Legal? Illegal? Paying Someone a Referral Fee for Finding a House
The May/June issue of Washington Realtor, www.warealtor.org (the article is not online) included the following article on “Incentives: What You Can Legally Offer”. It is item “b” that is of interest. My interpretation of this is that it is illegal to pay referral fees to a non-licensed agent, however, the Department of Licensing does not enforce it unless they feel like it.
Long story short…. Paying a referral fee for someone that locates a property for you to buy, is illegal, but not enforced, unless the authorities are having a bad day and want to terrorize people just trying to make an honest living.
1. Paying Rebates and/or Referral Fees.
a) Payments from Realtor to buyer or seller.
There are no state or federal prohibitions or limitations on the amount of money or incentive that an agent can pay to either the buyer or the seller in the transaction. It is the buyer and! or seller who pay a real estate commission, so if a REALTOR gives part of it back, the REALTOR is actually just charging a lower commission. That is lawful.
There is nothing wrong with an agent running an advertising campaign and offering to pay some amount of cash toward buyer’s or seller’s closing costs, to give a gift certificate to buyer or seller or to make a charitable donation in buyer’s or seller’s name. If a gift is given to a buyer, buyer should be reminded to make note of that gift on buyer’s loan application to avoid any allegations of lender fraud.
b) Payments from REALTOR to a third party referral source.
Both state and federal law restrict the payment of a referral fee to an unlicensed third party, although it is not clear if either jurisdiction will enforce the restrictions.
(i) State Law.
The Department of Licensing describes the practice of promising to pay a gift to an unlicensed person as unlawful under Washington law. However, under existing Department practices, it is not likely that this conduct will be prosecuted because it does not harm consumers. At its core, the Department of Licensing is a consumer protection agency. While the strict language of the Licensing Law prohibits an organized and advertised plan to pay a referral fee to an unlicensed third party, the Department believes that this conduct causes no harm to consumers.
With limited resources available to prosecute real estate agent misconduct, the Department is likely to expend its prosecution efforts on violations that result in harm to consumers. That is the current stated position of the Department. It could change.
If the referral fee is paid spontaneously-in other words, agent had not promised to pay a referral fee in exchange for the giving of a referral-then the Department’s position is that it is lawful to pay such a referral fee.
(ii) Federal Law.
RESPA, a federal law (“Real Estate Settlement Procedures Act”), dictates that any payment made to another settlement service provider (except a licensed broker or agent), in direct exchange for a referral, is prohibited. The definition of “settlement service provider” seems to be broad enough to include unlicensed, third parties. Nevertheless, payment of referral fees to friends and past clients is a practice in which many agents engage across the country. It does not appear that HUD prosecutes agents for this practice. It may be that HUD does not prosecute real estate agents for the payment of referral fees to third parties because, like the Department of Licensing, HUD believes there is no harm to consumers from this action. Or, it could be that HUD’s prosecution resources are dedicated to other violations and HUD will prosecute agents for these payments when resources become available. If HUD has reason to believe that such payments result in a higher fee to a consumer, HUD will be more likely to prosecute. If a REALTOR chooses to offer referral fees to unlicensed third parties, REALTOR should consult with their broker and! or legal counsel and determine to proceed only in conjunction with broker’s permission.
c) Payments from Seller to Buyer or Buyer’s Agent.
Of course, there are no restrictions on sellers offering incentives to buyers. Sellers can offer buyers any amount of price reduction, in the form of a cash payment or the giving of a gift. Sellers can offer to pay closing costs, give a vacation, award a carpeting allowance, or anything else. Buyer must be certain to notify buyer’s lender of any intended gift or cash contribution from seller. If a gift is deemed excessive by a lender, lender may limit buyer’s ability to take the gift or cash payment from seller. However, the offering of the incentive is never unlawful. As a reminder, if seller offers an incentive in a listing printout or other advertisement, buyer must include the incentive in the written purchase agreement or seller will have no obligation to give the incentive.
It is lawful for seller to offer an incentive to a buyer’s agent. However, if an incentive is offered from seller to the buyer’s agent, buyer’s agent must disclose the gift or incentive to buyer. This disclosure is necessary to avoid conflicts of interests or conflicts of loyalty between buyer and buyer’s agent.
Moreover, Washington law requires that all compensation for real estate services be paid by a consumer, only to a broker. Accordingly, the incentive cannot be given directly to buyer’s agent. Incentives must be paid through buyer’s broker.
