You just landed a fancy new job at a big name company. They have put together a generous relocation package to move you and your family across the country, and you are excited that they are picking up the tab. They even offered to help you with the costs of selling your home and buying a home in your new city. Sounds like a great benefit, right? It is, but you may be surprised at who is actually paying for relocation benefits when you buy or sell a home.
When you buy or sell a home as part of a relocation, your company will say that they will pay certain fees associated with those transactions. If you are selling your home, they may pick the cost of your real estate commissions or other transaction fees. If you are buying a home, they may help to pay for your loan fees or other transaction costs. I spent a long time in the corporate world, and until I entered real estate, I believed that all of these expenses were being paid for by the employer, since that is what they would lead you to believe. As it turns out, corporate relocation programs use a “referral fee” system with a select group of real estate agents who offer to redirect some of their commissions to the relocation company in return for the relocation company sending them leads. While these large corporations may front some of the bill for your housing transactions, a big chunk of it actually is paid by your real estate agent! Let’s take a look at how it works.
You are moving to Seattle and are looking to purchase a home for $500,000. Your company puts you in contact with the relocation company who has a list of real estate agents to choose from. On the purchase of a $500,000 home, those agents would typically earn a 3% commission or $15,000 to represent you as a buyer. However, to be part of the list of relocation agents, they must accept a “referral agreement” to pay the relocation company a referral fee when they earn a commission. A typical referral fee is 30% of their commission, so in this case they would send $4,500 to the relocation company. What has the relocation company done to earn $4,500? They haven’t done any work, but function as a mechanism to funnel these funds back to the employer to pay for your relocation benefits. Maybe your company offered to pay your 1% loan origination fee. You probably took out a $450,000 mortgage, paying $4,500 for that origination fee. Want to guess where that money comes from? You’re right, most of it is paid for by the referral fee that your real estate agent paid, NOT by the company you are working for.
The first question that comes to mind is “why would a real estate agent give a whopping 30% of their income to a relocation company?” The agent is willing to sacrifice their commission for two reasons. First, they are provided with a highly-qualified buyer who is immediately ready to buy a home because of their relocation. Securing customers like this is difficult in real estate, and agents are willing to pay for the privilege. Second, the commissions are still large enough to make the transaction financially compelling for the agent. In my example above, the agent would still earn $10,500 for selling a $500,000 home.
You may also wonder what the relocation company has done to earn 30% of the commission. Surprisingly they do nothing in the transaction. Their sole purpose is to manage their stable of real estate agents, direct relocation clients to them, and mostly ensure that agents follow through with payment of their referral fees. In turn, they funnel the bulk of these proceeds back to the employer to defray the costs of these relocation expenses.
Corporate HR departments and relocation companies will tell you that this system has existed for many years and works to the mutual benefit of both the employer and the real estate agents. The employer gets to defray some of their relocation costs, which are usually quite expensive. The real estate agent gets a reliable stream of new business with little to no effort. However, I can’t help but think that this system is inherently flawed. It feels deceptive that the employer claims that they are paying for your relocation, which is only partly true. It is also a sad statement on real estate commissions if the typical Realtor feels comfortable giving away 30% of their income. Surely that is a sign of over-inflated real estate commissions.
If you are in the midst of a corporate relocation, don’t let this deter you from taking advantage of your relocation benefits. However, as an educated consumer, I would have a conversation with your real estate agent about how they are being compensated and how referral fees are being shared in the process.