Real Estate Referrals, Again

Real Estate Referrals, Again

A few weeks ago, we discussed the topic of paying real estate referrals to unlicensed persons. In the course of our discussion we made reference to the differences between California law and federal law under the Real Estate Settlement and Procedures Act (RESPA). The salient difference was that, whereas RESPA widely prohibits the payment of such fees, California allows them so long as the unlicensed recipient of the fee has not been in any way engaged in the transaction. That is to say, he or she must not have been involved in any activity that would require a real estate license.

We’ve had enough queries and responses regarding the difference between state and federal law on this matter that it appeared worthwhile to examine the issues a bit more.

Of all people, Californians who live in a self-proclaimed sanctuary state, should be aware of the fact that state and federal laws may conflict with one another. Think marijuana legislation. Sometimes these conflicts may require resolution through a court decision; other times they just go on. In the present case the differences in the laws have not led to the kind or size of conflict that would have merited extensive and expensive litigation.

Moreover, it’s important to remember that, for a significant number of transactions, the issue doesn’t even arise. The RESPA rules and prohibitions cover what is probably a majority of real estate transactions. Those are residential real estate of less than five units in which federal or federally-related financing is involved. But that leaves out a large group of transactions, such as vacant land, commercial property, and transactions that are financed with cash and/or lenders not covered by federal financial institutions. In all of those, neither federal nor California law prohibits the payment of referral fees.

It is also worth noting that California law regarding referral (sometimes called “finder”) fees came about from a court ruling. It is case law, as opposed to the result of specific legislation aimed at referral fees. The landmark case (Shaffer v. Beinhorn) went before the California Supreme Court in 1923. The plaintiffs in the case had sued a California real estate broker for not paying them a finder fee as he had promised to do. The broker’s defense was that he could not pay them because they didn’t have a real estate license.

The California Business and Professions Code (Currently Business and Professions Code §10131) spells out those activities that require having a real estate license. Simply referring, or “finding”, a buyer (or seller) is not among them. The court noted this, and thus noted that the plaintiffs’ lack of a license was not sufficient reason not to pay them. The logic of that ruling prevails today.

Recently, I was pointed to a very thorough and detailed discussion of the referral rules for both RESPA and California law. It appears in the 2016 Winter Bulletin of the California BRE/DRE, and it is available on the department’s website. The article was written by Wayne Bell and Summer Goralik – two very smart and very nice people. Mr. Bell is the former California Real Estate Commissioner and Ms. Goralik is a former Special Investigator for the BRE/DRE. I commend this article to anyone further interested in this topic.

While the article reference above is detailed, comprehensive, and very useful, it includes something that, for me, requires further analysis. The authors say:

…B&P Section 10137 provides that a real estate salesperson can only be compensated for real estate acts through his or her employing or responsible broker. That prohibits a real estate salesperson from receiving pay, a commission or a lawful referral fee directly from another person. If a lawful referral fee will be paid to any salesperson, including a broker acting as a salesperson, an any real estate transaction, then it must be paid first through the responsible broker.

What the authors say would be true only if simply giving a referral were a real estate act. But it isn’t. That was settled in 1923. Giving a referral is not an act that requires a real estate license. In California, payment to a real estate agent for simply giving a referral should not be required to go through a broker. QED

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