A Hidden Way to Make Money with Real Estate Investing

7

(Note from the Editor: As Ali discusses later in the article – collecting referral fees is often illegal unless you are a licensed real estate agent. Always check with an attorney to ensure you are complying with local laws. Just wanted to make that point clear upfront!)

Since I am always very strong with my opinions about what counts as “passive income” versus what is actually work ({cough}…flipping and wholesaling), and because I am openly opposed to work, I preface this article by saying that what I am suggesting… is in fact work. However, this work can be about as passive as work can be.

You may have heard references to this strategy I’m about to talk about – but likely never thought about it as a realistic money-maker for yourself. Is the suspense killing you yet? I’m talking about referral fees.

Commissions and Referral Fees

Real estate, whether investing or just normal listings, is highly dependent on commissions. Most everyone that works in real estate makes commissions in some way. Real estate agents are the best example, as the main source of money they earn is from the purchase of properties by their clients; they don’t make a base salary. Real estate brokers are similar and even lenders make a certain percentage off each loan they write. Real estate is far from the only industry that is commissions-based, but I’d say it ranks up there as one of the most renowned.

The other thing that is very standard in real estate, still regardless if it’s investing or normal listings, is referral fees. Referral fees are different from commissions in that referral fees are indirect from clients’ purchases while commissions are direct. For example, if I know of someone wanting to buy a house in Atlanta, and I am licensed as an agent in California (which means I can’t sell that person a house in Atlanta,) I can connect him to an agent in Atlanta who can help him. Let’s say the buyer goes ahead and buys a house from that agent – then that agent would make the full commission from the purchase. At that point, it is standard (and friendly) practice for that agent to offer me a small chunk of what he made from that purchase because if it weren’t for me sending him the buyer, he never would have made the commission. So he makes the commission and I make a referral fee. This is what I mean by direct pay versus indirect. That’s the relationship with commissions and referral fees, in a general sense.

NOTE: In the case I just mentioned, I would have to be a licensed real estate agent in order to legally accept the referral fee from that agent. I won’t go into the details of the law here, but you would be safe to assume you need to be a licensed agent to accept referral fees at all times. It isn’t the case every time, and a lot of it depends on who is offering the referral fee, but you are safer to assume you need the license. Be sure to research the laws before you go running off accepting referral fees illegally.

Referral Fees and Investing

Wholesaling is actually a form of earning referral fees and although very different from the example above, a wholesaler is still essentially finding a buyer for a seller, i.e. matchmaking. As a result, although structured very differently because the seller isn’t the one paying you, you earn what is basically a referral fee for finding that buyer. So go ahead and assume wholesaling is one way to take advantage of referral fees.

The other way is to just connect with people selling properties and offer to find them buyers. They don’t necessarily have to be properties for flipping, as with wholesalers, they can be properties of any sort. Ask them if they are willing to pay you a referral fee if you bring them any buyers. It is very common in real estate investing for just about everyone to offer them. Usually the only hindrance is the legality of who can pay what. Most likely if someone doesn’t offer you a referral fee – it’s because they legally can’t. Can’t hurt to ask though.

How Much Are We Talking Here?

Let’s put it this way – referral fees are usually equivalent to – or higher than – what a normal real estate agent makes on each purchase. Real estate agents often do that as their full-time job and the commissions they make can easily support them, so if you can make equal to or more than they do, you can assume make referring a full-time gig is feasible. Think about this too: what does a real estate agent usually have to do in order to make a sale? They have to find prospective properties based on the buyers’ preferences, they have to drive the buyers around (oftentimes for months and to the point of exhaustion,) and then they have to do all the contract work, help coordinate with the lender, hold the buyers’ hands, and then buy them some nice wine glasses as a congratulations on their new home gift. That’s a lot of work!

What about with investing? That’s a totally different story! You can make the same referral fee as the agent who does all that work (although theirs would be considered a commission) by simply sending someone over to a seller. You don’t write contracts, you usually don’t do any driving, you certainly don’t have to buy wine glasses, and sometimes you may get away with not even doing any hand-holding! You only have to send names over and most of the sellers will gladly do the rest of the work for you and still pay you a referral fee. So there is no reason to believe that you can’t make a nice livable salary just off referral fees if you wanted.

Or, if you like whatever job you are already doing and don’t really want to make a career out of real estate matchmaking, you can at least scoop up nice chunks of money here and there by referring people. When I first started investing for myself, I was so excited about the companies I met and bought through that I started just very casually telling people I knew about those companies. My cousin, for example, was like “Hey I’ve wanted to start investing in real estate too! Can you connect me with who you have gone through?” Sure, why not. Then one of my mom’s friends said she wanted to buy real estate, and then a friend from college. I had referred a couple people who bought properties before I even knew referral fees existed and later before I could even accept the fees. All of a sudden, once I knew about being able to make referral fees, it dawned on me- there is money in matchmaking! And there birthed my exit out of my corporate job.

Never Lose Your Morals!

Referral fees tend to strike up a huge suspicion from buyers.

If Joe presents a buying opportunity to Susan, and Susan finds out Joe will make a referral fee if she buys, Susan is likely to assume Joe is trying to scam her or that Joe only cares about the money he will make and could care less about Susan. Unfortunately most rumors do stem from some level of truth, and I have no doubt that there are plenty of people out there who are always trying to sell something, caring less about the quality of what they are trying to sell and just focusing on how much they will make from it.

Don’t be that person.  

If you decide to take advantage of being able to make referral fees in real estate, be ethical and legit about it. Don’t snow people just so you can make a buck. Get that? Let me say it again.

Be genuine in your referrals! Don’t refer for the money, refer because the investment opportunity is awesome. Then be excited you were able to make some money from it!

If I ever recommend a company to someone, I guarantee you I have personal experience with that company. I won’t refer for anyone that I have not bought through myself.  I’ve even turned down several referral fee opportunities from companies who offered them, simply because I did not know enough about them or trust them enough to feel comfortable sending anyone their way. I could have easily said “Sure!” and sent buyers their way just so I could make extra money, but I don’t consider that to be ethical at all. I want to make sure if I refer you to someone, if something bad happens with your purchase, that I am as floored as you are. Because if something bad happens with some opportunity I’ve sent you to, my reputation is on the line! Remember your reputation as well if you ever refer someone anywhere. Don’t give people reason to continue thinking referral fees are the enemy.

Referral Fees are Friend, not Foe!

Ha… I just thought of the part in Finding Nemo where the sharks are training the other sharks that fish are friends, not food.

I digress…

One last reality check to finish this off. For all of you buyers out there who are constantly suspicious of who is making what money in what deal, including referral fees, you need to drop your focus on that. You should buy an investment for one reason, and one reason only:

Because it’s a good deal.

If what you are buying is a good deal, who cares if anyone on the other side is making a referral fee! If you disagree, give me one good reason why it matters. If your reason is that you could get an investment property cheaper elsewhere if people weren’t getting referral fees somewhere along the line, then awesome, go find the cheaper property. You won’t hurt anyone’s feelings. The people who make the referral fees make those fees because they are helping out the seller by finding a buyer, but they are helping you too by finding you the properties. If you think you can do a better job of finding investment properties yourself, have at it!

But to really burst your bubble about even doing that (finding cheaper properties with less referral fees built in), the bigger reality is that just about everything you buy in real estate, no matter what it is, has referral fees built into the price. It’s how real estate works. So if you think you are going to get around that, ever, you are sadly mistaken. The real estate industry is built around commissions. There is no escaping it, so you might as well not stress over it.

SO, if you’ve been looking for a new way to make some side income or even potentially be able to start a new career, look into alternative ways to make money in the industry! Referral fees are one of those alternatives. Maybe you are more of a people-person and would rather talk to people all day long than flip houses. Perfect! Or, maybe you can see the potential in being an agent (of sorts) on the investing side of real estate because I can guarantee you, there is a lot of money in commissions being left on the table with investment properties. So many investors would love to work with an agent, or someone who can help them, and yet so few do just because they don’t know where to find them.

One last rehash about the legality of referral fees- Make sure you are fully up on the laws! If you are licensed, you doubtfully have anything to worry about. But if you aren’t, again, do some research.

Photo Credit: •?pfaff via Compfight cc

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

7 Comments

  1. Those are all great ways to make money Ali, I would stress people check their state laws and encourage people to get their license. In Colorado an agent can’t pay a referral to anyone who is not licensed unless they have nothing to do with real estate. You also can’t link up buyers and sellers unless you have a license or an ownership/contract for ownership on the property.

    • Ali Boone

      Lol Karen. I’ve never actually seen “pototo” spelled out.

      But no, well yes, bird dogging is definitely a form of it. Well yes, I guess it is for sure. Hadn’t thought about that one specifically. It can really be sending buyers to anyone- an individual, a company who sells who knows what, an agent, etc. But again, can’t emphasize enough just making sure you know the legalities because they will differ for each, and like Mark said, per state sometimes too.

      But bird dogging is definitely not the only form of it. At least not as I understand what most mean by bird dogging.

  2. Ali, thanks for such a resourceful article, I keep getting amazed at how many other options an individual has to start off in Real Estate Investing. On another note I was also impressed that you are an Aeronautical Engineer and that you invest in Nicaragua as well. I’m also majoring in the same degree and while I may not be a Nicaragua native, I was born and raised in Honduras and I’m pretty sure RE there is quite advantageous. Either way thanks for all the information and best of regards!

  3. First thing to do is dump the referral fee reference unless your licensed. In California you can pay finders fees as long as they are for the mere introduction process and not much more. You can also legally sell leads but again your involvement must be limited.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php