The must knows about real estate referral arrangements
O*NO! Is your company wanting to refer potential clients to a business, but you’re not sure where to begin? To save your company’s a*rse and prevent aching headaches down the road, the best course of action is to put in place a referral agreement between your company and potential referrers, partners or affiliates.
What is a Referral Agreement?
A referral agreement, also known as an introduction agreement, commission agreement, or a finder’s fee agreement, is a binding contract used when a company refers potential clients to a business. The formal contract enforces the transaction between the referrer and the business, where the referrer agrees to refer potential future clients to the business for a fee while protecting all party interests. Entering a referral agreement is one of the most valuable and reliable sources of revenue. In general, a referral agreement allows two parties to form a partnership, under which one person will refer clients to another person/business, primarily for their expertise or experience in a specific field, whilst benefiting from the relationship by earning a fee or commission for the referral or completion of the project.
For real estate agents, the purpose of a referral allows a client to enter the hands of an expert, who is the most qualified to get them the real estate services they desire. For example, you may be a whiz at selling clients residential properties, however, you may not have the best expertise when it comes to commercial matters. What happens when one of your client’s decides to branch out and purchase a commercial property? In this case, you may consider yourself to not be the best person to service them as you don’t have the knowledge, experience or expertise they may need. So, to achieve the best outcome for your client you may want to refer them to an agent who has expertise in the area. The most effective and efficient way to do this is by forming a referral agreement between yourself and the other agent/business. A referral agreement for real estate agents is a simple contract between the two people who refer work to each other. This agreement covers what fee is to be paid, whether the fee is a lump sum or trail, when the fee is to be paid, the length of the referral, disclosure requirements and all other essential matters.
What should you include in a Referral Agreement?
Getting your referral agreement right from the get go will help prevent financial, contractual, and business headaches later on. Your referral agreement should have various parts to it, but most importantly must cover:
Who is involved – Whilst it might seem like a no-brainer, we need to clearly set out who is involved – the referrer (the person doing the referring) and the referee (the person to whom the client is being referred to). The nature of the agreement ensures both parties are aware of their obligations and reduces any misunderstandings in the future.
Duration of the Agreement – the duration of the agreement may be short-term or long-term. Referral Fees – it is essential to set out what fees are due and payable with clear milestones to be achieved, when payment is due, and a payment method, to avoid any payment disputes.
Referral Process – the process is how you would like the referral to occur – and this can be as simple as the referral being done through emails.
Confidentiality and Privacy – protect yourself, your company, and your interests. The information within the agreement must be kept confidential and comply with the relevant privacy laws. To ensure security, a detailed confidentiality and privacy clause helps to clarify how personal information will be handled according to law and the agreement and be sure that when leads are sent to you, the person sending them is complying with both spam and privacy laws so you don’t get into trouble when you use that personal information.
There are also other clauses, however not as necessary, that can always be added to your referral agreement. As this agreement is a simple contract, you as are able to customise it your needs, and in some cases negotiate the terms with the other party. Common clauses include:
Exclusivity, in which you can prevent the other party from entering into similar business arrangements, especially if it harms your business.
Another may deal with the matter of intellectual property. If you or the other business intend to use your IP during the course of the referral work, it is wise to set out the obligations, rights, and licences that may attached to your branding. This also prevents others from misusing your IP and damaging your reputation.
And, like all contracts, you may need a Terms and Conditions section for any other key information and special conditions relating to your referral relationship.
What are the perks of referring clients?
A referral relationship is a valuable, reliable, and rewarding source of income. What is referred to as a ‘lifeline,’ a referral agreement is the best protection to your agency when wanting to branch out, whether that being through new markets or segments or getting in front of new audiences. This builds strong and long-lasting relationships with other agents, while pulling in impressive incomes. For real estate agents, referral agreements are a good way to create leads from existing contracts and networks that can potentially become a significant number of quality referrals. Not only does it create a long-lasting expectation, constructing a referral agreement is the best way to avoid damaging your reputation – because at the end of the day, what matters most is that your clients get the best real-estate service they need, even you can’t always be the one to deliver it.
The law
By now, we all know that referral relationships in most states and Territories of Australia are highly regulated in the real estate industry. And, depending on whether a client is being referred into a business or out of a business, will also depend on what rules you need to follow. Some states terms that are used are ‘referrals’, ‘inducements’ and ‘conflicts of interest’. We strongly recommend not putting any referral relationships in place unless you are across the rules that apply to you as in some states there is a blanket ban and other states simply require adequate disclosure of the referral relationship to the client. We will be publishing a separate blog on the ins and outs of the laws of referrals shortly, so watch this space!
Key Takeaways:
Referral Arrangements are the best and fastest way to help you build and strengthen relationships with other businesses;
Ensure you have a formal legal contract in place so you don’t get bitten;
Referrals are a valuable and reliable source of income and can make growth happen faster; and
Make sure you know the rules in your state or territory as they apply to referrals so you don’t; risk your licence by getting it wrong.
Your Next Steps:
Wanting to set-up your own referral agreement but don’t know where to start? You can do it yourself with our real estate agency tailored Referral Fee Agreement template. So, make sure you’re protected today and download now!
Want us to help you customise your referral agreement or not sure about your legal requirements when it comes to constructing your own referral agreement? Book a FREE 10 min chat with us today to discuss your options!
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial, or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.