You might think for someone running a large international sales business selling foreign property, their number #1 problem is getting appointed by developers to sell their development. Well, you would be wrong.
The number #1 issue for anyone running a large international property sales business is getting new potential buyers.
This is where referrers and runners come in.
Anyone who runs a large off-plan international sales business will tell you it’s not the product which is difficult to get. There is no shortage of developers willing to engage with you to help you sell their properties off-plan. They all have huge budgets for fees, staff incentives and promotions. The biggest problem everyone has is getting new leads!
Placing large adverts in the Straits Times or South China morning post is not enough to generate ‘footfall’ to a foreign property exhibition. Agencies have to be more strategic and encourage other businesses and individuals to refer them to business. These are groups are known as ‘referrers and runners’.
What do Referrers & Runners do?
Referrers and runners are companies or individuals with connections and relationships to people that fit the target audience of a property agency. These are their ‘contacts’. The relationships these runners and referrers have with their ‘contacts’ varies: it may be a business relationship, a friend or acquaintance, or an ‘influencer’ on social media – where there is no ‘personal’ relationship at all. It really doesn’t matter – provided the target audience suits that of the property agency, that’s what counts.
The property agencies engage referrers and runners to introduce specific foreign properties to their contacts. They sign an agreement with them setting out what fee they will pay them if they introduce new buyers to a development.
Some referrers are very active promoting foreign properties and are open about their involvement. Others simply don’t want their contacts to know they have a relationship with a property agent and they will be far more subtle in their ‘sales’ approach. Typically these referrers don’t want their contacts to know that they will be financially rewarded when they buy a property.
So what’s the problem? Why does this matter? The agent is happy because they have sold a property and the buyer is happy because they’ve just bought a new foreign property.
Unfortunately, fees are the problem for you, the buyer.
If you buy a property through a referrer (either knowingly or not) I guarantee you have not got the best deal for the property.
But why? Surely the agent simply splits their commission with the referrer? Wrong.
The problem is that their simply isn’t enough money in the ‘commission pot’ to keep both the agent and the referrer happy. This is caused by the huge fees that referrers charge and because of the way large property agencies are structured.
Property agencies have two separate teams that share the commission for every sale. A listing team, based in the same country as the development and responsible for bringing the development to market. As well as a sales team, based in Asia responsible for finding buyers and selling the properties.
The fee (commission) the developer pays the agent is split between the listing team and the selling team. This structure works well until there are third parties (referrers) to pay.
Referrers generally charge 5% – 8% of the property price for introducing a buyer to a development. Although we regularly see eye-watering referral fees of 10% paid for some Australian property referrals. These referrers have read the market and worked it to their advantage – they know that the marketing of foreign properties is a crowded space, with more properties for sale than willing buyers.
So where does the money come from to pay for the referrer? Developers simply don’t have a separate pot of cash set aside to pay referrers. You may be surprised to find out that it’s you, the buyer who ultimately pays the referrer.
Here’s how it works
When the property agent presents your offer to the developer, the agent will also tell the developer that they need an additional fee to pay the referrer. The developer will then calculate whether they can accept your offer taking into account the fee they have to pay the referrer.
What this boils down to, is that the fee which has to be paid to the referrer will come out of any potential discount you could have received. So, if a referrer is paid 5%, that’s 5% you could have saved on the price of your property if you hadn’t bought it through a referrer.
Might not sound like much, but let’s say the property you bought was £600,000 and that a referrer was paid 5%, you could have paid £570,000 for the same property if a referrer had not been involved. And it’s not just the property that you would have cost you less money, you’d also have paid less Stamp Duty and potentially lower legal fees and financing fees.
For you as a buyer, it’s crucial that you understand who else is involved in the deal with you. If you want to make sure you are paying the best possible price for your property, you’ve got to know who else is being paid a fee and how much. Only then will you know if you’re getting the best deal.
Don’t be afraid to ask the agent you’re buying through who else is being paid a fee and how much. As a property investor, you have to drive the best possible price for your property, and you can’t do that if you don’t have all the information you need.
Conflict of Interest
The other thing you need to consider is the conflict of interest. If you are dealing with a referrer who is introducing you to a property where do their interests lie?
Think about it, they only have two options:
- You Buy – they get paid
- You don’t Buy – they don’t get paid
Which one do you think they prefer? The reality is they are highly incentivised to get you to buy – they will likely tell you just about anything to get you to buy!
If the fees don’t bother you, and they should. Finally, think about the market knowledge they have. Referrers don’t generally understand the complexities of the property market. They don’t have the expertise to really advise you on what is the right property to meet your objectives.
You need to think about who else is the ‘deal’ with you. Think very carefully if you can’t get to the bottom of who is being paid what, for you to buy a property. These fees come off your bottom line, the price you pay for the property will be attached to the deal forever and will ultimately impact the ongoing performance of your investment permanently.