Real estate referral fees are a portion of the commission paid to a real estate broker in exchange for client referrals. Though subject to negotiation, a typical referral fee is 25% of the gross commission for a single side of a transaction.
Let’s review why referrals are sometimes necessary, how real estate referral fees work, how they may vary, and answer some of the most frequently asked questions about real estate referral fees.
What Is a Real Estate Referral?
A real estate referral is the act of getting a client into the hands of the person who is the most qualified to get them the real estate services they need. As much as real estate agents would love to be the go-to resource for all things real estate for all our clients all the time, there are times when our clients request things that we simply can’t deliver.
Most commonly, real estate referrals occur because a real estate agent is either unlicensed or unqualified to service their client in the purchase or sale of property in a particular geographic area or for a specific type of real estate.
Real Estate Referral Form
The only paperwork required for a real estate referral is a real estate referral agreement. This is a basic contract between the two brokers of the referring agents that covers how the commission will be split, the length of the referral, and other matters.
It’s typically the referring agent’s responsibility to supply the referral contract with the initially stated terms. If the receiving broker wants to negotiate these terms, they may do so.
Need a referral contract? Click below to get our free, customizable, and easy-to-use template. The National Association of Realtors also has an easy-to-use referral form you can find here.
When to Make a Real Estate Referral
Let’s say you’re a real estate agent working in Maryland, and you have a client who wants to purchase a beach house in Delaware. Even though these states are right next to each other, Delaware is a turf state, and as a Maryland license holder, you’re unable to conduct business in Delaware.
However, you can refer this client to a real estate agent who is licensed in Delaware. In exchange for that referral, you (or more accurately, your broker) will receive a percentage of the commission.
[Related article: Real Estate License Reciprocity & Portability: A State-by-State Guide]
Another situation where a real estate referral fee may arise is when your client is seeking services that you’re licensed to provide, but perhaps you don’t have the knowledge or expertise to feel confident that you can adequately represent your client’s best interests.
Consider the following scenario: You’ve got a client who you’ve helped with residential real estate transactions in the past, but now they want to sell an industrially zoned building they own.
If you’ve never worked on a commercial transaction, you may not be qualified to give your client advice on pricing, negotiation, or closing conditions since the best practices of residential real estate may not apply to commercial or industrial real estate. So, a referral to an experienced commercial and industrial real estate agent would be the best option for your client.
Real Estate Referral Fees: Chris Answers Your Most Frequently Asked Questions
Real Estate Referral Fees: Money Matters
Now that you have a basic understanding of real estate referral fees, let’s dig into the financial nuts and bolts. Real estate referral fees present a pretty straightforward topic, but since there’s money involved, more knowledge is good knowledge, and we want you to be the smartest person in the room.
How Much Is a Real Estate Referral Fee?
The short answer here is: Whatever you want it to be. Just like real estate commissions, there’s no predetermined amount that you have to charge or be charged for a real estate referral fee. However, there are some standard conventions that most brokers stick to. In the residential real estate world, the standard is 25%.
When to Negotiate a Real Estate Referral Fee
Given that standard fee, there may be reasons for negotiating this amount.
For instance, say your buyer wants to purchase income properties in a state where you’re not licensed or able to conduct business. Since you’re sending a client to an agent who will be making multiple purchases, it isn’t uncommon to bump up that commission to 30% or even 35%.
On the other hand, if you are receiving a lead that is very high up in the funnel, not prequalified, and who may need a lot of work to get them under contract, you may consider trying to negotiate the standard 25% down to 20%.
Though you are well within your right to do so, remember that the real estate agent sending the referral is under no obligation to share it with you. Push too hard during the negotiation and you may risk losing the lead altogether.
How Do I Get Paid When I Make a Real Estate Referral?
When you make a real estate referral, you are handing over the care and keeping of your client to another real estate agent for that particular transaction. Just like the agent you’re handing your client over to, you don’t get paid until their transaction closes.
When an offer has been written on your client’s behalf and is accepted, the ensuing contract will include a clause that entitles you to the agreed-upon referral percentage. When it comes time for the closing company to cut checks dividing up the sale proceeds, your broker will be issued a check just like the real estate agent’s broker to whom you referred the client.
Once your broker has your referral fee, they’ll treat it like any typical real estate transaction. They will pull their percentage share of your split and issue a check to you for the balance.
Can a Broker Pay a Referral Fee to a Non-licensed Person?
No, a broker cannot legally pay a referral fee to a non-licensed person. Enterprising real estate agents who are trying to come up with new referral generation methods from their sphere will knock around the idea of offering to pay a cash referral fee to former clients who send new business their way.
However, recruiting clientele for the purpose of real estate purchase or sale is considered to be the work of licensed professionals only. You can get in serious trouble with your local board, the National Association of Realtors, and even your state government by engaging in this practice.
There are some fine lines to walk here, particularly when it comes to real estate bird-dogging. A “bird dog” seeks out and then brings real estate investment opportunities to well-capitalized real estate investors. Technically speaking, this isn’t illegal since a bird dog isn’t actually bringing a buyer and seller together, just bringing the possibility of a deal to a buyer.
However, bird dogs and others operating in a similar space who seek a “finder’s fee” are just a couple of clicks away from asking for referrals, so we’d advise against this practice.
Real Estate Referral Essential Tools
If real estate referrals are a part of your business plan, you’ll want to have a few important tools in your tool chest.
Real Estate Referral Contract
The first is a solid real estate referral contract. We suggest using the same one every time. That way, you’ll be familiar with the language and terms and know what to expect in every transaction. If you need a referral contract template, we’ve got one for you.
Electronic Signature Platform
The second is an electronic signature platform that will allow you to gather the necessary paperwork for a real estate referral without having to worry about writing, scanning, printing, signing, and so on. Our favorite platform for this is DocuSign. Their online platform is highly accessible, super easy to use, and affordable (plans start at just $10 a month). Even though they’re not a real estate-specific product, they have plans and features designed with real estate agents in mind, so they’ll definitely fit into your tech stack.
Real Estate CRM With Transaction Management Options
Sometimes the hardest part about the real estate referral process is tracking the progress of your referrals after you’ve given them. A real estate CRM that has transaction management tools, like Propertybase or WiseAgent, will be a great option. However, just about every provider listed in our guide, 7 Best Real Estate CRMs of 2022, will have features to fit your needs.
Are There Real Estate Referral Companies?
Yes, some companies specialize in real estate referrals. Since the only way to legally send and receive a referral is to do so via a brokerage, it’s important to know that some brokerages focus exclusively on this practice.
For instance, Agent Pronto is a real estate brokerage based out of Florida, but you would never know it by looking at their website. Their entire business plan is based around the idea of attracting homebuyers and sellers from anywhere in the United States with the promise of matching them with the perfect agent.
Once a buyer or seller reaches out to them and requests to be matched with an agent, Agent Pronto then contacts agents in their local area who have agreed to receive referrals. Agent Pronto offers agents the referral for a 25% to 35% fee, depending on the buyer’s budget or the estimated home price of the seller.
A few additional real estate referral companies include:
How Common Are Real Estate Referrals?
In 2018, ReferralExchange made more than 245,000 connections across the United States, up more than 14% over 2017. In a survey conducted of over 1,200 real estate agents, most of whom belonged to a referral network of some sort, ReferralExchange found that nearly 25% of agents are receiving up to 10 referrals every year, further bolstering the trend seen in the last two years that the agent-to-agent real estate referral economy is growing steadily year after year.
Sounds Great, But What’s the Catch?
While this appears to be a lead generation strategy without an upfront cost, remember you’re paying pretty dearly for referral leads. A referral client who purchases a $250,000 home with a 3% commission will cost you $1,875.
That is a hefty cost per lead, especially when you consider that properly placed ads from a service like BoldLeads can yield you the same exclusive lead for significantly less cost. Check out BoldLeads to see if your ZIP code is available.
The Future of Real Estate Referrals
We’re confident that agent-to-agent referrals are going to remain a part of the real estate business. Businesses like ReferralExchange, OpCity, and Agent Harvest are going to continue to offer their services, but they won’t be alone.
Companies like Zillow, through programs like Zillow Flex, are getting into the referral business too, giving credence to a Tom Ferry prediction that by 2023, a full 50% of real estate transactions are going to have some form of a referral fee attached to them. Will that be the case? Only time will tell.
Bringing It All Together
Knowing how real estate referral fees work is a must for any real estate agent. Whether you’ve got clients who are movers and shakers, or you live in a desirable spot where people are moving or purchasing vacation property, you need to know about real estate referral fees. They can be a great source of income for you and the practice is vital to providing your clients with the best service possible.
Have any real estate referral fee questions we didn’t get to? Ask away in the comments!