Bricktionary

What is a real estate referral fee?

The Consumer Federation of America warns buyers and sellers that a referral fee that “will make it more difficult to negotiate a lower commission and could lower the quality of service received,” but that may only be the case in very specific and competitive situations for NYC real estate.

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As a New York City buyer, you can assume when one broker refers you to another broker who closes the deal that an amount of money is changing hands, known as a referral fee. It's good to be aware of any potential impact this might have on the level of service you receive.

Brokers make referrals when they have to hand off your business, perhaps because they are not licensed to work in the area or are less knowledgeable about what you are seeking. This is different from the more common scenario of co-broking—which involves two brokers (both licensed here) representing the buyer and seller and sharing the commission.

A national organization, the Consumer Federation of America, says in a recent report that referral fees—which can be 25 percent of a broker’s commission, or even higherare “hidden from consumers” and “reinforce high commission rates.” The CFA warns home buyers and sellers that a referral fee that “will make it more difficult to negotiate a lower commission and could lower the quality of service received,” but that may only be the case in very specific and competitive situations for NYC real estate.

For example, if a buyer is moving from California and is referred by a California agent to a NYC sales broker, that NYC broker now has to pay 20 to 30 percent of any commission to the California broker. If that NYC broker is juggling other potential buyers who are not referrals, he or she may not be inclined to work as hard on behalf of the California buyer. (Note: Bidding wars are becoming more rare these days. They’ve fallen to the lowest level in almost five years, according to a recent Elliman Report.)

Here’s another scenario: A renter is moving from California and is referred to a NYC agent. The NYC agent now owes 20-30 percent of their commission to the California agent, so the NYC agent may be less willing to negotiate their fee with the renter.

Still, real estate insiders say New Yorkers are protected from abuse of referral fees.

First, they point out, broker fees are not set in stone. Sellers can try to negotiate them and once they do, they sign a listing agreement, which spells out exactly what the fee structure is. Similarly, renters also have the ability to negotiate broker fees—and incidentally, these days more rental brokers willing to negotiate on fees.

John Walkup, COO at UrbanDigs, says sales referrals are not a part of “a very meaningful slice of transactions in NYC. He says they are not tracked but may represent 15 to 20 percent of deals here "but that may be high.”

In his experience, sales brokers “greatly appreciate all the effort to come up with a very solid lead. Most brokers don’t rely on them, but when they happen, even though it takes a cut of their commission, “a lot are happy to write that check,” he says.

Attorney David Slarskey says referral fees are not hidden from sellers.

Brokers “have a duty to inform the client about all matters related to compensation.” He says the REBNY Code of Ethics emphasizes “the importance that clients should be informed of all commissions and compensation paid on a transaction.”

To that point: Neil Garfinkel, who serves as broker counsel to REBNY, says, "brokers are expected to act in the best interest of clients."

The REBNY Code spells this out in different ways, including prohibiting brokers from accepting a commission without a client’s knowledge and consent, and obligating brokers to serve their clients and all parties to a transaction honesty and fairly.