When is it acceptable for a broker to pay a referral fee to an unlicensed person

A real estate agent doesn’t always have the time for every client who comes their way. That’s where referrals come in. When a real estate agent can’t work with a client (whether it’s a time or expertise issue), they can instead refer them to another real estate agent altogether. The real estate agent gets a finder’s fee, also known as real estate referral fees.

Usually, these deals are drawn up well in advance. Over the course of your real estate career, you’ll start to develop referral contracts with others in the industry. Sometimes, a referral agent may just reach out to you unexpectedly with an offer.

And it’s not always another agent — sometimes it’s a third-party system such as an online service or another broker. As long as the other party or broker is licensed, they can refer work to you.

Let’s take a deeper look at everything you need to know about a real estate referral fee, including how to capture them on your own.

1. You Can Make a Lot of Money Through Referrals

On both sides, a lot of money can be made through referrals. If you’re the referral agent, you can make money for doing virtually nothing; you just need to make sure you’re working with a partner agent you can trust. If you’re the agent being referred to, getting a lot of referrals vastly cuts down on the amount of time you need to spend sourcing your clients.

But you need to have a firm referral fee agreement to avoid any confusion. As a real estate agent progresses in their career, it’s a good idea for them to already have a boilerplate referral agreement available should they run into this situation. A broker isn’t always going to give someone a lot of work, especially when they are new to the profession.

There are times when you just aren’t the best person for the job, such as an out-of-state sale or a sale outside of your expertise. Eventually, you can become known as a real estate referral agent; someone who knows the best person to consult with for an agent referral.

Some real estate professionals even “retire” from their career through referrals; they stop taking direct work, but they continue to give out a real estate referral whenever someone comes to them.

2. There Are a Lot of Sources for Referrals

Many people reach out for referrals first from colleagues in their area. But consider that a referral agent or broker in your area is most likely to be your competition rather than provide a real estate referral.

The world has broadened a lot. Today, a lot of real estate agents are getting leads from places such as Trulia, Zillow, and more.

In this situation, you need to pay a fee for the referral. You would sign up for a third-party marketplace and you’d be notified when people are looking for an agent. But that can be very powerful in a world where online marketplaces are just as competitive as a brick-and-mortar real estate broker.

And the fees that you pay for referrals for third-party marketplaces are generally much lower than you would be paying for a referral from a licensed agent. It’s a different type of fee entirely.

When you’re trying to build out your career as a real estate professional, it may be worth it to sign up for one of these third-party websites. You’ll have to pay a fee, but you may very well get more leads than from your employing broker.

3. Building an Out-of-State Network Helps

Today, a lot of people are moving. But what does someone do when they live in Ohio and need to purchase a home in California? Usually, they reach out to a Realtor in Ohio first, to sell their home. Then, they need to find someone in California for their next transaction. Since you’re likely not licensed in another state, you won’t be able to help.

Connecting with a real estate licensee in major states can help you; you can easily refer your existing clientele for the next half of their real estate transaction. Likewise, each salesperson will be able to refer people to you when they have a transaction in your area.

The real estate industry is highly interconnected. By forging new relationships with a licensed agent in other popular states, you’ll get more leads. You can also work with your brokerage to find real estate professionals in other parts of the world or just a real estate referral company.

4. You Need to Follow RESPA

RESPA is the Real Estate Settlement Procedures Act. In the RESPA act, it becomes illegal for kickbacks and fees to be paid to other parties in a real estate transaction. That includes real estate attorneys, home inspectors, and appraisers. This is to keep a real estate agent from promoting services that might not be beneficial to the client, simply because they are getting a “bribe.”

But most real estate referral fees don’t count. To not count, they have to be from a licensed real estate agent to another licensed real estate agent. As long as you’re working with a licensed Realtor, you should be fine. If you’re passing on a fee to any unlicensed person, you will be in violation of RESPA.

This includes real estate companies. Any licensed real estate broker cannot pay a referral fee to an unlicensed person or entity, including unlicensed real estate organizations.

RESPA is designed to keep the closing costs from spiraling for clients. But it also means that someone who refers you business (such as past clients) can’t be given a finders fee, even if you want to reward them. And anything can count as a finders fee as long as it has value; you also shouldn’t be giving any big gifts to the people who refer you.

5. Referral Fees Should Be Transparent to All Parties

Part of what ensures that a referral fee meets RESPA standards is that the entire process must be transparent. So, both the buyer and seller involved in the transaction should be aware of the referral fees.

Real estate referral fees should never be an afterthought to a transaction nor should they be a verbal agreement. They should be outlined in writing before the transaction. A new real estate professional can ask their brokerage for guidance.

What is the average real estate referral fee?

The average referral cost is substantial. It’s usually about 20 to 25 percent of your real estate commission, but it can be as much as half. This can turn a Realtor off to working with real estate referral fees entirely — but it’s still more than the “nothing” the Realtor would get without the referral.

Like other elements of real estate service, the typical referral fee can also be negotiated. It will be outlined in the contract between the referring and referred agent. Sometimes it can even be a flat fee.

Does the referred client need to pay the referral fee?

The referral fee is paid out of commission, just as fees to the managing broker would be. Technically, the referral fee is going to come from the commission, usually paid by the buyer, but the commission generally doesn’t increase to compensate for the referral fee.

Are there referral fees in property management?

It’s rare for there to be a referral fee in property management. While it would still be a transaction between two parties with a real estate license, it’s rarer for a referring agent to get a referral for property management services. A real estate referral agreement can help make it clear.

Are there differences for commercial properties?

When a real estate investor goes to an agent who specializes in residential real estate, the agent will often refer them. Someone specializing in residential real estate generally can’t work in commercial real estate. The same is true vice versa.

It can be a good idea for a residential agent to maintain a relationship with commercial agents with this in mind. The client will still be able to get what they want and the residential agent will at least become a referring agent.

Final Thoughts on Real Estate Referral Fees

Referrals are an essential part of the real estate business. Whether you’re the one giving them or receiving them, it’s important to be aware of referral fees.

Have you worked as a referral agent before? Or been on the receiving end of referrals from a partner agent? Let me know in the comments below!

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