It’s no secret that there’s plenty of money to be made in the real estate universe. Investors, developers, brokers and agents all stand to earn a good living, if not, for the elite ones, a fortune.
Equally well-known, however, is that the industry is tough, plain and simple. It’s competitive, it moves at break neck speeds, and it’s notoriously fickle.
However, there’s an exception to this general rule: referrals.
What Is a Real Estate Referral?
A referral, in industry jargon, is simply the act of referring business to a real estate professional (aka, brokers and agents). If that business bears fruit for the professional receiving the referral, then the person who made the referral is entitled to a cut – usually between 25 and 35% -- of the deal’s commission.
The one caveat, and it’s an important one, is that to legally reap referral fees, you must be a licensed real estate professional. Need help getting your license in the most timely and efficiently manner? Check out this guide on the quickest way to get your license in New York.
How Do You Make Money From Real Estate Referrals?
- To illustrate how referral fees work in practice, let’s run through a common scenario: you’ve got a friend, past co-worker, family member, or a friend of a friend moving to your neck of the woods.
- Remember, in this hypothetical, and in any world in which you hope to cash in on referrals, you are a licensed real estate person.
- Remember, in this hypothetical, and in any world in which you hope to cash in on referrals, you are a licensed real estate person.
- Your friend wants to purchase a house, and therefore seeks your services. For whatever reason – you’re unfamiliar with the market or perhaps you’re a part-time agent busy with other work – you inform your friend that you cannot be of direct help, but that you can set him up with a reputable, trustworthy professional.
- Now you may be wondering: what is there stopping this real estate professional from going ahead, closing the deal, and never giving you any credit? Having selected such a professional, you execute a referral agreeement with him or her to ensure that if he or she helps your friend buy a place, he or she can’t go over your head and stiff you on the referral fee.
- Referral agreements are straightforward contracts which simply serve to memorialize the specific agreement made by the referring person and the receiving professional. Check out this example of a real estate referral template.
- Referral agreements are straightforward contracts which simply serve to memorialize the specific agreement made by the referring person and the receiving professional. Check out this example of a real estate referral template.
- Sit back and let the professional work. Let’s imagine that your friend, with the help of the professional, purchases a $500,000 house. What’s your referral fee? Assuming a standard 6% commission shared by the buying and selling agents, and further assuming that you agreed to a 25% referral fee, you’ve just made $3,750. All this for simply connecting an in-the-market person with the right real estate professional.
[Details on how that math shakes out: the $500K purchase results in a $15K commission for the person representing your friend. This is because the total commission is 6% of $500K – so, $30K – and that $30K is shared evenly by both side’s agents. You are entitled to 25% of the commission received by the professional to whom you sent your friend (25% of $15K is $3,750).]
If you’re more visually inclined, or if you’d like to see how referral fees play out in the rental context, see the chart below:
