Beyond the agent’s scope of services

Brokers and their agents often encounter prospective clients who need brokerage services beyond their business operations. These situations are often about the property’s location or an expertise outside the broker’s scope of practice.

Here, brokers and agents best serve their clients by referring them to another broker or agent capable of providing the service the client needs. Thus, the agent making the referral properly asks for a fee from the brokerage office accepting the referral. The referral fee is earned when the client enters into a real estate transaction in which the other brokerage office is paid a fee.

The referring agent needs to document the referral to ensure collection of the fee from the other licensee. A referral fee agreement form is the most reliable evidence of the arrangement. [See RPI Form 114]

Referrals may be made by:

  • brokers;
  • agents; or
  • unlicensed finders.

Licensed brokers and sales agents owe fiduciary duties to the principals they represent. Fiduciary duties require brokers and their agents to perform on behalf of their client with the utmost care and diligence, as a protective shield in transactions.

Conversely, an unlicensed finder has no such has no such responsibility. A finder’s function is limited to identifying and referring potential real estate participants to brokers, agents or principals in exchange for the promise of a fee. They are locators, period.

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Finders: a Nonlicensee Referral Service

Although not licensed by the California Department of Real Estate (DRE) or any real estate trade association, finders are authorized by state codes to solicit prospective buyers, sellers, borrowers, lenders, tenants or landlords for referral to real estate brokers, agents or principals. Thus, they provide leads about individuals who may become participants in real estate transactions.

The Broker Referral Fee Agreement

When an agent refers a prospective client to another agent, a referral fee agreement is used to document the referral. The referral fee agreement is a broker-to-broker referral form. A referral between brokers and is not to be confused with a finder’s fee agreement, as a finder is an unlicensed individual who locates clients for a broker and their agent. [See RPI Form 115]

The Broker Referral Fee Agreement published by RPI (Realty Publications, Inc.) is used by an agent when agreeing with another broker or their agent for their payment of a fee in exchange for the referral of a client. Further, the Broker Referral Fee Agreement is used to identify the person referred and document the amount and terms for payment of the referral fee. [See RPI Form 114]

The first section of the Broker Referral Fee Agreement identifies the agents involved in the referral as the Referring Broker and the Recipient Broker, as well as their Associate Licensees. It also designates the prospective client as either a:

The referring broker will receive no other fees on transactions the referred prospective client enters into through the services of the other broker. Further, the referring broker and their agents undertake no activities after making the referral. Their involvement is limited to the referral of the prospective client only. Accordingly, a provision in the referral fee agreement states the referring broker will not advise or participate in any negotiations with the prospective client.

The remaining sections of the form provide for:

  • the identity of the prospective client;
  • a description of the real estate involved, if applicable;
  • the compensation to the referring broker;
  • the conditions under which the referral fee is earned by the referring broker; and
  • a mediation provision. [See RPI Form 114]

An oral agreement between brokers for a referral is fully enforceable, but a documented agreement clearly sets:

  • the agreed conditions for the fee to be earned;
  • the amount to be paid; and
  • when the fee will be paid.

The written Broker Referral Fee Agreement acts as documentation for the agreed referral fee, which might not be fully clarified or forgotten in an oral agreement.

Referrals from finders

A finder providing referral services in California for a fee may:

  • find and introduce parties;
  • solicit parties for referral to others [Tyrone Kelley (1973) 9 C3d 1]; and
  • provide referrals to principals or brokers.

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The Finder’s Fee Agreement published by RPI documents an agent’s use of a finder to locate, solicit and refer or identify persons who need the services of the broker. [See RPI Form 115]

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 provides for:

  • the identity of the prospective client;
  • a description of the real estate involved, if applicable;
  • the compensation due to the finder; and
  • the conditions under which the referral fee is earned by the finder. [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.

Though referral fees to finders are permitted under California law, they are prohibited in certain transactions by the federal Real Estate Settlement Procedures Act (RESPA).

No person in a RESPA-controlled transaction may give or accept a referral fee, kickback or any other thing of value for advising a homebuyer, seller or owner participating in the transaction to employ a particular service provider. The act of referring is not a service and no service provider, such as a transaction agent, may collect a fee for such a referral.

This article was originally posted June 2016 and has been updated.