How Do Real Estate Agent Referrals Work?

This controversial practice can be helpful or shady

Real estate agent asking a couple for a list of referrals is a controversial practice.
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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, when and if 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 percent to 50 percent of the total commission received. And it comes off the top before the commission is split between the active listing and buyer's agents.

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 percent, it means that the buyer's agent will get only $3,000; $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 his search into a neighboring state that his real estate agent doesn't know or isn't licensed in; that agent may well refer him to a colleague who can help in return for collecting 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 find it a bit despicable. 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 — especially when you consider how much 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 she knows 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; the agents referred are complete strangers. 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 pros 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; about 80 percent of agents do not make enough to live on. But you will probably never find a top-producing agent, one of the successful 20 percent, relying on referrals as a source of business.

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: "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 become a commodity that an agent is selling to another agent.