BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
10 Rules for Referral Fees Between Brokers – and Others
1. Referral fees must be Broker-to-Broker, not agent-to-agent. If you, as an agent, are receiving a referral fee from an agent in a different brokerage, remember that the referral is from the other BROKER to your BROKER. The paperwork should reflect that.
2. Referral fees CANNOT be paid from one agent to the other. California law requires all compensation be paid through the broker. In addition, most Independent Contractor Agreements require the agent working for the broker to have all compensation paid through the employing broker. Agent-to-agent referral fee payments could be a violation of the law and a violation of your employing agreement with your broker.
3. Always have a written referral agreement specifying payment from the Referring Broker to the Receiving Broker, not the agent.
See the CAR form Referral Fee Agreement (Form RFA on ZipForms).
E-mail referrals often lack sufficient specific information to make them enforceable. Verbal agreements to refer are difficult, if not impossible, to enforce. Use the Referral Fee Agreement, and check that it is fully completed and reflects the terms of your referral agreement.
4. Read the Referral Agreement carefully. Is there a time limit for owing a referral fee? What if the referred buyer doesn’t buy now but comes back to you in 3 years? Is a referral fee still owed?
5. What transactions are covered? Is it just the buyer for the one purchase, or a seller for the one sale, or does the Referral Agreement cover more transactions over a specified period of time?
6. The Referring Broker’s right to earn the referral fee is created at the time the referral is made to the Receiving Broker. So, even if the agent of the Referring Broker who made the referral leaves that Referring Broker and affiliates with a new broker, and then later the agent at the Receiving Broker ratifies a purchase/sale with the referred client, the Referring Broker is entitled to receive the referral fee. The referring agent’s right to get paid on that referral is going to be a function of the Referring Broker’s internal compensation policies. However, the Referring Broker CAN pay the referring agent directly, rather than through their new broker, because the referring agent’s right to be paid was earned, just like the Referring Broker, at the time the referral was made.
7. Be careful when solicited by brokers who call you and solicit you to receive referral leads which they obtain from their websites. There are many companies who have a broker license and a website with an IDX feed – but no real agents working for them. They solicit agents in various areas to receive their leads from their websites in exchange for a 30% or greater referral fee. Often the solicitation is just by phone with a “Terms of Agreement” e-mailed to the receiving agent after they agree to participate. READ THAT AGREEMENT CAREFULLY BEFORE YOU PROCEED. You may be obligated for all transactions (sales, listings, rentals) for a long period of time such as two years. Some of these referral agreements extend to family members of the referred client. Some even charge the agent a fee for being in their network, promising many leads – which may not materialize. Always review any such proposed Referral Agreement with your manager before agreeing to participate.
8. Referral fees are illegal if made to, or received from, mortgage brokers, attorneys, lenders, title companies, escrow companies and other “settlement service providers” under RESPA. Under RESPA, it is illegal to give, and to receive, ANYTHING OF VALUE between a real estate broker or agent and any Settlement Service Provider or unlicensed person in a residential 1-4 unit property transaction where there will be a “federally-related loan” (basically all institutional lender loans) in exchange for a referral of business pursuant to “any agreement or understanding, oral or otherwise.” NOTE: Even if RESPA does not apply, if such payments are made to or received from a title company (or, in Northern California, a related escrow company), California state law makes any such payments illegal as well.
9. A fee to an unlicensed person is not called a referral fee but rather is known as a “Finder’s Fee.” Finder’s Fees to unlicensed persons are illegal if RESPA applies – See paragraph 8 above for when RESPA applies. So, Finder Fees to unlicensed persons can legally be paid on 5+ residential sales, commercial and raw land sales; and on all cash and hard money loan transactions.
10. No matter what you call it, these rules apply. Calling compensation something other than a referral fee doesn’t change the rules.
For information on paying referral fees or any compensation to non-licensees or other “settlement service providers” see CAR Legal Memos:
“Referral Fee Chart” at: http://www.car.org/legal/referral-fee-folder/referral-fee-chart/
“Referral Fees” at: http://www.car.org/legal/referral-fee-folder/referral-fees/
Also See Weekly Practice Tips entitled “Referral Fees” and “Referral Fees and RESPA”
DO NOT FORWARD TO CLIENTS OR THIRD PARTIES. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2013 Rev. 06-09-14