Jeff Blair is the general counsel of the Kentucky Real Estate Commission and 2001 chairman of the ARELLO Law Committee. He can be reached at Jeff.Blair@mail.state.ky.us.
The Law & You: Don't Pay Illegal Referral Fees
People who refer business to you online must have an active license.
June 1, 2001
A 2001 study of more than 50,000 real estate transactions in Dallas confirms what you may already know: The Internet influences nearly all aspects of your business.
Of the real estate companies involved, 90 percent maintain a Web site. In addition, 93 percent of the properties involved were advertised on the Internet, according to the study, Internet Influence on the Residential Real Estate Market, published by theReal Estate Center at Texas A&M University.
It’s no wonder the Web has become so ubiquitous as a real estate marketing tool: A professional and well-designed Web site allows you to reach a huge audience at a reasonable cost--and not only buyers and sellers. You can also increase your referrals to and from other licensed real estate professionals.
And therein lies a potential pitfall. Referral fee payments to unlicensed individuals or entities can jeopardize your real estate license. Yet, it’s so easy to make referrals online that it may be equally easy to overlook the status of someone’s license.
Imagine receiving an e-mail titled “potential referral” from Joe Smith, a real estate salesperson who says he saw your Web site. Joe and his nephew Johnny live out of state. Johnny’s been transferred to your area, and Joe is referring him to you.
Joe tells you he received his license in 1985 and he’d like a referral fee. “No problem,” you think. You know a fee may be paid out of state as long as the referring person holds a license. Your broker and attorney confirm your understanding.
You eventually find a home for Johnny’s family. They love the house and appreciate all the time you spent with them. You pay Joe a nice referral fee. Happy sellers, happy buyers, fair commission.
Two weeks later, you get a letter from a real estate commission investigator asking you to explain your illegal referral payment. The investigator tells you Joe used to be licensed but didn’t renew his license five years ago and “forgot” to tell you.
With the Internet, people from anywhere in the country can quickly and easily locate you. That’s good news. The bad news is that someone looking to collect a fee can tell you anything in an attempt to earn easy money.
State laws generally allow you to pay a referral fee to someone licensed in any state or jurisdiction. The licensure requirement applies whether you’re paying the referral fee to a relocation company, affinity group, corporation, or individual. No license means no referral fee.
But don’t you have enough to worry about without having to confirm the licensure status of someone from another state? It’s worth the time to avoid facing license discipline.
State real estate commissions handle unlicensed referral payments differently, but the process is never pleasant. A complaint, regardless of the outcome, often requires hiring an attorney and suffering through an investigation and disciplinary hearing. If your regulatory body finds that you violated your state’s license law, the penalty may include fines and suspension. Furthermore, you may find your name printed under the “Disciplinary Action” section of the commission newsletter.
To limit your risk of paying illegal referral fees:
- Ask referring parties for their full name, company name, company address, state of licensure, license number, and written confirmation that they hold an active real estate license in that state.
- Seek written confirmation of an active license from the appropriate state real estate commission.
- Retain the documents in your transaction file.
- If you’re the principal broker, establish a company policy that licensure confirmation be obtained as early as possible--definitely before closing.
- Check with the state association of Realtors« or real estate commission to learn your state laws regarding the paying of referral fees, appropriate disclosure, and Internet advertising.
- Also know your state law on referrals originating from foreign countries that don’t license real estate professionals (Mexico, the United Kingdom, Venezuela, and many others). The express language of the law doesn’t always address this situation.
NAR and the Association of Real Estate License Law Officials (www.arello.org) are creating a Web site listing U.S. real estate licensees. Watch for a partial list to be posted by the summer.
Watch your Web tactics
Marketing your services online opens a big gray area in terms of what’s allowed by your state law. Here’s a guide:
Generally allowed: Your Web site doesn’t actively seek referrals in states where you’re unlicensed. Nor does your site give the impression you’re licensed in states where you’re not. A licensee from another state locates your site and refers a consumer who’s relocating to your area.
Generally prohibited: Your site actively seeks to locate consumers in jurisdictions where you’re not licensed. When out-of-state consumers contact you, you refer them to a broker in their state, and the broker pays you for the referral.
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