- Referral programs can potentially create legal risks for brokerages and people making the referrals.
- California state law and federal law allow the practice under certain conditions.
- Some state laws may prohibit it.
Open Listings, an Internet-based brokerage that helps homebuyers “shop without an agent” in Los Angeles and San Francisco, was recently offering to pay $500 to anyone referring a client who then bought a home with the brokerage. The company has since ceased offering the “finder’s fee.”
The offer shed light on a client acquisition strategy that could potentially bear fruit for brokerages in some states, but that also can create legal risks under federal and state laws, according to attorneys and a regulator.
Companies that offer finder or referral fees must carefully navigate laws that govern who can receive a fee and under what circumstances. The laws vary from state to state, and federal laws are murky when it comes to some types of referral fees.
Jonathan Schley, a broker at Open Listings, emphasized that Open Listings was offering “finder’s fees” for introductions to buyers, not “referral fees,” “which can imply brokerage or employment arrangement,” he said.
Open Listing’s Web page about the offer encouraged people to invite friends to use Open Listings and “Get $500 for each friend who buys with us.”
Open Listings removed Web pages associated with the offer following inquiries from Inman. The offer previously had a dedicated Web page with a link to terms and conditions.
The offer was only in “soft launch” and hadn’t been promoted by Open Listings, co-founder and CEO Judd Schoenholtz told Inman before Open Listings removed Web pages associated with the offer.
Asked to comment on Open Listing’s decision to remove the offer, Schoenholtz said, “We’re working to launch a program that helps our awesome community of homebuyers share Open Listings with their friends and colleagues.”
Some agents shake their heads at the thought of shelling out cash to non-agents for referrals, arguing that the practice raises clear legal risks.
“I can’t imagine any licensee/brokerage willing to risk their license,” said Andrea Geller, a Chicago broker, commenting on the practice in the Facebook group Inman Coast to Coast.
But others question why paying individuals for referral fees, which are paid only if a transaction results from an introduction, should be any less acceptable than paying companies for leads, which are paid upfront.
“If we pay Zillow, realtor.com, etc., for leads, then why can’t we pay ‘people’ for leads? Isn’t this the same?” asked Fred Glick.
Open Listings provides homebuyers a commission rebate of 50 percent, ranking among a growing number of alternative brokerages that use innovative technology and business practices to offer discount rates to consumers.
Buyers who work with Open Listings are largely responsible for finding a home themselves, but they can use the Internet-based brokerage to request showings (if the buyer can’t see the home at an open house) and make an offer online. Clients can also tap a team of experts for guidance throughout a transaction.
Demonstrating a focus on innovation, the brokerage recently debuted a search-by-commute-time property search tool and began offering free consulting to businesses that want to provide homebuyer assistance to employees.
Referral fee or finder’s fee?
Open Listings had only soft launched the offer, which its terms and conditions had referred to as a “referral program,” and the offer hadn’t been promoted yet, said Schoenholtz.
“We are offering a finder’s fee, not a referral fee, and need to be clear about the difference as we promote publicly,” Schley had emphasized when the offer was posted.
The offer’s terms and conditions stated that, “As a licensed real estate brokerage in the state of California, Open Listings can pay a referral fee or finder’s fee to a nonlicensee or nonlicensed person for an introduction or referral. The introduction must be the extent of the finder’s involvement, as a nonlicensed finder cannot be compensated for any activity for which a license is required (California Business and Professions Code 10130-10149).”
‘If it walks like a duck …’
Case law in California has established the concept of a “finder” — a nonlicensed person who under certain conditions could earn a referral fee for introducing a person to a real estate business — but the definition of a “finder” is “very narrow” and “very nuanced,” said Tom Pool, legislative liaison at the California Bureau of Real Estate (CalBRE).
He said that a brokerage that pays a fee to a nonlicensee for referring a buyer who purchases a home with the brokerage would appear to be paying a referral fee to the nonlicensee, in which case CalBRE would investigate the transaction. “If it walks like a duck and talks like a duck, it’s a duck,” he said.
Brokerages can pay fees to nonlicensees for referrals under California state law if they don’t engage in activities with the referrals that require a real state license, according to Pool. Federal law places further restrictions on the practice, prohibiting a brokerage from paying nonlicensees for referrals who buy a home with a federally backed mortgage, according to Gov Hutchinson, assistant general counsel at the California Association of Realtors (CAR).
Toeing the line
Brokerages who pay for referrals from nonlicensees could inadvertently break California state law if the nonlicensee referring a buyer solicited the buyer, according to Pool. Soliciting buyers of real estate is considered a licensed activity in California, he said.
“If you’re paying someone who’s unlicensed, the question that needs to be asked is, ‘What did that person do to earn the fee?” Pool said. “If it was a mere introduction, you’re OK. If there was any kind of extra solicitation done to drum up that referral business, it’s illegal.”
The terms and conditions of Open Listings’ referral program appeared to acknowledge this, stating that Open Listings could void a referral fee if a person referred “customers using spam, display advertising, sponsored links, unsolicited emails, or links on message boards, or forums.”
But disclosures alone won’t absolve a brokerage of legal liability should the brokerage accept a referral from a nonlicensee who engaged in activities with the referral that required a real estate license, Pool said.
In that scenario, both the brokerage and the nonlicensee could be subject to enforcement actions, Pool said.
He added that “best practices would dictate” that any agent or brokerage that pays a fee to nonlicensees for a referral should disclose to the referral that they were referred for a fee.
While paying non-agents for referrals can be legal under California state law, many other states prohibit the practice.
In Ohio, for example, only a real estate licensee “can be paid for referring prospects to another licensee,” according to state law, said Lindsey Burnworth, public information officer at the Ohio Department of Commerce.
That’s the reason why Northwood Realty Services, a brokerage operating in Ohio and Pennsylvania that’s also seeking to tap people’s spheres of influence for referrals, requires people who sign up for its “social agent” program to get real estate licenses before sending business its way.
Letty Fuentes, an agent based in San Antonio, Texas, claims that in her state, “The only gift referral fee we can give a nonlicensed person is $50 in the form of a gift card ONLY, not cash.”
Even in states where paying nonlicensees for referrals is legal under certain conditions, federal law outlined in the Real Estate Settlement Procedures Act (RESPA) imposes further restrictions on the practice, according to CAR’s Gov Hutchinson.
RESPA prohibits any “person” from giving or accepting any “fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federal relate mortgage loan shall be referred to any person.”
Paying for referrals from nonlicensees may be outright illegal in some states. And brokerages who engage in the practice in states where it can be legal should do the following:
1. Make sure the nonlicensee they are paying a referral fee to hasn’t engaged in activities with the referral that requires a real estate license.
2. Only pay the referral fee if the referral buys a home in cash or buys a home with a mortgage that isn’t backed by the federal government.
“You better do your due diligence before you cut that check,” Pool said.
‘Disintermediating the finder from the process’
If a California brokerage paying nonlicensees for referrals does do its homework, the growth strategy could potentially pay dividends in some housing markets, Hutchinson said.
“There is a lot of cash out there” in San Francisco — one of the two markets where Open Listings operates — Hutchinson noted.
“It’s not so different than the way a traditional buyer may refer a friend to a traditional broker and receive a finder’s fee; we’re just making it a part of our continued goal of creating the most efficient transaction,” said Schley, the broker at Open Listings, of Open Listings’ referral offer before the brokerage pulled the offer information from its website.
“Our method, in actuality, makes all parties safer in complying with the legal aspects of a transaction by disintermediating the finder from the process,” he added.
In New York, doormen and property managers commonly circumvent rules prohibiting non-agents from referring business to agents or brokerages for a fee by obtaining real estate licenses, according to Derek Eisenberg, president of Continental Real Estate Group, a brokerage covering the New York City area.
“All there is is graft to Albany for a worthless license,” he said. “That’s why referral fees should be legal and RESPA should be thrown in the trash. Replace them both with a mandatory disclosure law perhaps. …”