BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Many questions arise over whether a licensed real estate agent may pay a finder’s fee for a referral from a non-licensee (a person without a California real estate license). A finder is defined as an unlicensed person who, for compensation or the expectation of compensation, introduces or refers another for the purpose of purchasing or selling real estate.
In the State of California, it is legal to pay a “finder” a fee even if they do not have a real estate license. According to the Department of Real Estate (“DRE”), a finder can be paid a fee by a licensed real estate agent for a referral to a client so long as that finder does not participate in the transaction and there is no federally backed loan.
Please note that federal law is stricter than state law. Pursuant to the federal Real Estate Settlement Procedures Act (“RESPA”), it is illegal to give or receive anything of value in exchange for the referral of a buyer or seller to a licensee of 1 – 4 unit residential real property where there is a federally backed loan being obtained to purchase the property by the buyer (a majority of institutional loans).
Under both state and federal law, the finder may not undertake any activities for which a real estate license is required. A finder may not negotiate or discuss the price. A finder may not participate in disclosures or in any other part of the transaction except for merely making the introduction. If the finder “crosses the line” into participating in the real estate transaction, a finder’s fee cannot be paid. Consider the following scenarios.
SCENARIO NO. 1: I am a listing agent. I was referred to a buyer by a friend. The friend merely made the introduction and requested a referral fee of $1,000. Can I pay that fee?
RESPONSE: Yes. A finder’s fee can be paid to your friend unless RESPA applies, in which case such a payment to the friend/finder could not be paid.
SCENARIO NO. 2: I am representing a seller. An individual introduced me to a buyer. That individual then started negotiating the purchase price with me on behalf of that buyer. The individual then demanded a referral fee. He is unlicensed. Can I pay the referral fee?
RESPONSE: No. The negotiation of a purchase price while representing a party with the expectation of a commission requires a California real estate license. The minute the “finder” began discussing contract terms, including the purchase price, the finder lost the right to request compensation.
SCENARIO NO. 3: I am a listing agent. A referring party introduced me to a buyer. That “finder” then participated in the inspections and disclosures and advised the buyer on the condition of the property. That “finder” does not have a real estate license. Can I pay him a finder’s fee?
RESPONSE: No. Because he participated in discussing disclosures with the expectation of compensation.
Broker Risk Management has created a finder’s fee agreement for use by its clients. That referral fee agreement is attached. Agents should obtain the approval of the relevant party. For example, if the finder referred the buyer, the buyer should consent to the payment. If the finder referred the seller, the seller should consent to the payment.
PRACTICE TIPS:
- If a client is referred to you by a non-licensee and that non-licensee expects compensation, ensure the agreement is in writing and that the “finder” does not participate in any part of the transaction, including negotiations, contracts, disclosures, etc.
- If you have a question about whether a non-licensee can legally receive a commission, please discuss it with your manager.
- If you are entering an agreement with a non-licensee, please use BRM’s finder’s fee form.
- The DRE disapproves of agents advertising that agents will pay finders fees to non-licensees.
Attachment: Finder’s Fee Agreement – Unlicensed Finder
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice.