What should be expected from organizations receiving referral fees in the real estate industry?

While there is no question in our minds that referral fees are being abused by many organizations who are demanding them, there are those who earn them by contributing significantly to the success of a transaction. We believe that the goal should be to exclude those who are not significantly contributing to the actual transaction.

Rather than trying to outlaw referral fees (which would be fraught with numerous legal challenges), it seems to us that it would be better for the industry to establish a litmus test that those seeking referral fees must pass in order to earn such fees. With this in mind, we would suggest the following:

1. The referring company must hold a real estate license and be a member of a local real estate board;
2. The primary business of the referring company must be the offering of real estate services to the public;
3. The referring company must have made human contact with the party being referred and demonstratively qualified them as to ability, motivation, timeliness and requirements;
4. The referring company must enter into an agreement, in advance, with the referred brokerage or agent for each referral placed with them that specifies customer service expectations and the amount of the referral fee to be paid upon successful completion;
5. The referring company must make available in advance to the referred client a summary of the referred agent’s qualifications and experience and be prepared to follow-up with the referred party to ensure their needs have been met by the referred agent;
6. The referring company must inform the referred client in advance that a referral fee will be paid to the referral company for their services, unless the referring company has been engaged on an ongoing basis, by the agent who receives the referral, to market such agent’s services to the public; and
7. The maximum referral fee should probably not exceed 25 percent of the commission earned by the brokerage/agent that completes the transaction.

If the above test were applied to most of those demanding referral fees today it would make it very clear which organizations are significantly contributing to the actual transaction and which ones are just parasites undeserving of such fees.

Ken Galpin is president and CEO of Most Referred Real Estate Agents, Inc.

Published: December 5, 2002

Use of this article without permission is a violation of federal copyright laws.