Today Redfin was touting the merits of their agent partner program. They claim to to have 200 partner agents across the country in their program from big brokerages like Century 21, Coldwell Banker, Keller-Williams and John L. Scott. The program is pretty simple. Redfin screens for quality agents to join, they provide high quality referrals from their website, and agent quality standards are upheld via customer reviews. In return for the referrals from the Redfin website, agents pay a 30% referral fee from their commission. 15% is paid to Redfin for the referral, and the other 15% is given back to the client as a rebate. On a $300,000 purchase, Redfin would receive a referral fee of $1350.
This referral concept is as old as our profession, and there are countless players out there touting similar models. However, with the rise of popular internet search sites (Redfin, Estately, Sawbuck, etc), the big brokerages should be ashamed that their agents need to participate in these referral plans and terrified that their agent’s loyalty to their office is in jeopardy. By tacitly allowing their agents to participate in their competitor’s referral programs, the big brokerages are undermining their own value to agents, and fueling the development of their competitors’ websites. This will eventually lead to their demise.
Why aren’t big brokerages procuring quality leads for their agents?
Real estate agents who hang their license at big brokerages often pay hefty desk fees and commission splits. Annual caps on their split limit their fees, but it is certainly not uncommon for agents to pay $20,000-$30,000/year for the privilege of being an agent at one of these brokerages. That is a hefty sum of money. What do brokerages provide in return? They give you somewhere to hang your license, training to make sure that said license remains active, a brand name to work under, and broker oversight to keep everyone in compliance. They don’t usually give you any office space, office supplies or any other basic business expenses, without paying for the privilege. Evidently they also don’t give their agents any quality leads because their agents are so willing to sign up for referral programs from external companies.
Given the high fees that agents pay to these brokerages, it is astounding that the brokerages do not have a reliable method to source new, high-quality prospects for their agents. They have well-recognized brands, large budgets for their websites and should be able to craft a web presence that drives high-quality prospects to their agents. With the rise of these referral programs, here are some thoughts on why it is not working.
- Big brokerages don’t care how their agents source new clients. Each of their agents runs an independent business, and the brokerage gets their recurring desk fees and commission splits, regardless of how those agents find new clients. As long as agents close a handful of deals each year, the brokerage is ensured to get their desk fees and commission splits and will remain profitable.
- Big brokerages cannot figure out how to craft a compelling website, despite having millions of dollars to make that happen. They haven’t been listening to what internet consumers want, and are not well-versed in how to optimize their internet presence for search engine traffic.
- Big brokerages remain tied to the idea that “less is better” on their websites. By limiting property information that they display on their websites, brokerages try to increase the value of contacting their agents. What is happening is that the sites with robust data about homes are rocketing in popularity while the old, information-poor websites languish.
- Big brokerages are not financially incented to sell more homes. They are incented to recruit a high number of low-producing agents, who end up being more profitable to the brokerage than high-producing agents who hit their commission caps every year.
Referral programs funnel profit away from big brokerages
Large brokerages who allow their agents to participate in referral programs are letting revenue slip away from their office at an alarming rate. Let’s take a simple example. Agent A works for Big Broker X. They have an annual cap of $25,000 in fees, which they meet almost every year. Agent A signs up for Redfin’s referral program and sources 11 clients for the year, at an average sale price of $250,000. The referral program charges 30% of their commission for the referrals, which is $24,750. While Redfin rebates half of that to their customers, it still reflects a $24,750 that their agent is willing to pay to a third party, rather than Big Broker X. Clearly agents are willing to pay these amounts because the most difficult part of this business is to source your next client. But if I were the owner of Big Broker X, I would be alarmed that my agents are paying an the same amount to me in desk fees/splits that they are paying to external companies to source quality leads. If I were Big Broker X, I would find ways to stem the flow of revenue away from my agents and brokerage and provide a similar source of quality leads to my agents. In fact, shouldn’t my desk fees and commission splits pay for high-quality leads for my agents? That seems logical from an agent perspective.
Long-term viability of brokerages relies on agent loyalty
Big brokerages and their brand-names exist to serve the needs of their agents. By maintaining a strong brand, brokerages are able to attract thousands of agents to sign up with their office and pay their ongoing fees and splits. Retaining agents is a tough job, as switching brokerages is easy and done all of the time by agents seeking “greener pastures.” The long-term viability of big brokerages is threatened by referral programs because they are either unwilling or incapable of generating quality leads for their own agents. It is not hard to imagine a future where agents leave big brokerages in droves. If I pay $25,000 to a referral program to source 10 closings per year, why should I pay another $25,000 in desk fees and commission splits to my brokerage. Either agents will join referral companies directly or start small, independent offices that do not carry the overheard required by big brokerage brands.
He who trims the fat is going to win
Referral fees are laden with profit for the companies who receive them. If you have been in the business for any length of time, you know how profitable it is to receive a 20%-30% referral fee. You don’t do any work, but get a fat paycheck for the referral. The receiving agent remains happy to pay the large amount because it is so darned difficult to find new clients. Redfin takes a 15% fee for their referrals and said in 2009 that the average fee they collected was $1,110 per referral. That is a pretty large amount of money, and they do little to no work to receive it, other than creating their website and funneling clients to agents in their program. They claim that they have a 50% gross margin on each of these referrals. Other referral programs don’t have consumer rebates, so profit margins are likely higher through some of the other programs out there.
In the long-term, this referral business is going to have a “Walmart moment”. The companies left standing after 10 years are going to be the ones who can trim the fat out of referral fees, desk fees and commission splits. Agents will continue to vote with their pocket books, migrating away from high brokerage fees and migrating towards reasonably-priced sources of new clients. While it will be a slow process, I believe that the companies who will succeed in the long term are those able to optimize their web presence, easily source quality leads to their agents, display a recognized brand, and lower the costs of doing business as a real estate agent.