When looking for a real estate agent, it’s possible that you won’t end up working with the first person you get in touch with. Agents frequently refer one another and send potential clients their way. Alternatively, you could use a website that guarantees to pair you up with a local agent.
In situations like these, when someone refers you to your agent, the person who recommended you frequently receives payment when you close on your purchase or sale. They are paid what is known as a real estate finder’s fee or referral fee.
Referral commissions can range from 10% to 50% of an agent’s commission. Fees at the higher end of that spectrum are frequently paid to companies that only refer clients.
To learn more about referral fees, including how much they cost in real estate, continue reading.
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What is a 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. Compared to real estate lead services that only charge on success, this is more true for agent-to-agent referrals. OpCity, Real Estate Exchange, and Redfin are a few of the lead generation companies in the real estate industry that typically charge a referral fee of between 30% and 35%.
These rules are not universal; there are exceptions. Particularly, we have retiring agents who set up a succession plan that gives them significantly higher referral fees as they switch from being a full-service agent to referral-only role.
How Much is a Referral Fee in Real Estate?
The referral fee’s size is determined by the terms that the participating agents or brokers have agreed to. However, it’s customary for the fee to equal 25% of the agent’s commission who received the referral.
In a typical real estate transaction, the total commission ranges from 5% to 6% of the sale price. (This is the same as Orchard’s commission on real estate transactions.) The buyer’s agent and the seller’s agent then split this commission. They would give a portion of their earnings to the agent who made the referral if one of those agents acquired their client through a referral.
Examining a straightforward example will help you understand how math functions. Let’s say a house fetches $400,000 in sales. It comes to $20,000 if the commission is 5%. Each agent receives $10,000, assuming the commission is divided equally between the buyer’s and seller’s agents.
Therefore, if the buyer’s agent received a client referral and was being paid a referral fee of 25%, they would keep $7,500 and give the remaining $2,500 to the referring agent.
If each of those agents works for a brokerage that also takes a cut or if several agents collaborate as a team, the calculation may become slightly more challenging. Also, there’s a chance that the split between the buyer’s and seller’s agents isn’t exactly 50/50. The most important thing to know, however, is that an agent receives a commission based on a percentage of the sales price if they find their own client. Additionally, they frequently forfeit a portion of their commission if a client comes from a referral in order to pay a fee for the referral.
How Do I Ask for a Referral Fee?
There is no set fee for a referral, unlike a general store. Details about the client, the property, and the local market can have a significant impact on the final amount that is agreed upon when the referral fee is negotiated between the sending and receiving agents. It’s best to always agree on the referral fee in advance, put the details in writing, and get everyone’s approval before proceeding.
Here are some basic negotiation steps you can take when negotiating a referral fee over the typical 25% rate:
• Make sure the recipient is informed of the default referral fee rate (35%) that most real estate agents accept to set the stage.
• Then, give specific reasons why this referral is more valuable than others using examples (you can use social proof, scarcity, authority, etc.).).
• Ask the receiving party if their preferred referral fee (anchoring) will work before stating it.
• Finally, try your best to listen to what they have to say. If you need more time to think of a response, just let them know that you’ll be in touch. Do not forget that finding the best agent to work the lead is more crucial than the referral fee. No matter how much you are able to negotiate for your referral fee, it won’t matter if the deal never closes.
Is a Referral Fee the Same as a Commission?
A commission is a sum of money that someone receives in return for rendering a service. The service of connecting a client with an agent is compensated with a referral fee. Therefore, one type of commission is a referral fee.
The commissions that buyers and sellers give their agents are not exactly the same as referral fees. A brokerage deducts the referral fee from the commission that its agent is paid from sales. This commission is therefore free for both the buyer and the seller.
Can Anyone Earn a Referral Fee?
You might be curious about whether you can use real estate agents as a side hustle by referring your friends to them.
The answer is almost always no if you do not hold a valid real estate agent license yourself. Federal law places restrictions on the fees that can be paid for real estate transactions and generally mandates that referral fees only go to licensed agents or brokers. States occasionally may permit specific exceptions for paying referral fees to unlicensed individuals. But you should consider getting licensed as a first step if you want to make money from referrals.
Summary
Regardless of your opinion of referral fees, they are a common practice in the real estate sector and are probably not going anywhere anytime soon. Your experience buying or selling a home shouldn’t be impacted by a referral fee because it won’t cost you anything extra and is handled by brokerages behind the scenes. Just remember that whoever recommended you to an agent is probably receiving a commission if you use their referral.
