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Legally speaking: Referral fee do’s and don’ts

By Peg Ritenour, OAR Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. This one offers the do’s and don’ts when it comes to referral fees.

Q: Can I send out a mailer to past clients offering to give them a $100 gift certificate to a local restaurant for referring a seller or buyer to the agent? Can I offer a $100 rent credit to any tenant who refers a friend who rents an apartment in a building I manage?

A: The answer to both questions is no. Under Ohio law only a licensee can be compensated for referring prospects to another licensee. An unlicensed person cannot be compensated in any way for referring sales or leasing prospects to a licensee. This prohibition applies to all non-licensees, including past clients, current tenants, builders, attorneys, etc.

Q: I have a commercial property listed for sale. I have been contacted by a “consultant” who is working with a buyer who is interested in purchasing the property. He is seeking a “consulting” fee from me for his services. He is not licensed in Ohio or any other state. Can I pay him?

A: The answer depends on what services he is providing as a consultant. If he is seeking compensation for acts that require a license you cannot pay him since he does not hold any real estate license. Such acts would include procuring the buyer, showing the property, writing and negotiating the offer, etc. On the other hand, if he is performing acts that do not require a license such as architectural or design services, you could legally pay for these services.

Q: Can my brokerage pay a referral fee to a broker licensed in another state? Can I receive a referral fee from an out-of-state broker?

A: Yes. Under Ohio license law you can pay a referral fee to a broker licensed in another state and receive a fee from them.

Q: I deal with relocation companies from around the country and send them a portion of my commission. Do they have to be licensed in order for me to pay them?

A: Yes. Under Ohio license law it is a violation to pay or split a commission with an unlicensed person or entity. Therefore, before you agree to split your commission or pay a referral fee to a relocation company, you need to verify that it is licensed either in Ohio or in another state.

Q: My agent was offered a referral fee from an out of state broker. Can he collect that in his own name or does it have to be made payable to the broker?

A: Under Ohio license law, all fees paid in conjunction with a real estate transaction must be collected in the name of the broker. Thus, the compensation paid for the referral must be handled the same as commissions, broker to broker. A referral fee must be paid to the broker, not directly to the agent who made the referral.

Q: A broker is asking for a referral fee that would be almost equal to what I normally offer as a “co-op” fee. Is there any limit to the amount of referral fee I can pay?

A: No. The amount of the referral fee is negotiable between you and the other broker.

Q: I am thinking of placing my sales license on an inactive status. If I refer one of my relatives to my former brokerage can I receive a referral fee?

A: No. Only a licensee whose license is active can be paid a referral fee for referring prospects to another licensee. An individual with an inactive license (the license is in the possession of the Ohio Division of Real Estate and Professional Licensing) is viewed the same as an unlicensed person and cannot be compensated for a referral. If you want to be compensated for referrals, you must keep your license active.

 

Want more information on this topic? Watch this video from the OAR Daily Buzz Viewing Room or read the OAR White Paper on Inducements, Referral Fees and Gifts.

Tags: legal, Legally Speaking