Hire recruits as finders today, licensees tomorrow
Very few new licensees are entering the real estate industry as the Department of Real Estate (DRE) drastically reduced the availability of the state exam in response to the pandemic. Read on to learn how licensed brokers and salespersons properly employ aspiring agents as finders, set limits on their conduct with potential clients they locate, and oversee their licensing education as a strategy for long-term, fee-generating business when licensing is not possible for months to come.
It takes a crisis to enlighten offices
On March 18th, 2020, the Department of Real Estate (DRE) stopped administering the salesperson and broker licensing exams – a reality never experienced in California.
Cessation of the state exam was implemented piecemeal, then fully in response to Governor Gavin Newsom’s call to limit large gatherings to reduce the spread of the coronavirus.
Effective May 1st 2020, the DRE began tentatively administering a handful of exams in small groups of 10 to comply with physical distancing guidelines. Due to the reduced exam attendance size, availability is extremely limited. Thus, though the exams are available to a scant number of lucky individuals, they are still effectively still unavailable to the vast majority of aspiring agents.
Traditionally, new licensing activity is high when the outlook for housing is good and correspondingly low during rough economic patches. But this time is different – many aspiring agents simply CANNOT today get a license from the DRE, regardless of economic outlook.
Though it is not known how long exam availability will remain direly restricted, one thing is clear – there will be far fewer newly licensed agents entering the California real estate market well into the foreseeable future.
So what is a brokerage office in need of new talent to do?
Finders, reintroduced from good times past
Those with a desire to enter the real estate profession – aspiring agents – do not need to be licensed by the DRE so long as their conduct with members of the public remains limited to that of a finder. Finders are not controlled by DRE law and regulations – rather, finders are control by California law. Thus, finders are not real estate licensees – they are unlicensed agents-in-training.
Recall that licensed brokers and sales agents employed by principals owe fiduciary duties to the principals they represent. Fiduciary duties require licensees to perform on behalf of their clients with the utmost care and diligence.
Learn more about Finders
An unlicensed finder has no such fiduciary duty due to the nature of their work for a broker and does not act in the same capacity as a licensed agent or broker employed by a broker. A finder is someone who identifies and refers potential real estate clients or participants to a broker, agent or principal in exchange for a fee. Essentially and importantly – they feed new business to a brokerage office or team for a fee.
Today, a brokerage needs to call on alternative rules and methods for generating business, particularly in times of decreasing real estate activity with no new agents to generate fees (and fill cubbies when the pandemic is past). If not, their business model will produce insufficient numbers of new clientele to provide enough earnings to keep them from being driven out of the real estate brokerage profession. The employment of unlicensed finders/locators of buyers, tenants and owners who want to sell or lease will extend operations for a brokerage business to bring earnings to a level sufficient to sustain their sought-after standard of living.
State and federal regulations on this arrangement are straightforward making compliance easy to achieve. Critically, as distinguished from hiring a licensee, limitations are placed on the conduct of a finder. 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)]
Until the DRE finds the risk presented by the global pandemic has subsided and aspiring agents are able to once again test and be employed as licensees in the real estate industry, finders are the source of new talent that would otherwise be licensed employees for any brokerage. Thus, as part of a strategy for generating business, an unlicensed finder on behalf of a broker or agent, may:
- be recruited and immediately hired under a written contract of employment [See RPI Form 115];
- begin work locating and introducing transaction participants who need real estate services to licensees at the brokerage office, functioning as a “runner” or “gopher” while bonding with the brokerage office as part of the team;
- study and train to be licensed by enrolling in the three DRE-approved statutory pre-licensing courses needed to qualify for the salesperson exam while getting practical experience;
- pass the state exam once it is made available in sufficient volume by the DRE; and
- restructure their employment with the brokerage office on becoming a DRE licensed salesperson, taking on the rather demanding fiduciary duties a licensee owes to clients. [See RPI Form 505 and 506]
The formula is deceptively simple: hire – work – study – license – promote.
Further, like any unlicensed employee of a broker who is a member of the California Association of Realtors (CAR), a finder does is not required to be member. This type of agent, the finder, saves some $700 annually, the amount depending on the local association and whether the broker actually is a member.
Related reading:
Finder’s fee agreement
Brokers hire all employees under written contracts of employment, including:
- licensed agents and broker-associates; and
- unlicensed staff.
Written contracts are entered into with the purpose of clearly delineating the responsibilities each participant has undertaken, and the scope of an employee’s duties. Provisions limit an employee’s conduct to what regulations allow for their licensed or unlicensed status. [See RPI Form 115, 505, 506 and 510]
The Finder’s Fee Agreement published continuously since 1978 by RPI is used by a broker, broker-associate or agent when they employ an individual to locate, solicit and refer or identify persons who need the services of the broker, to document the terms of the employment. [See RPI Form 115]
The Finder’s Fee Agreement provides for:
- the identity of the prospective client;
- a description of the real estate involved, if applicable;
- the compensation due the finder; and
- the conditions under which the referral fee is earned by the finder. [See RPI Form 115]
The Finder's Fee Agreement: A closer analysis
Individuals employed by a broker or salesperson generate business to be serviced by the broker and their licensed agents. Thus, they are paid for their activity as limited. The finder does not have the freedom, by contract, to refer a prospect to just any broker. They are employed and work for a single brokerage business. [12 CFR §§1024.2(b), 1024 Appendix B, examples 11; Zalk v. General Exploration Co. (1980) 105 CA3d 786]
The writing memorializes the agreement as documentation against memories to the contrary, and is in conformance with DRE regulations controlling the employing broker. [Grant v. Marinell (1980) 112 CA3d 617; see RPI Form 115]
Generally, a finder’s fee is a lump sum amount or a percentage of the fee received by the broker on a transaction which is closed due to the finder’s referral. Only sound economics control the amount of the fee a broker, agent or principal should pay a finder for a lead. Also, no limit is placed on the volume of referral business conducted by a finder.
For instance, a broker can compensate their finder with:
- a salary;
- a percentage fee; or
- a fixed fee per closing. [See Form 115 §5; Zalk, supra]
Further, while brokers may collect DRE-approved advance fees from principals, finders may not. Advance-fee operators, masking themselves as finders for principals, sometimes collect fees “up front,” a prohibited activity for an unlicensed individual. [Bus & P C §10131.2]
Finder referrals and limitations
A finder in California may:
- find and introduce parties;
- solicit parties for referral to others [Tyrone v. Kelley (1973) 9 C3d 1]; and
- be employed by principals or brokers.
However, a finder may not:
- take part in any negotiations [Bus & P C §10131(a)];
- discuss the price;
- discuss the property; or
- discuss the terms or conditions of the transaction. [Spielberg v. Granz (1960) 185 CA2d 283]
A finder who crosses into any aspect of negotiations or disclosures arising in a real estate transaction first needs a real estate license as they are both soliciting and negotiating. Unless licensed, an individual who enters into negotiations (supplying property or sales information) are barred from collecting a fee for services rendered — even if they call it a finder’s fee.
Additional rules and regulations
The finder is subject to a penalty of up to $20,000 and/or a six-month jail term for engaging in controlled brokerage activities without a license. [Bus & P C §§10137, 10139]
In addition, a broker who permits an unlicensed employee to perform any type of “licensed” work may have their license suspended or revoked. Property managers are aware of this situation since they hire unlicensed individuals to do all sorts of work with owners and tenants beside referrals. [Bus & P C §§10131, 10137]
Anyone may be a paid finder, unless barred by professional regulations, codes of ethics or conflict-of-interest policies controlling the individual’s conduct. This category includes other licensees such as attorneys, accountants and others who by their services rendered under those licenses or for their employer have a conflict of interest.
A finder who crosses into any aspect of negotiations or disclosures arising in a real estate transaction first needs a real estate license as they are both soliciting and negotiating. Unless licensed, an individual who enters into negotiations (supplying property or sales information) are barred from collecting a fee for services rendered — even if they call it a finder’s fee.
The finder is subject to a penalty of up to $20,000 and/or a six-month jail term for engaging in controlled brokerage activities without a license. [Bus & P C §§10137, 10139]
In addition, a broker who permits an unlicensed employee to perform any type of “licensed” work may have their license suspended or revoked. Property managers are aware of this situation since they hire unlicensed individuals to do all sorts of work with owners and tenants beside referrals. [Bus & P C §§10131, 10137]
Anyone may be a paid finder, unless barred by professional regulations, codes of ethics or conflict-of-interest policies controlling the individual’s conduct. This category includes other licensees such as attorneys, accountants and others who by their services rendered under those licenses or for their employer have a conflict of interest.
Upgrade your finders to sales agents
The end goal of hiring an aspiring agent as a finder is to eventually employ them permanently as a DRE licensee. When licensed, they join the team as a fully functional licensee able to carry out disclosures and negotiations on behalf of the broker and their clients.
Brokers interested in employing an aspiring agent can hire the individual immediately as a finder and start them producing income for the finder and the broker. Concurrent with being hired as a finder, the prospective agent enrolls in the DRE-mandated pre-licensing coursework and begins their studies.
Pre-licensing coursework and exam prep with firsttuesday
To qualify for the state exam, an aspiring agent completes three pre-licensing courses:
- Real Estate Principles;
- Real Estate Practice; and
- one elective course, such as Legal Aspects of Real Estate.
Each course has a minimum 18-day enrollment period in which the finder studies before they may take the final examination for that course. Thus, it takes a total of at least 54 days before the aspiring agent is able to complete all three courses and apply for the state exam, provided testing has been made available by the DRE. The sooner this educational process is started, the sooner the finder becomes eligible to apply to the DRE for testing and licensing.
Further, state exam training tools are recommended to best prepare and ensure the finder will pass the state licensing exam on their first attempt.
Editor’s note – first tuesday provides the critical educational requirements plus numerous exam preparation options here.
Once the finder passes the state exam with a 70% or greater and processes the appropriate DRE paperwork, they are issued a salesperson license – graduating from an aspiring agent and finder to a licensed agent.
The finder-turned-licensee and broker enter into a different employment agreement reserved for licensees. Like the use of a Finder’s Fee Agreement, a real estate broker is required to have a written employment agreement with each person acting on their behalf. The agreement covers the material aspects of the employment relationship between the broker and their sales agents (or broker-associates).
Realty Publications, Inc. (RPI) publishes two employment agreements used by a broker employing a licensee to perform agency duties on the broker’s behalf. These employment agreements are:
- Sales Agent and Broker-Associate Employee Agreement [See RPI Form 505]; and
- Independent Contractor Employment Agreement — For Sales Agents and Broker-Associates. [See RPI Form 506]
When acting as an agent of the broker, the licensee represents their employing broker, and never acts independently. [Calif. Civil Code §2079.13(b)]
The upgraded powers of your finder-turned-agent
Now fully licensed and under contract as an employee of a broker, the agent may use their negotiating and counseling skills which were previously prohibited when unlicensed and acting as a finder, such as the ability to:
- conduct due diligence investigations into a subject property;
- negotiate on behalf of the client;
- evaluate the financial impact of a proposed transaction;
- advise on the legal consequences of documents which affect a client;
- consider the tax aspects of a transfer; and
- review the suitability of the client’s exposure to a risk of loss.
Thus, the process of recruiting an aspiring prospective agent as a finder and grooming them to professional maturity provides two key benefits for a growing team:
- the aspiring agent obtains their professional objective as a qualified licensed agent; and
- the employing broker improves their staff with the addition of a new licensee – one who has been vetted, branded and grown fully compatible with the broker’s office policies and culture as a team member while working as a finder.
Summing it up
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