How LFRO & Referral Agent Relationship’s Work
The Limited Function Referral Office (LFRO) and referral agent relationship is a structure designed to facilitate real estate agents who want to continue earning referral fees without actively participating in real estate transactions. This setup benefits both the brokerage (which operates the LFRO) and the referral agent (who primarily focuses on client referrals). Here’s how the relationship works:
1. What is an LFRO?
An LFRO (Limited Function Referral Office) is a specific type of real estate brokerage or office within a brokerage that is created solely for handling referral-only business. Agents associated with an LFRO do not engage in active real estate transactions, such as listing properties, showing homes, or negotiating sales contracts. Instead, their function is limited to generating referrals to active real estate agents or brokers.
In this structure:
Referral agents are licensed real estate agents but focus solely on referring clients to active agents.
The LFRO acts as the brokerage entity responsible for handling these referrals and managing the referral fee agreements.
2. How Does the LFRO-Referral Agent Relationship Work?
The relationship between the LFRO and the referral agent can be broken down into several key aspects:
a) Affiliation and Licensing
Referral agents must maintain an active real estate license, but they are affiliated with an LFRO instead of a traditional brokerage where agents actively buy, sell, or lease properties.
The referral agent cannot practice real estate beyond making referrals. This includes not showing properties, negotiating contracts, or closing deals. Their involvement in transactions is purely limited to generating leads and passing them to active agents.
The LFRO acts as the legal entity where the referral agent “hangs” their license. It oversees the referral process and ensures that agents are compliant with state real estate laws, including how referrals are managed and paid out.
b) Generating Referrals
Referral agents are responsible for generating leads by maintaining relationships with potential buyers and sellers. When someone they know is ready to enter a real estate transaction, they refer them to an active agent who will handle the client.
These referrals can be sent to agents within the same brokerage (if the LFRO is part of a larger brokerage firm) or to agents outside the LFRO’s network, depending on the agreements in place.
The LFRO provides the framework for these referrals, making it easy for agents to send leads and track their referral fees.
c) Referral Fees
When a referral agent refers a client, and that client completes a real estate transaction (buying, selling, or leasing a property), the referral agent earns a referral fee.
This fee is typically a percentage of the commission earned by the agent who completes the transaction (often ranging from 20% to 35% of the gross commission).
The LFRO is responsible for handling the payment of referral fees. Once the transaction is closed, the LFRO collects the commission from the active agent or brokerage and distributes the agreed-upon referral fee to the referral agent.
All payments must go through the LFRO, as referral agents cannot directly receive compensation from clients or the active agent without the involvement of the LFRO/broker.
d) Compliance and Legal Oversight
The LFRO ensures that all referrals are handled in compliance with state real estate laws and regulations. This includes ensuring that referral fees are disclosed and processed correctly, and that agents are not performing activities that require active participation in a transaction.
Referral agents are subject to the same real estate licensing requirements as traditional agents, such as continuing education and license renewals. However, because they are affiliated with an LFRO, they do not need to be members of a Multiple Listing Service (MLS) or pay association dues (unless required by the LFRO).
The LFRO serves as a legal buffer, protecting referral agents from inadvertently violating real estate laws, such as engaging in activities that require active participation without the proper supervision.
e) Marketing and Lead Generation
Referral agents can market themselves as part of the LFRO or alongside a specific real estate team or broker they send referrals to, provided they comply with local advertising regulations (e.g., disclosing their affiliation with the LFRO and license status).
LFROs may provide support for agents, such as CRM systems, databases, or marketing materials, to help referral agents stay top-of-mind with their networks and continue generating high-quality referrals.
Referral agents typically focus on building and nurturing relationships with past clients, friends, family, or other contacts who may need real estate services in the future, rather than actively marketing properties or transactions.
3. Benefits of the LFRO-Referral Agent Model
For Referral Agents:
Passive Income: Referral agents can earn income without the demands of active real estate work, allowing them to generate revenue from their existing client networks.
Flexibility: This model is ideal for agents who want to step back from full-time real estate work, whether they are transitioning to retirement, pursuing other ventures, or simply seeking a more flexible career.
Reduced Costs: Referral agents affiliated with an LFRO typically do not need to pay MLS fees or association dues, which can reduce overhead costs.
Compliance Management: The LFRO ensures that referral agents remain compliant with state real estate laws and that all referral fees are processed properly.
For the LFRO/Brokerage:
Captures Value from Retiring Agents: LFROs allow brokerages to retain value from agents who are stepping back from full-time real estate work. Instead of losing their client relationships, brokerages can continue generating business through referrals.
Revenue Streams: The LFRO can earn a portion of the referral fee, creating an additional revenue stream for the brokerage without needing to manage active transactions for the referral agents.
4. Compliance Considerations
Real Estate License: The referral agent must hold an active real estate license, and the LFRO must be licensed as a brokerage by the state.
Advertising and Branding: Referral agents must comply with advertising regulations, ensuring that they disclose their license status and affiliation with the LFRO or brokerage in all marketing materials.
Referral Agreements: The LFRO should have clear, written referral agreements in place to outline the terms of compensation and ensure that all parties understand the referral process.
Summary of the LFRO and Referral Agent Relationship:
Aspect Referral Agent LFRO (Limited Function Referral Office) Role Refers clients to active agents Manages referral process and compliance Activities Generates leads, sends referrals Handles contracts, payments, and compliance for referrals Income Earns referral fees (percentage of commission) Collects part of the referral fee, processes payments Licensing Must hold a valid real estate license Must be a licensed brokerage Marketing Can market as part of the LFRO or team Provides support tools for lead generation Compliance Limited to referrals, cannot engage in transactions Ensures referral agents comply with real estate laws
In conclusion, the LFRO and referral agent relationship is designed to provide a legal and operational framework for agents who want to focus on referring clients while still maintaining an active real estate license. The LFRO manages the referral process, ensuring compliance and facilitating the payment of referral fees. This structure offers both flexibility and a revenue-generating opportunity for agents who prefer a less active role in the real estate industry.