What is a referral fee in real estate: A guide

Real estate referral fees can be a great way for realtors and agents to make extra money. And, good relationships with other real estate professionals. For those with established businesses, most sales come from past clients, friends, and referrals. That’s why it’s important to know how referral commissions work, what is a referral fee in real estate, what is the average referral fee in the United States, and how to request referral fees.

For the uninitiated, when a licensed agent sends a potential buyer or seller to another licensed agent to handle the deal, it’s called a real estate referral. The referred agent takes over as the main contact and the referring agent gets a fee if the deal goes through.

Referrals are great for everyone. The referring agent earns a referral fee and the new agent gets motivated clients.

So, what is a referral fee in real estate?

A referral fee is the amount of money a real estate referral agent gets for connecting a buyer with a broker or agency. This happens when two licensed real estate pros agree in writing before a sale. The fee first goes to the lead broker, who then pays the agent or broker who made the sale. By law, only licensed people can earn referral fees. 

Referrals are common in real estate for several reasons. Agents might refer out business if they’re on vacation or too busy, if they don’t specialize in the area or type of property the client wants, are retiring and passing clients to their network, if the deal is too small for their preference, or if they mainly focus on making referrals rather than handling transactions themselves.

Is referral fees the same as finder’s fees?

While both finder’s fees and referral fees may be similar in some ways, they are different. Both involve payments based on written agreements made before referring a buyer and closing the sale, and both are percentages of the seller’s commission fee which can vary based on property value, company standards, and the relationship with the broker.

However, only licensed real estate pros can earn referral fees, while anyone can earn a finder’s fee. Finders connect brokers with buyers but referrers help with negotiating and selling properties.

Furthermore, referral fees tend to be more standard (are always in money form) since they often come from active real estate agents with many contacts. On the other hand, finder’s fees can be money or gifts. Last but not least, real estate brokers pay finders directly while referral fees go to the lead broker first, who then pays the referring agent.

Who pays the referral fee?

In real estate deals, when one agent refers a client to another who closes the sale, the referring agent gets a referral fee. This fee is taken from the commission earned by the closing agent. If there’s a third party involved, like a title company, they handle issuing a separate check to the referring agent’s broker and the agent themselves. Typically, payment arrives within ten days after the sale closes. 

It’s best to discuss the referral fee early on in your conversation with the agent you’re referring to. Agree on the fee upfront, then send a referral fee agreement to sign. After that, you can introduce them to your client through text, email, a call, or in person. This approach ensures clarity and locks in the agreement when you’re in the best position to negotiate.

How to draft a good referral agreement?

Making a clear real estate referral agreement is essential for both sides to stay protected. It should be simple and cover the details of the real estate deal. It’s best to hire a real estate attorney for more personalized terms.

Keep in mind that a real estate referral fee agreement should cover these basics:

• Details of the referring source (like the broker or agent’s contact info)
• Information about the receiving real estate agent or broker
• A clear breakdown of the referral fee
• Terms and conditions of the agreement
• Signatures from the agents and brokers
• Contact information for the referred client
• Any other relevant details about the existing relationship between the referring agent and the client

How does the real estate referral system work?

The real estate referral system works by allowing licensed agents to refer potential buyers or sellers to other licensed agents. It starts with a referring agent identifying a client they cannot or do not wish to assist directly. They then connect this client with another agent who can handle the transaction. Both agents agree in writing on the referral terms before proceeding. The referred agent takes over as the primary point of contact for the client and manages the transaction.

Once the deal is successfully closed, the referral fee is paid. The fee typically goes first to the lead broker, who then compensates the referring agent. 

Here’s an example of how a referral fee works in real estate. Ella is a retired real estate agent with an active license and a strong network of leads and contacts. She refers a broker named Marcus to a homeowner who wants to sell their house. Marcus successfully closes the sale, and the property sells for $600,000.

At Marcus’s agency, he earns a seller commission of 3%, which amounts to $18,000. Based on their written agreement, Ella is entitled to 20% of Marcus’s commission, which is $3,600.

What is the average referral commission?

While there’s no set percentage for referral fees, for non-luxury properties, it’s often around 25% of the seller’s commission. 

Keep in mind that real estate referral fee depends on a few key factors:

• Referral agent’s experience
• Agency policies
• The current market conditions
• Referral agent’s involvement
• The property’s value (luxury properties usually have slightly lower referral fees)

Key takeaway

Referrals are crucial in the real estate industry. First and foremost, they help build trust and credibility among professionals. This can lead to repeat business and a steady stream of referrals over time. When someone refers a real estate agent, they are essentially vouching for their competence and reliability, which can be reassuring for potential clients who may be hesitant about choosing an agent. 

Referrals also streamline the process of finding clients and listings, often resulting in higher-quality leads that are more likely to convert into successful transactions. 

Moreover, referrals can significantly reduce marketing costs and time spent on prospecting and advertising. The bottom line is that referrals not only enhance an agent’s business but also contribute to a positive ecosystem within the real estate community.

Written by Ramona Sinha. December 21, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.