Okay, so the whole thing sounds good, but man, that 40% referral fee sounds
high. Why is is so much? Actually, there are several reasons.
The Business Model
First, let me break down how the referral fees work again. On every transaction
that an Advisor completes with a NARREIA client (except their own clients, of
course), NARREIA receives a 5% referral fee. This is used to offset the cost
of the website, the high cost of identifying and screening potential Advisors,
flying to their market to interview them (which may happen several times in
a market until we find the right Advisor), and marketing and networking for
clients. I have personally spent several hundred thousand dollars building it
to this point, and we have several investors looking at financing a huge chunk
of it. So, out of the 35% total referral, 5% is to pay for the network. This is why there are
no fees for Clients, Agents, or Advisors. The money has to come from somewhere,
and this is the business model that will encourage thousands of Clients
to join, risk free.
The remainder of the referral fee goes to the Agent who refers the client in.
That Agent could be me. NARREIA will market very hard to build a large number
of clients, and the clients that come via NARREIA marketing will be assigned
to NARREIA (which is currently me, but it may, in the future, be another agent
of record). The Agent could be another Advisor, and I expect that once the Advisors
see how easy it is, they will be referring a lot. The Agent could be someone
in your office, or my office, or an office in Tulsa. There may not be a lot
of investing going on in Mansfield, Ohio, but there's still money in Mansfield.
An agent in Mansfield might be working with one of those clients, or maybe it's
their relative. They didn't have any property to sell them in Mansfield, but
by being affiliated with NARREIA, they gain access to a network of investor-
savvy agents who do have good investments for their clients or relatives.
Or the Agent might be you. And it should be you.
Volume with No Additional Marketing Cost
So, we're back to the question, why so high? You might understand the 5% going
to NARREIA. After all, it has to be paid for some how, and this way the only
time NARREIA is paid is if the Client buys or sells a property (their objective)
and the Advisor gets a commission (their objective.) .Why do we need to agree
to the other 30%? The answer is volume. The industry standard for referrals is 20%-25%,
with 25% seemingly the going rate. So anyone can negotiate a 25% referral fee,
and if the first person that answers the phone says no to 25%, the next person
will be okay with it. I would venture to guess that every person reading this
page has given out several 25% referral fees, and if you haven't, you more than
likely haven't done a ton of business.
The average real estate investment transaction is about $250,000 these days.
With a 3% co-op, which is not a standard but is a co-op that is frequently seen,
that means a GCI (Gross Commission Income) of $7,500. A 25% referral fee would
be $1,875, whereas a 30% referral fee would be $2,250, or a $375 difference.
How much did you spend in marketing last year? How many clients did you have
last year? What was the cost of marketing per client? I'll bet if you added
up all of your marketing costs and divided it by the number of transactions,
it came to a lot more than $375 per transaction. If it didn't, you're under-marketing
yourself and should be doing a lot higher volume.
The High Referral Fee is Actually a Benefit to the
Advisors
If you are sitting there considering whether you should become an Advisor or
not, and your hang-up is the 30% referral fee to the Agents, consider this.
Let's say you opt not to do it and we find another individual in your area.
Let's assume that the other agent gets only 10 deals from NARREIA next year.
That's 10 transactions they would not have had, period. The ONLY way they got
them was because they were with NARREIA. So the difference between the 30% and
the 25% is $375, or in this case, a total of $3,750. Wow, $3,750 is a
lot. But that agent also got to keep an additional $48,750, their take in the
deals. No marketing cost on these, by the way. With the NARREIA 5% already paid,
by the way, they clear $48,750. Remember, you don't pay any fees unless you
close a deal, and not until YOU get paid. Don't forget the Advisor
could have referred in several clients as well, receiving the referral
fee. If they only referred in 10 clients and they did a single deal each, it
is basically like they did 10 total transactions and got amost the same amount
of commission.
Let's take this a step further. Let's say last year the Advisor did 10 deals
from clients that came from Agents and not Advisors. They also referred 10 transactions
to NARREIA Advisors. They would get 65% of the 10 deals that came from Agents
and 30% from deals that they referred out, so they got 90% and their own Clients
were able to diversify their portfolio. But then this year, the Advisor did 10
deals with the exact same clients, and they referred out their exact same clients.
Because the Clients from Agents only incur a 30%+ referral fee, they
are getting to keep 70% of the 10 transactions. But since they are Advisors,
and their referral fee schedule is better and longer, they receive a 30% referral fee for life. So they'll get 70% of 10 transactions they did in their own
market and 30% of 10 transactions that their Clients did in other markets! This is a good example of why referring Clients
in is a very powerful advantage of being an Advisor. The third year, the clients
are now ready to sell their properties. Because they have been with NARREIA 2 years
and are assigned to Agents, there is no longer a referral fee due to the Agent,
so the Advisor sends NARREIA a 5% referral and keeps 95% on TWENTY homes. Their
clients are now in their third year, and for Advisors, that means they still get a
30% referral. So in the third year, they are keeping 30% of the commission
on 20 deals. This example is a very neat and easy way to explain how the referral
fee works in the Advisor's favor, but it is overly simplified. Depending on
your current Client database and your future marketing skills, you could theoretically
refer more Clients in than you receive from other Agents, and that would just
improve your take.
Being an Advisor does not preclude you from doing your own transactions. Some
Advisors in hot markets will be flooded with NARREIA clients, which is one of
the reasons that we try to put 2-4 Advisors in each market. Some Advisors are
in less active markets, but there are always deals in any market, you just have
to know where to go to find them. (And that place can be found at www.NARREIA.com.)
A Strong Referral Fee Encourages Thousands of Agents
to Refer their Clients
Now, consider the Agents who come across our site. They are going to see 30%
referral and say, "HOLY COW! I just got a 25% referral fee on ONE stinking transaction,
and here I could be receiving 30% on every deal in the first two years?
SIGN ME UP!" I know several agents in my office that would say that.
I'm sure you know several agents in your office that would say that. I'll bet
you know several agents in the Coldwell Banker office across town that would
say that. And in the Keller Williams office down the street, and in the C21
brokerage downtown. And in all of those offices in the next city over. And the
next city to that. Get the picture? See why I think this thing is going to explode?
Oh, I forgot to bring it up recently, but it's all FREE to these Agents and
their Clients. The unbelievable website. Access to the tools and data. Access
to experts in every market across the US (that's you, by the way.) Free. Now
reread this paragraph with the "FREE" word etched in your brain, and
again, you'll see why this thing is already on fire.
Geographical Diversification of the Clients' Portfolios
It's sad that I have to bring up the monetary benefit so strongly, because
it's my philosophy to create the system and the money will flow. That is how
a lot of people I work with think. That is how most of the wealthy people I
know operate. But there is a much better reason to offer the 30% referral fee,
better than enticing the Agents outside of the group to refer in. It can be
boiled down to this: geographical diversification of your client's portfolio.
When people talk about stocks, you hear them talking about "diversifying
their portfolio." It's the opposite of the "all your eggs in one basket"
concept. Don't put your entire retirement into one stock, lest it go down (or
out) and you lose the whole thing. Oddly enough, most people don't think about
this when it comes to real estate investing. They think diversification means
buying one on the north side of town and one in the south. At NARREIA, we encourage
diversification of our client's portfolio, both geographically as well as across
the various real estate investment vehicles (rentals, rehabs, foreclosures,
multi-unit, income producing, flips, rapidly appreciating, etc.) Actually, we
even think it's a good idea to keep some money in the stock market or some other
non-real estate oriented investment (if you know what you're doing).
This is where the 30% comes in. If an agent is working with an investor, that
investor has a finite amount of capital that they are going to spend on real
estate investing. Traditionally, an agent will want to keep their client in
their market because that was the only way for them to benefit from their
client's capital expenditure. Think about it, if your client buys a property
out of your market, you are lucky to get a one-time good deal of a 25% referral
fee. But if you are going to receive 30%, and you're sending an investor who
is likely to do more than one transaction, you could earn a decent living never
doing another transaction again. If they buy 3 properties from our Advisor
in Boise (Lyndon Holdeman, a really good guy, by the way), you just made 90%
commission, didn't do anything but register your client and point them to the
contact info. (Although, I would hope your relationship with your client would
be good enough that you'd be more actively involved than that, but it's not
required)
So if an agent is getting a third of the commission and doesn't have to find
the property, deal with escrow, deal with the lender, handle the inspections,
follow up on the repairs, or get the property manager to get a tenant in there,
they'll be inclined to help their clients diversify their portfolios geographically.
This might be a case of doing the right thing for the wrong reason (personal
monetary benefit), but in the end, it's the right thing, and that's what matters.
I mentioned that there is a finite amount of capital that your client will
spend in real estate investment, and for the most part that is true. But I have
seen clients that tell me they have about $100,000 in capital to burn, and when
I tell them about the agents and conditions in Boise, Albuquerque, Cocoa Beach
and Austin, they tend to find a little more capital. So I bust my butt to find
them two or three properties in Vegas and then send them to Lyndon and the other
Advisors to do the rest of the work. We just created a real estate transaction
or three that probably never was going to happen, but we put the right property
in front of the right person. With the numbers of clients we expect, we should
have several "right persons." Coincidentally, with the number of Advisors
that could and should be sending properties via email, we should have several
"right places" at the exact "right time." Making real estate
a commodity. (I must pause to wipe a tear.)
Most Referral Fees are gone after a Client has been registered
with NARREIA for two years
When an Agent refers a Client into NARREIA, they receive a 30% referral fee
for any contract written by a NARREIA Advisor in the first two years the client is
registered with NARREIA.
That's very generous considering the industry standard is a 20-25% referral
fee on one (maybe two, if you know it's coming) transactions, period. Upon a
Client's second anniversary with NARREIA, a referral fee is no longer due to
the Agent that referred them into the group. Realize, if you buy a property
for a client this year, they will probably keep it 1-5 years. If they hold it
for two years, when you go to sell it, you will not owe the Agent a referral
fee, and will only owe NARREIA a 5% referral fee. There are definite short-term
benefits, but there are long-term benefits as well.
