Referrals are one of the top methods used by businesses to acquire promising leads. In fact, recent studies have shown that peer referrals are 2.5x more responsive than leads acquired through other marketing efforts. For this reason, as a realtor, it can pay big to know the ins and outs of real estate referral fees and agreements.
Because not only are referred clients more responsive, but they also tend to have a higher retention rate and to generate higher margins. However, when using this strategy, you need to be aware of the real estate referral fees involved, what determines these fees, and what goes into a referral agreement. Being ignorant of this information could lead to you being attached to a shoddy contract and paying higher than average commissions.
So if you’re looking to expand your lead generation strategy, real estate referrals are a great place to start. In this article, we’ll cover the basics of real estate referral fees, contracts, and everything else you need to know to start utilizing this powerful strategy.
Table of Contents
- Real Estate Referral Agreements Explained
- The Importance of Real Estate Referral Agreements
- Determining Fair Real Estate Referral Fees
- Referral Agreements and What To Expect
- Creating Your Referral Network
Real Estate Referral Agreements Explained
If you’re reading this, chances are you know a thing or two about real estate referral agreements, but just in case you’re new, we’ll cover the basics.
A real estate referral agreement is an agreement between two agents where one provides the other with a client in exchange for a realtor referral fee. The fee that’s charged can vary based upon a number of factors (more on this later), but the average referral fee is usually within the 10% to 50% range. Real estate referral fees are only paid out upon the closing of a deal.
Real estate referral agents may or may not be practicing agents, although they will usually have a real estate license and should be associated with a licensed brokerage. Generally, referral agents fall into two categories:
- Agents who are no longer practicing, but have a good enough reputation to continue getting leads. In exchange for connecting other agents with these promising leads, they charge a real estate referral fee.
- Agents who have more leads than they can handle, so they decide to offer some to other agents in exchange for a realtor referral fee.
Regardless of the type, referral agents are used for locating active agents that can help a client. Referral agents aren’t involved with listing or finding a property for a client on their own. A real estate referral fee percentage is then taken from the agent’s commission once the deal is closed.
The Importance of Real Estate Referral Agreements
No one understands the needs and struggles that go along with being a real estate agent better than other agents. For this reason, using referral agents as a part of your lead generation strategy makes sense. Other agents can spot a good lead, will know who to pass them off to, and should know what they’re worth when determining their referral fee.
While not all referral agents will pay-off, the fact that they will only see a commission if the sale is successful does provide some incentive to only bring you quality leads. There are a few great advantages to incorporating real estate referral agreements into your lead generation system.
Some reasons to consider using a referral agreement include:
- Well-vetted clients: Not always, but most of the time the clients that will be referred to you are high quality and have already been vetted and hand-selected for an agent.
- More quality referrals: Even if you’re only using a few referral agents, the number of high-quality leads you could generate from them is often greater than what you would get from many other lead generation strategies, such as cold calling.
- Less friction: Compared to many other strategies, a referral agreement is a comparatively low-friction method of generating leads from existing networks and contacts.
- Passive source: Leads you generate through referral agents are passive and don’t require much heavy lifting on your part.
Just make sure that all the referral agents in your network are committed to generating quality leads. Don’t rely on a referral agent who continually underperforms, especially if they’re charging high real estate referral fees.
The real estate referral fee percentage that you negotiate is incredibly important as well and needs to be taken into consideration when determining whether or not a referral is worth the effort.
Determining Fair Real Estate Referral Fees
The typical referral fee, on average, is around 25%. However, this isn’t always the case. While the standard referral fee of 25% to 35% of the closing agent’s commission is fairly normal, those numbers could fall to as low as 10% and rise to as high as 50% depending on a number of factors.
Some things that could affect your real estate referral fees include:
- Quality of lead: High-quality leads are going to cost you more than a low-quality one.
- Amount of work: Depending on how much work the referring agent is expected to do can also affect the costs. A very involved agent who provides a list of high-interest properties in a great area can ask for a higher real estate referral fee percentage.
- Negotiating skills: If you’re an expert negotiator, you can expect to get a better rate.
- Source of lead: A referring agent who is handing you a lead they picked up from a Facebook ad will charge less than someone who is referring a personal friend or reliable client.
How Real Estate Referral Fees Commissions Works
As previously stated, the exact real estate referral fee percentage can vary by quite a bit depending on several factors. However, once agreed upon, the way that commission is handled is pretty standard.
Below, we’ll give you an example of a commission from a $100,000 transaction with the standard referral fee of 25%:
- A referral agent refers a client to you. Your contract states they will receive 25% of the closing agent’s take-home commission.
- Your total MLS commission is 6%, leaving you with $6,000.
- The listing agent gets 50% of the commission, leaving you with 3% ($3,000).
- The referral agent now takes their 25% commission out of the $3,000 ($750).
- You’re left with $2,250 and you give the referring agent $750.
Keep in mind that every market is different, and your market’s standard practices could make this process a bit different. For instance, in certain markets, real estate referral fees are only paid if the client’s purchase exceeds $100,000, any less, and the broker doesn’t have to pay commission.
Fighting for the Best Possible Real Estate Referral Fee
When determining your referral fees, you want to fight for the best possible rate. In order to do this, keep the following things in mind during negotiations:
- The source of the lead and how it was qualified
- The relationship between the referrer and the client
- The approval status of the client (are they pre-approved by a lender?)
- The reason the client is being referred to you (Is it due to a heavy workload or a personality clash? The answer to this could give you more negotiating power)
- The amount of effort the referring agent has already put into the lead
- The amount of effort that will be required by the involved parties
- The needs of the agent who is receiving the referral (do they need mentoring or support in order to close?)
Getting the best referral agreement will depend on your business boundaries and your personal goals. Only agree to things that you’re comfortable with and try to work out a deal that’s equitable for both parties.
Real Estate Referral Agreements — What To Expect
Other than basic information, such as the names and addresses of the referring and receiving parties, there are some other things that you may want to include in your referral agreement.
For one, your agreement must be authorized by a licensed broker, otherwise, it won’t be legal and binding. Additionally, the contract needs to clearly specify how long the terms of the agreement are valid for, the fee agreed upon, and the types of transactions that will be covered.
On top of these things, you should consider adding the following clauses to your referral agreement:
- Qualified or unqualified referrals: States whether or not the leads have been vetted by the agent.
- Relationship between parties: Define the relationship as an agreement between two independent contractors.
- Method of payment: State how the agent will be paid.
- Expiration of payment period: If someone who is referred turns into a repeat customer, define how long commission will be paid out to the referrer.
- Earn-out period: A date that the sale must be made by in order for a commission to be earned.
Real Estate Referral Agreement Templates
When creating a referral agreement, there are loads of free real estate referral agreement templates that you can use. When using a template, just make sure it includes this basic information:
- Referring party’s name, agency/company details, address, telephone, and email address
- Receiving party’s name, agency/company details, address, telephone, and email address
- Fee that was agreed upon and a breakdown of it
- Terms that the two parties are agreeing upon
- Contact information of the client being referred
- All relevant information regarding the referring party’s association with the client
- Time of payment
- Expiration date of the agreement
- Signature from both parties
What You Should and Shouldn’t Do With Your Real Estate Referral Agreement
When going into a real estate referral agreement, there are a few things that you definitely want to avoid doing. This includes relying on third party sites, forgetting to follow up with leads, and paying fees to an unlicensed broker. While some of these may seem like common sense, it’s best practice to avoid doing any of these things.
Now, for the really valuable bits. When getting into a real estate referral agreement, it’s a good idea that you do the following things:
- Find a referral partner who has a lot of knowledge and experience
- Create a network of realtors and brokers who think similarly to you
- Share notes and updates with your referral partners, as well as give them access to your CRM
- Make certain any broker you work with is licensed before paying them anything
Creating Your Referral Network
Now that you know the basics around real estate referral fees and agreements, it’s time to start building your referral network. One of the best ways to increase the number, and the quality, of the referrals you receive, is to offer an outstanding service. Be someone that agents would trust referring their friends and family to. While this may sound obvious, you’d be surprised how many realtors ignore this simple bit of advice.
Another great way to build your network is to create a referral program. This can be done by determining your ideal customer and using referrers who are likely to offer these promising leads.
Next, educate your referrers as to the exact type of customer you’re seeking so there’s no room for mistakes. Make sure to incentivize these referrers and to reward them for providing the types of leads you’re looking for. This can be done through bonuses or simple gifts. Finally, measure your success, or failure, with your new referrers based on a relevant metric, such as ROI.
Once you have a great referral network that you can rely on, your hunt for leads should no longer be the struggle it once was when using other strategies, such as cold emails. While real estate referrals may not become your primary lead generation strategy, it’s still a great tool to add to your lead generation toolbox!
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