Broker Risk Management (“BRM”) recently released a tip regarding finder’s fees. BRM received volumes of questions regarding circumstances under which finder’s fees could be paid and specifically, whether there is a cap on a finder’s fee. The following addresses whether there is a cap and some additional information regarding finder’s fees.
There is no specific cap identified in any statute or regulatory opinion limiting fees paid to a finder. However, the Department of Real Estate (“DRE”) has indicated that if a finder’s fee is more than what would reasonably be expected to be paid for a referral, the DRE may take the position that the finder likely performed work beyond simply an introduction and therefore, the payment is to an unlicensed person for licensed activity. In other words, if a complaint is made with regard to a finder’s fee, the DRE will review the amount paid and whether the finder participated in the transaction. The DRE will also review how often the finder is paid by any specific agent or brokerage. If the finder is paid more than 5% to 10%, the DRE will likely investigate the issue further and may conclude that the finder must have performed services beyond a mere introduction. If that occurs, the DRE can take action against an agent’s and/or broker’s license.
A common example is where an unlicensed person refers a buyer to a California real estate licensee and requests a finder/referral fee. That person refers another buyer, and then another. The DRE may determine that the “finder” is soliciting buyers to work through them. It is a violation of California law for a person to solicit buyers (or sellers for that matter) to be referred to a licensee with the expectation of compensation. It is a violation to pay and to receive compensation to such a referring person, and can subject the agent and broker to sanctions and fines.
As indicated, the frequency that a particular finder is paid by an agent or brokerage will also be reviewed by the DRE. If regular payments are made to a finder by a specific agent or brokerage, the DRE may find that relationship to be beyond a mere referral requiring a real estate license.
It is acceptable for an agent to give a gift of nominal value to a person who refers a buyer or seller to that agent, so long as thee is no agreement or expectation of compensation explicitly or implicitly between them.