Every agent gets into real estate with visions of easy paychecks rolling in. But the reality is real estate takes work. Leads don’t just come to you from some lead fairy. Although… one lead gen source that is almost like sitting back and collecting checks is real estate referral fees. If you haven’t tapped into the world of referrals yet, don’t worry! We’re here to remove some of the mystery around real estate referrals and the associated fees for you.
In this article, we’ll review why referrals happen and how real estate referral fee agreements work. We’ll also answer some of the most frequently asked questions about real estate referral fees, and give you a chance to ask your own.
Free Real Estate Referral Form Template
The only paperwork required for a real estate referral is a real estate referral agreement. This is a basic contract between the two brokers who oversee the referring agents. It covers how the commission will be split, the length of the referral, and other terms of the agreement.
Even though this form is very important for real estate professionals, not every association or brokerage has one available for their members. That’s why we’ve created a free, customizable, easy-to-use template you can download and start using today. Click below to get started.
What Is a Real Estate Referral?
A real estate referral happens when one agent or broker passes a client to another licensed real estate agent or broker. Why give away those hard-earned leads? Well, as much as real estate professionals strive to be the go-to resource for all things real estate for all their clients, there are occasions when a client’s request is something we simply can’t deliver on. In those circumstances, referring your client to another agent is often the best way to serve them.
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When Should Agents Refer Clients to Others?
Real estate referrals happen every day, for a variety of reasons. Most referrals happen because of one (or more) of the following circumstances:
Out of Market Transaction
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 and Delaware has full reciprocity with all states, it might not make sense for you to conduct business in Delaware.
However, you can refer your beach house client to a real estate agent who regularly sells on the Delaware coast. In exchange for that referral, you (or more accurately, your broker) will receive a percentage of the commission on the Delaware transaction.
Real Estate License Reciprocity & Portability: A State-by-State Guide
Unqualified Transaction
As a licensed real estate professional, you have the ability to facilitate lots of different transaction types. But, if a client comes to you with a request for help on a transaction type you’re not familiar with, a referral might be the best way to provide them with the service they deserve, even though you’re technically licensed to help.
For instance, say 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. After all, the best practices of residential real estate may not apply to commercial or industrial real estate. So, a referral to an experienced commercial or industrial real estate agent would be the best alternative for your client.
Too Many Clients
It’s a great problem to have, but too many clients all at once can put you in Stressville fast. This might be the perfect time to ask for a little help from a fellow agent in your brokerage. For example, let’s say you are one of your brokerage’s top-producing agents, and your plate is running over. You get a phone call from someone who found you through your social media to help them buy a home, but you’re too busy to provide your typical stellar service. There’s a newer agent in the office who doesn’t have nearly as much business, so you talk to them about taking on the new client. That’s a referral, and you can split the commission accordingly.
Real Estate Referral Fees: Your Most Frequently Asked Questions—Answered
Now that you know the basics of what a real estate referral fee is and why they’re used, let’s dig a little deeper into some of your most frequently asked questions about them.
If you have a question about real estate referrals or the associated fees that you don’t see an answer to, leave a note in the comments section below. I answer referral questions every week, and would love to answer yours!
Don’t feel like reading? Scroll up to the very top of this article for our YouTube video version of this FAQ.
How much is a typical real estate referral fee?
The typical real estate referral fee is 25% of the final commission, but it’s important to note that there is no standard or prescribed amount. Just like any other commission in this industry, a real estate referral fee is completely negotiable. Your market likely has typical conventions. You can always ask your broker if they suggest any best practices when it comes to real estate referral fees.
Who pays real estate referral fees?
The referral fee comes directly out of the commission paid to the agent who received the referral. When an accepted offer has been written on your client’s behalf, the contract will include a clause that entitles you to the agreed-upon referral percentage. The title company that is handling the closing payouts will cut a third check to the referring agent’s broker. Then, that broker will take their cut, just like any other commission, before paying the referring agent.
[Related article: What Is GCI & Why It Matters to Every Real Estate Agent]
For example, let’s say an agent from out of state referred you a prequalified, homebuying client who is approved to spend $450,000 on a home. Assuming a buy-side commission of 2.5% on the purchase of a home at that price point, you would earn $11,250 on that transaction. A typical 25% referral fee would come out to $2,813 which would be paid at closing, leaving $8,438 paid to your broker. That’s still a good amount of commission for a lead that was practically handed to you. So, is the juice worth the squeeze? I’d venture that most agents would say yes.
Though unconventional, it is also acceptable that a referring broker would receive payment directly from the broker to whom the referral was made. This is not advisable. The risk of unpaid referral commissions rises substantially when this type of agreement is made.
How do I ask for a referral fee?
When your client contacts you and you’re not in a position to provide the best service, reach out to an agent who is. During that conversation with the other agent, offer to send your client to them in exchange for a specific percentage referral fee. Again, the exact percentage is negotiable, but 25% is pretty standard. Then, fill out the referral agreement form we provided above and ask them to sign through an online signing platform like DocuSign. Simple.
The important thing is to get the referral agreement signed before any work begins on the part of the referred agent. If you don’t get the contract signed ahead of time, it might be difficult to go back and claim the fee.
What do I do if the agent refuses to pay my referral fee?
You referred a lead to another agent, and now the deal is closed. But you haven’t received your payment for your referral—what do you do?
First, you should receive a referral payout as soon as the deal closes. So if it’s been more than a week without a check, you probably need to reach out to the title company or closing agent to see if the check was cut to your broker.
If the closing agent has no record of a referral fee payout to your brokerage, it’s time to get your broker involved. Ask your broker to contact the other agent’s broker to ask about the referral. Make sure you have your referral agreement, which should be signed by both brokers, to show proof of the arrangement. Your broker should first ask if the other broker is willing to pay the referral fee back to your brokerage.
If you didn’t get a referral agreement signed by your broker and the receiving broker, that could pose a big problem. Emails and phone calls don’t usually hold up when it comes to enforcing referral arrangements.
It’s really important in referrals to get those referral agreements signed by both agents and brokers. When a situation arises where one broker refuses to pay the other broker, it will likely end up decided through arbitration via your state’s real estate commission. So, if you want to see that payout, you should be prepared with all the documentation necessary to show proof of the agreement.
Why should I agree to pay a real estate referral fee?
When an agent contacts you about a referral, consider it a compliment! If the agent is worth their mettle, they’ve done their research and chosen you to refer their clients to. That’s a lot of trust! In exchange for the lead, you’re agreeing to pay the referring agent for a lead you didn’t generate.
But as I mentioned before, referral fees are negotiable. So, ask questions about your future client while you’ve got the agent on the phone. If the lead is highly qualified and ready to buy, you won’t have to do much to close the deal and get paid. They might even have a property picked out already. However, if the lead is not prequalified and has been a little flaky, you might end up doing a lot of work for a much smaller commission. It helps to know which scenario you’re getting into.
Overall, referrals are a great way to get leads. Other agents are typically great to work with and they can do a lot of the work upfront. Agents who don’t tap into this as a lead source may miss out on a ton of money, even after paying out the fees.
When should I negotiate a real estate referral fee?
Since real estate referral fees aren’t set by anyone, you can always negotiate if you want. That being said, it’s important to know when it’s a good idea to do so. Here are a couple of scenarios when you should consider negotiating:
- Say your buyer wants to purchase income properties in a state where you’re not licensed or able to conduct business. Since you’re referring a client who will be making multiple purchases, you might want to consider bumping up that referral commission to 30% or even 35%.
- On the other end of the spectrum, picture yourself receiving a lead you don’t know very well who is very high up in the funnel, not prequalified, and may need a lot of work to get them under contract. As the agent receiving the referral, you may consider trying to negotiate the standard 25% down to 20%.
Remember, even though negotiating is completely allowed when it comes to referrals, the partnering agent is under no obligation to accept your proposals, should you decide to make them. Push too hard during the negotiation and you may risk losing the lead altogether, so negotiate with caution.
Can a broker pay a referral fee to a non-licensed person?
No, a broker cannot legally pay a referral fee to a person who is not a licensed real estate professional. 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 Referrals: Essential Tools
If real estate referrals are a part of your business plan, you’ll want to consider what’s in your tool chest. Here are some of the questions we get about the tools that make this process easier:
Where Can I Get a Real Estate Referral Contract?
In order to make and receive referrals, you’ll need a real estate referral contract. We suggest using the same one every time so you’re familiar with the terms and know exactly what to expect from the other party. Many associations offer a referral contract template in their toolbox of forms, so check there first. If your association doesn’t provide one, we’ve got one for you. Grab our free, downloadable template below.
Should I Use an Electronic Signature Platform for Referrals?
Yes. Electronic signature platforms make the act of soliciting and keeping track of your referral contract quick and easy. Our favorite platform for this is DocuSign. Their system 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.
What Other Parts of My Existing Tech Stack Will Figure Into Managing Real Estate Referrals?
A real estate customer relationship manager (CRM) with transaction management options will give you visibility on every referral you make. Choose a real estate CRM with top-of-the-line business management tools, like Top Producer, for maximum functionality. However, just about every provider listed in our guide of the best real estate CRMs of 2023 will have features to track all of your leads and referrals.
How Do Real Estate Referral Companies Work?
Companies that specialize in real estate referrals generally fall into two categories:
- Lead generation companies find prospects and offer those leads free in exchange for a percentage of the commission when the deal closes.
- Referral networks connect agents across the country with one another in order to facilitate referrals.
In the first group, some examples of companies offering their own leads as referrals are Agent Pronto, OpCity, and Zillow Flex. While these are good options for some, their steep referral fees (up to 40%) are usually more than most agents want to pay.
Is Zillow Premier Agent Worth the Cost?
In the second group, NuOp is one of our favorite companies offering a marketplace for agents to exchange referrals with one another. They have a nationwide network of agents, are growing quickly, and best of all, they offer a free-forever plan for agents who are still trying to decide if referral generation works for them. Check out NuOp to learn more about what they do and how they can help you and your business grow.
Bringing It All Together
Knowing how real estate referral fees work is a must for any agent. Whether you’ve got clients who are movers and shakers, or you live in a desirable spot where people are moving to or purchasing vacation property, you need to know how to seize these opportunities. 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!
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