Yes, real estate agents can pay referral fees, sometimes called a finders fee, to licensed persons. However, most state laws prohibit the paying of referral fees to unlicensed persons. Federal law also prohibits this in most cases. This law was spelled out in the Real Estate Settlements and Procedures Act (RESPA), passed by Congress in 1974. It governs many real estate transactions in which the government is involved.
Why are referral fees involved in real estate? One individual could be looking to sell a property, but not have any buyers in mind until another realtor discovers a potential buyer. If the transaction goes through, and the potential buyer ends up purchasing the property, the seller's agent might give the buyer's agent a small percentage of the sale, as a reward for finding the purchaser.
- Referral fees may be paid between licensed real estate agents as compensation for finding clients, properties, or closing deals.
- Non-licensed individuals, however, cannot receive referral fees based on state and federal law.
- Eligible referral fees must be paid by one's broker and not between individuals directly.
Who Can Receive Referral Fees?
Referral fees can inflate the cost of real estate. Still, licensed realtors can and do pay referral fees to one another in return for recommending clients, finding properties, or helping to close a deal. In certain states, inactive salespeople can also be paid referral fees in addition to salespeople who are considered active and are affiliated with a firm. Active salespeople, it should be noted, can only receive compensation from the broker they are affiliated with. Licenses can only be changed from active to inactive, and vice versa, during a renewal.
Some states allow unlicensed individuals to receive compensation for referrals on the sole condition that the recipient of the fee not be involved in the real estate transaction itself. However, in most cases both state and federal law will prohibit a referral fee to be paid to an unlicensed person (or somebody with a lapsed licence).
How Are Referral Fees Paid?
Referral fees are paid from broker to broker rather than between individual agents directly. Referral agreements are thus paid between cooperating brokers and afterward the broker will then pay the agent.
It is illegal for a broker to hire or compensate someone without a proper license for acts that require a license. Many companies use websites, social media or online ads to complete referrals, but this can be dangerous as it is more difficult to discern people's trustworthiness or know what qualifications they have.
If a referral fee is paid to someone without the proper qualifications, the people who paid the fee could have their own qualifications removed.