What are Referral Fees in Real Estate Transactions?
Real estate referral fees are often mysterious to folks who are buying and selling homes (whether in Silicon Valley or anywhere else), and there are a lot of misconceptions about them. So I’m going to explain what they are, who can get them, how it works, and what to “beware of” with them.
What they are: referral fees are a broker-to-broker (agent to agent) payment of money for business that one agent refers to another. For instance, if my friend, a real estate licensee, asks me to help her friend or relative to sell a home in Los Gatos, Saratoga, or San Jose (let’s say she’s in LA), I will pay her a percentage of the sales price (or possibly a fixed dollar amount) because she referred me the business. The amount varies, just like commissions do, but 25% is pretty common. When I was at Windermere, 20% was most common. When I was at Intero, there was no set fee but some agents required 30%. Some relocation firms demand 35% or more….
Relocation companies also vary among themselves in how this works, but basically they charge the agent a fairly high fee (40 – 50% is not unheard of, sometimes more – and the agent’s company often also reduces the “split” between the agent and the company) so that the buyer or seller’s move is underwritten somewhat by the commission dollars. The agent makes a lot less than usual on this deal, but hopefully the client will be happy and refer the agent to others (who will not have a referral fee attached to them).
What about Costco, USAA or others? To work a “referral” deal, they have to be licensed by the department of real estate in the places where they are referring business. Let’s say a big company wants in on this lucrative market. They get a license and offer to “feed” potential clients to hungry agents and in turn charge a set amount, such as 30%, as a “referral fee”. The big company, in turn, tells the potential buyer or seller, “find your agent through us and we’ll get you a rebate (kickback) of XX% or XX dollars!” So maybe the agent is charged 30% to “find” a client and the client gets 20% back. Guess who gets the rest? Yup, the big company.
A couple of years ago, I had a potential client for buying a Los Gatos home, who’d found an agent through Costco once before, DEMAND a kickback or rebate of my commission when or if she bought a house through me. I told her that I don’t do that (no one referred her to me – she found me because of my Silicon Valley home sellers book and other connections, not because someone else “sold” her to me as a lead). I didn’t mind that she asked, but she got quite huffy about it when I tried explaining how referral fees work, and I realized that this woman just wanted a portion of my income and with her really bad attitude, I didn’t want to work with her. There are a lot of nice folks buying & selling homes in the San Jose area, so I was OK letting her go.
There are lots of licensed middlemen like House Values, HomeGain and others who likewise collect leads and basically sell them to agents for a fee, whether a percentage at closing or a “per lead” cost. Again, they aggregate “leads” (people inquiring about selling or buying a home), pass the leads to local, San Jose area real estate agents and charge them for the leads, either per each lead, per territory each month, or at a successful closing. So what you may not realize, as a consumer, is that if you get an agent through one of these portals, that agent is probably paying a hefty fee for the pleasure of meeting you. (So if you were hoping for a discounted commission, it will be difficult for the agent to do that.) Also to be noted: many of the contracts between agent and aggregator prohibit them from telling you how much they must pay the referring company. This is particularly true among relocation companies.
As a consumer, is a referred real estate agent better for you or not?
Let’s dig a little deeper:
Are you better off with an agent you get by referral from another licensee or company than you are finding one yourself? Some buyers and sellers are very cynical and suspicious of referred agents because they know that the referring agent or company is getting paid. To see if it’s really in your best interest, we need to view the referral types distinctly from one another.
1. Agent to agent referrals
Often agent to agent referrals are excellent because the referring agent hand picks the individual that he or she feels will be your best match. The agent who gets the referral is normally very grateful for the opportunity and will work hard for you both because he or she wants your repeat business and referrals, but also because of the hope for more future business from the referring agent. Conversely, the agent who gets the referred business knows that if he or she screws up, there will be lost opportunities on both fronts.
When I make agent to agent referrals, I take it very seriously and do research before deciding not only who’s most knowledgeable but also who I trust to be honest, hardworking and diligent while assisting the client. A bad referral reflects poorly on me, too, so not only will I make the original introduction, but I’ll check back to make sure all stays on track and that my clients are taken care of from start to finish.
Agent to agent referrals are usually not at a high cost. Sometimes they are made at a really low cost to the receiving salesperson, and occasionally at no cost at all. Don’t assume that if your current agent is referring you to someone else that there’s a big payoff happening. Of all referral categories, in my experience, these are the most trustworthy and are often head & shoulders above picking someone you don’t know (and might not know how to glean on your own).
2. Relocation referrals
Many times, when a company relocates its employees there is a benefits package which requires that you work with a real estate licensee or brokerage which is assigned to you. Because relo referral fees are so high (50% in many cases), the best agents – the successful ones – won’t do it. Why work so hard for half the pay?
Sometimes, though, the fees aren’t so high. And sometimes you may be able to work with anyone you want (and get your benefits if the agent agrees to the fee). In some cases, there is no fee from the agent at all. They’re not all alike.
Relo benefits are hugely helpful in making a move, both for assistance on the practical items but also for the cash assistance which is very often involved. Best if you can find out upfront, before you even start surfing the web about your future home, what the rules of engagement are so that your relocation is as smooth as possible. (Your agent will thank you for it too.)
3. Lead aggregaters
The final category is that of lead aggregaters. These companies have websites which are designed to “capture leads” – that is, you and your contact information – so that they can sell them off to hungry agents who “buy leads”. Sometimes the cost by the agent or Realtor is per lead, other times it’s a referral fee if a transaction closes, sometimes it’s a monthly fee – or some combination of all three.
Even within this category there are better and worse companies which provide more or less help to the consumer. Some home buyers will want to use these companies or sites because of a promised rebate or lower selling commission. Just remember that as with other cases discussed above, the more of a discount there is from the agent, very likely the lower the quality of the agent since the best agents don’t have to work for pennies on the dollar – and they won’t.
In order to work for a really low amount of pay, to make a decent living these same agents absolutely must increase their volume and lower what is offered to their customers or clients in terms of time and attention. This may not be true on every transaction but over time, it will happen because there’s not nearly the profit margin built into the traditional model that the public might think (there’s a lot of hidden work in the real estate business which isn’t obvious to those outside of the industry).
Referrals are very helpful for agents looking to grow their business, whether by relocation companies or via an agent network. If you want to make some money in real estate yourself, get your license and network like mad. You can make a decent amount of money and never have to actually sell a house yourself!
This article originally published by Mary Pope-Handy for this blog in 2008; updated & expanded in 2011.