How Do Real Estate Agent Referrals Work?
Understanding a Controversial Practice
When seeking a professional's services, people frequently ask for referrals. But suppose you learn that your source got paid to recommend someone to you. That's exactly what happens you hire a referral agent—that is, a real estate agent who introduces another agent. Let's look more closely at how real estate agent referrals work.
How a Real Estate Referral Agent Works
People who make real estate referrals function like an agent's agent. While they have real estate licenses and are affiliated with real estate brokerages, they usually don't list or locate properties for clients; instead, they find an active agent for individuals to work with. In return, they receive a finder's fee from the agent they referred—a percentage of the agent's commission—if and when the deal goes through.
Referral agents work with both listing (seller's) agents and buyer's agents. The size of their referral fee depends on a variety of factors, but the fee usually ranges from 10% to 50% of the total commission received. A 25% fee from the buyer's or seller's agent is fairly common.
Let's say a seller agrees to pay a listing agent $7,000. That listing agent might decide to keep $3,000 for herself and offer $4,000 as commission 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%, then the buyer's agent will get only $3,000. The other $1,000 will go to the agent who referred the buyer.
The Controversy Over Referral Agents
There are legitimate reasons for the referral process. A veteran real estate agent or broker who is semiretired may transition into a referral agent. Or let's say a house-hunter has decided to broaden their search into a neighboring state that their real estate agent doesn't know or in which they're not licensed. That agent may well refer them to a colleague who can help in return for a fee. At some time or another, most professionals admit, almost every real estate agent in the business will agree to pay a referral fee in exchange for a client.
Many in the real estate business see this practice as perfectly acceptable, but most feel it can be a bit despicable at times. Although technically the referral fee is paid by the active agent's brokerage to the referral agent's brokerage, the whole process still has a whiff of kickback to it, they feel. This is especially true when you consider how little effort the referral agent, who might be a solo practitioner or who might be part of a real estate referral company, might be making.
Ideally, the referral agent should be coming up with people they know well—experienced agents with solid track records and expertise in your type of property and the local market. But much of the time the referral agent just looks at a list and picks a name or two. This is especially typical in the increasing number of online referral agencies, which promise to find agents across multiple states or even countries. Other referral agents go strictly by the numbers: they recommend the agent who offers the highest referral fee.
What Kind of Agent Pays a Referral Fee?
Then there's the whole question of the competency of the agent who pays those fees. Real estate professionals who need to outbid each other to get referrers' nods, surrendering a portion of their precious commission, might not be your best bet for representation. Some could be new to the profession or new in town and need referrals to get their careers going. But some agents seek out referrals because they have no other way to get any business. Does a rep who either has little experience or isn't good at the game sound like a great pick for you?
Real estate is a tough field. According to the National Association of Realtors, the median income was only $41,800 in 2018. Some make much more. But you will probably never find a top-producing agent relying on referrals as a source of business.
The Bottom Line
Middlemen have always existed in the real estate business—look at mortgage brokers, for example. But many real estate professionals see referral agents as simply parasites. As the saying goes, "Those who can, do; those who can't, refer." That being said, referral agents with expertise can be of service, depending on your situation. Just be aware that, when you employ one, you may become a commodity that an agent is selling to another agent.