referral fee real estate
Can real estate agents give referral fees?
Real estate agents can pay referral fees to licensed persons. Most state laws prohibit the paying of referral fees to unlicensed persons. Federal law also prohibits this in most cases. This law is contained in the Real Estate Settlements and Procedures Act, passed by Congress in 1974. This act governs many real estate transactions in which the government is involved.
Referral fees often inflate the cost of real estate. In certain states, inactive salespeople can be paid referral fees, as well as salespeople who are considered active and are affiliated with a firm. Active salespeople 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.
Referral fees are paid from broker to broker rather than between individual agents. Referral agreements are paid between cooperating brokers. 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 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.
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(h) Paying and Receiving Referral Fees
Some licensees pay or receive referral fees. Typically, referral fees are paid by a licensee for receiving a ‘‘lead’’ which results in the licensee earning remuneration. A licensee might receive a referral fee for referring a client to another licensee or service provider if that client uses the services of that other person. The following are issues that licensees should be aware of related to the payment or receipt of referral fees.
Paying a referral fee to an unlicensed person
A licensee may pay an unlicensed person a referral fee as long as
- the unlicensed person does not solicit, for the purposes of making a referral, the names of persons who may want to acquire or dispose of real estate;
- the practice of making referrals is not the main business of the unlicensed person making the referral; and
- the unlicensed person making the referral does nothing else that would require them to be licensed (refer to the definition of ‘‘real estate services’’ in section 1 of RESA).
Those who intend to pay a referral fee to an unlicensed person have an obligation to first ensure that person satisfies the above criteria. Section 6-1 of the Rules prohibits the payment of any remuneration to an unlicensed person in relation to real estate services if that person is required to be licensed. For this reason, it is important that a brokerage has clear policies, and advises its licensees accordingly, with respect to the payment of referral fees. It may also be useful to obtain independent accounting advice with respect to any tax implications that may be associated with the payment of referral fees to unlicensed persons.
Paying a referral fee to another licensee
Licensees must only receive remuneration related to the provision of real estate services from the brokerage with which they are engaged. Therefore, any form of remuneration, including referral fees, must be paid to the related brokerage for disbursement to the licensee. No remuneration may be paid directly to the licensee. The definition of ‘‘remuneration’’ is very broad and includes any commission, fee, gain, or reward.
Disclosure that a referral fee is to be paid
Section 3-3(1)(f) of the Rules requires a licensee to disclose to a client ‘‘all known material information respecting the real estate services’’ being provided. If a licensee has agreed to pay a referral fee, that is a material fact which must be disclosed to the client. This is true whether the referral fee is to be paid to a licensee or to an unlicensed person.
The Council does not consider internal remuneration sharing arrangements to be matters which require disclosure under section 3-3(1)(f) of the Rules. This is true whether these internal arrangements relate to the manner in which remuneration is shared between a brokerage and its related licensees, or the manner in which remuneration is shared between licensees or with unlicensed employees of the same brokerage.
Mr. Seller, who wants to sell his home, is referred to Licensee Good by Ms. Referrer. Licensee Good would like to pay Ms. Referrer a referral fee for the ‘‘lead’’. Licensee Good must disclose to Mr. Seller the intention to pay a referral fee to Ms. Referrer, and the amount of that referral fee.
[06/19/2012 The following section was added to the Professional Standards Manual]
Section 5-11 of the Rules requires a licensee to disclose in writing to a client any remuneration the licensee anticipates receiving that is not to be paid directly by that client. Therefore, if a licensee is to receive a referral fee for referring a client to another service provider, be that another licensee or another person providing services related to real estate (e.g., a mortgage broker, appraiser, etc.), the licensee is required to disclose to the client the details of this referral. Those details include:
- the source (who is paying the referral fee);
- the amount, or if the amount is unknown, the likely amount or method of calculation of the amount; and
- any other relevant facts related to the referral fee.
Remuneration is a very broadly defined term, and includes any form of benefit, whether it be money or otherwise (e.g., mortgage points). All referral fees, benefits, and other forms of remuneration must be received through the brokerage with which the licensee is engaged.
Further, section 3-3 (1)(e) of the Rules requires a licensee to maintain the confidentiality of information respecting a client. This is consistent with privacy law which requires that a licensee not provide a client’s personal information to a third party without that client’s consent, or unless otherwise required by law to do so. In the course of making a referral, the type of information a licensee may be asked to provide to another licensee or service provider will vary. Some referrals may involve basic contact information (e.g. name and telephone number or email address) whereas some may require details concerning the client’s real estate, mortgage or appraisal requirements.
In all cases, the information must be treated as confidential and cannot be released to a third party without first obtaining the consent of the client. Licensees may find more detailed information on this matter at www.cio.gov.bc.ca/local/cio/priv_leg/documents/pipa/guidepipaview.pdf
Mr. Seller, a client of Licensee Good, wants to purchase a home in the market area worked by Licensee Best. Licensee Good refers Mr. Seller to Licensee Best on the understanding that Licensee Best agrees to pay Licensee Good a referral fee if Mr. Seller buys a home through Licensee Best. In order to comply with section 5-11 of the Rules, Licensee Good must disclose to Mr. Seller that he anticipates receiving a referral fee from Licensee Best if Mr. Seller buys a home through Licensee Best. He must also disclose the amount or the method of calculation of the amount. In addition, Licensee Good must also obtain Mr. Seller’s consent to providing Mr. Seller’s personal information to Licensee Best.
Referring a person who is not a client
Kelowna licensee Betty Best receives a call from Sally Seller about a home Betty has listed for sale. This is the only time Betty and Sally talk. During the course of the discussion, Sally tells Betty that she wants to sell her home in Fernie before moving to Kelowna. Sally asks Betty if she knows a good real estate agent in the Fernie area. Betty tells Sally about Jim Lister, a licensee friend in Fernie. Betty calls Jim to advise him of this, and the two agree that Betty will receive a $2,000 referral fee if Sally lists her home with Jim, and it subsequently sells. Sally lists her home for sale with Jim, the home sells, and Jim sends a $2,000 referral fee to Betty’s brokerage.
Must Betty disclose to Sally that she will receive a referral fee from Jim?
No. Both the common law and section 5-11 of the Rules require that a licensee must disclose to a client remuneration received as a result of providing real estate services to or on behalf of a client, whenever that remuneration is not paid directly by that client. ‘‘Client’’ is defined in section 1-1 of the Rules as ‘‘Client’’ means, in relation to a licensee, the principal who has engaged the licensee to provide real estate services to or on behalf of the principal. In this scenario, Sally is not a client of Betty or her related brokerage. She has not engaged Betty or her related brokerage to provide any real estate services. During the course of a single conversation, she has asked Betty if she knows a good real estate agent in Fernie.
Under these circumstances, Betty’s obligation to Sally is to act honestly and with reasonable care and skill (see section 3-4 of the Rules). Betty has no obligation to disclose to Sally that she will receive a referral fee from Jim if Sally lists her home for sale with Jim and the home sells.
Must Jim disclose to Sally that he intends to pay a referral fee to Betty?
Yes. Section 3-3(1)(f) of the Rules requires a licensee to disclose to a client all known material information respecting the real estate services being provided. By listing her home for sale with Jim and his related brokerage, Sally becomes a client who has engaged them to provide real estate services. Jim has agreed to pay a referral fee to Betty; that is material information which he must disclose to Sally. He must make this disclosure at a time when the information is relevant to Sally — that is before Sally agrees to enter into the listing contract. This timing is important because Sally does not have to agree to the payment of this referral fee. She may agree, or she may choose to list her home for sale with another licensee.
Receiving an unanticipated referral fee
Eileen Lots has a client, Dave Doer, who has just sold his home using Eileen and her related brokerage as his listing agent. Dave is interested in buying a property in White Rock, a market area that is not familiar to Eileen. He asks Eileen if she knows a good real estate agent in White Rock. Eileen refers Dave to Fred Finder and calls Fred to advise him of this referral. There is no discussion about a referral fee; Eileen neither requests nor expects to receive one. Several months later, a cheque from Fred’s brokerage arrives at the office of Eileen’s brokerage, accompanied by a note from Fred to Eileen saying ‘‘Thanks for the lead on Dave. He bought two properties through me. I appreciate the referral’’.
Must Fred disclose to Dave that he intends to pay a referral fee to Eileen?
Yes. Dave has engaged Fred and his related brokerage to provide real estate services to help him acquire properties in White Rock. Fred and his related brokerage have an obligation to disclose to Dave all known material information respecting the real estate services being provided. Therefore, Fred must disclose to Dave the fact that he intends to pay a referral fee to Eileen. He must do so before paying the referral fee. Dave may not agree, and may even suggest that if Fred is prepared to share his commission with someone, that someone should be Dave himself.
What, if anything, must Eileen disclose to Dave?
That depends. Assuming Dave has agreed to Fred’s payment of the referral fee, the answer to this depends on two factors: whether Eileen knew, or should have known, she was going to receive the referral fee, and whether Dave is still considered Eileen’s client when the referral is received.
A licensee can only disclose what he or she knows, or reasonably ought to have known at the relevant time. For example, if Eileen regularly referred clients to Fred and received referral fees for doing so, even though she did not discuss a referral fee with Fred on this occasion, she could reasonably expect to receive one. She must disclose that to Dave at the time she provides him with Fred’s name.However, if this was a ‘‘one off’’ referral to Fred, and, as the scenario suggests, Eileen had no reason to anticipate receiving a referral fee, there would be nothing to disclose at the time the referral was made.
If a referral fee is unexpectedly received, whether disclosure is required at that time is dependent on whether Dave is still considered Eileen’s client at the time of receipt. If the answer is ‘‘no’’; that is, neither Eileen nor her brokerage have been engaged to provide real estate services to Dave in the intervening period, nor is there an ongoing client relationship with Dave, then disclosing receipt of the unexpected referral fee is not required. However, if Eileen or her brokerage have been engaged by Dave to provide real estate services in the intervening period or they have an ongoing client relationship with Dave, disclosure of this referral fee, even though it was not expected, is required at the time of its receipt.
If Fred has made the required disclosure, Dave will have already agreed to the payment of this referral fee to Eileen, regardless of whether Eileen is required to disclose having received it. Eileen’s disclosure, if required, will verify information Dave has already been told by Fred.
If the situation dictates that Eileen must also disclose, this may seem an example of ‘‘too much disclosure’’. Why should Dave receive the same information from two different licensees? It is important to realize that Fred and Eileen have to disclose for different reasons. Fred’s obligation, both at common law and as described in section 3-3(1)(f) of the Rules, is to disclose to his client Dave everything material about the real estate services being provided. The fact that he intends to pay a referral fee to Eileen is material.
Eileen’s obligation, both at common law and as described in section 5-11(1) of the Rules, is to disclose to her client Dave remuneration she has received as a result of providing real estate services to or on behalf of him, when that remuneration has been paid by someone other than Dave.
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Referral’s are a part of any business, as they should be.
One hand washes the other!
Or how about, “you scratch my back, I’ll scratch yours!”
There are, however, rules and regulations in the Real Estate industry that all of us must follow…
Around this time last year, a man I had met through a past client came to my office for a “sit down.” He actually called me on the phone and said, “We need to have a sit down.” He was Italian, and not to adhere to the mafia stereotype, but I wondered if we were going to talk about whacking somebody…
We drank coffee in the boardroom at my office and he told me that he has a friend with five or six properties in the downtown core who is looking to divest himself of his holdings, and sail off into the proverbial sunset by returning back to Sicily and leaving his Toronto life behind him.
He asked me if I would be interested in working with this friend of his and assisting him with the sale of his assets.
Of course I would! That was a silly question, right?
But here was the catch-22: this man asked me if I would give him a percentage of my commission as a “referral of sorts” when I successfully sold some of these properties.
I knew it was too good to be true.
The Real Estate Council of Ontario has rules and regulations concerning referrals, and as a licensed Realtor, I have to follow them very strictly or I risk losing my license.
I told this man that I would have to check with my manager as to the exact process for handling referrals, but he wasn’t interested in this method.
“An envelope full of green is prettier than the Christmas tree in Time Square,” he said.
Okay, now this seemed a little sketchy. Once an envelope full of cash enters the equation, I start to consider this a suspicious transaction.
Under the Real Estate & Business Broker’s Act (REBBA), RECO’s Code of Ethics, Section 18 specifically states:
A registrant must disclose any direct or indirect financial benefit received from another person arising from services provided to the client, e.g., a finder’s fee or referral fee.
So technically, I could have paid a “referral fee” to the gentleman in the example above, but I would have to disclose this in the Agreement of Purchase & Sale and receive a signed notice of understanding from my seller.
But the man who was bringing me all this business didn’t like this arrangement. He asked me why I couldn’t just sell these houses after he introduces and recommends me, and then bring him cash.
Because while there are a ton of shady Realtors in the City of Toronto, I am not, and will never be one of them.
I’m entitled to write off any “referral fees” paid as expenses against my income for tax purposes, but likewise, this man would have to claim the referral fee as income. Inclusion of one and not the other would raise red flags at Revenue Canada, so no wonder this man didn’t like the arrangement I had to abide by legally.
In another section of REBBA concerning “Mortgage Finder’s Fees & Referral Fees”:
If, at any time a real estate registrant is going to, or likely to, receive compensation for “directing” prospective borrowers to a lender, FULL DISCLOSURE must be made to either one, or both of the parties to the real estate transaction.
Disclosure to clients must be in writing and clearly set out, not only that compensation may, or will be paid, to the real estate registrant, but the amount and any other relevant details.
Personally, I use one mortgage broker in particular because I know him, trust him, and I’ve always been pleased with his service.
But he doesn’t pay me a referral fee when I send him a client, although many brokers out there do.
The issue is: many Realtors don’t disclose to their clients that they are, in fact, receiving monetary compensation when their clients use a mortgage broker recommended by that Realtor.
Buyers or sellers should specifically ask their Realtor, “Are you receiving a referral fee or any monetary compensation from this mortgage broker you’ve recommended?”
If the Realtor answers, “yes,” then that buyer or seller should question when or if the Realtor was going to tell them that!
It’s a slippery slope, because what if that mortgage broker is not putting these buyers or sellers into the right mortgage product? They might want to get a second opinion, or perhaps use another broker altogether. The Realtor, with dollar signs in his eyes, may have his judgement (and integrity!) compromised if he were to recommend sticking with that broker and that mortgage product.
You might sight a conflict of interest with respect to any and all referral fees, but I think as long as it’s disclosed and agreed to by the clients in writing, then that supercedes any potential conflict that may arise.
Referral fees are an integral part of our free market economy, and when used responsibly, they can help forge business relationships that are beneficial and lucrative for many years to come.
But as with any benefit in any industry, there is always the potential for abuse.
If a Realtor recommends a home inspector or a lawyer, the same rules apply.
A renovator, interior designer, or even a home-stager all fall under the same guidelines.
If you recommend a cleaning lady, I’m not really sure if this falls into a grey area or if it’s worth bringing up at all…
But the old adage buyer beware is ever-present in these real estate transactions when third-parties are brought into the mix by the Realtors, and a buyer of a house would be better safe than sorry by asking the tough questions that simply need to be asked.
What if a buyer was having a home inspection performed on a house while a conditional deal was pending, and that home inspector was referred to the buyer by the Realtor? If a referral fee is part of the transaction, it is possible that maybe the home inspection could come out a little more favorable so as to ease the buyer’s worries regarding the condition of the house.
I’m just saying that buyers and sellers alike need to be aware of some of the rules that Realtors MUST abide by, and understand that not everybody likes playing by the rules.
I have dealt with some of the dirtiest, slimiest, shadiest Realtors in the course of the last five years, and I have reported many of them to RECO as is my right and obligation.
Last week, a client of mine found a condo for lease on Craigslist and brought it to my attention. The crazy part is – the Realtor who put the ad on the website was NOT the listing agent! I notified the real listing agent, and we both reported this man (working for HomeLife in Markham, no surprise) to RECO for unauthorized advertising, which breaches part of REBBA.
Caveat Emptor, ladies and gentlemen!
Everybody is out there to make a buck. But while some people tread carefully as to not cross the line, others stomp all over it…
So, you just passed the real estate licensing exam. Congratulations!
You’re on your way to an exciting and fulfilling career as a real estate agent.
While you’re busy getting business cards made and setting up your website, you’re probably wondering where your first — and second, and third — paycheck will come from.
The truth is that there are many possibilities, and each new agent’s sources will vary depending on their situation. That said, here’s an overview of some ways to make money as a new agent.
Yes, commissions are the number one way for agents to make money, and those in their first year are no exception.
While your sales are going to be fewer than the average number of homes sold by a real estate agent per year, you’ll still make some.
You can increase your gross commission income (GCI) by focusing on some key data points, like the number of leads you have and the rate at which you convert them, and maximizing your efforts in those areas. (See our GCI calculator for more information.)
The amount of your commission depends on the closing price, and the percentage is something you need to negotiate with your client. Generally, 6 percent is considered a typical commission rate.
Another big factor in the amount of your commission is how you split it with your brokerage or team leader, which can vary wildly between brokerages and teams.
One good option for new agents is to join a team where earnings are distributed, or commissions split.
In this type of setup, it’s a team effort to market and sell properties. Responsibilities can be assigned to different team members, and more properties can be managed than if there were just one agent handling all the duties.
Newer agents can get more experience with the myriad tasks involved with helping clients buy and sell homes, and be mentored by seasoned agents, while still earning some cash.
However you work toward earning commissions as you get started, one thing is clear: The more experience you have, the more money you’ll make.
And doing the actual work of buying and selling is the only way to get it.
While perhaps not a reliable source of income, an additional way that real estate agents make money is through various fees.
One of the most common source of fees throughout a real estate agent’s career is a referral fee. A referral fee is a percentage of the commission that an agent receives from a sale that they pay to another agent who referred the client.
It’s important that the percentage is something negotiated between the agents, and not given as an expectation of the referring agent, for the same reason that it’s important to negotiate — rather than dictate — your commission to your client.
There’s no standard for this percentage, either, but around 20 percent is a reasonable starting place for your negotiation.
As a new agent, you might be doing an extraordinary amount of networking, resulting in potential clients of all kinds getting in touch, including those who are outside your intended target market or area of expertise.
Rather than feeling like you need to try and serve these clients, consider passing along qualified clients (those that are pre-qualified and serious about buying or selling) to colleagues you know will be able to help them effectively.
Work with this new agent on a referral fee, and you all come out on top. The client gets a highly qualified agent who can help them, the agent you referred them to gets a new client and a commission, and you make a little cash.
On the flip side of this equation, as a newer agent who might be on the receiving end of a referral, there are things to keep in mind.
Mainly, don’t feel you need to take every referral you get. Just because you’re hungry for business doesn’t mean every client is a good client.
Be sure the client you’re being referred is qualified and evaluate them for your ability to effectively meet their needs.
For example, if you’ve mostly helped first-time buyers (and many newer agents have), and you’re getting a very experienced buyer looking for a second home as a referral, you might not be the best agent for them.
Other opportunities for collecting fees are from helping other busy agents with a showing or open house, if your brokerage allows it.
As with other fees or commissions, these fees are highly variable, and sometimes are treated as an exchange (“If you show this house for me today, I can cover you on the weekend…”).
For new agents, in addition to potentially picking up a few bucks for your trouble, you gain experience and a new connection.
And, the agent could end up throwing you the client if they’re too busy, or giving you a cut of the commission if the client you helped ends up buying that property.
Side hustles for real estate agent income
Many real estate agents supplement their income with related offerings, which can help them weather fluctuations in the market.
As a new agent, taking on one or more of these side hustles has the added benefit of giving you additional experience in the field, and potentially providing you with a specialty.
Possibilities for new agents include doing BPOs (broker price option) for banks or becoming a property or apartment manager, if the brokerage where you have your license allows it.
Other options include tapping into your past experience. For example, many agents put marketing on the back burner.
If your past work experience involved creating Facebook ads, setting up websites, or other marketing tasks, you can offer your marketing help to other agents for a fee.
Many of these additional areas of work require some study and certification, but they’re a great investment to boost your earnings early on — and into the future.
There would have to be a written and signed (by the brokers) agreement as to what is to be paid, for what type of transaction and for what period of time.
Example: Brokerage A will pay to brokerage B 25% of all transactions regarding said referal.
or. Brokerage A will pay to brokerage B 25% of commission involved with a sale
or Brokerage A will pay to brokerage B 25% of commission involved with a purchase.
I'm sorry you feel you are in the middle of this but in actuality all of this has to do with the BROKERS of the two agencies. Not you, not the sales associates but the brokers of the company.
If your relative has a signed referral agreement with the other agent/firm, that agreement will rule.
And tell your family member to have a very nice Thanksgiving, at someone else's house.