Referrals and Kickbacks in Real Estate

Over the last few months Occupy-Whichever-Street has been the highlight of every tv newscast and written about in every major and not-so major periodical.  I’ve kept my itchy blogger-fingers from typing my opinion on the matter of bankers, big banks, government agencies and the happenings down in Zuccotti Park.  I guess because I’m still trying to sort it all out, and because I have been in a corrupt industry for five years, too, and I’ve just come to accept it, keeping my mouth shut about the matter. That it is until, today.

It’s no surprise to anyone that real estate is big money here in Manhattan and it’s well publicized that Gotham’s agents receive the largest commissions in the United States.  Prior to the red-white-and-blue Recession, in 2006, the general percentage paid by a seller to a real estate broker to sell a house, in most US cities, was on graduated scale:  6% of the first $100K, 5% on the second $100K, and 3% on the remainder.  In New York City it’s a straight 6%.   The average priced home in those other US cities was around $150,000.00, back in 2006, deeming a gross commission of $8,500.  The average priced Manhattan home, at the time, was a little over $1,000,000.00—that’s a $60,000.00 commission!  And that’s why I decided to move from Cleveland to become an agent in The-City-That-Never-Sleeps. Money. I wanted those fat commissions.

But once here, I was seeing a different side of that 6% commission: Kickbacks. Voicing my opinion on the matter of bribes and payoffs back then only caused my colleagues to think and say that I was naïve and too Midwest, and I guess I was back then—green as those Ohio hills I grew-up near. Heck, kickbacks have been standard for hundreds of years and acceptable; it’s how this pro$perous nation was built. So who was I, a single mom from the Midwest, to voice my views—on the ethics of it all?  (A poor, goody-two-shoes real estate agent in NYC, that’s who!)  Over the years, I’ve witnessed managers receive cash envelopes from their agents, sex in exchange for business leads and many deals unlawfully “off the books.”   I have known many, and still know many agents, who send envelopes of cash to their friends, doormen, hotel concierges, past real estate customers and even hairstylists, in exchange real estate trades, disguised as referral fees. That’s right, if your hairstylist recommends a real estate agent to you, while your golden locks are being coiffed, you can almost guarantee, in addition to paying them big bucks for your new “do,” that they’re making money off of your real estate transaction, too. If this seems unlawful, it is. Yet, it is witnessed with a lazy eye here in New York City because almost everyone is in on “the deal,” making a return on a “connection.” And more importantly, cold hard cash doesn’t really leave a paper trail.

On the flip side, outside of those huge commissions, real estate agents in NYC make money off you—their clients in other ways, too. Let’s say you need an architect or furniture or art for your new Manhattan pad, so you ask your agent for a recommendation. Guess what? They’re probably making money off that recommendation to you. Real estate agents call this “gravy money” and it is very common in New York City.  Sometimes it’s semi-lawful, but you must tell your client that you’re receiving a fee for recommending the said company/vendor to them.  But agents never, ever tell their clients that they’re profiting from their recommendations.  Their clients just think they are being helpful. “I have the best agent in the world! Helped me every step of the way, finding me a new apartment and hooking me up with art and furniture, too!” Yeap, you sure do…{cough}

As far as what is legal: only a licensed real estate person can receive a referral fee from a real estate transaction from another licensed agent/broker.  And this is the only way I’ve paid a referral fee over the years and I’ve paid many. It’s how I built my NYC business, actually. And this is how it works: Let’s say you are relocating from Chicago, you sell your home and ask your Illinois realtor if they happen to know a fantastic agent who they could recommend to you in New York City. Well, of course they do!  It may take them a day or two to get the agent’s name and contact info to you, though. Because, what you don’t know, is that they are searching for an agent in your new city to pay them a referral fee, for the “lead.”  Over the years, I’ve paid 25-35% of my gross commission for such referrals, and it’s 100% legal. I will say that most of my referred clients don’t know that I’m paying a referral fee to their agent back in their old state (or country). It’s not my place or duty to tell them. I just keep mum about it all, even though it’s standard and legal. Has been forever.

So next time you’re looking for an agent or asking for a recommendation, keep this blog-post in mind. Will it matter or make a difference in your Manhattan real estate investment? Probably not, but it’s good to know…

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5 thoughts on “Referrals and Kickbacks in Real Estate

  1. Great post HL and thank you so much for shining the light into the shadier, albeit legal, spots of NYC real-estate transactions. Now if this is what is involved in the buying and selling of everyday real-estate, what deals are taking place at the hedge-fund levels, the mergers & acquisitions, lobbyists and political campaigns that we will never know about but be witness to the collapse and having to bare the costs when it all implodes?

  2. Erm, uh, hate to break it to you HL, but you are breaking the law too. New York, like most states, prohibits giving a commission to anyone not licensed in the State. So, those Illinois realtors? Not legal to share with them unless they are licensed in NY.
    It would probably make have made more sense to permit referral fees to unlicensed individuals and require disclosure than to make them illegal. But government generally refuses to deal with reality.

    1. Thank you for reading and commenting, Dan. Just to be clear: fees must be paid broker (brokerage) to broker (brokerage), regardless of the state. Per the NY Real Estate license law:

      “… it shall be permissible for a broker properly registered pursuant to the provisions of article 23-A of the General Business Law who earns a commission on the original sale of a cooperative or homeowners association interest in real estate, including condominium units to pay any part of a fee, commission or other compensation received for bringing about such sale to a person whose principal business is not the sale or offering of cooperatives or homeowners association interests in real property, including condominium units in this state but who is either: (i) a real estate salesperson duly licensed under this article who is regularly associated with such broker; (ii) a broker duly licensed under this article; or a person regularly engaged in the real estate brokerage business in a state outside of New York.”
      Source: http://www.dos.ny.gov/licensing/lawbooks/RE-Law.pdf

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