What is a Referral Agent?
One of the great things about being a real estate agent is the ability to have a flexible schedule and even do real estate as a second job. While most of the real estate agents that the public comes in contact with on a daily basis are full time agents, many very capable and experienced agents have other careers or occupations. This includes lenders who are also licensed agents, people who have part-time jobs like bartenders, caterers, personal trainers, flight attendants, and even airline pilots!
Almost half of all people with real estate licenses won’t actually sell any houses in a given year. Almost 25% will only sell one house. The top 25% of real estate agents will sell the lion’s share of homes, and even that’s skewed as almost half of all homes sold are sold by just 10% of all agents. What this means for those agents in the bottom 75% is that they usually make their money by giving referrals to other agents, either in their own market or in another market.
What these agents are called is “referral agents”.
How Does a Referral Agent Make Money?
Referral agents make money from something called a “referral fee” which is a customary fee paid to an agent who refers a client to another real estate agent. This fee is usually 25% of the gross commission. The gross commission is defined as the total commission received by a brokerage for the buyer/seller side of the transaction. Here’s an example of how this works.
An agent in San Francisco has a client moving to Las Vegas. They call an agent in Las Vegas and tell them about the client and what they are looking for. If the agent has the ability to help and the clients needs are within the expertise of the agent, they sign something called a referral agreement, which binds the receiving agent (also known as the inbound agent) to pay a referral fee to the broker of the referring agent (outbound agent). So lets say the client buys a $400,000 house and a 2.5% commission is paid to the buyers broker. Here’s the breakdown.
Sale Price: $400k
Gross Commission: $10,000 (2.5% x $400k)
Amount sent to referral agent: $2,500 (25% x $10,000
Amount kept by receiving agent: $7,500
Most brokers will then split the remaining commission of $7,500 between themselves and the agent, depending on the terms of the commission split agreement between the agent and the broker. In the case where the agent is on a 90% commission split, the broker would retain $750 of the $7,500 and the agent would get a check for $6,750. Of course that agent has to pay income taxes, payroll taxes, MLS fees, professional fees, etc out of that commission and the broker has to run their office as well.
Why would an agent not just handle the transaction themselves?
There are a number of reasons a real estate agent would not just take care of the client. One of the most common reasons is that the client has real estate needs in a market that that agent doesn’t have a license in. A common example is a person wants to move from San Diego to Las Vegas. They find an agent in Las Vegas and then start looking for houses. The agent in Las Vegas asks if they have found an agent to handle the home sale in San Diego. If they don’t the Las Vegas agent might know a good agent that handles listings in San Diego and connect them with their new clients.
The same scenario could be swapped. The home sellers in San Diego go ahead and hire a real estate agent in San Diego and then tell them they are moving to Las Vegas. The agent in San Diego can then refer them to an agent in Las Vegas and collect a referral fee as well as the commission for listing their home.
Another reason for an agent to refer could be that the clients are purchasing something outside the area of expertise of the agent. For example someone moving to Beverly Hills has a good friend in real estate, but they don’t handle luxury homes in Beverly Hills. So the agent could talk with a couple agents themselves and find one that’s a good fit and then do a referral agreement and refer the clients directly.
Also there could be a conflict of interest that would keep an agent from being able to represent someone directly. For example a real estate agent has a listing for sale and the sellers have told the agent that they do not want them representing any client who is a prospective buyer. The agent starts working with buyers and it turns out that the house they have listed would be perfect for them. The agent could then do a referral to another agent, either in their office our another brokerage entirely, and then the agent would not be representing the buyers, another agent would be. It would be prudent to disclose to all parties that the agents have a referral agreement between them so that the sellers are aware the agent financially benefits if those buyers actually buy the house.
Another example would be an agent who is working with buyers who have shown a number of houses to them, but then the agent is going on a month-loving vacation out of the country and will not be personally available to help with the home search. Many times this agent will “refer” them to another agent at their brokerage, and the agents will do a private agreement to split the commission depending on how much work each agent will do. These referrals tend to be between 25% and 75% in instances where the home is under contract, but an agent is only needed to help with the closing aspect of the home if the contract has already been negotiated.
Can Referral Agents Make Money doing only Referrals?
The number of house on a typical real estate transaction is roughly 30 hours. Some are much less and some can be far more. There are stories of agents who worked with buyers for years, showing over 100 properties before the buyers finally selected a home. Other examples are listings that go under contract almost immediately and close quickly.
But the great thing about a referral is that it only takes about an hour to refer the client. This hour includes the process of calling and interviewing agents, and then putting together and signing the referral agreement. One great advantage ReferralCloud has is that this process is less than a minute, where the referring agent just puts the client information into the ReferralCloud platform and the inbound agent is selected almost instantly and all referral paperwork is generated electronically. All the referral agent has to do is follow the process in their ReferralCloud account and then they get a check sent automatically after closing. What’s also great is that ReferralCloud pays 25% to the agent who gave the referral.
Are there always referral fees paid between agents?
Not always. Many times an agent doesn’t ask for a referral fee from another agent. One time we referred a client to an agent in Lancaster Pennsylvania. The referral was for 25%. Before closing the agent called and asked if they could not pay the referral fee. We asked why they wouldn’t pay it. It turns out the house they bought was about $40,000 and the commission was going to be around $1,200 total. The agent said they would only get $600 after their split with their broker, and that the client was a lot of work. So we told them they didn’t have to pay it.
Would ReferralCloud be a good fit for most real estate agents?
ReferralCloud does more than just pay the agents 25% for the referral fees they would get with a standard referral. ReferralCloud rewards the agent with more referrals as a function of the clearinghouse. Each time an agents refers a client to someone, that referral is tracked and the agent is given credit for a closed referral when it closes as well as a pending one while it is under contract. Referrals that end up being “dead leads” aren’t given any credit in the long run, however, they also aren’t harmed for doing so. In a perfect scenario, an agent would be given the same number of inbound referrals as outbound referrals, when possible. There are many instances where there would be an imbalance in referrals, such as agents in a market where people tend to leave for other places and markets where there is a net influx of people (Las Vegas, Phoenix, Austin, Orlando, Miami, etc).
What is the ultimate goal of ReferralCloud?
The goal of ReferralCloud is to make the process of giving and getting real estate referrals easier and reward agents who use the system to place their outbound referrals. There is no downside, since even if an agent is in a market where no referrals are ever placed, or a really small market, they will still be able to more easily get a referral fee for their client and have the most difficult parts of the process, finding the referral agent and dealing with the referral agreement, done automatically.