Whether you’re in the market to buy or sell a home or lease commercial space, knowing how real estate referral fees work gives every buyer, seller, and commercial tenant a superpower. Before you learn about your superpower you should first understand the forces behind it. Most consumers don’t know that referrals and referral fees are a common part of life for brokers. The other important and little known fact is that referral fees can legally only be paid by one sponsoring broker to another sponsoring broker – brokerage company to brokerage company.
Why referral fees exist.
In many cases, a particular real estate agent who may have done a great job for a client (a consumer) in a previous transaction, is not a good fit for that consumer’s next desired transaction. That begins to explain why referrals are such a big part of life for brokers. Here are a few examples of why referrals among brokers are so prevalent:
- Consumer is looking for property outside the agent’s usual market area
- Consumer is looking for property outside the state where the agent is licensed
(Most agents are licensed in only one state.)
- Consumer is looking for a type of property that the agent is unfamiliar with
- Agent is too busy to take on a new client (rare!) or is going on vacation
Agents and brokers almost always want to land the next client, and gladly agree to pay a referral fee to the referring broker after the deal closes. In other words, most of a commission seems always to be preferred to none of a commission. Brokers love referrals – even when they have to pay a referral fee. Full stop.
How much is a “typical” referral fee?
Use of a referral agreement is a common practice among real estate professionals. It spells out the referral fee, as a percentage of their commission, that they will pay to the referring brokerage company after the deal closes. In our experience speaking with residential brokers around the country, the most common percentage for their referral fees is 25%. That means 25% of the commission that will be paid to the company where that agent works is paid to another broker as a referral fee. On a $5,000 commission, that would be $1,250 paid by the agent’s company to the referring brokerage company. (See this blog post about how referral fees work in the world of commercial real estate brokerage, because it’s not quite the same as in residential.)
Are Referral Fees the Same as Kickbacks?
Good question! There are ethical and legal differences between the two. I think most people consider kickbacks as being “under the table”. In contrast, referral fees are put in writing and are fully transparent. Brokers are paying other brokers for something of value, and the client is aware of and unharmed by this payment.
In the world of real estate, kickbacks are prohibited under the Real Estate Settlement Procedures Act (RESPA) enacted by Congress in 1974. But RESPA specifically permits referral arrangements, as you can see highlighted below.
There are a few other rules worth spelling out:
- Referral fees can only legally be paid by one sponsoring broker to another sponsoring broker.
- Referral fees can NOT be paid to a non-licensed individual.
- Referral fees are negotiated between managing brokers and the percentage of commission can vary because of many factors including market, type of real estate, and, if it’s a commercial lease, number of square feet and number of years.
Now for the superpower!
Because brokers are eager for new business and happy to pay referral fees, you are able to have your pick of brokers AND more importantly, turn your transaction into a good chunk of funding for your favorite nonprofit, which makes you a hero. And because that funding comes only from your broker’s commission, it doesn’t cost you a penny. Even when you already have a broker in mind, your favorite charity can still benefit, as long as you start with Investing In Communities.
Investing In Communities exists to make it easy for any consumer to have the pick of qualified licensees, while using their superpower to do good for their favorite nonprofit. (To keep it safer for birds, we don’t provide capes.)
Referral Agreement Unveiled
Here’s a look at an Investing In Communities referral agreement:
IIC IL License # 478-026690 EIN 38-3973632
DATE, 2019 VIA EMAIL: ADDRESS
Dear MANAGING BROKER of ###,
This letter shall serve to confirm the referral fee agreement between Investing In Communities® (IIC) and NAME OF brokerage firm (###), with regard to this upcoming IIC transaction. It is agreed and understood that ### will remit to IIC ??% of the gross commission that ### receives as a result of its representation of IIC CONSUMER in connection with the PURCHASE/SALE/LEASE of a TYPE OF PROPERTY, .
###, as sponsoring broker, shall have the sole right to act on behalf of IIC CONSUMER in connection with this referral fee agreement, while SPECIFIC AGENT NAME shall act as designated agent for IIC CONSUMER. In the event that IIC CONSUMER elects to work with a different licensee at ###, this referral fee agreement shall remain in full force and effect for the duration of that representation.
No less than 70% of this referral fee shall be distributed by IIC to the Eligible Charity chosen by IIC CONSUMER.
Please sign below and return to me, via e-mail.
Sharon Porter, Managing Broker, Investing In Communities® (IIC)
_____________________________, DATE , 2019