Referral fees are a type of compensation paid to an individual or company for referring clients to a related service. This practice is most often seen in the real estate industry. A real estate agent may refer a client to a particular mortgage broker and receive referral fees for doing so.
In a referral fee agreement, two separate sole proprietors or companies agree to "share" each other's clients. Individuals who enter into these types of agreements are usually in the same industry or offer services to consumers that may complement each other. When a client enlists the services of a real estate agent to purchase a home, that client is most likely going to need a lender to purchase it. This is where the referral agreement between the real estate agent and the mortgage broker comes into play.
The real estate agent recommends or instructs the client to contact the mortgage broker. As the client may be unaware of other lenders or options, he may decide to contact only the recommended mortgage broker to meet his mortgage needs. Even if the client is aware of other options, he may trust his real estate agent enough to give the recommended mortgage broker his business. Referral fees are paid to the real estate agent as a reward for essentially giving the mortgage broker the client's business.
Sometimes the payment of real estate referral fees can raise ethical concerns and questions. The mortgage broker may not be the lowest cost option available or be a business that the real estate agent has investigated properly. Real estate agents may be more motivated by the promise of the extra income than they are by their clients' best interests. Common charges, such as appraisal fees, are usually set and determined by the lender, which may be higher than average with the recommended mortgage broker.
Referral fees are also paid in affiliate marketing programs and selling partnerships. Some companies pay individuals to help them sell their products and services. Others pay a referral fee just for directing the customer to the company. Once the customer begins interacting with the company's staff, it handles and manages the entire sales transaction.
In order for referral fees to be paid, an actual sale needs to take place. Companies usually will not pay finder's fees if the customer decides to back out of the transaction or does not submit payment. Once payment from the customer is received, the company is obliged to pay the referral per the terms of the agreement.