Limited Function Referral Office: Turn Inactive Agents Into Income

When the National Association of Realtors® (NAR) settlement changes became effective in 2024, there was speculation of a mass agent exodus. That still hasn’t happened, but there is an aging Realtor® population that may be in a wait-and-see mode before they choose to retire. Along with that agent pool, newer real estate associates may find themselves unable to compete with experienced agents adept at showing their value proposition to buyers.

It can be challenging for a broker-owner when an agent is not producing to their standards. On the flip side, retiring or non-producing agents often have a wealth of contacts; and moving them into a referral-only company can be a financial win-win for the broker-owner and the agent. It allows for a graceful exit from full-time selling, and their primary focus becomes referring their contacts to other real estate associates.

Benefits of a LFRO

In a LFRO, licensees only act in a referral capacity. They may not show or list properties, discuss or negotiate contracts, or represent themselves as a practicing real estate sales associate.

CLICK HERE TO LEARN ABOUT NAR'S LFRO POLICY

Benefits for the broker-owner:

• Provides a source of new business for your practicing agents.
• Removes non-producing or retired agents  from your branch roster and avoids skewing production numbers.
• Gives the broker continued access to the referral agent’s contacts.
• Provides a supportive way to transition agents out of brokerage.
• Provides a source of revenue via annual dues and transactions.
• Attracts agents leaving other brokerages that don’t have an LFRO.

The benefits for the non-practicing licensee:

• Puts personal and professional contacts to work generating income.
• No need to pay MLS and board dues, fees. Brokers should check with their carrier about E & O insurance costs.
• Can retire or maintain a full-time job in another field and still earn extra income through referral fees.
• Don’t have to create marketing materials to stay in contact with their sphere.
• Don’t have to show or list properties or manage transactions.
• Don’t incur any listing or marketing expenses.
• No specific production level is required to be a member of the referral company.
• Can feel confident their contacts are well taken care of.

Setting Up a Company

State requirements vary on how a LFRO should be set up, so investigate your state’s structural requirements and regulations, particularly around the structure of the broker of record. It’s important to ensure that your brokerage complies with these regulations, especially regarding supervising and managing agents who are not MLS and board members.

To have a robust and compliant referral company:

You will need to get a separate Tax ID number for the company, and while you don’t need to create an LLC to form a real estate license holding company, doing so can provide additional benefits. It’s always a good idea to consult with a legal or financial advisor to determine the best structure for your needs. Here are some other to-do’s:

1. Create an Independent Contractor’s Agreement different from the one you typically use that clearly outlines what they can and can’t do as a non-practicing agent and how they get paid on their referrals.
2. Help the agents transition their license and get all of the necessary documents and payments together to keep their license valid.
3. Offer continuing education classes or resources.
4. Collect their Independent Contractor’s Agreement, profile information and a W9 form.
5. Alert them when their license is up for renewal.
6. Allow them to participate in agent selection for their referrals, if they choose.
7. Have someone on staff facilitate the referral process from beginning to close, and ensure they get paid in a timely fashion.
8. Determine their annual dues for membership and invoice them.

From a marketing perspective:

1. Create a company name and logo different from your brokerage, set up the company and register it with the Department of Business and Professional Regulation (DBPR).
2. Buy the URL and build a website where licensees can get information on the program, tips on where to find referrals and details on state licensing requirements. Make sure to add a ‘Frequently Asked Questions’ section and a link to your state’s licensing website.
3. Provide scripts and shareable content they can use in social media and emails to generate referrals.
4. Consider offering referral-company business cards so they can pass them out, identifying them as referral-only agents.
5. Create monthly newsletters and email communication, coaching them on where to find referrals and how to send information.
6. Invite them to company events to keep them networking with your practicing agents.
7. Give them the tools they need to stay engaged with your firm and with their past clients and contacts.

Establishing a good return of investment within a LFRO begins with staying engaged with the member licensees and then capitalizing on every referral opportunity that might come their way. Referral-only members can earn passive income by putting their contacts to work, and your firm benefits from the clients and the transactions. #

Teresa Howe is the founder of TRH Consulting, a real estate coaching company.