Hold On to Your Wallet: Referral Fees Are Growing

Some see the future, and it includes you paying referral fees for more and more business.

October 1, 1996

In today's market, it's more likely than ever that you'll be asked to pay referral fees on relocations--even on business you've generated yourself.

Although no statistics are available yet, anecdotal evidence suggests the proportion of transactions that carry referral fees is growing. Five years ago, 10 percent to 15 percent of the average brokerage's business carried referral fees. These days, as much as 25 percent of customers coming through a broker's door carry some fee, estimates Jo Lay, relocation director for Van Zandt Relocation Center, Arlington, Texas.

Janet Scheaffer, GRI, executive vice president of Blake & Davis, REALTORS®, St. Louis, agrees the proportion in her market is probably 20 percent to 30 percent these days.

Barbara Wallace, president of the Relocation Directors Council and relocation director at Amelia Bullock Inc., REALTORS®, Austin, Texas, says it could get worse. ''We've told our salespeople to expect a referral fee on almost every piece of business in the future.''

In addition, the Department of Housing and Urban Development may begin work on a Real Estate Settlement Procedures Act rule that could allow real estate companies to pay referral fees to anyone not affiliated with a broker, who sends them business. HUD Special Assistant Sarah Rosen says it's ''unlikely it will happen before the end of the year.''

Your Analysis, Please

What's behind the increase in referral fee requests? Corporations, retailers, and affinity groups are signing up in droves for programs that allow them to collect fees in exchange for referring a high volume of homebuyers and homesellers.

''Corporations are looking to offset their relocation expenses, which can be $45,000 per employee per move, by participating in referral fees,'' explains Pam O'Connor, president of RELO/The International Relocation Network, Chicago.

Among those collecting fees is DuPont Co., Wilmington, Del., which transfers about 2,000 employees each year with the help of a select group of real estatepractitioners who pay the company a fee each time they close a transaction involving a DuPont employee transfer.

''The transfer wouldn't exist without DuPont,'' says DuPont policy consultant Steve Rogers. ''Because of that, we're entitled to that referral fee. If the fee is excessive or, in salespeople's minds, invalid, they have the option not to do the business.''

Fortunately for practitioners in good markets, there's an escape clause in the DuPont contract. If a property sells within 120 days, DuPont waives the referral fee.

Cutting the Pie Further

Corporations that turn their transferees over to a relocation management company, rather than handling the process in-house, may ask the relocation company to share any referral fees they're paid by practitioners. So relocation companies, in order to retain the same level of service to transferees, may end up either reducing their own profit margin or passing higher referral fees on to you.

To make sure transferring employees use only practitioners willing to pay a referral fee, about a quarter of corporations now link relocation benefits to the use of preselected brokers, estimates Robert Gregory, president of Argonaut Relocation Services, Detroit, who thinks service, not just fee collection, should be the corporation's focus. Employee relocation benefits that companies are putting on the line range from home warranties to complete reimbursement for all closing costs on the sale of the old home and the purchase of a new one.

National Programs Capture Local Business

Corporations and relocation companies aren't the only source of fee requests. Affinity groups and retailers looking for benefits to offer their customers and members have had no trouble finding national partners in the real estate industry willing to offer consumers a premium funded by local salespeople's referral fees. ''Affinity programs are a way for national relocation companies to tap into local business,'' explains O'Connor.

BJ's Warehouse Club, an East Coast grocery superstore, offers cash-back discounts on real estate commissions to customers who sign up for its real estate and relocation program. Affinity groups, from trade associations and college alumni organizations to credit card issuers, have cut similar deals for their members.

For example, American Airlines awards frequent flier miles to members of its AAdvantage Program when they buy or sell a home through brokers at PHH Real Estate Services, Danbury, Conn., the airline's real estate affinity partner.Then the brokers pay a referral fee to PHH.

NAR's affinity marketing working group is in the process of developing a white paper on the impact such relationships have on practitioners. This paper will be presented to the Business Issues Committee at NAR's annual convention in San Francisco.

Etiquette Lost: Double-Dippers and Late Askers
Most salespeople who work the relocation niche are used to paying referral fees, says Wallace,unless they're asked after they have a signed listing or a broker and relocation company ask for a fee on the same customer.

But what's causing the most serious concern among salespeople is retail and affinity programs that allow salespeople's friends and former clients to ask for discounts or cash-back rebates because they now shop at a BJ's Warehouse, Wallace says. ''They're clients or customersyou've had before, but you now have to pay an affinity group or retailer to keep them. That's hard for salespeople to swallow, because they're the procuring cause for that business, not the affinity group.''

In some cases, the salesperson isn't aware of the referral fee request until the closing. David Gage, vice president at Weichert Relocation Co. Inc., Fairfax, Va., worked with one customer who had been transferred by his company and received full-service, high-cost relocation assistance. At the closing table, the transferee said he was a member of an affinity group and wanted his cash-back bonus. ''We had to turn part of our funds over to him. He got $800 back in his pocket,'' Gage recalls.

State license laws generally regulate, and in many cases prohibit, real estate--related commissions and fees being paid to unlicensed people, such as employees’ companies and individual buyers. Make sure your operation--whether a brokerage or a relocation company--complies with state law regarding unlicensed referrals.

One thing is clear: There's a growing number of folks out there cashing in on referral fees. The question for salespeople is, How far into your pocket are you willing to let them reach?

Is Relocation Business Worth It?

Is time spent on referred business--particularly referrals of relocating employees--well spent?

Referral fees can be seen as a replacement for marketing dollars, points out Arthur Lederman, director of corporate services for DeWolfe, New England, Boston.''In my experience, salespeople spend about 25 cents on the dollar for marketing. Why not pay referral fees to buy the business directly instead of going out to the market?''

But relocation work has its drawbacks. In relocation, repeat business often carries a repeat referral fee. Deb Benham, CRS®, a salesperson with RE/MAX–Masters, Englewood, Colo., paid a referral fee to a relocation company when she sold a home to an oil company executive transferred by his company. Later, when the executive was transferred out of the area, Benham listed his house and had to pay a second referral fee to the relocation company. Despite the second fee, the referral business has been good to her. In fact, most of her business comes from it.

There are other practitioners who like the side benefits of relocation work. Transferees generally don't have much time to make a decision. Most take one look-see trip and buy a home during a follow-up trip, says Kay Settle, a salesperson at Harry Norman, REALTORS®, Atlanta. However, the average salesperson shops with buyers who don't have to move and who therefore may look a long time, eating into the salesperson's productivity.

Relocation work is valuable in other ways, too. Since relocating employees are new to the area, a salesperson often becomes their first friend, says Tere Foster, CRS®, a selling broker at Coldwell Banker--Bain, Seattle, who recently invited transferees to a mixer at her home.

On the other hand, some salespeople, particularly those already working a strong niche, avoid relocation work that isn't as profitable as their regular market or is more time-consuming because of relocation company demands for weekly two-page marketing reports. ''I'd turn down things that aren't likely to sell, that entail a lot of paperwork, or that are in a low price range,'' says Elaine Northrop, a salesperson with Coldwell Banker--Grempler Inc., Ellicott City, Md., and a past international number one salesperson for CB. ''I get so much local referral business from advertising and satisfied customers,'' she says, ''that I don't need the corporate referrals.''

Seven Heads-Up Ways to Tackle Referral Fees

Been asked for a referral fee after you've landed a customer? Or worse yet, have you been asked for two referral fees on the same buyer--say, one from your broker network and one from a relocation company? Try these tips from relocation directors:

  1. When asked for after-the-fact or double referral fees, don't call the referral source directly. Go to your relocation director. Most directors have contracts with referral sources that they can put to work for you to determine, for instance, whether the transferring employee's benefits are tied to the referral fees. If you don't have a relocation director, get representatives from both parties together in a conference call and ask them to help resolve the problem.
  2. When a salesperson or relocation company asks for an after-the-fact fee, ask customers for clarification.Maybe they were referred to you and just haven't mentioned it. But the best solution is prevention. Always ask potential customers why they're moving. If they're being transferred, especially by a large corporation, expect to pay a fee.
  3. Get your broker's help. Is your company handling a large volume of business from the referral source? If so, your broker may be willing to chip in on the referral fee.
  4. Don't waste time writing to the Department of Housing and Urban Development saying the referral source is violating the Real Estate Settlement Procedures Act.HUD has told salespeople that the agency isn't authorized to cover broker-to-broker and commission fees.
  5. If employees have to use certain brokers to avoid losing benefits, find out which benefits are at risk. You may be able to match a company's offer if all the employee loses is a small item such as a home warranty.
  6. To compete with an affinity group, consider offering a similar benefit. To match American Airlines’ frequent flier mile offer, for example, you can buy an airline ticket for the customer who chose you over a ''preferred vendor.'' It may even be cheaper than paying a referral fee.
  7. If you get the short end of a referral stick, ask your relocation director to make it up to you with future business.
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