Dan Corkill
on

Are you taking advantage of one of the easiest sources of low-cost, high-quality leads out there? According to recent stats, agent-to-agent referrals are a growing source of revenue for agents all across North America.

But don't take our word for it.

In 2018, 25% of agents received between six and 10 referrals according to PNC Real Estate, yet only 2% said they earned more than $100,000 in dollars from said referrals.

Clearly, this is one lead gen opportunity that remains untapped.

If you're looking for a way to diversify your lead gen strategy, without becoming too dependent on third party sources, it's time to start developing your agent-to-agent referral network. But be warned, there is a right and a wrong way to go about it.

In this article, we cover the basics of real estate referral agreements, including how to structure your fee percentages, what forms and templates to use, and how to make agent-to-agent referrals a profitable part of your real estate wheelhouse.

Table of contents

  1. What is a real estate referral agreement?
  2. How to structure a real estate referral agreement
  3. What should every referral contract should include?
  4. How to create a high-producing referral network

What is a real estate referral agreement?

If you're new to the idea of real estate referral contracts, we'll break it down to brass tacks.

The first thing you need to know is that a real estate referral agent may or may not be the same thing as a practicing real estate agent.

Confusing, right? We'll explain.

For example, you could have a producing agent who's simply got too much on their plate to service all their leads so they hand them to you in exchange for a fee upon closing. 

Alternatively, you might have a retired agent who's built such a stellar rep, they keep getting leads, despite the fact they're no longer in production.

Whatever the case, a real estate referral agent will usually:

  • Have a real estate license and be affiliated with a licensed brokerage
  • Find an active agent for individuals to work with, rather than listing or locating properties for clients themselves
  • Receive a percentage of the agent's commission if and when the deal closes


Source: PNC Real Estate

Why are real estate referral agreements important?

"I love agent-to-agent networking because it's fun and easy," says LA-based agent Melissa Menard. "We're all agents, it's a very approachable lead generation system, it's like we're on the same team."

In her presentation at the Tom Ferry Summit 2017, Melissa explains how building strong relationships with other agents have earned her an impressive $151,000 in GCI, all from agent-to-agent networking referrals.

Rockstars like Melissa are actively reaping the benefits of real estate referral agreements as a core part of their lead gen strategy—and they're doing it 100% sleaze-free.

If you're thinking of adding intentional, connection-driven referral agreements to your list of 2020 goals, here are some of the perks you can expect.

The top 3 benefits of referral agreements:

  1. Referral agreements are a low-friction way to generate leads from existing contacts and networks
  2. Many client referrals are already vetted and are great quality clients
  3. Even a small group of referring agents can lead to a significant number of quality referrals

If you're already rolling your eyes, we get it. 

Depending on your own personal experience with referral agreements, you may think they're a stellar source of passive leads, or you may think they're a complete waste of time.

And, we'll be honest, there is no free lunch. 

Referral agents rely on the commission of successful sales. If it's going to pay off, you and the agents in your referral network must be focused on developing what Melissa calls a "referral mindset"—one where everyone in your network is committed to bringing quality referrals to the table.

Of course, it goes without saying that you also must get the math right. The percentage of referral fee you negotiate is a huge factor in determining whether or a referral is worth your time.

Let's take a closer look.

How to structure a real estate referral agreement

Referral fees vary based on a number of factors, but a typical fee is usually 25% of the closing agent's take-home commission. 

Again, this number can vary dramatically based on the client, the market, and the amount of work required from both the referring and the closing agent.

For an agent who's completely out of production and doing very little work to qualify the lead, 10% may seem fair. On the flip side, for agents who referring a lifelong friend or personal connection and doing the majority of the hand holding as that person relocates to a new and unfamiliar city, 50% might be fitting.

Here's an example of a standard real estate referral agreement form from the Rhode Island Association of REALTORS. You can find more forms and templates below. 

What are the most common percentages? Examples and breakdowns.

Referral fees can range anywhere from 10 to 50%, but most of the time they sit somewhere between 20 to 35%.

The fee percentage usually depends on three core factors:

  • How much work was or is required of the referring agent
  • How involved the referring agent will be in the transaction
  • How hard you negotiate

According to one Reddit user, "some agents are just after the money and will continue to ask around until someone is desperate enough to accept 50% commission for 100% of the work."

We'd argue that's 100% the wrong way to go about it.

What rainmaker's like Melissa know is that the value of a real estate referral network compounds over time. The more time and energy you put into nurturing your agent relationships, the more you get back.

Here's a commissions example using the common referral fee of 25% on a $100K transaction:

A referral agent refers a client to you who buys a home for $100K. 

The total MLS commission is 6% or $6,000.

You split the commission 50/50 with the listing agent for 3% or $3,000 each.

You now owe 25% of your 3% commission to the referral agent.

You pay the referring agent $750.

Remember, each market has its own set of unspoken but solemnly upheld "rules" about what's considered best practice in these kind of agreements. 

For example, in many markets, agents will write their referral agreement to say that the referral fee is paid on the first deal with the client on a purchase price of $100K or above. If the client spends less, the broker doesn't have to pay out a commission on such a small deal. If they spend more, then great!

Tips for negotiating the right referral fee

Much of the animosity agents feel toward referral fees can be boiled down to not getting a fair shake in their referral agreement. 

Remember, negotiating a fair referral fee starts with asking the right questions.

Here are some questions to ask the referring agent:

  • How well do they know the client?
  • How was the lead generated and qualified?
  • How much effort has the referring agent already put into the lead?
  • Why is the agent referring the client? Logistics? Workload? Personality clash?
  • Is the client pre-approved by a lender?
  • Will the agent receiving the referral need shadowing, mentoring or other support to close the deal?
  • Exactly how much involvement will be required from each party?

As one Quora commenter pointed out, “Generating and quantifying a lead can mean different things. Does that mean you ran a FB ad for $50, then called the lead and found out they want to buy in another location so you are referring them out? If it's something like that I don't see that being worth 50%."

Fair enough. On the other hand, if they've delivered a piping hot lead and a shortlist of high-interest properties in big-ticket area, maybe that'd be well worth 50%.

Like all things in this business, negotiating the right referral agreement is going to fully depend on your own personal goals and business boundaries. There's no right or wrong answer—only what makes sense for you at this moment of your real estate journey.

What are the sites that offer referral fees?

What should every referral contract should include?

For any referral agreement to be considered legal and binding, it must be authorized by a licensed broker. The agreement should clearly state how long the terms of the agreement will last, the types of transactions covered and the fee agreed. And of course, it must be signed by both parties.

Some of the most profitable agreements cover a length of time that spans decades, including a referral commission for every transaction a client closes with the agent they've been referred to.

Here are the other details every referral agreement should include:

  • Referring Source - broker/agent contact details, name, address, etc.
  • Receiving broker/agent
  • Breakdown of referral fee
  • Term of the agreement
  • Signatures from both parties (and broker)
  • Contact details for the client referred
  • Any other pertinent info regarding the referring agent's existing relationship with this client

Here are three referral fee agreement templates you may want to check out:

These templates can be a great place to start, but always make sure you've ticked all the necessary legal boxes to make you're 100% legit.

Real estate referral agreements: The dos and don'ts

Do:

  • Network with like-minded Realtors and brokers
  • Choose a knowledgeable, experienced referral partner
  • Check broker licensure before transmitting a referral fee (this is a big one for out-of-state brokers sending referrals via lead gen sites)
  • Give referral partners access to your CRM so you can share notes and updates in real time

Don't:

  • Rely purely on third party sites, human connection is still king
  • Recommend someone you don't know (it's just bad business)
  • Pay a referral fee without checking the broker's licensure first
  • Forget to follow up with your referral leads!

How to create a high-producing referral network

As with so many other things in life, if a real estate referral strategy sounds too good to be true, it probably is.

But for the few agents who take the time to build a database of strong, trustworthy collaborators—people who they communicate with consistently (even if it's just twice per year, every year), real estate referral agreements can be an excellent, long-term source of high quality leads.