What is a Realtor referral fee?
A real estate referral fee is a commission that a real estate Agent (Agent 2) pays to another Agent (Agent 1) for referring a Client to them. The referral fee is typically a percentage of the commission earned by Agent 2 when the Client referred by Agent 1 completes a real estate transaction. The fee is usually paid when a transaction with Agent 2 and Client has been closed and completed.
For example, real estate Agent 1 in Colorado refers a Client to Agent 2 in California. That Client buys or sells a property through Agent 2. Agent 2 may pay a referral fee to Agent 1 as compensation for the referral. A 25% referral fee of the commission received by Agent B from the transaction would be fairly common.
The Colorado Department of Regulatory Agencies (DORA) tells Realtors they should not represent Clients outside of a geographic area in which the Realtor has no knowledge or expertise. As a Colorado Springs Realtor, let’s say I have a Client who wants to buy a house in Denver (ninety miles away). I would either refer to a Denver Realtor, or pay someone a referral fee to work with me. The Denver Realtor would have access to the local Denver MLS, and would have expert knowledge in the area.
This can be a significant source of income for Realtors. Those just starting out or who are looking to expand their network would do well to look for referrals for friends or family around the country.
When the market was crazy hot, I would refer to a local friend whose business was not doing as well. Or if a Realtor has a personality conflict with one of their Clients, they can refer them to another local Agent with whom the Client may have a better rapport.
The Business of Referral Fees
Realtors Make Money Through Referral Fees
Realtor referral fees are legal and common in the real estate industry. State laws and the rules of the National Association of Realtors (NAR) regulate them. It’s important to note that referral fees should be disclosed to the Client and all parties involved in the transaction to avoid ethical or legal issues.
There are legitimate reasons for the referral process. A veteran real estate Agent or broker who is semiretired may transition into a referral Agent. Or maybe a house-hunter has broadened their search into a state in which their Realtor is not licensed. Their Agent may refer them to a colleague who can help for a fee. Most professionals admit, almost every real estate Agent in the business will pay a referral fee.
The practice of giving referrals to other licensed Realtors is common. Whether the primary motivation is financial gain or professional networking, referrals are an important part of building a successful real estate career.
Referral fees can be a win-win for both the referring and receiving parties. Agent A earns a financial reward for sending business to Agent B. Agent B benefits from the referral and the opportunity to work with a new Client. Realtors should be transparent about referral fees and ensure Clients are aware of any financial incentives that may influence their recommendations.
What Consumers Need to Know
How It Should Work
When a Client, friend, or family member tells me they’re moving to another locale, I’m always willing to give them a referral to wherever they’re relocating. It’s not just about making money. I want to make sure they’re well represented in their next transaction.
I am in two national real estate communities where I am close to agents around the country. From California to Maine, there aren’t many places where I’m not familiar with a local Realtor. I’m also aware of agents to whom I would never refer.
If I know and respect someone in the proposed town, I will, of course, refer to them. If I don’t have a relationship with another Agent, I will draw from my two communities. When I find a highly qualified Realtor, I call them and ask pertinent questions to see if they would be a good fit for the prospective Client. While speaking with the other Realtor, if I don’t have a rapport with or confidence in them, I will find someone else. (I figure if I don’t get along with the person, then the person I’m close to probably won’t either.)
How It Often Works
An out-of-town friend recently called me. He was upset and wanted an explanation for how his situation had turned so murky. He had spoken with a local friend who was also a Realtor (let’s call her Sue). When he mentioned he was buying a house in another state for his daughter, Sue told him she could refer him to a Realtor in that town.
When he arrived and met the new Agent, he disliked her on sight. He spent a few hours with the new Agent and liked her less and less. When asked, “How long have you known Sue?”, she told him she’d never met Sue, nor had she ever spoken to her. He was beyond frustrated.
It’s unfortunate that so often, the referring Agent just looks at a list and picks a name. This is especially typical in the increasing number of online referral agencies. They promise to find agents across multiple states or even countries but don’t vet them first.
If someone refers you to another Agent, be sure to ask what they know about that Realtor. Also know you don’t have to use the Agent to whom you were referred.
Can I Pay a Referral Fee to a Non-Realtor?
By law, Realtors can only pay referral fees to other licensed Realtors. Fees cannot be paid to lenders, appraisers, inspectors, title companies, family, friends, or anyone else who may have sent you a Client. They may do something nice for you. However, they are not allowed to exchange money with non-licensed individuals for a referral.
They should always disclose to the Client that the Realtor who is referring to another Agent in a different town or state will make money because of that transaction.
If you’re looking anywhere for a well-qualified Realtor, reach out and I’ll help in any way I can. If you’re looking to buy or sell in Colorado Springs, call me. I have decades of experience to help you through the ever-changing real estate market. No pressure, no obligation, call or text and I’ll be happy to discuss your individual real estate needs.