When you're searching for a real estate agent, the first person you contact might not be the agent you end up working with. Often, agents make referrals and send prospective clients to one another. Or, you might use a website that promises to match you with an agent in your area.
In cases like these where someone refers you to your agent, whoever makes the referral often gets paid when you close on your purchase or sale. The money they receive is called a real estate referral fee or a finder's fee.
Referral fees reward agents or brokers who refer prospective clients to other real estate agents.
Let's say you're looking to buy a home, and you contact an agent. We'll call them Agent A.
Agent A tells you that they don't work in the market you're interested in, but they can refer you to a different agent — Agent B — who can help.
So Agent A passes along your name and contact information to Agent B, and Agent B gets in touch with you. Agent B helps you find a home. When you close the sale, Agent B earns a commission that's a percentage of the price.
But Agent B doesn't keep the full commission. Instead, they share part of it with Agent A. If the two agents are working for the same brokerage, their employer will split the commission between them. If they work for different brokerages, Agent B's employer will send part of the commission to Agent A's employer.
The money that Agent A earns for bringing you and Agent B together is the referral fee.
Real estate agents can collect referral fees for referring someone who's buying a home, like in this example, or they can earn a referral fee for referring someone who wants to sell. Either way, the referral fee compensates them for connecting a customer with an agent who ultimately oversees the transaction.
There are a few different reasons why agents or brokers might refer a customer to another real estate professional instead of accepting them as a client.
First, the homebuyer or seller might be looking for a service that the agent doesn't offer.
For example, someone who's selling a home might let their agent know that they plan to buy a home in another state. If the agent doesn't work in that state, they'll probably offer a referral to a colleague who does.
Or, someone who wants to sell a commercial property might contact an agent who handles only residential transactions. The agent will typically give them a referral to another professional who works on commercial deals.
Some well-established agents get calls from more interested customers than they have time to work with. These agents might choose to work on the highest-priced listings and refer everyone else to another agent.
Similarly, if an agent is scaling back their business and going part time, they might make more referrals since they're no longer looking for the same volume of work.
And if an agent retires, they might refer every prospective buyer or seller who reaches out to them.
Some agents or brokers don't work directly with any clients themselves — instead, they build their entire business on providing referrals. For example, they might set up a website where prospective buyers or sellers can get information about the real estate market and submit their contact details. Then, they refer all those customers to local brokerages.
The size of the referral fee depends on what the participating agents or brokers have negotiated. But it's typical for the fee to be 25% of the commission for the agent who received the referral.
The total commission on a real estate transaction is generally 5% to 6% of the sale price. (This is the same as Orchard’s fee for home sales.) That commission is then divided between the buyer's agent and the seller's agent. If one of those agents got their client through a referral, they would give part of their earnings to the agent who made the referral.
To see how the math works out, let's take a look at a simple example. Suppose a house sells for $400,000. If the commission is 5%, then it amounts to $20,000. Assuming it's split evenly between the buyer's and seller's agents, each agent gets $10,000.
So if the buyer's agent had their client referred to them and they're paying a 25% referral fee, they would keep $7,500 and turn the remaining $2,500 over to the referring agent.
The calculation can be a little more complicated if each of those agents works for a brokerage that also takes a cut, or if a few agents work together as a team. And the split between the buyer's and seller's agents might not be exactly 50-50. But the main thing to understand is that if an agent finds their own client, they receive a commission that's a percentage of the sales price. And if they get a client from a referral, they often give up part of that commission to cover a referral fee.
Referral fees can be as low as 10% or as high as 50% of an agent's commission. It's common for fees at the higher end of that range to go to businesses that focus exclusively on referring customers.
A commission is a fee a person earns in exchange for providing a service. And a referral fee is a payment for the service of connecting a client with an agent. So, a referral fee is one kind of commission.
But a referral fee is not exactly the same as the commissions buyers and sellers pay their agents. A brokerage pays a referral fee out of the commission its agent receives. So neither the buyer nor the seller has to pay anything extra for this commission.
You might be wondering if you can refer your friends to real estate agents and collect referral fees as a side hustle.
If you're not licensed to work as a real estate agent yourself, the answer is almost always no. Federal law restricts the fees that can be paid for real estate transactions and generally requires that referral fees go only to licensed agents or brokers. States may occasionally allow narrow exceptions for paying referral fees to non-licensees. But if you want to earn money from making referrals, you should plan on getting licensed as a first step.
Whether you're buying or selling a home, a real estate referral fee doesn't take any additional money out of your pocket. If there's a referral fee involved in your transaction, the commission is split so that some of the money goes to the referring agent. The amount you pay stays the same if you were referred — all that changes is how the commission is divided up.
There's debate about whether the practice of paying referral fees leads to higher prices for consumers. Some argue that referral fees keep commissions high in general. The reasoning is that when agents have to pay referral fees, they're less likely to lower the commissions they charge to their clients.
On the other hand, some research shows that if it takes a lot of time and effort to find an agent, referral fees could help consumers by matching them up with agents more easily and reducing the burden of searching for an agent on their own.
However you feel about referral fees, they're common in the real estate industry and probably aren't going away any time soon. A referral fee won't cost you extra and is taken care of by brokerages behind the scenes, so it shouldn't affect your experience of buying or selling a home. Just be aware that if you were referred to an agent, whoever sent you to them is likely getting a slice of the commission.
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