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Referral fees take a bite out of real estate agent commissions
Source: Pittsburgh Post Gazette Author: Tim Grant
8/28/2022
When home buyers provide their contact information on real estate websites in order to reach an agent, it’s worth more than they may realize.
Big players like Zillow and Realtor.com pass that information to real estate agents who have already agreed to pay the referral platform a kickback of between 25% and 38% of the commission they earn.
“These fees do not ensure the best customer service, often the opposite,” said Stephen Brobeck, a senior fellow at the Washington, D.C.-based Consumer Federation of America.
With a record high number of real estate agents competing for a record low number of homes for sale, referral services are gaining wider acceptance as a marketing tool for meeting clients and more often seen as another cost of doing business.
But the owner of a Franklin Park-based real estate website is hoping to level the playing field with a free online meeting place for agents and consumers. At least locally, it could cut out the middleman so that agents keep more of their sales commissions and consumers will have more wiggle room to negotiate lower commissions.
Wendy Gilch, owner of SellingLater, said her website for matching sellers with buyers has evolved into a consumer advocacy platform. It also aims to educate buyers and sellers about how the industry works, which includes how to prevent big companies from adding hefty fees onto a transaction.
“A lot of times if consumers would just contact real estate agents directly instead of going through a referral service they could get a lower commission because the agent may be willing to negotiate,” Ms. Gilch said.
Sharing your details
One of the surest signs that a website is directing you to a referral program is if it offers to connect you to an agent, but requires all of your personal information (phone, email or address) before it shows you any agent profiles.
It’s the same scenario with all of the big referral platforms, including Homelight, Upnest, Dave Ramsey and parts of Realtor.com and parts of Zillow.
“None of them will show you an agent profile until you cough up your details — so they can track and see if the agent closes with you … to make sure they get their money,” Ms. Gilch said.
Zillow, the largest real estate website in the U.S., and Realtor.com are the industry’s biggest players. They have access to tens of millions of people searching for homes. To the extent they are able to capture information from home buyers, they can sell that information to Realtors.
Both companies offer two tiers of advertising for real estate agents.
Under the monthly subscription option, agents pay a monthly fee that can range from hundreds to thousands of dollars to be listed on the platform, receive higher placement or appear in certain zip codes and searches.
The other option is the referral system, which agents of all experience levels can use, but is more likely to attract agents who are newer to the business or less established because it requires no monthly fee or upfront costs.
Zillow representative Anna Tilden called what Zillow offers agents a pre- and post-pay model, “meaning depending on the market, some agents only pay us after they close on a lead we send them.”
“For agents in the post-pay model, which we call the Flex program, there are no upfront costs for connections,” she said. “Instead, they pay a success fee when they close a transaction from a Zillow connection. This fee varies by market.”
The pre-pay model is Zillow’s Premier Agent program. Those agents pay monthly fees to advertise and display their contact information on Zillow Group properties — Zillow.com, Trulia and apps.
She said Zillow focuses on partnering with agents in both its advertising programs who have “demonstrated excellent customer service and an ability to close.”
With Zillow shutting down its iBuying program, which bought homes directly from homeowners, the company has turned its focus on selling advertising and leads to agents.
In 2021, Zillow generated $8.1 billion in revenue versus $3.3 billion generated in the previous year. But rising interest rates and home price increases put a damper on Zillow’s revenues in the second quarter of 2022.
The company reported Premier Agent revenue decreased 5% year over year to $333 million, down from $349 million the second quarter of 2021.
Discounts
David Tkacik, a real estate agent at Insight Realty in Pine Township, said he used to win a lot of referral business from Upnest.com, but in 2019 he was excluded from the platform for offering discounted commissions.
“I tried to log-in one day and it didn’t work,” Mr. Tkacik said. “I emailed them to find out why and they said the company made a business decision that Realtors who offer commission rebates no longer can participate.
“Their vested interest is in keeping traditional brokers happy because there are more of them than discount brokers,” he said. “The only agents allowed to partner with them are high-priced ones now.”
UpNest.com was purchased in June by Realtor.com. Lexie Holbert, a senior communications director at Realtor.com, said the company has no insights on what occurred three years prior to its 2022 acquisition, but she clarified that UpNest does work with agents that offer rebates and discounts.
Mr. Tkacik, 39, a broker with eight years of experience, has built his business offering clients a 50% rebate on their commissions, with a minimum commission of $5,000.
“I have to make $5,000 minimum to make it worthwhile, but I’ve offered commission rebates as high as $14,000,” he said.
That means if he and another agent split a 6% commission on a $400,000 home, his share of the 3% split would amount to $12,000, but he rebates $6,000 back to the client, which reduces their closing costs.
Many agents in the Pittsburgh region charge a 6% commission on home sales. Some will lower the commission to 5%, but only if they don’t have to pay a referral fee.
Jay Villella, a licensed Pennsylvania real estate agent working for Kafalos & Associates Real Estate in Regent Square, has never used agent referral services to reach customers, and he doesn’t like how they’ve taken over the industry.
“The mechanisms that we have to choose agents are broken,” Mr. Villella said. “When people go shopping for real estate services they really have no idea what they’re getting.
“In my opinion, they’re getting connected with people who are willing to pay the most, which is not necessarily the most skilled agent, or whatever these sites promise the top agents will deliver.”
The recent spike in number of agents caused an imbalance that is driving the need to use every marketing advance. But Mr. Villella believes hiring practices in the industry also share some of the blame for the feeding frenzy on commissions.
“There are no negative consequences for a company to hire more real estate agents,” he said. “There’s only upside because the agents are not employees. They don’t get benefits and they don’t get paid unless they’re productive, which the broker also profits from.
“So, if they recruit thousands of people and they don’t get but a couple hundred sales out of that group of thousands, that’s a win for them at basically no cost.”
Agents outnumber homes
The Realtors Association of Metropolitan Pittsburgh takes a hands-off approach on agents signing up for referral services, said John Petrack, vice president of the Downtown-based trade group.
“That’s strictly a business decision made by each brokerage individually,” Mr. Petrack said.
It’s easy to see why some agents see referral fees as a cost-of-doing business when there are so many agents and it can be so hard to connect with customers.
There are 7,000 real estate professionals licensed with West Penn Multi-List, but only 4,000 active residential listings in the 15-county area it covers, Mr. Petrack said.
Nationally, the imbalance is just as bad. The National Association of Realtors has about 1.5 million real estate agents while there were only 1.3 million homes for sale in June 2021 while the housing market was booming.
Still, Mr. Petrack estimates only 10% to 15% of his organization’s 3,100 members participate in referral services.
The main mission
The Consumer Federation of America has been tracking the rise of referral fees and consumer costs in real estate transactions for years.
In October 2019, the CFA released a report in which researchers pretending to be a nephew trying to sell a home for an elderly uncle in their area contacted 263 agents in 20 cities for a study on transparency.
“Only 27% of the agents even said they were willing to negotiate their commission,” Mr. Brobeck said.
In the Pittsburgh region, agents typically charge 6% commissions on home sales. It’s unclear how many will lower the rate to 5%. The average commission rate across the country is 5.5%, Mr. Brobeck said.
Ms. Gilch’s website, Selling Later, was free when it debuted in 2019. It took some time for her to research the industry to understand how it works and how consumers could be helped most.
Now, her website earns revenue from agents primarily in Pittsburgh region who list themselves, their credentials and contact information on her site for a monthly fee. Agents pay $10; mortgage lenders $10; home inspectors $5; title companies $10; and real estate attorneys pay $5.
She said home sellers from 24 states have posted about 300 homes on the website since it launched. She said around 20 service providers have signed up already to list their profiles on the site. While most of them are in Pittsburgh, providers in Dallas and Charlotte has expressed interest, which is encouraging her to expand to other cities.
“We are very transparent,” Ms. Gilch said. “That’s the only money we would ever take from service providers. So, if you use us, there’s no referral fee. There’s no success fee.
“My main mission is to help consumers understand what’s happening and find savings.”
Agent profiles will be free to browse and will arm consumers with enough information to understand who an agent is, where they work, approximately what they charge and other things that might be important when making a decision to contact an agent, she said.
“By removing the high costs and referral fees that are infiltrating the market, we are able to give sellers and buyers a better chance to find savings,” Ms. Gilch said. “It’s really important, with talks of a recession looming, that consumers understand where their money ends up and how to try and save some of it.”