points, according to Brobeck and Gilch. For one thing, companies are likely to recommend solid agents because income is generated only when a house is sold. For another, their programs generate enough money to offer a broad array of property listings.
Impact on Commissions Suspected
Still, the authors contend that agents who pay a substantial referral fee are more likely to charge a higher commission and less likely to negotiate their fees. Moreover, referral companies are more likely to recommend the name of just one agent, which “limits meaningful consumer choice.” Offering the names of several agents, who can be researched and compared, is better for consumers, they write.
The authors also warn that many referral sites also peddle mortgages and other ancillary services, giving agents “more opportunities and temptations” to recommend them – possibly at a higher cost than what consumers could find on their own.
Their report calls on state governments to require all referral companies and referred agents to clearly disclose their fees and their amounts up-front, before anyone signs a contract. It also recommends that the regulations should contain some teeth, as such rules are “meaningless unless they are enforced.”
In the meantime, the authors advise consumers to “think twice” about contacting a referral company or choosing an agent with that company. Said Gilch: “Consumers would likely get better value by working with a local agent that they had researched and interviewed.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
