This article discusses a broker’s or his agent’s use of finders to locate sellers, buyers or borrowers, and presents the finder’s fee agreement along with instructions for an agent’s use of the form.
Agency relationships in real estate transactions
Three classes of real estate “agents” have been established in California:
· licensed brokers;
· licensed sales agents; and
· unlicensed agents, called finders.
Licensed brokers and agents owe fiduciary duties to the principals they represent. Fiduciary duties require licensees to perform on behalf of their client with utmost care and diligence.
A finder has no such agency 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.
A finder working for a principal is distinguished from a licensed broker working for a principal. Limitations are placed on the conduct of a finder. A finder lacks legal authority to participate in any aspect of property information dissemination or other transactional negotiations. [Business and Professions Code §§10130 et seq.]
Although not licensed by the California Department of Real Estate (DRE) or admitted as members of a real estate trade association, finders are authorized by statute to solicit prospective buyers, sellers, borrowers, lenders, tenants or landlords for referral to real estate licensees or principals. Thus, they provide leads about individuals who may become participants in real estate transactions.
A finder is entitled to a fee as an unlicensed individual if he solicits, locates, places, introduces or delivers up names of prospective clients to a broker or principal. [Tyrone v. Kelley (1973) 9 C3d 1]
Implementing the finder relationship
Finders are often individuals who are employed by large companies. Their work makes them privy to information on other employees who are relocating and will most likely need to sell or buy a home. They, in turn, pass this information on to a broker or an agent employed by the broker.
A finder is, in essence, a type of “middleman.” He locates or has knowledge of potential buyers, sellers and other prospective clients or participants in real estate transactions and places them with an agent either by referring them to the agent or providing the agent with the lead. Once brought together by placement or referral, the parties are left to negotiate their real estate related arrangements apart from the finder. [Tyrone, supra]
For example, an individual employed in a corporate personnel department agrees to provide a loan broker with a list of people moving into the area. The broker believes many of the referrals will be purchasing a new home and will likely need financing. The list is not a trade secret of the individual’s employer and the release is not in conflict with company policy.
In exchange, the loan broker will pay the individual a percentage of the fee the broker receives from each loan closed with any of the leads developed from the referrals.
The individual referring potential clients to the broker is not licensed by the DRE to render brokerage services for a fee.
Can an individual who is not licensed by the DRE earn a fee when a loan transaction results from his referral?
Yes! The nonlicensee is a finder, exempt from real estate licensing laws as long as he restricts his solicitation activities to the single act of placing (introducing) or referring a borrower or a trust deed investor to the loan broker. [Tyrone, supra]
Since the finder is performing a single act (the referral) in a transaction which requires financing, no Real Estate Settlement Procedures Act (RESPA) violation has occurred by the payment of a fee.
Conversely, the same loan referral fee paid by a lender to a licensee participating as an agent in a single-family residence sale would be a violation of RESPA since the referral is not the only service the agent provides the borrower.
The finder’s fee: the bargained for exchange
Generally, a finder’s fee is a lump sum or a percentage of the fee from a transaction which is closed due to his referral. Only sound economics controls 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 loan broker can compensate his finder with:
· a salary;
· a fee based on a percentage of the loan; or
· a lump sum basis per closing. [Zalk. v. General Exploration Company. (1980) 105 CA3d 786]
Also, while brokers may, finders may not collect advance fees from principals. 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]
Who qualifies as a finder?
Anyone can be a finder, unless barred by professional regulations or code-of-ethics or conflict-of-interest policies controlling an individual’s conduct.
CPAs are barred by regulation from being finders and receiving a fee for the referral of their clients to others. [16 Calif. Code of Regulations §56]
A finder who advertises to locate leads he will place or refer to a broker or principal must not hold himself out as also rendering services which require a broker’s license. [Bus & P C §10139]
Thus, a finder may advertise as a “referral service.” He may state he will place. an interested party with a broker or principal, or refer. a principal to a match sought for a real estate transaction.
Soliciting to place or refer a match
A finder providing referral services for a fee may:
· find and introduce parties;
· solicit parties for referral to others [Tyrone, supra]; and
· be employed by principals or brokers.
A finder may not:
· take part in any negotiations [Bus & P C §10131];
· 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 steps over into any aspect of negotiations which lead to the creation of a real estate transaction needs a real estate license for he is both soliciting and negotiating.. Unless licensed, an individual who enters into negotiations (supplying property or sales information) cannot collect a fee for services rendered — even if he calls it a finder’s fee. Also, he is subject to a penalty of up to $10,000 for engaging in brokerage activities without a license. [Bus & P C §§10137, 10139]
In addition, a broker who permits a finder or anyone else in his employ (or his agents’ employ) to perform any type of “licensed” work beyond solicitation for a referral, may have his license suspended or revoked. [Bus & P C§§10131, 10137]
Entitlement to a fee
A finder’s fee agreement entered into between a finder and a principal. regarding the finder’s referral services must be evidenced in a writing signed by the principal who employed the finder. If not, the finder cannot enforce his 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]
Likewise, oral fee agreements between a broker (or his agents) and a finder are enforceable. No written agreement is required between a broker (or his agents) and a finder. However, a writing memorializes the agreement as documentation against memories to the contrary.
The finder introduces the broker to prospects who close transactions with the broker. The broker refuses to pay the finder the agreed-to compensation since the oral agreement is not evidenced in a writing signed by the broker who retained him.
However, the finder can enforce the broker’s oral fee agreement. Oral fee-sharing agreements between brokers or finders are enforceable. [Grant v. Marinell (1980) 112 CA3d 617]
Analyzing the finder’s fee agreement
The finder’s fee agreement, first tuesday Form 115, is used by brokers and their agents, as well as principals, who seek to contract with an unlicensed individual by entering into a finder’s agreement. The agreement calls for the individual (finder) to identify prospective clients, be they sellers or buyers, lenders or borrowers, or landlords or tenants, in exchange for a fee on the closing of one or more transactions between the broker and the prospective client.
Finders, unlike licensed real estate agents, are true independent contractors. Finders are authorized by statute to collect a fee directly from a principal; licensed sales agents are not.
If a principal uses the finder’s fee agreement to contract with a finder, the party named as broker in the form is merely re- identified as the principal (be he an owner, buyer, lender, etc.).
Each section in Form 115 has a separate purpose and need for enforcement. The sections include:
1. Service to be rendered: A broker (or an agent acting on behalf of the broker) contracts with an individual as a finder to locate and refer prospective real estate clients to the broker. The services of the finder are limited to the referral of prospective client(s) while the broker retains control over the gathering and handling of all property information, client confidentialities and negotiations as set forth in sections 1 and 2.
2. Identification of potential clients: The finder identifies the prospective client and the property involved, if applicable, as set forth in sections 3 and 4.
3. Finder’s fee: The amount of the fee due the finder and when the fee is earned and payable is established by negotiations between the broker/agent and the finder as set forth in sections 5 and 6.
Editor’s note — No limits exist and no formula is prohibited in the setting of the fee or when the fee will be paid. However, brokers tend to set a time period for the expiration of the finder’s right to earn further referral fee(s) on future transactions entered into between the client the finder located and the broker. Conversely, the finder usually seeks to be paid on all deals with the prospective client, forever.
4. Signatures: The broker (or his agent) and the finder sign the agreement consenting to the contracted employment.
Preparing the finder’s fee agreement
The following instructions are for the preparation and use of the Finder’s Fee Agreement, first tuesday Form 115, by a broker to employ a finder who agrees to refer prospective clients to the broker.
Each instruction corresponds to the provision in the form bearing the same number.
Editor’s note — Check and enter items throughout the agreement in each provision with boxes and blanks, unless the provision is not intended to be included as part of the final agreement, in which case it is left unchecked or blank.
Enter the date and name of the city where the agreement is prepared. This date is used when referencing this agreement.
1. Type of client sought: Check the box for the type of prospective client the finder is to refer to the broker.
2. Participation in negotiations: The finder agrees not to participate in any negotiations or to solicit loans. If he does, the finder may not enforce collection of the agreed-to compensation since a broker’s license is required to collect a fee for providing property information, collecting information from the client or negotiating a transaction.
2.1 The finder acknowledges he is not a real estate
3. Identification of prospective clients: Enter the name, address and telephone number of the prospective client the finder is referring to the broker.
3.1 If additional prospective clients are to be covered by the agreement, such as buyers who are now known or will be located in the future, use an addendum to add names now or to include others later. [See first tuesday Form 250]
4. Information on property: Enter the common street address of any real estate in question.
Enter the legal description or assessor’s number for the property, information which can be obtained from a copy of a recorded deed or a title insurance policy on the property, or from any title company on request.
5. Payment of finder’s fee: Enter the dollar amount or percentage in the appropriate blank which establishes the finder’s fee. The amount of the fee may be set as a fixed dollar amount (§5a), a percentage of the broker’s compensation from the client (§5b), a percentage of the purchase price (§5c) or some other agreed- to method of determining payment (§5d).
Editor’s note — No limit exists on the amount to be paid or the number of referrals a finder can be paid for.
6. Fee earned and payable: Check the box indicating when the fee has been earned by the finder and when it is due and payable by the broker. If box a is checked, a transaction brought about by @I = this agreement must close before the broker is liable to the finder for payment of a fee. If box b is checked, enter in the blank the event other than closing which triggers payment of the finder’s fee.
6.1 Expiration of finder agreement: Enter the number of months after which the finder will not be entitled to receive a fee for subsequent transactions with the prospective client(s).
7. Additional terms: Enter any additional terms agreed to between the finder and the broker.
Broker’s/Agent’s signature: Enter the date the agreement is signed and the broker’s name. Enter the broker’s (or agent’s) signature. Enter the broker’s address, telephone and fax numbers, and his email address.
Finder’s signature: Enter the date the finder signs the agreement and the finder’s name. Obtain the finder’s signature. Enter the finder’s social security number, address, telephone and fax numbers, and his email address.