A real estate referral fee is a portion of a real estate commission that is paid to a real estate broker in exchange for referring them a client. Though subject to negotiation, a typical referral fee is 25% of the gross commission for a single side of a transaction.
Real estate referrals happen all the time for a variety of reasons. Most commonly, they happen 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 particular type of real estate.
Let’s take a look at how real estate referrals work, what the typical fees are, and what the most frequently asked questions are 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 are asking for things that we can’t deliver. These situations are perfect for a real estate referral.
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 you as a Maryland license holder are unable to conduct business in Delaware.
However, you can refer this client to a real estate agent who is licensed in Delaware, and in exchange for that referral, you (actually, your broker) receives a percentage of the commission.
Another good example of this is when your client is seeking services that you’re technically licensed to provide, but you don’t have the knowledge or expertise to be confident your client’s best interests will be looked after.
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.
Everything You’ve Ever Wanted to Know About Real Estate Referral Fees
Now that you have a basic understanding of what a real estate referral is, let’s dig into the nuts and bolts of the referral fee. This is 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 you’re not licensed in and are unable to conduct business in. 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, is not prequalified, and is going to 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 send it to you, so push too hard during negotiation and you may risk not getting the lead at all.
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 accepted offer has been written on your client’s behalf, a clause is included in that contract that entitles you to the agreed upon referral percentage. When it comes time for the closing company to cut checks dividing up the proceeds of the sale, your broker is written a check just like the broker of the real estate agent to whom you referred the client.
Once your broker has your referral amount, it’s treated like a normal real estate transaction. They will pull their percentage for your split and issue you the rest.
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 things like how the commission will be split and the length of the referral.
It’s typically the responsibility of the agent who is doing the referring to supply the referral contract with the initially stated terms. If the receiving broker wants to negotiate these terms, they may do so.
If you need a referral contract, try our free, customizable, and easy-to-use template.
The National Association of Realtors also has an easy-to-use referral form you can get here.
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, the recruitment of clientele for the purpose of real estate purchase or sale is considered to be the work of licensed professionals only, so you can get in some 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” is someone who is seeking out and then bringing 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 that seek a “finder’s fee” are just a couple of clicks away from asking for referrals, so this is a practice we’d advise against.
Are There Real Estate Referral Companies?
Yes. There are companies that specialize in real estate referrals. Since the only way to legally send and receive a referral is to do so via a brokerage, there are brokerages that focus entirely on this practice and conduct almost no business otherwise.
For instance, Agent Pronto is a real estate brokerage based out of Florida, but you would never know it to look at their website. Their entire business plan is based around the idea of attracting home buyers 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 the local area that have agreed to receive referrals and offers them the referral for a fee of between 25% and 35%, depending on the budget of the buyer or estimated home price of the seller.
A few additional real estate referral companies include:
How Common Are Real Estate Referrals?
In 2018, ReferralExchange alone made over 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 these leads. A referral that 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 somewhere like BoldLeads can yield you the same exclusive lead for significantly less cost. Check out BoldLeads to see if your ZIP code is available.
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 spot where people are wanting to move to or buy a vacation property, you’ve got to know about real estate referral fees. Not only can this be a great source of income, but this 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!