At REALTOR conventions, at association meetings and on Internet message boards and list-servs(tm), a steady drumbeat is getting louder - what if there were no referral fees? Outlawing referral fees isn't as simple as taking a vote among Realtors. Would the industry benefit, and if so, how would outlawing fees be accomplished - if that is what the real estate industry says it wants?

With federal approval, via the Real Estate Settlement Procedures Act, real estate brokers are allowed to pay each other referral fees. This is a useful way to capitalize on clients who are relocating out of the area, or to get paid for supplying leads to other brokers without even being exactly in the same business.

Referral fees were an idea that may have seemed good at the time, but may have gotten out of hand to the point that some brokers question whether or not they are worth the high cost, associated liability, and anxiety. In recent years, brokers have been plagued by increasingly high referral fees (as much as 35 percent by some accounts), dealing with companies who threaten after-the-fact referral fees, and competing with new companies entering the brokerage industry which are licensed not to perform brokerage services, but to capture referral fees.

Says Karen Ott, a director of the Iowa Association of REALTORS, "In the last two years, as a part-time instructor for the Iowa Association of Realtors, I have traveled the state to big and small areas and have been surprised at the number of times this (referral fees) has come up as a discussion point. I am finding most agents are saying that their choice would be that no referral fees are paid or received."

While it could be argued that referral fees are only paid on business that the brokers would not have had otherwise, and that the broker is exercising free will to accept a referral, that is starting to wear thin with some brokers who perceive referrals and fees as burgeoning out of control.

"Three or four years ago," explains Ott, "we addressed through a cooperative effort between the Iowa Association of Realtors and the Iowa Real Estate Commission the problem of "after-the-fact" referral fees, hoping at the same time to alleviate the problem of exorbitant fees paid to third-party companies. At that time, we changed our rules and regulations to specifically define that fees could only be paid to "active" licensees. The referral companies who did not have "active" licensees, of course, promptly got them licensed, and the problem returned.

"We discussed at the same time, the pros and cons of paying no referral fees at all to anyone, including other licensees," she continues. "The following year, a group of us from all over the state participated in weekly leadership training, and in some of our meetings, we discussed this topic - the pros and cons. We generally came to the conclusion that if no referral fees were paid, that agents would still refer for no fee to the "best" agents to service their clients. And, we knew the referrals would still come to agents in Iowa because the agents from other states would still want their clients taken care of in Iowa."

"I think they should be banished forever from the industry," says Al Napier, broker/owner of Napier Realty Group, "We should refer customers to other agents strictly on merit, not money, and if we all did this the (referral) money would average out anyway, and the best agents would take the best care of the clientele, and the consumer would win out in the end."

Napier believes that the industry should handle referrals same as other "professions."

"I think it's a shame that people often get referred to the highest bidder, or by a faceless, nameless (or online) entity instead of professional to professional as it should be," says Napier, who has shunned referral fees in his own practice. "I have done it this way for years. If someone wants to send a token of appreciation, then fine, but I never actually ask for a fee, and if offered, I decline or tell them to just buy me dinner."

Unlike other professions which disdain referral fees between its licensees, the real estate industry has not only embraced referral fees as a way of doing business, but has expanded its concepts of what a real estate brokerage is in order to accommodate the practice. Once the referral fee door was open, third-party relocation companies and REO companies take large shares of participating brokers' commissions. Now online advertising companies are getting licensed for the purpose of sharing in referral fees nationwide from their affiliated brokers.

Yahoo! is more than one of the world's largest online directories with an almost pure advertising model. Yet, Yahoo! is also a licensed real estate broker, according to the California Department of Real Estate doing business as Yahoo! Realty, Inc. Yahoo! does not pay MLSs for listings, but obtains them from partners such as eRealty and zipRealty, who have virtual office Websites (VOWs.) These VOWs contain the complete MLS listings from their local MLSs. The e-brokers serve as the gateway to the listings and are able to capture the consumer leads from those willing to click through a non-agency-binding "user agreement" to view the listings. Ryan Roslansky, product manager for Yahoo! Real Estate could not be reached for comment, but the practice has raised questions among brokers as to whether or not their listings are cleverly being used as advertising, which is against state regulations. To be paid by the e-brokers, Yahoo! charges a referral fee on closed sales stemming from consumers who signed the online agreements. While the brokers who supplied the listings being used in a referral or advertisement, depending on your point of view, aren't paying the referral fees, some feel they are paying in lost opportunity. Yahoo's arrangements are exclusive with only one broker serving as gateway per city.

The NAR has given its approval, but some brokers are nonetheless outraged that they've been outsmarted with their own reciprocity rules. Some people are beginning to wonder - is this healthy for the industry?

According to National Association of REALTORS general counsel Laurie Janik, it isn't. "The reason I think that it isn't is that if a broker is paying another broker, the money is staying in the industry. I see third parties who are siphoning money out of the industry. They are getting themselves a license only for the purpose of extracting these fees, and it will increase operating costs to the broker. He is dividing his commission with one more party. Some would say that if he doesn't get the business, he won't pay the fee."

The question could go to the very heart of what is a brokerage. Is Yahoo! a brokerage or has one of the world's largest online directories figured out a new way to sell advertising?

According to Janik, the definition of a brokerage is already clearly defined by RESPA, and Yahoo! Realty meets the definition. Her concern is broker profitability. More and more findings and reports suggest that brokers are having a more difficult time being profitable. A NAR trends study, A Changing Landscape, published in 2001 suggests that the average broker is clearing only about $150 per transaction side.

"There are two sides, so I'm at the preliminary stages of thinking this through," says Janik. "At 15 to 35 percent you are paying a hefty portion of your commission, and what was the service provided? Is there a cost benefit in balance? In an average priced home is $175,000, at six percent commission, and we're just saying that hypothetically, a broker's half of a $10,500 commission is $5,520. If I'm paying a 25 percent referral, that would be over $1,300 in referral fees. Is it worth that amount of a broker's commission to pay that much for a referral?"

What is there to gain? More money with less liability, and maybe the chance to be more professional in front of consumers, who would like a referred agent because he's good, not because he was willing to pay a large referral fee, as pointed out by Peter Miller, in his excellent editorial about the topic. Who would be hurt? No one who wasn't operating a licensed brokerage to begin with.

Should brokers decide that enough is enough, what would be the procedure for outlawing referral fees? Janik says it is not something that would be part of the Code of Ethics or standards of practice as an ethical justification for how the public may be harmed has not been examined. Banning referral fees at the state level would be less than effective because Congress has already preempted the states.

"It wouldn't be the NAR," says Janik. "It would be through legislation. RESPA, the federal statue, allows referral fees between brokers and outlaws fees between brokers and lenders and other parties. The only fees permitted are between broker and broker. You would have to get someone to introduce an amendment to RESPA to amend RESPA, it would take out the provision that allows broker-to-broker referral fees."

The whispers would have to get much louder for that to happen. Meanwhile, suggests Miller, if you don't agree that referral fees are good for you or the industry, just say no.

Published: November 26, 2002

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.