The Wilmoth Group Blog

Referral Fees

When it gets down to it, the referral fee should not matter at all to any of the parties to the transaction.  This section is particularly pointed to the agents representing buyers (buyers agents or BA) of REO properties.  They seem to be the ones who spend a lot of time trying to figure out how much money the REO listing agent is making on each transaction.

Sometimes, we find, the buyers agent will even choose not to show a property to an interested buyer because they do not like the amount of compensation they perceive is being offerred.  Of course, writing this will likely throw me under the bus of Realtors and the Associations of which we are all members. If I wanted to I could end discussion right here and now and reprint remarks, in writing, I have received weekly from BA’s who tell me they won’t show a property because of the amount of compensation being offered.  Should not happen, not ethical and not professional. 

I am writing this section in particular to those BA’s who have ever considered not showing a REO listing because they perceive the compensation is poor.  There will be at least one more post in this series that will also address this topic, but the topic of referral fees has to be covered before delving deeper into this subject.

Mortgage servicers lose money on defaults..that is stating the obvious.  These organizations then have a decision to make..do we service the defaulted mortgage, soon to be foreclosed upon and henceforth known as REO, internally..or do we hire a outsourcer company that specializes in servicing default and REO?  Depending on industry volumes, these outsourcer companies provide a service that allows the servicer to focus on profitable activities and not the time consuming activity of managing and marketing a property.

Outsourcers do not work for free.  Unfortunately, the industry has evolved so that the outsourcer, in most cases, now is compensated through a referral fee paid by the listing REO broker at the time of closing.  These referral fees often amount to a third of the total commissions paid.

Each agreement is different.  The REO listing agent has no say in how the compensation structure works.  The listing agent either accepts the deal or declines.  The original property owner/servicer wants the commission paid to be displayed in a certain way that often, in itself, is a violation of most MLS rules today.  So, the listing agent now must find a creative way to satisfy the listing agreement compensation requirements.  Then, the outsourcer gets their fee.

Ultimately, the listing agent is not making the amount of money that  a BA may believe they are.  This is usually witnessed at closing on the settlement statement.  By then though, some BA’s have decided not to show the property as they believed the listing agent was taking the lion’s share of the commission or the actual cooperative commission offered was too low.

This also factors into the subject covered on volume (posting two in this series) as to the low average commission received by the listing agent.  If 60% of our transactions involve outsourcers, and we pay 30% of the commission in a referral fee, this brings the average commission down and returns us to the volume issue.

The volume issue requires efficiencies..efficeincies not commonly seen in traditional real estate.  I understand how this issue frustrates the consumer and can appreciate they should not suffer due to the differences in service offered.  This is why, a typical consumer wishing to purchase a bank foreclosure should enroll the services of an ethical, experienced Buyers Agent.  We have them working for us if you do not know one.

This post is for the Buyers Agents.  Stay focused on serving your client and not the commission.  It all works out fairly.  Usually you make more than the REO listing agent for a quarter of the work.  For more information refer to our website set up specifically for Buyers Agents…www.BuyWilmothREO.com.   

It’s The Volume

The top real estate agents in America talk about closing 50 sales in a year.  That is about one a week.  Some agents actually close upwards of 100 sales a year.  This represents less than 1% of all agents in America.

REO brokerage requires a volume far in excess of what “traditional agents” are accustomed to..with at least as much, if not more, servicing.  For instance, last year our company closed over 500 foreclosed properties. 

The immediate response I get when I share this information to anyone who is familiar with “traditional real estate” is WOW!  In their heads I can see the little dollar signs dancing around, not the logistical struggle that we fight to pull that off.  The bottom line is we have to close 500 properties in order to be in a similar income category as the “traditional” agent who closes 100. 

The simple facts are these.  Nationally, the average sales price of residential real estate is about $175,000.  Traditional real estate agents on average earn around 3% per transaction (though this number is negotiated and varies by company and agent).  After that, there are internal office splits and fees and the actual agent might end up with around 2-2.5%,  This places the average commission per average residential transaction, collected by the agent, around $3500.

In REO brokerage, we have reduced listing commissions..justified by the promise of volume.  In addition, much REO is handled through outsource companies and they receive an average 30% referral fee from our commission.  Finally, the average sales price of our properties in four different markets so far this year is about $75,000.  Our average commission after fees is about $1000.

Now, where this gets very interesting.  Traditional real estate agents closing 100 sales a year may have a staff of about five.  Due to the extensive paperwork requirements in selling foreclosures, not to mention the closing challenges and the fun involved in evictions and rehab of properties, we maintan a staff of 10.  So, in order to sell 500 properties, we maintain a payroll twice the size of the traditional agent. 

The conclusion is that we actually make less money doing five times the volume!  So, how does the business model work?  Operating efficiencies.  We have to have many areas where we operate in ways that are not the norm for traditonal real estate agents.  These efficiencies make the unaccustomed believe that we do not care.  We DO CARE..very much.  We just have to operate in a way that maximizes our time.  Those efficiencies are a big part of what makes working with an REO listing agent different. 

Future posts will discuss some of these operating procedures and why we need to use them.