In the late fall of 2024, the United States District Court for the Western District of Missouri granted final approval of the National Association of Realtor® (NAR) proposed settlement agreement. This agreement was to resolve class action claims related to broker commissions against NAR after a decision was rendered against NAR for unfair real estate commission practices.
Under the court approved agreement, $418 million will be paid into a settlement fund over a four (4) year period.
New Commission Guidelines for Real Estate Sales
Although this Missouri lawsuit had no direct impact on real estate commissions in California or other states, it had an indirect impact on real estate commissions with new protocols in California and throughout the U.S. as follows:
1. The listing brokerage’s agreed-upon commission percentage with the seller does not obligate the seller to pay real estate commissions to the selling brokerage and selling agent representing the buyer
2. Real estate forms now state for the buyer’s and seller’s protection that real estate commissions are freely negotiable and are not set by law.
3. Real estate commissions payable to the selling brokerage representing the buyer are no longer placed in the MLS in California (and other states). Compensation information is allowed to be placed on non-MLS advertisements and the listing brokerage’s website.
4. Potential buyers of real estate in California (and other states) are required to sign a buyer broker exclusive agreement prior to any licensed real estate agent or broker showing the potential buyer listed property on the MLS. This exclusivity agreement is to state the amount of compensation to the selling brokerage and how such is paid. If the seller does not agree to pay the selling brokerage’s compensation, then it is up to the potential buyer to do so.
5. Sellers of real property in California in written, dated and signed documents have the choice to only pay a specific amount of money to the listing brokerage on a closed transaction and/or pay a certain amount at close of escrow to the selling brokerage. Another option is that the listing brokerage can pay a certain amount to the selling brokerage on a closed escrow in a dated and signed written agreement by all parties in the transaction.
Referral Fees and RESPA
The fall 2024 NAR settlement in the Western District of Missouri’s federal court also has no impact in the payment of any disclosed referral fee in California on a closed real estate transaction that does not violate the Real Estate Settlement and Procedures Act (RESPA).
California’s Department of Real Estate still allows a licensed brokerage to pay a referral fee for a closed real estate transaction to a person who is not licensed only if the person who receives the referral was not solicitating on behalf of the brokerage. This referral fee only applies if the unlicensed individual just introduces the seller, buyer or both to a licensed real estate agent of broker. This “finder” must not be involved in any negotiations as to the subject real estate transaction.
The “finder’s exception” allowing an unlicensed person to receive compensation for introducing a party to a real estate transaction has been approved by California appellate courts since 1923.
“Numerous cases have held that one who simply finds and introduces two parties to a real estate transaction need not be a licensed as a real estate agent or broker. Such an intermediary or middleman is protected by the finder’s exception to the real estate licensing laws, an exception first established in Shaffer v. Beinborn (1923) 190 Cal. 569, 573-574. In that case, this court held that a person who contracted to introduce a seller to a prospective purchaser did not act as a broker, but rather as a finder.
The finder is a person whose employment is limited to bringing parties together so that they may negotiate their own contract, and the distinction between the finder and the broker frequently turns upon whether the intermediary has been invested with the authority or duties beyond merely bringing the parties together, usually the authority to participate in negotiations.” (Tyrone v. Kelly (1973) 9 Cal. 3d 1, 9).
California’s Attorney General issued an opinion in 1995 that a real estate broker may pay a referral fee to a person who is not licensed with California’s Department of Real Estate only if the referring person did not make the introduction on behalf of the compensating brokerage. (78 Ops. Cal. Gen. 71).
RESPA prohibits the acceptance of any percentage, portion, or split of any fee or charge pertaining to a settlement service with the exception of services actually provided in a given residential real estate transaction of one to four units. (12 U.S.C. section 2607(b)).
If a “finder” receives a referral fee in a real estate transaction where there is a federally insured residential loan on one to four units, under RESPA the payment violates federal law.
Be sure your business is protected with real estate E&O insurance.
Guest blog written by Edward McCutchan, Jr.
Partner, Sunderland | McCutchan, LLP
Edward McCutchan, Jr | www.sunmclaw.com
Edward McCutchan, Jr. was admitted to the California State Bar in December 1985 and is qualified to practice law in all California, the United States District Court (Eastern and Northern Districts of California) as well as the United States Tax court.
Mr. McCutchan’s practice is primarily civil litigation with an emphasis in defending professionals and businesses in real estate, mortgage brokering, construction, banking and agricultural industries and all phases of dispute resolution through trial and appeal. His area of practice is also agricultural law (viticulture and wineries), trusts and estates, probate, real estate transactions, business law and elder abuse.
Edward McCutchan graduated from the University of California at Davis with a Bachelor of Arts degree in 1982, graduated from Golden Gate University in San Francisco, California with a Juris Doctris degree in 1985 and graduated from McGeorge School of Law with an LL.M, in Business and Taxation in 1986. He is a member of the California State Bar and the Sonoma County Bar Association.
Mr. McCutchan has been a partner with Sunderland | McCutchan, LLP since 2005 and was previously a partner with Ginder, Sunderland & Carlson, LLP from 2003 through 2005. He is a former Deputy District Attorney with the Sonoma County District Attorney’s Office and has personally tried many jury and court trials in addition to administrative hearings and binding arbitrations.
Edward McCutchan is an experienced mediator and arbitrator handling private matters as well as California State Bar disputes with the State Bar’s fee dispute program between attorney’s and their clients. He has served as a court appointed Judge Pro Tem, Arbitrator and Settlement Commissioner in Alameda and Sonoma Counties. He has served as an expert witness in attorney standard of care matters, real estate broker/agent standard of care issues as well as agricultural matters in the viticulture field. Edward McCutchan manages the firm’s Santa Rosa, California office.
