As an agent, there are several ways that you can make money in addition to your income, whether it is through your primary job or as a side hustle.
One of the most popular sources for earning extra money has been receiving referral fees from other professionals. This article will outline what you need to know about real estate referral fees and how to get started.
First off, what is a real estate referral fee? A referral fee is compensation that an agent gives to another professional to introduce business at settlement.
This can be given in several forms, such as cash or gift cards, but it must be disclosed on the Settlement Statement (HUD-50059). The amount should also match your local market average for referral fees.
The basic rule: The agent receiving the fee must be actively involved in providing a service and cannot simply introduce business (some exceptions apply).
Types of Referral Fees
There are three main types of referral fees that you can receive as a real estate agent:
A commission split between two agents for the same transaction. This is probably the most common type of fee. An agent providing a service (i.e., lender, home inspector, etc.) splits the commission with another agent for introducing business at settlement of a real estate transaction.
The split needs to be agreed upon in writing and must follow pertinent state laws and guidelines on referral fees.
Comparable to Commission
In this situation, an agent receives a referral fee comparable to the commission they would have earned from the transaction.
In this case, you need real estate referral agreements in place with your client before providing services for them and disclosing all of the details to be sure it fits within state regulations.
Comparable or Higher
The last type occurs when an agent receives a referral fee equal to or higher than the original commission for a transaction. In this case, your client will need to sign off on all of the details before you provide services and disclose them in writing with everyone involved.
Not allowed – It’s important to note that referral fees cannot be given when an agent provides an introduction of business. In addition, they cannot be given in exchange for a business transaction.
Determinants of the Type of Referral Fees You Get
The types of referral fees you receive also depends on the type of service that is being provided and who is paying it:
Agent Provides Services
When an agent provides services to another party (i.e., inspection), then this must be disclosed as a “referral fee” on the Settlement Statement (HUD-50059) and must be either comparable to commission or higher.
Agent Does Not Provide Services
When an agent does not provide any of these services, it is considered a gift under $100.00 in most states and can be given without disclosing anything on the settlement statement.
Seller Pays Fee
When the property owner pays a referral fee, it cannot be split between agents and can only go to one agent. In this case, a referral agreement will need to be in place that states how much you are receiving.
Buyer Pays Fee
In some cases, when the potential buyer is paying the service, real estate referral fees can be split between agents. In this case, a referral agreement must state each agent’s amount to avoid any disputes later on.
Third-Party Pays Fee
When a third party pays the fee (i.e., title company), it does not have to be disclosed under most circumstances because there will never be any dispute about the amount.
Client Pays Fee
When an agent accepts a referral fee from their client, it must be disclosed under most circumstances on the Settlement Statement (HUD-50059) with any other agents involved to avoid disputes later on.
How to get the most out of your referral fee?
The most important thing to remember is that you cannot receive referral fees from any transaction without disclosing it on the Settlement Statement (HUD-50059). In addition, these fees should be comparable to your local market average for this type of service.
The last thing you want is an agent going back and forth with another professional about what was or was not disclosed on the Settlement Statement.
But once you are sure that you’ve met all the requirements that qualify you for agent referral fees, you can now maximize your income through the following;
Sell More Houses – The more houses you sell, the higher chance that business will come back around, which means more money in your pocket. In addition, some real estate companies have programs where they pass on a percentage of their commission off the transaction.
Sell Similar Properties – Instead of selling only properties that you have listed, reach out to sellers with similar homes and provide an offer on their property for a referral fee instead. Even if the buyer does not want to work with your realtor, many agents will still accept these deals in exchange for some compensation.
Sell on Multiple Platforms – In addition to selling through your website and social media platforms, also consider reaching out to other real estate professionals (i.e., moving companies) that work with a lot of first-time homebuyers and provide them some commission for every transaction they close.
Increase Your Marketing – One way to get more referrals is by increasing your marketing efforts to increase visibility online and offline. This could include advertising on social media platforms, signing up for realtor referral networks, and giving out business cards to anyone that will take them!
Increase Your Commission – You may also want to consider working with a larger company that pays you higher commissions so you can receive the most money possible from every transaction.
The Pros and Cons of a Real Estate Referral Fee
Like in any business, there must be some pros and cons to it, and this applies to referral fees as well.
- You can get a check in your hand within days instead of waiting for commissions to be paid out.
- It’s a great way to earn some money on the side while still having time for family and friends.
- You can only receive one fee per transaction, which means that you may end up splitting with another agent even though it is not ideal or wanted by either party.
- It can be very time-consuming having to go over contracts, etc., with other real estate professionals that may not even end up working together.
When should you use a real estate referral fee?
While it is understood that most real estate agents are primarily interested in selling their properties, there are many situations where referral services can come into play.
Clients ask for help – As a buyer’s agent, you will often find yourself working with clients who have no idea what they should be looking for or even how to get started.
By referring your client to another real estate professional such as an inspector or loan officer, the two of them could work together and bring more business back around eventually.
Sellers list on behalf of someone else – There may also be instances when you want to sell a property but do not take ownership of it either because it belongs to your parents or other family members, and this would be their responsibility to list it.
In that case, you would need to have them listed as the owners and then take care of all negotiations with other real estate professionals.
When it comes to finding the right real estate referral agreement that is most beneficial for you, a few steps can be taken.
Look at their business website
A good indication of how much they value referrals and what types of services clients will receive by working with them would come in forms such as testimonials from past customers or information on any certifications/licenses they have received.
For example, suppose they are an agent who works specifically with first-time homebuyers. In that case, it may benefit your client more if this person was referred over to another professional who has no experience with assisting people in this situation.
It also never hurts to ask other colleagues in the industry about which professionals work well with clients to ensure that you will be referring them to your business and not receiving anything in return.
If they have good real estate referral agreements, it should not be too difficult to reach out and inquire about what their services include or how much they charge for using real estate agents as well!
This is the best way of ensuring that everything runs smoothly when working together. No negotiations are happening beforehand, which can lead to disagreements later on down the line if things do not work out.
It is not always better to work with professionals that offer incentives such as lower closing costs or no real estate commissions. While this may be beneficial for you at the moment, there could also be potential disadvantages down the line if things do not go well.
Offering a coupon code to clients so they can get a discount off of your next transaction would be beneficial for showing that you care about them and their future.
Hosting open houses with no fees to attend is another way real estate agents can get more people in the door without losing money on commissions or referrals.
The referred client does not have to pay the referral fee, and a Realtor can’t force them to do so, and it would be unprofessional of that real estate agent in the first place if they did try to get money from their clients in this way.
A 15 percent sales price commission on top of fees is reasonable when you’re dealing with someone who has already paid your full commission amount for selling their home or property.
If you are receiving anything less than 20 percent (in addition to traditional closing costs), there may be something wrong with your referral agreement.
Agents can undoubtedly receive both commissions and real estate referral fees. This is a great way to incentivize your clients when you are working so closely with each other.
If both parties have agreed that there will be referral fees for either buying or selling, then it’s only right that they should receive their cut of this referral agreement in full, even if something goes wrong.
The real estate agent who received payment would need to return part/all of the amount paid by the referring party (in most cases).
No set commission rate should be paid on top of referrals. The amount you can charge will depend on your commissions and what type of real estate agent’s referral agreement has been reached between the two parties involved.
A referral fee agreement is fair if both parties are equally compensated for their hard work or services! If you have received a cut of the commission, but now your client needs to pay this real estate agent as well, then it may not be logical.
If you are receiving money for referrals, then the other party should be able to do this without having any extra fees or costs.
The real estate industry is constantly changing and evolving due to new technologies, innovations, and clients’ needs.
When it comes to working with other professionals in this field, referral fees can be an excellent way for both parties to earn some extra money if they have the same goals in mind!
With that being said, there are several things you need to know about receiving referrals from others, including how much commission should come off of each sale or purchase before taking into account any additional payments such as those given by your client after closing on their property!
Keep these tips in mind when setting up agreements between yourself and another agent, so everyone ends up happy at the end of the day.