In the real estate industry, transfer fees have become a valuable barrier to innovation, increasing the value chain, and ultimately hurting both buyers and agents. Despite their proliferation, the current system is ripe for re-examination.
The transfer fee paradox
Transfer fees are a common practice in real estate. Let’s say someone with a real estate license identifies a potential buyer or seller. If so, they can refer that person to an agent to get a share of the commission. This can amount to half of the agent’s commission with little effort on the part of the referrer.
Consider this scenario: A home buyer clicks to contact a Realtor through Zillow. In no time, Zillow sells this lead to the agent for up to 40% commission. If a buyer ends up buying an $800,000 home, Zillow may pocket up to $9,600, while the agent takes all the risk and does all the work. The agent has little room to negotiate fees, as he has already given away a large portion of his profits.
Zillow’s $2 billion in annual revenue is largely driven by referral fees. While these funds may offer some benefits—such as a select list of agents—these benefits often overshadow potential conflicts of interest. Agents are incentivized to refer clients to the highest quality buyer rather than doing only what the buyer wants.
Ethical issues
The Real Estate Settlement Procedures Act (RESPA) prohibits agents from accepting payments for referring clients to lenders or home inspectors. Violating this law can result in severe penalties, including license suspension and fines. However, transfer fees between agents remain legal and are largely hidden from consumers. This distinction raises an important question: If payments to moneylenders are illegal, why are transfers between agents allowed?
The remittance ecosystem
Many real estate sites, such as Rocket Mortgage, Realtor.com, and Redfin, use a portion of their referral fees to offer cash incentives or discounts to buyers. While this may seem beneficial, it often hides the fact that these benefits are funded by transfer fees that increase overall costs. Buyers actually get a portion of their money without any transparency about the actual cost.
Will buyers use Zillow if they know the commission is marked up, 40% goes to the platform? Greater transparency can change consumer behavior, leading to more direct conversations, potentially lower costs for consumers, and increased income for agents doing all the work.
Impact on innovation
The dominance of transfer fees also stifles innovation. With large corporations fiercely protecting their lucrative business models, there is little room for new ideas that can lower costs or bring transparency. Increased transmission costs contribute to increased advertising costs, making it difficult for agents to communicate directly with customers. Higher margins translate into higher customer acquisition costs, a very important factor when trying to lower costs for consumers.
Agents and referral fees
It is important to understand that agents are often driven to accept referrals because acquiring new clients is a challenge. Given the choice between not paying and paying a referral fee, most agents choose the latter. This system leaves agents with reduced profits and limits their ability to control the results of their business.
A request for transparency
The real estate industry needs to rethink its approach to referral fees. Greater clarity is essential. Disclosing referral fees to consumers will empower them to make informed decisions about the value of the services they receive. A broker agreement outlining the services rendered and associated costs would pave the way for a more equitable and transparent industry.
If transfer costs were disclosed and made transparent, it would encourage innovation and allow agents to regain control of their business processes. By removing hidden fees and ensuring that all participants in the value chain provide tangible value, we can create an efficient and consumer-friendly housing market.
Final thoughts
Industry giants protect referral fees, often at the expense of buyers and agents. To drive meaningful change, we must promote transparency and rethink the role of transfer funds in the real estate industry. Only by addressing these issues can we hope to promote a more equitable and innovative market.
Dean DiCarlo is the CEO of Homing.com.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
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