Q: I received an email solicitation to sign up to receive referrals from an internet site which promised me “many qualified leads in my area.” I was selected, it said, because I was a “leading Agent” in my area. All I had to do was to sign their Referral Agreement that said I would pay a referral fee on any referral prospect who sells or buys through me. It sounded like a great source for referral clients, so I signed up.
At first, I received a bunch of names but none were quality referrals at all. After several months, I have not closed any sales with the people that they have named.
Today, the Referral Company is claiming I owe them a referral fee because one of the Buyers they had identified for me had, unbeknownst to me, worked with another Agent in my office and closed escrow last month. The Referral Company pointed out that since they sent me that Buyer’s name, I am obligated to pay the referral fee even if another Agent working for my brokerage represents that person. They claim I must send them the fee or they can sue me.
Can the Referral Company legally do this? What can I do?
A: Unfortunately, yes, the Referral Company may well have an enforceable contract. Your situation points out the pitfalls of working with “blanket referral agreements” with entities whose business model is to simply send Agents lists of names.
Many of these Referral Companies are internet-based companies with slick websites that showcase properties that are for sale or rent in many areas but they are not listing those properties. Their websites tout that they have many qualified Agents in many markets so that prospects will sign up for more information; however, they have no Agents affiliated with them at all! They merely solicit Agents such as yourself to receive the referred prospects.
In most instances, the Referral Company’s website lures prospective sellers and buyers to sign up for information, the Referral Company then refers them out and simply takes a referral fee for little or no work on their part. Because these entities are licensed brokers in the states where they operate and they are members of the various MLSs (where they get the listings being advertised on their sites), their practice is technically legal.
The Referral Company’s list of “qualified prospects” may be nothing more than a list of property owners against whom a Notice of Default has been recorded, or just visitors who have registered at their website with no attempt to qualify them or, in some instances, are simply names of individuals who are already working with other Agents in your company.
“RED FLAGS” TO WATCH FOR: The following list of problems are just some of the typical pitfalls Agents face when they agree to work with these Referral Companies:
- Some Referral Companies have a website registration process for Agents with the typical “click to agree” button that many people press without actually reviewing the terms and conditions and/or the form signed by the Agent references policies and procedures that are not included in the material the Agent must sign to be able to receive the list of prospects. Thus, many Agents never even read the actual Referral Agreement.
- These Agreements usually specify that the referral fee is owed not only if the Agent signing the Agreement closes with the prospect but also if any Agents in the signing Agent’s brokerage close with the prospect. Thus, if a different Agent in your company represents a buyer or seller which was referred to you, the Referral Company claims a referral fee is owed.
- The Agreements are for a long period of time and cover any subsequent sale or purchase by the referred prospect during that period of time. These Companies check County Recorder’s records for sellers or buyers who were referred out and, finding the referred client’s name, they start checking to see which brokerage represented those clients.
- The Agreements often include not only the referred prospect but their family members and any company owned by the prospect.
- Some Referral Companies are set up so that if the Agent clicks on an email with the name of the referred prospect, that act is deemed to be an “acceptance” of an obligation for that Agent to pay a referral fee even though the Agent may never actually agree to work with the prospect and/or may never even communicate with that person. If that prospect sells or purchases through an Agent in the brokerage, the Referral Company claims the Agent who clicked on the email owes the referral fee.
- Some of the more egregious Agreements require the Agent to pay a flat annual fee for each zip code for which they would have an “exclusive right to receive referrals,” even if they never get any prospects that close a transaction — as long as the Agreement is in effect, the fee is owed.
PRACTICE TIPS:
- Do not sign any Referral Agreement unless you:
(a) First, check with your Manager or Broker and obtain their approval to sign; and
(b) Second, carefully read and fully understand all terms of the Referral Agreement.
- Do not pay any money upfront to receive referrals. Regardless of the type of Referral Company, most provide little or no value for the money and some are outright scams.
- If you have already signed such an Agreement, discuss the situation with your Manager or Broker. Legal counsel may be needed to determine if you must comply with any demand.
DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged document 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.
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