Getting real estate leads via referrals can significantly reduce your costs per lead and increase your profits.
But there’s more.
According to marketing performance statistics I worked out in this article, these leads often have a much higher quality than other lead sources and can increase your profits due to cost-reducing effects.
Since it’s a real estate lead generation and marketing strategy you don’t want to ignore because of the above benefits, I wrote this article to analyze the factors that help you crush it with real estate referrals.
This article discusses…
…what referrals mean in real estate and the two types of referrals there are
…the importance of referrals in real estate, including 13 inspiring marketing performance statistics
… “Stone-Agey” Psychological Factors that make people refer someone to you
…practical tips to get “organic” and rewarded real estate referrals
…referral setup programs you can also use for real estate
…what referral agents are and how realtor referrals work
…whether a realtor can pay a referral fee in Florida
…and whether referral fees are legal in California
So, let’s start reading.
What Do Referrals Mean in Real Estate? The Two Types of Referrals
In real estate, referrals mean that a past, current, or future client, or another licensed or even unlicensed individual refers potential buyer and fewer seller clients to another real estate agent or broker.
But there are only two different categories of (real estate) referrals, and the same is true in businesses of other industries.
There are referrals without rewards. Those are sometimes also called “organic” referrals (e.g., from clients that were very happy with your real estate services), and there are referrals with rewards (e.g., from other licensed real estate professionals or lead providers paid at closing).
Sometimes, real estate agents need to refer a client (without the intent of a reward) out of necessity because they may have received a client that needs a service that is not entirely within the agent’s or brokerage’s expertise or out of state.
In that case, it’s more of a gray area between a referral with and without reward.
Similar to referral (marketing) is word-of-mouth marketing, but you could also put it in the category of referrals without rewards. Because this is what it is.
Both referral marketing without rewards and word-of-mouth marketing is hard to predict and measure, although not impossible.
Measuring and tracking when you run a reward or incentive-based referral marketing campaign is easier.
For the latter, there are different providers on the market that include tracking capacities. But more about them later in this article.
The Importance of Referrals in Real Estate – 13 Inspiring Marketing Performance Statistics
Before we get deeper into how to crush it with real estate referrals and get more leads with them, I would also like to mention why this method shouldn’t be ignored in the context of marketing performance statistics.
- 41% of sellers found their real estate agent through a referral. (source)
- Word-of-mouth is considered to be two to ten times more reliable by consumers than paid ads. (source)
- Provided a customer had a positive experience with a company, 69% would recommend the brand to others. (source)
- If you use a referral program with an incentive/reward, it can motivate more than 50% of people to refer new customers. (source)
- The profit margin can be increased (due to lower costs per lead) by 25% from referred customers. (source)
- The conversion rate is 30% higher from referred customers than leads generated in different ways. (source)
- The lead quality generated by referral programs is stated to be excellent by 78% of B2B marketers. (source)
- More than half (54%) mention that lead costs are lower than in other channels when using referral programs. (source)
- The likelihood of getting additional referrals from referred customers is 4 times higher. (source)
- 70% still use email to refer products and services to their friends, but while this is the most used channel, SMS converts better. Prospects are thirty percent more likely to shop this way than when referred by email. (source)
- Over a quarter of referrals happen 10 or more days later. (source)
- 63% of referring women do it to treat their friends to a great offer, and 57% of men do it to get a reward. (source)
- The likelihood is 23% higher for a referral when an email inviting to refer is sent right after a transaction (source)
The above statistics sound intriguing at first glance, but you may want to take them with a grain of salt. Why?
For example, let’s take the statistic that you get a 30% higher conversion rate from referred customers compared to leads generated in different ways.
There is not much more information about the lead generation methods or campaigns it was compared to.
Maybe they were campaigns that weren’t optimized enough, had bad copywriting, etc.
So, we can’t know for sure what variables were taken into account for the statistical results.
Nevertheless, we can’t ignore that referral marketing (in real estate), by logic, can reduce your lead costs and increase the overall quality of leads and profits.
It’s actually simple to calculate.
Let’s assume your cost to generate a new buyer or seller lead is $25.
If this same generated lead refers you to just one additional contact, you just halved your cost per lead to $12.50 since you didn’t pay for the generation of this additional lead (reward costs ignored).
Although most of the above statistics are from industries other than real estate, you can apply the information almost 1:1 to the real estate industry because the psychological factors that make people refer don’t change with the industry.
These psychological factors will be covered in the next section to get a basis for what you may want to do to crush it with real estate referrals or real estate referral marketing.
“Stone Agey” Psychological Factors that Make People Refer Someone to You
For this section, I did a bit more in-depth research into the psychological science and basics that make people refer to a product or service.
So, why do people refer something to others in the first place?
It is something that is ingrained in human psychology. This “something” is the social connection. (source)
What happens in this dynamic of social connection explains a lot about referring.
Imagine for a second that you were in the stone age and about to cook a nice meal (you already discovered fire, of course) for your friends and family in a nice cave with great curb appeal.
Suddenly you realize, “crap, I need one more mammoth leg to complete the meal,” and so you tell one of your friends that Fred in the neighboring town still may have one leg left over.
So, you refer this friend to Fred to get this mammoth leg. “You should be back by sunset because this guy is trustworthy,” you tell him.
This friend never returned, and Fred from the neighboring town was never seen again. What happened to you after that incident?
You now try to survive independently because you’ve become an outcast.
And why were you turned into one? Because the referring to Fred put one tribe member in danger, and thus the whole tribe.
So, referring a product, service, or someone to a friend always involves a risk. And this has been ingrained in humans since the stone Age.
Before the referring, the person will more or less unconsciously wonder whether they will be socially ignored or rejected or recognized and rewarded.
And how can this risk be reduced by the service or product provider?
This source mentions one of the most important factors for a working non-reward or “organic” referral system is the quality of a product.
And I would also add the quality of service in the case of real estate professionals.
This is confirmed and complemented by a study from the Association of Consumer Research that studied word-of-mouth dynamics.
This study found that positive word-of-mouth mostly happened concerning four categories: product performance, response to product/purchase problems, price/value perceptions, and employee behavior.
Positive word-of-mouth (referrals without rewards) happened in these categories when:
- A product performed superiorly and/or had unique features/benefits.
- Problems of products were resolved without friction (e.g., product exchange, refunds, repairs, etc.)
- The product was considered low-priced and/or a “good buy.”
- Employees were perceived as helpful, friendly, and responsive.
From all of the above, let’s now derive practical tips for getting “organic” real estate referrals with and without rewards.
Practical Tips to Get “Organic” and Rewarded Real Estate Referrals
Since the risk of being an “outcast” from the tribe weighs more than the potential reward a referring person gets when considering the decision to make a referral, practical tips should focus on mitigating or reducing that risk.
How can we do that in real estate?
First, we would need to ensure that the basic requirements are met, which could make positive word-of-mouth (referrals without rewards) happen.
Based on the psychological factors and the study from the prior section, we can derive the following tips for getting “organic” real estate referrals:
- Offer a service with unique features/benefits (working out a great unique selling proposition/USP comes in here).
- Be or become a good problem solver when it comes to seller or buyer clients.
- Provide value as a real estate professional so the service will be considered a “good buy.”
- Be overall helpful, friendly, and responsive.
When these basic things are in place (aligned with the study from the Association of Consumer Research), the next step can be a more strategic and tactical approach to rewarded referrals.
Why not before?
In my opinion, if the conditions for creating positive word-of-mouth are not met, an incentivized referral program may do more harm than good.
Let’s say you had a brokerage and one or two real estate agent colleagues (“bad apples”) who were not helpful, friendly, and responsive with potential sellers and buyers.
Now you put a referral marketing program in place to incentivize referrals to your brokerage.
The person referring you those leads, although receiving a reward from you, may do it for a while, but in the long run, it will cost her or him socially.
The buyer that was referred to you by him might complain to him afterward that one of the agents of this brokerage was not really friendly and didn’t reply to texts.
This might, in turn, even create negative buzz for the one having done the referring. The “outcast” is happening again.
Once you meet most of the above conditions, what follows will be additional strategic and tactical questions and some answers for inspiration.
1) How could I make the referring as frictionless and easy as possible? What technology could help me with that?
You could use pre-made templates that clients can use to refer you to others.
But there are also already existing solutions, such as referral software.
To name a few that you can use to reduce the friction of rewarded referrals, there is Referral Factory, Ambassador, Friendbuy, ReferralRock, or InviteReferrals.
2) How can I further reduce the risk of someone referring a client to my business?
To improve your service and make it more unique, you could, for example, introduce a “show-ready service,” smoothing the hassle of showings interrupting the homeowner’s daily life.
Providing helpful content for your community can also be perceived as an additional service you provide.
You could do this via the website Park Bench or content marketing (blog articles, videos, etc.)
You can also reduce the referral risk by becoming an even better problem solver by improving your negotiation and communication skills.
This prepares you for any curve ball before, during, or after a real estate transaction.
What else could you do to increase the value you provide?
You could also have a stream-lined buyer pre-approval system in place to reduce potential time wasters and tire-kickers for sellers or offer after-sales services and have an after-sales follow-up system in place (e.g., market insights).
3) What incentives meeting their needs and wants could I offer to sellers/buyers and/or other real estate professionals that refer me to clients?
Regarding real estate professionals, the answer is usually straightforward.
The incentive is usually a referral fee (share of the gross commission), or it could be that you also send them referrals.
For buyers, it could be something related to home decoration and furnishings and a moving truck discount for sellers.
However, the more personalized the gift (incentive) you can offer, the better the effect will be, as I worked out in my article “Custom Real Estate Marketing Products that Stand Out“.
4) What events and other unconventional marketing activities could I use to create buzz?
I already covered these topics more deeply in my articles “What is Experiential Real Estate Marketing After 2020“, and “How You Can Benefit from Real Estate Guerrilla Marketing“.
As real estate guerrilla marketing, you could do, for example, a combination of an open house and treasure hunt for kids or helping with yard sales in the community.
Another idea I covered in the above articles is, for example, a potential buyer needing to solve a particular puzzle in a certain amount of time (of course, this needs to be prepared as an event that you can stream on social media for the buzz effect, etc.).
If they do, they receive a reward (e.g., a price reduction for a newly built home, a new refrigerator, etc.).
5) When is the best moment to ask for a referral?
This author opines that you may want to ask for referrals once you made the sale.
Because this is when things are still fresh, and the seller and/or buyers are still most excited about using your services.
According to this source, you may want to use the following rules to find the right moment:
- The moment when the positive sentiment towards your service is highest.
- The moment when your clients are most receptive to messages from you.
- When the chances are highest that they act on a call to action to refer a friend.
And this source and the statistics mentioned at the beginning of this article
confirm the rule that you want to ask for a referral right after a successful transaction, ideally by email and/or SMS.
Referral Setup Programs You Can Also Use for Real Estate
Answering the first question in the prior section above, I mentioned referral software you can use to provide almost frictionless referrals.
In this section, I will complement this with an overview table of these providers and their respective prices that can also be used for real estate use cases.
|Referral Software Provider||Monthly Pricing|
|Referral Factory||$95 - $1,400|
|InviteReferrals||$99 - $249|
What Are Referral Agents and How Do Realtor Referrals Work?
There is also a whole business model around real estate referrals.
The main focus is to earn a referral fee from a closed real estate transaction.
Licensed real estate pros and agents that specialize in generating buyer leads to refer them to other real estate agents are called referral agents.
The benefit for potential buyers working with referral agents is that provided the referral agent does a good job, they can be trusted to connect them with the best real estate agents for their needs.
There are even whole businesses that have specialized in this business model. The benefit for buyer or seller agents is that they can be provided with leads they don’t have to pay for upfront and only when the transaction concludes.
In this context, you may also want to read my article “(Free) Real Estate Leads Paid at Closing – Top 9 Providers“.
In this article, you will find providers that do referrals as their main business model.
By the way, during my research for this article, I found an additional real estate referral provider called referrals.io.
And yes, real estate agents usually get referral fees when they refer a client to another realtor who later manages to close a transaction with them.
Paying referral fees is a common practice. According to several sources such as this, this, this, this and also by my own experience, referral fees range from 20% to 35% of the gross commission of a particular transaction.
This doesn’t mean it always has to be in this range.
It also depends on the market and what is individually negotiated between the referral agent and the listing or buyer agent.
Now you may wonder how referral agents get clients in the first place.
As a matter of course, referral agents need to be pretty good in real estate marketing or real estate lead generation.
Depending on their focus, they will mainly focus on generating buyer or seller leads.
Since they are less involved in the typical operational processes of buyer and listing agents (e.g., listing presentations, carrying out showings, etc.), (e.g., when it comes to transactions), they can invest more time in generating leads.
Overall, they are less on the road and have less paperwork to deal with.
So, working with a referral agent is a bit like outsourcing your real estate lead generation.
But it’s not only cold lead generation that gets the referral agent new clients and leads; it’s also a network of real estate agents.
The latter is also important to be successful.
In the beginning, this network is non-existing or very small. So, a referral agent starts with lead generation to show other agents the value they can provide.
These agents can then be added to the network, and a network is built little by little.
From this network, new leads can also come, and the referral agent takes the role of a matchmaker.
I know one or two things about referral agents because I was in this business and sometimes cut out from commissions.
Can a Realtor Pay a Referral Fee in Florida?
In some states, it’s a bit complicated when paying referral fees.
The thing is, it’s not only realtors who refer clients sometimes, but also non-licensed individuals.
According to this source for example, a licensed realtor or broker is not allowed to pay a fee for real estate services without a real estate license in Florida or another state, including attorneys.
There is only one exception (not too lucrative, though).
When a tenant refers another tenant to live in the same apartment building, a property management firm can pay up to $50 per transaction.
According to this source, if a real estate broker in Florida pays a referral fee to an unlicensed individual, it could mean fines of up to $5,000 for each violation.
Are Real Estate Referral Fees Legal in California?
The situation with referral fees in California is similar to Florida, just a bit more complicated. They are legal and illegal at the same time.
Let me explain.
Provided the non-licensed individual wasn’t soliciting on behalf of the brokerage, did only the introduction, and isn’t involved in any negotiations or any other work that would require a license, then according to this source and the Bureau of Real Estate, those unlicensed individuals can be paid a finder’s fee.
Sounds straightforward, right? Well, not so fast.
According to this source, this is just the Bureau of Real Estate, but there are also the feds that have a say here, particularly the Federal Real Estate Settlement Procedures Act (“RESPA”).
If the unlicensed individual sends you a client with the intention from the beginning to gain a reward or referral fee, although he complies with the above, he still can violate the RESPA.
Because according to RESPA, it was done with the expectation of earning a reward.
There is only one exception: commercial property, vacant land, apartments, or apartments with 5 or more units or all-cash transactions.
So, as you can see, if you want to act as an unlicensed referral agent in a particular state and/or build your business model on real estate referrals, you may want to first research the regulations in the different states you plan to operate in.
Because you may be licensed in Ohio, but when you refer someone to Florida, where you don’t hold a license, you are considered an unlicensed individual.
This article has been reviewed by our editorial team. It has been approved for publication in accordance with our editorial policy.
Author & Founder
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