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. Keep reading to find out more about these fees and who is eligible to receive them.
- 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.
Can Real Estate Agents Give Referral Fees?
A referral fee is a type of commission paid to a middleman—someone who introduces an interested party into a real estate deal. Finders fees, as they are also called by some professionals, don't necessarily require a contractual agreement between the finder and the party who pays the fee. The amount of the fee varies and is usually a percentage of the total purchase or sale price of a property.
So can they be provided by real estate agents? The short answer to this question is yes, real estate agents can pay referral fees to licensed persons. But there is one catch. 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 oversees many real estate transactions in which the government is involved. The act was put in place to prevent illegal and abusive practices in the real estate industry. It is regulated by the Consumer Financial Protection Bureau (CFPB).
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 as compensation 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. But in most cases, both state and federal law prohibit a referral fee to be paid to an unlicensed person or somebody whose license has lapsed.
How Are Referral Fees Paid?
Referral fees are paid from broker to broker rather than between individual agents directly. Referral agreements are, therefore, paid between cooperating brokers. The broker will then pay the agent after that.
One thing to keep in mind is that it is illegal for a broker to hire or compensate an unlicensed party for acts that actually 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.
Paying a fee to an unlicensed individual may lead to a loss in your qualifications.
There's one important point to note. If a referral fee is paid to someone without the proper qualifications, the people who paid the fee could have their own license revoked by the appropriate authorities.