In response to recent Realty Times articles on referral fees, brokers are writing in with their opinions. The problem isn't just whether referral fees should be eliminated to prevent after-the-fact referrals and to reduce competition from third-party interlopers, say some brokers, but knowing whether there is more liability to the practice than meets the eye.

Broker Augie Garcia is concerned that many referrals don't add a benefit to the consumer, and in fact, threaten consumers' benefits.

"This is hot topic since the creation of third parties, e.g.: relocation companies, etc. that not only want 30 to 40 percent referral fees but want to control the transactions and dictate to brokers how to operate their businesses," says Garcia. "I personally have cases of prior clients that have listed with me and then after-the-fact, a relocation company will ask me for a 30 percent cut, and if I don't accept that, my client would have lost the paid moving expenses, etc. I, for one, have refused to work with them.

"Now, big companies like Coldwell Banker and others want part of the commissions when a referral is processed through the system," says Garcia. "Why? We really don't need all of this. We were doing well before the big cats got involved. I consider these parties parasites that don't add any benefit to the consumer but extract from brokers a big chunk of their hard-earned fees. There are too many outsider hands in the pot wanting to make money off our efforts for doing nothing."

Referral fees do more than cut broker profitability in some cases, they can pose some risks that some brokers may not have considered.

Edwin J. Ricketts, a broker and former deputy commissioner of the Arizona Department of Real Estate, says, "As to the potential of adverse impact on the public, no one has yet addressed the issue of agency, or for that matter, negligent referral. Based on the "recommendation" from the referral broker, I think the referral broker is creating a limited agency relationship.

"Consider for a moment, if you were to say to a prospect that you know a broker who is licensed, but you really don't know anything else about him, other than you will receive a referral fee for sending the prospect to the broker, how many prospects would respond, "Gee, that's great! I can't wait to engage this unknown broker's services!" poses Ricketts.

"Let's take it to the next level," he suggests, "that of the Internet Referral Broker (IRB). When the unsuspecting public logs onto one of these behemoths to search for property or a broker, what is the clear impression the IRB gives the public? Isn't it, "We have hundreds (thousands?) of good brokers in our database, all of whom are experienced, conscientious professionals who will do a terrific job for you."

"On what basis do they make this claim? Have they really checked the backgrounds of these licensees? Do they have minimum qualifications? Is there an experience level? What would happen if the IRB told the public the truth? 'We have hundreds of people in our database who say they are licensed. We have absolutely no idea how qualified they are, nor have we made an attempt to find out. You're on your own, Bubba. All we know is that their check didn't bounce when they paid us for the privilege of being in our terrific database. Oh, and thank you for engaging their services -- they will be paying us a referral fee!'"

"It's only amazing to me that so few lawsuits have been pursued against referral brokers. Or maybe they (consumers) just haven't thought it through yet?" wonders Ricketts. "I am unaware of any litigation that has sought to include a referring party on a theory of negligence (for real estate referral fees), but I think most attorneys never consider the referring party — if they even know there was a referral."

A major question is whether or not the payment of referral fees is being properly disclosed to consumers.

Ricketts points to some civil litigation for which he is serving as a consultant that involves unlicensed referrers.

"I am an expert in civil litigation presently where unlicensed individuals referred some of the owners to a certain brokerage to list their homes," says Ricketts. "The owners were involved in a fraudulent financial scheme that resulted in what appears at this early stage to be millions in damages for the many sellers induced into the scheme. In this case, the referring parties did receive a referral fee out of escrow and no, they did not inform the sellers they were being paid for the referral. Actually, they were the former owners of the listing brokerage."

"It is my understanding that all referral fees must be disclosed to all parties," says Winnipeg broker < href=http://www.flexcom.ca>Dave Davidson. "If I am referring a buyer to another agent I must disclose to the buyer that I'm going to receive a referral fee. Can the buyer object to my receiving a fee? Am I obligated to disclose the amount of fee I am receiving for sending a referral? Referrals could affect the buyer from negotiating a better commission rate with their buyer's agent. The buyer may not get the best service if the referring agent has to pay out a 35 percent fee. That is more than 1/3 of the total commission paid out to another agent for making a phone call. Buyers should find their own agents and request the 35 percent referral fee be paid direct to them."

Yet some brokers make a very good living from the use of referrals and would not like to see them compromised, but they do agree that referral fees could use more policing.

"A little over a third of my business comes from out of state REALTORS through either the RE/MAX system of direct referral from agent to agent or from sources that I have developed over the years with marketing and personal contact. I do not mind sending a check back to the referring broker as long as we agreed upon the amount up front," says broker/salesman Steve B. Anderson. "I have never so far paid one after the fact."

"My referral business is by design," explains Anderson. "I keep a data base of out of state agents and expand on it all the time so that I can market and e-mail them. I am with RE/MAX and most of us are on 100 percent splits, and we pay all our own expenses which is a lot different than giving up 20-60 percent to the broker. So if I send back 25 percent that still leaves a decent commission. Referrals the majority of the time are very solid leads that are real buyers.

As far as competition from Internet referring brokers, Anderson says, "I do not think the companies that are trying just to gather names and send out to agents for referral fees will be a problem in the long run. For me a bigger problem are the agents that pay illegal fees to unlicensed people for business, or the ones that take kick backs from lenders for sending their clients for a loan which just raises the clients' costs for getting a loan because the loan officer just adds that in, in most cases."