What are Referral Fees in Real Estate Transactions?

dollar-billReal 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.