Two weeks ago I offered the case against referral fees, the notion that they are costly, unnecessary, and erode the public's perception of the real estate community and its professional status.

That column produced a number of thoughtful comments -- some pro, some con. Fair enough. Here are a few of the observations I have come across -- and some responses.

It Won't Happen

A common viewpoint goes like this: Referral fees are part of real estate today, were common in real estate brokerage in the past, and will be with real estate forever. Like DNA, referral fees are with us always.

We've heard this before and with much the same passion. Remember:

• Buyer brokerage will never work.

• MLS information can only be available in face-to-face meetings with local brokers.

• Continuing education courses require actual classroom attendance, no online education can be allowed.

• No one needs a home inspector.

Referral fees certainly won't end tomorrow, but opposition has been simmering for a long time. Perhaps we have the start of a movement here....

How Do We Start?

One of the most frequent questions has been "how do we start?"

Just say no. It really is that simple. Explain why, and explain as well that the policy works both ways: You welcome referrals, you make referrals, you just don't ask for referral fees and you don't offer them. You'll quickly find out who gets it and who doesn't.

Selective Referrals

What about going half way, continuing referral fees among individual licensees but not organizations? In effect, a partial ban.

All licensees must be treated equally, and in this case that means no referral fees. None. Zilch. Status as a natural person, a small business or a corporate colossus does not alter the fact that referral fee money is changing hands, sometimes without informed consumer consent.

Good Money

Referral fees produce good money with little work, a tough combination to dislodge according to several commentators.

Agreed.

It's also enticing to smoke, but the long-term impact can be devastating. The moment to kick the referral habit is now. In time, perhaps skilled scientists will be able to develop an anti-referral patch....

What About "Free" Services?

One writer offered the notion that referral fees should be encouraged because they are not an additional consumer expense, instead they are merely a cost of doing business for brokers. The consumer, it is argued, is actually getting a "free" service.

Other than accountants and analysts on Wall Street, no one believes this.

If a broker has higher costs, those costs must be passed along to the public, otherwise the broker is out of business. Costs, according to most economic studies, are not the same as free.

As to "free" services, use of the term "free" regarding the provision of realty services should be regarded as inherently misleading, unfair, deceptive, and unconscionable when checks are sought or expected. Such claims should be automatic grounds for license suspensions.

Should Referral Fees Be Outlawed?

Some argue that because referral fees are a cost for consumers and not fully disclosed in too many cases they should be banned. My alternative works like this: If brokers want to pay such fees, then with the stipulation below they should have the right to do so.

The caveat is this: If there must be referrals, then there ought to be a clear disclaimer consumers must sign with mandated language from the state real estate commission explaining that referral fees of approximately x dollars -- depending on the expected minimum value of the transaction -- will be paid on the basis of a successful referral. Such disclosures should be universally required so that no brokerage is at a disadvantage. Also, they must be signed prior to the creation of a client/agent relationship.

Big Firms

Won't big brokerage companies oppose an end to referral fees?

Some will, some won't, but one thing is clear: If you keep doing things the same old way you get the same old results -- and many brokerage firms would like to see a stronger bottom line. At the very least, you can bet that big firms will run the numbers, comparing income and costs.

Local Benefits

Won't brokers in states with declining populations want referral fees when they send prospective buyers to Florida, Georgia, Texas, Arizona, California, Colorado, Nevada and North Carolina?

People are going to move whether referral fees are paid or not.

Brokers who pay such fees need to look carefully at their economics. Outgoing referral fees raise the cost of being in business. Would brokers have a greater profit without such fees? Is not the Internet obviating the need to pay referral fees for leads from distant states?

What About Production?

Do not referral fees produce additional business? Is not such business valuable?

Look at a number of energy and telecom companies. They were able to bulk up sales by trading commodities back and forth among themselves. It looked good on paper, but such transactions were a wash -- no profits were produced.

Big revenue figures are nice, but the goal in business is to maximize profits, not sales. It's the "broker dollar" that counts, the broker's profit after all costs, fees, and charges. Without a "broker dollar" there is no brokerage. A company that sells real estate worth $1 billion but loses $1 million will fail unless the bottom line changes.

The Good Old Days

How did brokers and salespeople get business without referrals?

They marketed themselves and their services online and off. They did good work and grateful clients and customers told friends, co-workers, neighbors, and relatives. And they pocketed every dollar they earned.

Today referral fees represent a trade: More work, but reduced revenue and profits per transaction.

A second and more insidious trade works like this: Brokers spend big money on marketing expenditures to build up their own names, but when brokers pay referral fees they effectively tell consumers that it's okay to go to a middleman, to someone other then themselves.

Paying referral fees blesses third parties with an importance and utility which are debatable, and perpetuates a cost growing numbers of licensees can no longer afford to pay. For many brokers and salespeople, the value of such a trade is increasingly in question.

For more articles by Peter G. Miller, please press here.

Published: September 3, 2002

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