Question: Can a broker pay a finder’s fee to an individual who does not have a salesperson license?
Answer: Without the need to be licensed by the California Department of Real Estate (DRE) or admitted as members of a real estate trade association, finders are authorized by California statute to solicit prospective buyers, sellers, borrowers, lenders, tenants or landlords for referral to real estate licensees or principals. Thus, brokers and principals may employ and pay finders to provide leads about individuals who may become participants in real estate transactions. [Tyrone v. Kelley (1973) 9 C3d 1]
A finder who crosses into any aspect of negotiation or property information disclosures which leads to the creation of a real estate transaction needs a real estate license as 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 $20,000 and/or a six-month jail term for engaging in brokerage activities without a license. [Calif. Business & Professions Code §§10137, 10139]
Thus, a finder is an agent of the broker, employed to perform services that do not require a license, just as are administrative staff. All employees of a broker must be hired under written contracts of employment. Written contracts are entered into to delineate the responsibilities each has undertaken and to limit their conduct to that permitted by regulations for their different licensed or unlicensed status.
The distinction must be made between the sharing of fees (also known as fee-splitting) between brokers and the payment of a finder’s fee to an unlicensed employee of the broker. When sharing fees with a person that is not in the employ of the broker, the fee can only be shared with another real estate broker, not an attorney, CPA or other licensed professional. In order for a broker to pay a finder’s fee for an unlicensed referral service, the individual must be under contract with the broker as an employee. [For more information regarding a broker’s employment of a finder, see first tuesday Form 115, Finder’s Fee Agreement.]
For a detailed discussion of the broker/finder relationship, please refer to the July 2009 first tuesday article, Finders: a non-license referral service.