Allowable Referrals and Commission Splits in California Real Estate Transactions

In California, the Bureau of Real Estate and California law permit a licensed real estate brokerage to pay a referral fee for a real estate transaction to a person not licensed by the Bureau of Real Estate, only if the person who is to get such a fee was not soliciting on behalf of the brokerage. In short, this “finder’s fee” only applies if the unlicensed individual is solely limited to the introduction of a seller, buyer or both to a licensee. The caveat is that the “finder” is not involved in any negotiations as to the real estate transaction.

In California, a “finder’s exception,” allowing an unlicensed person to be compensated for introducing parties to a real estate transaction, has been judicially approved since 1923. As explained by California’s  Supreme Court in Tyrone v. Kelley (1973) 9 Cal.3d 1.

“Numerous cases have held that one who simply finds and introduces two parties to a real estate transaction need not be licensed as a real estate 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. Beinhorn (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 as a finder. Many subsequent cases have recognized the exception.

“The finder is a person whose employment is limited to bringing the 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 authority or duties beyond merely bringing the parties together, usually the authority to participate in negotiations.” (Ibid. at 9).

In 1995, California’s Attorney General issued an opinion that a real estate broker can pay a referral fee to an unlicensed person with the Department of Real Estate (Now Bureau of Real Estate) only if the referring person did not make the introduction on behalf of the compensating broker. (78 Ops. Cal. Gen. 71).

Custom and practice in California real estate is that a referral fee to a non-licensee with California’s Bureau of Real Estate is no more than five hundred dollars ($500.00) per completed transaction.

With respect to payment of a referral fee to a licensee with California’s Bureau of Real Estate as a form of a real estate commission split, such is allowed in California. Likewise, a broker can split a real estate commission with a party to a given real estate commission provided that the party receiving the split foes not perform any services requiring a real estate license.

Although licensed attorneys in California can broker a real estate transaction under California’s Business & Professions Code section 10133, a real estate broker cannot under Bureau of Real Estate regulations split a commission with such an attorney if he or she is not a real estate licensee. In such a situation, the licensed California attorney drafts an offer by his buyer to receive a percentage of the listing brokerage’s commission where the buyer uses such a real estate commission split to pay his or her attorney.

 


 

Edward McCutchan, JrGuest 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.

This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.

Originally Published July 21, 2014

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Barry Moss on

I am a licensed Real Estate Broker. I am one of five beneficiares of a California single family residence. May I receive a referral fee from a listing agents office for providing them the sales listing for that residence?

Stacey on

Thanks for your question. Here’s how it works – the broker beneficiary is allowed a referral fee from the listing agent IF the purchase is all cash or the buyer’s loan is a non federally insured loan.

IF the buyer’s loan for the parcel that the broker beneficiary referred is a federally insured loan (FHA as an example) then the broker beneficiary cannot simply get a referral fee on the parcel as it would be a RESPA issue. In the latter scenario, to get the referral fee ad not have a RESPA issue, the broker beneficiary must do actual work on the file with the listing brokerage and broker beneficiary’s fee must come out of the commissions to the listing brokerage at close and show clearly in the final closing statement.

Luke Vorlaw on

1/5 after estate settled

rocco71 on

I am a licensed broker who was given a referral by an un-licensed business partner. The resulting transaction generated a six-figure commission and the un-licensed person is demanding 50%. In anyone else’s opinion, what would be both a fair and legal split?

Valley Real Estate Agent on

He has been a partner with Sunderland. Very nice article

Balboaestate on

Likewise, a broker can split a real estate commission with a party to a given real estate commission provided that the party receiving the split

Mark E. Affsa on

I am a licensed Real Estate Agent, not a Broker. If I am reading this correctly, I can pay a referral fee to non-licensed individual providing it’s not larger than $500. Can I also credit the referral, as well? Providing it’s not larger than $500?

Krystina Feucht on

Hello Mark – Here is the response from the authoring attorney Ed McCutchan:

The referral fee up to $500.00 can be paid to a non-licensee legally in California by a broker or real estate agent SOLELY in a real estate transaction that does not have a federally funded loan, for example an all cash purchase otherwise there very well could be a RESPA violation for such a referral fee. I recommend that such referral fee be clearly stated in the closing statement so that all parties and others see the fee. The referral fee can also be credited in California provided the loan IS NOT a federally insured loan. Otherwise there is most likely a RESPA violation.

monicaBMH on

Question: Can a licensed agent say that they will give a finder’s fee on business cards or other similar introductory materials?

cresinsurance on

Hi Mark. The referral fee up to $500.00 can be paid to a non-licensee legally in California by a broker or real estate agent SOLELY in a real estate transaction that does not have a federally funded loan, for example an all cash purchase otherwise there very well could be a RESPA violation for such a referral fee. Ed (the article author) recommends that such referral fee be clearly stated in the closing statement so that all parties and others see the fee. The referral fee can also be credited in California provided the loan IS NOT a federally insured loan. Otherwise there is most likely a RESPA violation.

cresinsurance on

Hi Monica. The authoring attorney, Ed, advises that you NOT state that a finder’s fee on business cards or other similar introductory materials be placed by any real estate licensee in this state. The reason is that if a given transaction involves a loan that is federally insured, RESPA comes into place and RESPA rules DO NOT allow for a finder’s/referral fee because such fees are hidden fees and do not pertain directly to the transaction happening.

Jacqueline on

I am a licensed Real Estate Agent, currently not working and without a supervising broker. If I refer a former client to an active agent am I able to receive a percentage of the commission/commission split?

cresinsurance on

Hi Jacqueline. If the insured is not a licensed real estate broker and has no broker of record, BRE rules do not allow a real estate commission split for a referral that ends up in a closed transaction However, a referral fee (not a real estate commission split) would be allowed IF the transaction does not involve a federally insured loan which would trigger RESPA regulations.

Katherine on

I have been sent a referral from a California agent with a Brokers license, He is not the DB. He is stating that his DB has given permission to be paid directly from an Arizona Real Estate Company. The subject person and the DB are dating. Is it legal to pay the non-DB the referral fee directly?

cresinsurance on

Hi Katherine. The broker of record for the listing brokerage that received the referral needs to personally speak with the broker of record for the affiliated agent who is to get a possible referral fee to confirm this allowance and to advise that there cannot be a referral fee if the transaction ends up having a federally insured loan unless the referring agent actually does work on the transaction. A C.A.R. addendum then needs to be created setting forth the terms of the referral and the RESPA preclusion of such a referral to be sent to the out of state broker of record for signature, dating and return to the listing brokerage. The document needs to be save in transaction file.

Daniel Sapata on

Is the RESPA violation occur if the referred party is obtaining an FHA loan? Also, is sounds like I cannot send out an email to my client base telling them I would offer a $500 referral fee, correct?

cresinsurance on

Hi Daniel. Thanks for your questions. Edward, the authoring attorney, gave us the following response to share with you, “Yes, there would be a possible RESPA violation re a FHA loan where there is a referral fee to someone who does not actually put time in the transaction to earn the $500 “referral fee”. The $500 should never be mentioned as a “referral fee”.

Tracy TC on

What else might the payment be called?

cresinsurance on

Hi Tracy. Thanks for your question. Here is Edward’s response, “The whole issue’s analysis begins with whether or not the loan is federally insured. If the loan is federally insured then there cannot be a referral fee at all. Any person receiving money from the transaction as a real estate agent must actually have documented time in the transaction supporting whatever moneys he or she may receive.” So given that the payment must be for documented time performed for the transaction, the payment would be noted for that/those actions/services.

S.T. Farnsworth on

Great article. I am a Broker for a property management company in California. Can you tell me how this would apply to Property Management? Can I advertise to pay a referral fee for property management to unlicensed individuals? What about advertise to pay referral fee to licensed individuals? Is there a dollar limit maximum that I can pay in either situation?

cresinsurance on

Hi S.T. – Edward (the authoring attorney) provided the following responses to your questions. Thanks for your comments!

1. Can you tell me how this would apply to Property Management?

Answer: RESPA does not apply to property management matters. There is no sale or exchange of a residence in a property management situation. A BRE licensee per a recommended written property management agreement simply manages a landlord’s property. Hence RESPA does not apply to a property management situation.

2. Can I advertise to pay a referral fee for property management to unlicensed individuals?

Answer: Yes, a reasonable referral fee can be advertised by a BRE licensee to be paid those who are not licensed by the BRE. Property management is not a sale situation of real property (residential) subject to RESPA. As a matter of course, any referral fee for a property management matter should be disclosed in a writing dated and signed by the landlord whose parcel will be managed and saved by the BRE insured. Such shows that the insured is upfront with the landlord on the parcel being managed and will help avoid any distrust.

3. What about advertise to pay referral fee to licensed individuals?

Answer: see answers to items # 1 and # 2 above. Advertising for a property management referral and acquisition does not appear to be in violation of RESPA or BRE regulations in California.

4. Is there a dollar limit maximum that I can pay in either situation?

Answer: There is no dollar limit (cap) on a referral fee for a successful property management acquisition. I recommend that any referral fee be within custom and practice of California’s real estate industry in the given locality where the management contract is obtained. I would recommend one hundred dollars ($100.00) as the maximum referral fee in a property management acquisition.

Tim McInerney on

Hello, I have been working with large owners of apartment buildings for the last ten years. During that time I have been able to introduce buyers/sellers together based on my relationships. It’s my hope to make this a full-time business. However, i’m not sure on how this legally works. I do not hold a CA real estate license. My vision would be to collect a large fee for making the introduction between these two parties; I would not discuss price or structure the deal. My question is two-fold: Does the maximum $500.00 referral fee apply to a non-licensed intermediary, and does the law require a license to run a full-time business like this?

thank you for your thoughts, fantastic article!

cresinsurance on

Hello Tim. Thank you for your question. Here is the response from the authoring attorney.

QUESTION NO. 1: Does the maximum $500.00 referral fee apply to a non-licensed intermediary?

ANSWER: The customary maximum $500.00 referral fee applies to a non-licensed person with the California Bureau of Real Estate. The California Attorney General issued an opinion in 1995 that a broker can pay a referral fee to an unlicensed person for a referral so long as the referring person was not soliciting on behalf of the broker. The opinion goes on to say that the finder’s fee exemption can apply only if the finder’s activity is limited to the introduction, and the finder is not involved in any role in the negotiations “no matter how slight.”

The matter is different under federal law. RESPA covers most transactions involving single family residences in properties of one to four units. RESPA provides that, “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Most loans are “federally related” because that includes not only loans made by federally insured lenders (almost all banks are insured by the FDIC), but also loans intended to be sold to a federal institution such as Freddie Mac or Fannie Mae.

This prohibition applies to both licensees and laypersons. Realtors® are not exempt. RESPA prohibits either giving or receiving any consideration or thing of value pursuant to any agreement or understanding that it is in exchange for referral of business relating to a real estate settlement.

QUESTION NO. 2: Does the law require a license to run a full-time business like this?

ANSWER: I know of no California law in place requiring a license to run some referral fee real estate business where the person is not a California Bureau of Real Estate licensee (where industry standards is up to $500.00 on a successful referral to a non-licensee), where the loan on the closed parcel is not subject to RESPA requirements. If the loan is subject to RESPA requirement then a non-licensee cannot receive a referral fee and a licensee who gets a referral fee must spend some time on the transaction that is documented to be allowed the fee. Otherwise the referral would be an illegal fee or kickback under RESPA.

Alexander Kolominsky on

Hello, I’m a licensed California real estate agent. A friend of mine owns a company that designs and then orders a delivery of home shell’s made out of steel, that gets shipped to the homeowner and then gets built by other vendors / contractors, not under the control of the steel company.
Because of my connections, I am able to find and introduce buyers of the product to the steel company, and would like to collect a fee for it. The steel company is happy to pay.
I spoke with different CAR attorneys who are unsure, and can’t give a clear answer. Other attorneys, are saying that this shouldn’t be a problem.
Hoping for a clear answer from a professional,
Thanks kindly.

leftla on

In California can an unlicensed owner of a real estate partnership negotiate sale transactions including prices and terms? What if he knows the person personally? What about him negotiating commissions and price for a listing?

leftla on

I have taken one year off from selling real estate, after over 30 years in the business. I have been a real estate Broker since the 80’s. I cant believe how many changes. Really, can a Broker’s unlicensed assistant, negotiate sales, which of course includes price, down pymt., seller credits, other terms?
My understanding is NO…but am being told differently by a Broker!
Then see my other question left 5 minutes ago about the unlicensed owner of a real estate partnership negotiating price, terms, commissions with a potential client. So now I am doubting myself, to have both these scenarios in the same week.

cresinsurance on

Hello Mr. Kolominsky

Here is the response from one of our Risk Management attorneys and author of this post. Please let us know if you have further questions.

You would essentially be receiving a referral fee for any person you refer to the steel home shell’s manufacturing company. In essence, you would not be acting in any capacity in a real estate transaction such as a sale or most importantly a loan where potentially federal RESPA laws could be triggered.

Any referred buyer of the steel shell product would not be paying you directly any referral fee but in theory, any purchase by them would be paying the referral fee by the steel home shell’s manufacturer. From what has been presented in your question, I do not see any concerns from a legal perspective as to what you wish to do. From a risk management perspective, I recommend that you prepare a disclosure to all potential referral buyers stating that you may receive a referral fee if the product is purchased by them (buyer) from the manufacturer. You should also nail down in writing the terms and conditions of payment from the manufacturer of any referral fee to be paid in a dated and signed document.

cresinsurance on

Thank you for your questions within the 2 posts. Here is the full response from our authoring attorney, “A licensed real estate broker cannot have any person who is not licensed with the BRE negotiate sales in a given transaction including price, seller credits and other terms for the simple fact that such a person has not demonstrated the knowledge, training, and expertise to have been able to obtain a professional license issued by the BRE and the public must be protected from such unlicensed individuals.

In California, a person unlicensed with the BRE who is an owner of record in a real estate partnership that owns real estate in California can negotiate the sale of land in this state including, but not limited to price, deposits, credits and other terms. The caveat is to make sure per a signed and dated resolution by all members of a real estate partnership allowing one it its members to negotiate the sale for the real estate partnership which would include a listing and commission issues. Such a scenario is very similar to a situation where an individual California property owner who is not a BRE licensee sells his or her own property. This is allowed.”

cresinsurance on

See response for these questions in our reply to your other comment post. Thank you!

leftla on

To verify the second paragraph, is it properties owned buy the real estate partnership and those they intend to acquire that they can negotiate? Or any property (not owned or being acquired by company) that will be listed with an agent in the company-owned RE office, and, sold through a cooperating Broker.

cresinsurance on

Hello. Here is the additional clarification in response to your question.

All properties owned by a California real estate partnership to be sold and even those that the real estate partnership does not own but seeks to purchase for itself can be negotiated for sale by a representative of the real estate partnership who has an interest in it who is not licensed by California’s Bureau of Real Estate. The negotiation for sale or purchase by a representative for the California real estate partnership by one of its members who has a stake on the partnership can be with a licensed real estate agent representing the seller or buyer or a private individual who wishes to buy or sell. The key is that the person representing the California real estate partnership must have an ownership interest in the partnership that owns land in California.

Make sure per a signed and dated resolution by all members of a real estate partnership allowing one it its members to negotiate the sale or purchase for the real estate partnership which would include a listing and commission issues.

Jc Card on

Hello… Interesting discussion… Ive ran across this a more than a few times already… I perform digital ad management for RE pros and have been asked to take “commission / referral / finders” fee or commission however it’s worded….all in lieu of avoiding a monthly retainer for my ad management services.

From reading this, it looks like $500 is the max? If not how would more be achieved with no issues and proper paper trail? This would open doors for a lot of newer RE pros. Our services were’nt a good fit due to them having a lack funding for advertising.

Daniel Penner on

This is a great thread and conversation. I’m a Realtor in California. My friend is an attorney. She has clients who need to sell their homes. She wants to refer these clients to me in exchange for splitting the commission. Am I correct in understanding that as long as her only involvement is referring her client to me for my real estate service and nothing else, then my broker can split my commission and give a significant portion to my attorney friend? Second part, is there any way for me to compensate my attorney friend under RESPA aside from the buyer being an all-cash buyer? Third part, would it be ok under RESPA for her to refer me the client, I sell the home, credit back 30% of the commission to the seller and the seller then pays the attorney? This could for “other legal services” or whatever they decide? Trying to figure out how to make this arrangement work legally… Thank you!

cresinsurance on

Hi Daniel, here is the response from one of our Risk Management attorneys and author of this post:

In response to the first and second question – If the transaction involves a federally insured loan, under RESPA the attorney friend presumably a licensed California attorney like a licensed real estate agent under California’s Bureau of Real Estate MUST do actual work on the transaction in order to be allowed any form of compensation and the actual work MUST be documented with escrow for payment to this person and full written disclosures to all parties. If the transaction is a non-federally insured loan, then there can be a referral fee to the licensed California attorney without him or her doing any actual work on the transaction subject to full disclosure to all parties to the transaction.

For the third part – No. The scenario in question # 3 is exactly that the RESPA regulations are designed to prevent. Hidden and undisclosed charges unrelated to a given transaction. Assessment is that the scenario presented would be a clear RESPA violation.

Hope this helps!

Amardeep Singh on

Hi
Can I offer $500 to my past clients if they help me finding (refer their friends) buyer or seller on the SFR 1 -4 units?

cresinsurance on

Hi Amardeep. Here is the response from our authorizing CRES ClaimPrevent attorney:

The problem with offering a $500 referral fee to past clients if they actually assist a BRE licensee in getting a willing buyer or seller that closes escrow on a parcel is that the insured has no idea if the buyer in the referred transaction will be obtaining a federally insured loan subject to RESPA guidelines.

If the referred buyer obtains a federally insured loan, then the $500 finder’s fee would be a RESPA violation. If the referred seller has a buyer that obtains a federally insured loan, then the $500 finder’s fee would be a RESPA violation. If there is an all cash deal for the referred buyer or seller in the possible future transaction or any loan is not a federally insured loan, then the $500 referral fee to a past client would be allowable under California and State law.

Recommendations: If the insured wishes to make a contingent referral fee proposal of $500 to past clients, he/she should create a disclosure with respect to the fact that no referral fee can be given under RESPA regulations in a referred matter leading to the sale if there is a federally insured loan, and have the disclosure dated and signed by the referring party who is then on actual notice that any referral may not result in a referral fee and the reasons for such.

stephen on

Hello,
If I hold a brokers license in California, would I be able to collect referral fees for any of the 50 states? Any help would be appreciated. Thanks!

cresinsurance on

Hi Stephen – thanks for the question. Here is the response from our authoring CRES ClaimPrevent attorney:
A Realtor or licensed sales person cannot pay a referral fee to another broker (in or out of state) however, the agent’s broker can. The broker is the party authorized to receive and make payments, be the commissions, referral fees, etc. In California, you as a licensed real estate broker can receive a referral fee from a broker who is licensed to practice real estate in another state subject to RESPA requirements where if the outside state transaction has a federally insured loan you must do actual work on the transaction to be legally entitled to a fee. If the out of state transaction does not have a federally insured loan, you can receive a referral fee for simply doing the referral where you do not have to do actual work on the transaction to be entitled to compensation. Note: States other than California may have restrictions as to whether a broker in another state can give you a referral fee as a licensed broker in California but any such restrictions would apply to the broker giving you the referral fee and not you so long as you receive the fee inside the State of California.

Suzanna on

Hello,

I am a licensed realtor in CA. I have rebate/reward program for military and first responders. I am passionate about not only giving back to our clients but also supporting non-profits that benefit these men, women and their families. An amount equal to 10% of the total commission is rebated to the client as thank you/benefit for their service, and an additional  5% is donated to the nonprofit of their choice ( benefiting LE, Military or Firefighters). It started as a part of my business services. In an effort to benefit more military and first responders I created a nationwide referral platform. I have agent partners I refer our clients to so we can offer this benefit wherever they are buying or selling. Proceeds are rebated/donated out of my referral fee. Initially, I always did a credit through closing. Unfortunately, because I am the referring agent on many transactions now doing a credit is complicated. I was advised it is legal for me to provide a rebate check to clients upon closing. This is the simplest, most consistent way for me to way to offer this benefit. I did call CAR legal and was told I can do this. I would also like your opinion on any risk management issues I should be aware of. Thank you~

Brave Benefits:

Amount equal to 10% of agent commission goes back to you as a THANK YOU for thier service. 

Amount equal to 5% of commission is donated to the charity they choose, that benefits law Enforcement, Military, or Fire in some capacity.

Ed on

I am a licensed broker in Oregon. My practice is commercial Real Estate. I have a client that wants to bid on properties that are being offered by a Bankruptcy Court in California. There is a 3% fee for the selling broker. Can I collect that fee or must I pay the “outsider penalty” meaning must I find a cooperating California broker to pay me the fee and ultimately pay them a fee that they haven’t earned to funnel my commission to me?

cresinsurance on

Hi Ed, thanks for the question. Here is the response from our authoring CRES ClaimPrevent® attorney:

If you are not a licensed California broker or licensee with California’s Bureau of Real Estate and you bring a buyer for a parcel that is subject to sale by a California bankruptcy court your client can request the bankruptcy court to award you the 3% commission on a successful close of escrow by the client to be paid you through escrow per a dated, signed and filed bankruptcy court order. The above would eliminate the need for you to have a cooperating California broker. You would be protected by the suggested bankruptcy court order allowing you the 3% real estate commission.

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