A Hidden Way to Make Money with Real Estate Investing (IMPORTANT NOTE: We want to be clear up front… 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.)

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.

Read The Rest On BiggerPockets.

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