Referral Fees: A Guide For Real Estate Agents

Ever wondered how real estate referral agents make money, the answer is referral fees. In this guide, we cover everything you’ve ever wanted to know about real estate referral fees.

In this guide, we cover everything you’ve ever wanted to know about real estate referral fees including:

• What is a typical referral fee?
• Who pays the referral fee?
• When do I ask for a referral fee?
• How much does a referral agent earn?
• How much will I pay to a referral agent?
• Why should I agree to pay a referral fee?

WHAT IS A TYPICAL REFERRAL FEE?

A typical referral fee for a real estate transaction is 25% of the gross commission received by the side representing the principal you referred. This holds more true for agent to agent referrals than for real estate lead services that charge only on success. These real estate lead services include OpCity, Real Estate Exchange and Redfin & they typically charge a referral fee between 30% and 35%.

There are exceptions to these norms. In particular, we have retiring agents that structure a succession plan which provides them substantially higher referral fees as they transition from full-service agent to a referral-only capacity.

WHO PAYS THE REFERRAL FEE?

The receiving agent’s broker is usually responsible for paying the referral fee. Typically, the fee is due from the receiving company within 10 days of closing and comes out of the gross commission due the firm representing the referred client. Depending on the settlement procedures put in place, the referral is usually paid in one of two ways: (i) the referral fee is recorded on the settlement statement and paid by the settlement agent or (ii) the referral fee is not recorded on the settlement statement and paid directly by the receiving real estate firm. Read further for a referral fee math example.

WHEN DO I ASK FOR A REFERRAL FEE?

It’s not like the general store, there is no set price for a referral fee. The referral fee is negotiated between the referral agent and receiving agent, so details about the client, the property and local market conditions can weigh heavily on the agreed upon amount. It’s always good practice to negotiate the referral fee in advance, put the specifics in writing & get sign-off from all brokers involved. If you’re worried about the integrity of the other party, conduct the negotiation on a no-names basis to keep your referral client confidential until there is an informal agreement over text message or email.

Here are some basic negotiation steps you can take when seeking a referral fee over the typical 25% rate:

• Set the stage. Make sure the receiving party is aware of the referral fee rate most real estate agents agree to (the default amount of 25%).
• Share your reasoning. Then explain, with examples, why this particular referral is worth more than other referrals (you can use social-proof, scarcity, authority, etc.).
• Make the ask. Next, name your desired referral fee (anchoring) and ask if that will work for the receiving party.
• Keep your eye on the prize. Finally, do your best to hear them out & if you need time to formulate a response, simply tell them that you’ll be in touch. Remember, the referral fee is less important than finding the right agent to work the lead. If the deal never closes, it won’t matter how high you are able to negotiate your referral fee.

If you want to learn more about negotiation, I recommend reading the following books for some great advice: Influence by Robert Cialdini and Nudge by Robert Thaler.

HOW MUCH DOES A REFERRAL AGENT EARN?

Typically, there are three steps figure out your referral fee:

1. Determine the receiving firms gross commission for representing the referred client.
2. Multiply the gross commission by the negotiated referral fee.
3. Multiply that result by your split with your referral brokerage.

For example, if the receiving agent’s firm earns a $10,000 commission representing the referral client and a 30% referral fee was negotiated, the referral agent’s firm will be due a $3,000 referral commission (not bad for making a solid introduction!).

Then multiply the $3,000 by the split with your referral agency (at General Referral we offer referral agents a split of 100%, less a flat transaction fee!). If you’re not so lucky and your split is 80%, you will take home $2,400 before taxes.

HOW MUCH WILL I PAY TO A REFERRAL AGENT?

The receiving agent effectively splits the cost of the referral with their employing broker. Typically, the referral fee will be divided by the same amount as the commission split they normally receive for a transaction.

Using our example above, if the receiving agent’s firm earns a $10,000 commission representing the referral client and a 30% referral fee was negotiated, the receiving agent’s firm will earn $7,000 after the $3,000 referral fee is paid to the referral agency (not bad for being handed the business!). To calculate your commission, multiply the $7,000 by the split with your real estate agency. If your split is 75%, your take home is $5,250 before taxes.

WHY SHOULD I AGREE TO PAY A REFERRAL FEE?

If it seems you’re giving away a large percentage of your earnings for a simple introduction, you will quickly learn how valuable referrals are to your business. A referral costs no time and no marketing dollars to generate new business. He/She closes at more than 10 times the rate of an internet lead. A referral from an agent you have a relationship with closes at rates near 50%!!

Credit: generalreferral.com