In the broker’s hands

The only person permitted to receive compensation — fees — in a real estate transaction or for related services is a licensed broker. An agent involved in a transaction receives compensation directly from their employing broker. [Calif. Business & Professions Code §10137]

A broker may not compensate anyone for real estate-related activities requiring a license who is not employed by the broker at the time of payment and is not licensed by the California Department of Real Estate (DRE). [Bus & P C §10137]

When the transaction involves the origination of a mortgage, things get a more nuanced. Under the Real Estate Settlement Procedures Act (RESPA), when the broker or their agent involved in such a transaction already acts as a transaction agent (TA) for a fee, the broker may not give or receive a referral fee — with two major exceptions. [24 United States Code §2607(a); 12 Code of Federal Regulations §1024.14(b)]

The two exceptions in consumer mortgage transactions which allow fee sharing include:

  • referral fees paid to or received from other brokers (not in the broker’s employ), excluding any fee from a mortgage broker or lender who processes or originates the consumer mortgage [12 CFR §1024.14(g)(1)(v)]; and
  • fees paid by an employing broker to their licensed sales agents, broker associates or unlicensed finders — which excludes any other person connected with the consumer mortgage transaction. [12 CFR §1024.14(g)(1)(vii)]

Similarly, the DRE limits fee splitting to:

  • payments between brokers (who then split the fee with their employees); or
  • payments by a broker to their employees, licensed or unlicensed. [Bus & P C §§10130 et seq.]

Related video:

Referral Fees Between Brokerages

Thus, a licensed agent may only receive a fee or other compensation for acts requiring a DRE license if they are employed by a broker.

From the broker to their agents

Although an employing broker is in direct control of fees received by their sales agents, an agent may instruct their employing broker to pay some or all of an earned fee to another entity or individual, such as:

  • a corporation owned by the employed licensee;
  • a creditor of the agent; or
  • an unlicensed entity or individual who has not engaged in any licensed activity. [Bus & P C §10137]

A fee is considered earned when the licensee performs licensed real estate activity on behalf of their employing broker. Even when an agent agrees to give up their share of a fee, their employing broker disburses the compensation, not the agent.

In addition, when the broker pays the agent’s fee to a corporation owned by the sales agent, the corporation may not contract with the employing broker to render the services of the agent.

An escrow company may distribute an agent’s share of the brokerage fee on behalf of the broker when authorized to do so. A broker may also authorize the escrow company issue a check directly to someone who did not perform acts for which a license is required. In the interest of transparency, the escrow company needs to disclose any disbursement authorized by a broker to all participants. [Bus & P C §10138]

Out with the old, in with the new

Real estate agents often seek new employment opportunities with different brokers for numerous reasons, such as:

  • higher splits and marketing support;
  • better training and offices; or
  • closer proximity to geographic locations in which the agent has marketed their brand.

However, an agent may not be employed by two brokers at the same time — all licensed activity by the agent needs to be directed and controlled by one responsible employing broker.

Since only an agent’s employing broker may compensate them for licensed activities, an agent who leaves one employing broker to work for another may only be paid by their new broker. The agent’s prior employing broker will send any compensation owed the agent to their new employing broker. [Bus & P C §10137]

Upon receipt, the current broker either:

  • hands (endorses) the check to the agent; or
  • pays the agent their share of the fee as stated in their employment agreement. [Bus & P C §10137]

When a real estate agent formerly employed by a broker is not presently employed by a different broker, the broker may directly pay the fee to the agent. [See “Unlawful Employment and Payment of Compensation,” DRE Real Estate Bulletin, Spring 2012, Page 1]

Conversely, a licensed broker acting as an agent on behalf of a broker –– a broker-associate –– may perform licensed activities for multiple brokers simultaneously, unless prohibited by their employment contracts. [Department of Real Estate Regulations §2726; Bus & P C §10132; See RPI Form 505 and 506]

A broker-associate may be compensated by either their former or current employing broker. However, the broker-associate’s compensation needs to comply with the terms of their current employment agreement.

Sharing is caring

A real estate licensee may share or split their earned fee with any unlicensed entity or individual not in their employ, provided:

  • the fee sharing does not involve a consumer mortgage transaction [12 CFR §1024.14]; and
  • the person or entity receiving the shared fee has not engaged in any activity requiring a real estate license. [Bus & P C §10137]

Commonly, unlicensed participants in real estate transactions are finders who identify and refer potential real estate clients or participants to a broker, agent or principal in exchange for a fee. This fee is always paid by the broker, since the finder is considered to be in the employ of the broker, even when hired by a sales agent. [See RPI Form 115]

However, an individual performing acts that require a real estate license needs to be a licensee to receive a share of the fee. For example, a broker employing a licensed assistant who oversees a portion of the broker’s duties may share their fee with the assistant as compensation. This is not the case for an unlicensed individual.  [Bus & P C §10137]

The unlicensed finder

Licensed brokers and sales agents owe fiduciary duties to the principals they represent. Fiduciary duties require licensees to perform on behalf of their client with the utmost care and diligence.

An unlicensed finder has no such fiduciary duty. A finder’s function as an “agent” is limited to soliciting, identifying and referring potential real estate clients or participants to brokers, agents or principals in exchange for the promise of a fee. [See RPI Form 115]

The conduct of a finder comes with several limitations. For starters, a finder lacks legal authority to participate in any aspect of property information dissemination or transactional negotiations. [Tyrone v. Kelley (1973) 9 C3d 1; 78 Attorney General Opinion 71 (1995)]

For the most part, anyone may be a paid finder — unless they are barred by professional regulation or conflict-of-interest policies controlling an individual’s conduct. A licensed sales agent, for example, is employed to conduct licensed real estate activities on behalf of their broker, not others. In turn, only their broker receives any fee generated by their agent’s real estate activities, and splits it with the agent under the terms of their written employment agreement. [Bus & P C §10132; DRE Regs §2726; See RPI Form 505 and 506]


Finder’s entitlement to a fee

A finder is entitled to a fee as an unlicensed individual if they solicit, locate, place, introduce or deliver names of prospective clients to a broker or principal. [Tyrone v. Kelley (1973) 9 C3d 1]

A finder’s fee agreement needs to be in writing and signed by the principal who employed the finder. Otherwise the finder won’t be able to enforce their fee agreement with the principal. [Calif. Civil Code §1624(a)(4)]

However, the principal’s use and benefit of a finder’s referral under an oral finder’s fee agreement, such as closing a sale with an individual referred by the finder, will substitute for a written agreement. [Tenzer v. Superscope, Inc. (1985) 39 C3d 18]

This substitution-for-a-writing rule does not apply to brokers employed by a client. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]

Finders are also entitled to a fee for referrals under RESPA, dependent upon the relationship of the finder to the broker promising the fee.

An unlicensed person, such as a friend or past customer, who provides a referral to a broker or their agent is considered an unlicensed finder. However, on a RESPA-controlled transaction, the unlicensed finder needs to be under contract as an employee of the broker to receive a finder’s fee. [See RPI Form 115]

Thus, a bona fide employee of a broker is allowed to collect a fee or salary from their employer-broker — since employed individuals are exempt from RESPA’s referral fee prohibition.

This article was originally posted December 2014, and has been updated.