#1 Common Mistake with the Referral Fee Agreement

Avoid the top mistake agents make on a referral fee agreement.

It all begins as to how the referral fee agreement is structured. The form stipulates the fee to be paid to the referring broker is based off of the gross commission earned. Now, this verbiage is important and necessary because it protects the referring broker. Imagine if the agent that received the referral had a terrible broker split or some sort of debt that would take a big bite out of the gross commission. Well, the referring broker should be subject to the arbitrary fees incurred by the recipient agent. Therefore, the referral fee should be calculated based off the gross commission. All this works well and fine until an exception comes up. An example would be a problem in the transaction where the recipient agent has to contribute a portion of their commission to save the deal. Another example would be if the referred client turns on the agent and tells them they want a rebate or else they will go to some discount outlet like Redfin. Well, an agent will usually chip in commission if it saves the transaction. Especially, if that agent has invested time working with that client.

Let’s imagine a made up scenario to show how it all goes wrong.

The referral fee agreement stipulates the recipient broker has to pay 25% of the commission to the referring broker.

The recipient agent has a 70/30 commission split with her broker.

The recipient agent has to agree to chip in $3000 to save the deal. So she assumes the 25% referral fee will be based on the $7,000 commission reamining after she credits her client. This is a reasonable mistake. After all, her 30% broker fee will be calculated off the $7,000 not the original $10,000 gross commission. Only at the end does she find out that her broker is obligated to pay $2500 to the referral broker off the top. So, the new gross commission left for her is $4500. Then she has to pay the broker fee of 30% ($1350), which leaves her with $3,150. Naturally this agent will be unhappy because they did the majorty of the work for 31% of the gross commission. To prevent this one of two things should happen:

The Referral fee agreement should stipulate that any credits or rebates to the buyer must be deducted from the gross commission in which the fee is calculated.
The referring agent is contacted and made aware of the need to credit commission to the save the deal and then add the verbage from line 1 or recalculates as flat fee amount to be paid as the referral fee.

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