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What are referral fees in real estate transactions?

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Update: As of June 15, 2018, all licensed Realtors in the province of British Columbia must now inform their clients how their commission will be shared and any other remuneration, such as referral fees, they expect to earn from the transaction. For more information, please see the RECBC’s “Disclosure to Sellers of Expected Remuneration FAQs” or get a copy of the mandatory form that must be completed when working with people who are selling their home.

Real estate referral fees can seem like mysterious back-office, plain-envelope, shady-dealing-type transactions to anyone in the process of buying and selling a property. So, what are referral fees in real estate transactions? There are a lot of misconceptions about referral fees — who gets them, how much does that agent get paid and why does this agent even get paid a fee? These are just a handful of the questions that come up when you’re told that your agent will be paying a referral fee.

But truth be told, referral fees are a regular part of real estate business. And there’s nothing wrong with referral fees — if you understand what they are, when they should be paid and the red flags to watch for that signal less than ethical transactions.

What are referral fees?

what are referral fees two agents chat with client

Referral fees are paid from broker to broker or agent to agent. Referral fees are paid as an acknowledgement of a shared business transaction — one agent/broker refers a trusted client to another agent/broker who can best suit that client’s current needs.

For instance, if you live in Toronto and you ask your real estate agent to sell your Muskoka cottage, that agent will probably turn down the business. Marketing a property in Muskoka requires local knowledge and intimate awareness of the market trends. An agent who works in Toronto probably doesn’t have that knowledge. Rather than leave you hanging, your real estate agent may suggest you contact his or her colleague, who works the Muskoka area. If you end up buying with this Muskoka agent, the agent would pay a referral fee to the Toronto agent. Typically, this fee is a percentage of the commission earned on the property purchase. The payment acknowledges that the Toronto agent put their faith in the professionalism and expertise of the Muskoka agent and handed that Muskoka agent an interested, motivated buyer.

Keep in mind, for two agents to be in a referral arrangement, they can be part of the same brokerage, part of the same brand or two competing brands. For instance, a Toronto Zolo agent may refer you to a Parry Sound Zolo agent, or the Toronto Zolo agent could refer you to a Re/Max agent who specializes in Parry Sound/Muskoka vacation properties. Referrals should not be based on business affiliations but on each agent’s ability to provide exceptional customer service to the prospective buyer (or seller).

How much are referral fees?

There is no rule that a referral fee must be paid — and there is no set amount on how much to pay in a referral fee. It’s typical, however, for a referral fee to be paid based on a percentage of the property’s sale price — however, a fixed dollar amount is also possible.

The standard referral fee in most regions across North America is 20% to 25% (although some go as low as 15% and some, like relocation firms, demand as much as 45%).

What about referral companies?

what are referral fees two agents shaking hands

There are companies that specialize in finding buyers who need an agent referral. While these companies operate in Canada, there are far more operating in the United States, where they must be licensed by their local real estate board in order to refer business to agents.

For example, let’s say Costcal, a big company, wants in on the lucrative San Francisco, CA, market. Costcal would get pay for a license and then advertise to agents in the area to “feed” these agents leads, for a referral fee.  To incentivize the buyers, Costcal may offer potential buyers or sellers a rebate, for example, 10% cash-back or a $2,000 rebate. In these cases, the agent who is referred to the client by Costcal is charged a 30% referral fee by Costcal (so, they’d pay 30% of their commission to Costcal). The client would get 10% of that money as an incentive to use Costcal — leaving Costcal a 20% margin.

In the U.S. there are lots of licensed middlemen, like House Values, HomeGain and others, who collect client leads and then basically sell these leads to agents for a fee. In Canada, there’s only a handful and they aren’t very prominent across the country. Still, it’s good to appreciate the difference between getting a personalized referral from an agent you trust and getting a referral through a licensed middleman. As a consumer, if you get an agent through one of these middleman referral companies, that agent is not vetted based on professionalism or quality of service; the agent is simply paying a hefty fee to get you as a lead. (Also, if you were hoping to negotiate a discounted commission it will probably be very difficult since they are already paying quite a bit to do business with you.) Also, this agent may be prohibited by the middleman from telling disclosing how much they must pay the referring company. This is particularly true among relocation companies.

Is a referred real estate agent better for you or not?

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Some buyers and sellers are very cynical and suspicious of referred agents because they know that the referring agent or company is getting paid.  To see if it’s really in your best interest, we need to first assess the different types of referrals you can expect in the North American real estate marketplace.

1. Agent-to-agent referrals

Often agent-to-agent referrals are excellent because the referring agent handpicks the individual that he or she feels will be your best match.  The agent who gets the referral is normally very grateful for the opportunity and will work hard for you, both because he or she wants your repeat business and referrals, but also to nurture the opportunity of repeat business from the referring agent. Conversely, the agent who gets the referred business knows that if he or she screws up, there will be lost opportunities on both fronts. Agents who make referrals know that a bad referral reflects poorly on them — and this can also translate into lost business opportunities.

As a result, the agent-to-agent referral is considered the most trustworthy type of real estate agent referral, particularly when compared to the other options.

2. Relocation referrals

Many times, when a company relocates its employees there is a benefits package which requires that you work with a real estate licensee or brokerage that is assigned to you.  Because relocation referral fees are high, sometimes as high as 50%, the best and most successful real estate agents won’t take on this business. Why work so hard for half the pay?

Of course, this doesn’t mean an agent referred by a relocation firm is a terrible agent. It could be a marketing avenue the agent is trying out or a branch of business they are starting to expand. Whatever the reason, getting a referral is often much better than not using an agent or just picking an agent out of the blue.

To get the most out of your referral or relocation company referral. First, ask the company what standards they use to vet the agents they refer. For example, Costco in Canada will not work with real estate agents that have less than three years experience or less than 10 transactions per year. This ensures that the agents referred by Costco are, more than likely, full-time professional agents who take their role seriously.

3. Lead aggregators

The final referral type is the referral agents get from lead aggregators. These are companies that operate websites designed to “capture leads” – that is, contact information for potentially interested buyers and sellers. These aggregators will then sell these leads to real estate agents working specific geographic areas. Sometimes there is an upfront cost for each lead, other times it’s a referral fee if a transaction closes, and at other times it’s a monthly fee or some combination of all three.

To entice buyers and sellers to provide contact information, some lead aggregators offer rebates or lower commission costs. Just remember the old adage: You get what you pay for. If you select a company that has few, if any, qualifications for the agents that referrals, then you may end up getting an agent with deep pockets, rather than an agent that is trustworthy.

Why referrals are necessary

Referrals are very helpful for agents looking to grow their business, whether by relocation companies or via an agent network. Referrals are also very helpful for buyers and sellers who need expert, local advice in a city, province, state or country they aren’t too familiar with.

Image of Romana King & Alyssa Davies

Romana King & Alyssa Davies

Romana is an award-winning personal finance writer with an expertise in real estate. She is the Director of Content at Zolo. Alyssa is a personal finance blogger who focuses on mixing finances with laughter. She is a content specialist at Zolo.