Should You Hire a Referral Agent?
What Really Happens When Your Agent Refers an Agent To You
When you are referred to a referral agent, what do you get? You might think about the time you asked your next-door neighbor for a referral to a roofing contractor. After all, you can see your neighbor's roof, and it looks good. You might ask your best friend for a referral to her hair dresser because you like her hair. Or, you might ask a coworker for a referral to a mechanic because you both own the same car, and he gets good service from his mechanic.
All of these people probably gave you the referral on a complimentary basis. It's tit for tat. Someday, you might give them a referral. They also feel good because they were able to help you out. Not only do they feel good because they were helpful, but your asking for a referral validates their selection process. It says they were smart to hire a person you now want to hire and you respect their decision.
Real Estate Agents and Referral Fees
These people would probably never in a million years go to the referral person and ask that person to pay them a kickback. But that's exactly what happens when a real estate agent refers another agent.
The referral fee is paid from broker to broker. An agent cannot receive a referral fee directly from a licensed entity. All referral fees are paid to the broker. All referral fee agreements are between cooperating brokers. A broker will then pay the agent.
Sometimes, a party acting as a principal in a transaction might be related to an individual who has a real estate license. For example, in California, almost 1 in 50 people has a real estate license. In some of these instances, they might be coaxed by that individual to demand a referral fee from their agent.
They demand it solely on the basis that a family member has a real estate license. The implication is they will let the agent do his or her job and not try to represent the individual but they want to be paid for keeping their distance, even though they do no work and did not refer the individual.
Some see this practice as perfectly acceptable. But most agents find it a bit despicable.
How Much Do Referral Agents Earn as a Referral Fee?
It depends on a variety of factors, but many referral fees range from 10% to 50% of the total commission received. To understand how much money this is, you need to know that most commissions are split between listing and selling brokers. There is a listing commission and a selling commission.
Let's say a seller agrees to pay a listing agent 7 apple pies. That listing agent might decide to keep 3 of the apple pies for her own family, and she may offer 4 of the pies as compensation to the agent who brings a buyer. If the buyer's agent must pay a referral fee for the buyer, and that referral fee works out to be 25%, it means that buyer agent's broker will get only 3 pies. One apple pie will go to the agent's broker who referred the buyer.
What Kind of Agent Pays a Referral Fee?
Almost every real estate agent in the business will agree to pay a referral fee in exchange for a client.
However, the problem that comes into play, and why some agents frown on this process, is because not every referral agent is qualified to sell real estate. Some agents seek out referrals because they have no other way to get any business. You will probably never find a top producing agent relying on referrals as a source of business.
Ideally, it would be nice if the agent that is referred to you is referred because that agent is an experienced agent, qualified and has a track record known to the agent who is referring. But much of the time the agent that is referred is a complete stranger. The referring agent may have no idea whether that agent is competent or incompetent.
Real estate is a business in which about 80% of the agents do not make enough money to live on. The odds that you will end up with an agent in a major metropolitan area who has little experience and who doesn't make any money are actually pretty high.
It's even higher when it's a referral agent.
Some real estate agents will refer only to the agent who offers the highest referral fee. Agents who need to outbid each other by competing in the referral market might not be your best bet for representation. Whether you know it or not, you are a commodity that the agent is selling to another agent. The truth is even your best friend, if that friend is an agent, might sell you to another agent.