INDUCEMENTS, REFERRAL FEES AND GIFTS WHITE PAPER
Published by OAR’s Legal Services Group
In a competitive business such as real estate, innovative marketing ideas and promotions are often utilized to generate business. These can include offering incentives to buyers and sellers, paying referral fees for leads, or giving gifts to build good will and encourage repeat business. Such ideas, while usually creative, are regulated strictly by Ohio licensing law. In addition, the NAR Code of Ethics and federal regulations may also be applicable. The purpose of this White Paper is to address the legality of such inducements, referral fees and gifts.
To attract business, REALTORS oftentimes want to offer incentives to buyers or sellers to utilize their services. Such incentives may range from gift certificates to cash rebates of the REALTOR’s commission. Although many REALTORS believe that such inducements are prohibited under Ohio license law and the NAR Code of Ethics, they are not. However, there are certain requirements that must be met.
NAR Code of Ethics
Standard of Practice 12-3 clearly states that the “offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the REALTOR making the offer.” This Standard of Practice, however, cautions REALTORS that when advertising or marketing such incentives to the public, care should be exercised to assure that there is a clear understanding of the terms and conditions of the offer. Thus, under the REALTOR Code of Ethics, inducements can be offered and marketed to the public.
License Law Requirements
Ohio Revised Code Section 4735.18 (A)(14) prohibits a licensee from “offering anything of value other than the consideration recited in the sales contract as an inducement to enter into a contract for the purchase or sale of real estate.”
This section has been interpreted by Ohio courts as only prohibiting undisclosed inducements to purchase or sell real estate. If an inducement is disclosed in the purchase agreement as part of the consideration, a licensee does not violate ORC § 4735.18. Thus, REALTORS can offer incentives such as a gift certificate, a free home warranty, discount coupons, etc. to a buyer or seller as long as it is disclosed in the purchase agreement.
It should be noted that Section 4735.18(A)(14) only applies to inducements that are offered as an incentive to someone to enter into a purchase agreement. It does not require disclosure of items that are offered to merely entice a seller to enter into a listing agreement or get buyers to attend an open house. Thus, if the seller or buyer will receive the offered item (i.e. the gift certificate) for merely listing their property or attending the open house and no purchase or sale of property is required, disclosure in the purchase agreement is not required.
Like the NAR Code of Ethics, the license law also requires that all advertisements be accurate and not misleading. When marketing inducements, REALTORS must assure that the terms of any offer are clear and that any limitations or restrictions are disclosed. For example, it should be disclosed if there is a time limit or price restriction on the offer. It is also recommended that the dollar value of the item being offered be disclosed.
To summarize, when analyzing whether something that is being offered constitutes an inducement that must be disclosed, REALTORS should ask themselves the following questions:
- Does the item being offered have value?
- Is it being offered to a party to a purchase agreement?
- Will the person only receive the item of value if he enters into a purchase agreement?
If the answer to all of these questions is yes, then the item or money being offered to the buyer or seller must be disclosed in the purchase agreement.
While referrals are an excellent source of business, REALTORS need to be cognizant of the law in this area. Although referral fees can be paid to other brokers, Ohio license law prohibits payments to unlicensed persons. On the federal level, the Real Estate Settlement Procedures Act (RESPA) places restrictions on such fees between settlement service providers.
Ohio License Law
Ohio Revised Code Section 4735.01 sets forth those acts which require a real estate license if they are done for another person and for a fee, commission or any valuable consideration. Among these is anyone who “directs or assists in the procuring of prospects or the negotiation of any transaction … which does or is calculated to result in the sale, exchange, leasing or renting of any real estate.”
Thus under this section, in order to receive any type of compensation or anything of value for referring a prospect for a real estate transaction, a person must hold either an Ohio real estate sales or broker’s license. This would include the referral of a buyer, seller, landlord, or tenant. Anyone who engages in such activity without being licensed is guilty of a first degree misdemeanor and can be subject to fines of up to $1000 for every day they violate this law.
In addition to the civil and criminal penalties that can be imposed upon a person who illegally receives a referral fee, a licensed broker or agent who pays such a fee to an unlicensed person can be subject to disciplinary sanctions as well. Under Ohio Revised Code Section 4735.18(A)(11) it is a violation for a licensee to pay commissions or fees, or to divide commissions with anyone who is not licensed in Ohio. Such conduct can result in suspension or revocation of one’s license, fines, etc.
An exception to this prohibition exists for persons or entities that are licensed in another state. Under Ohio Administrative Code Section 1301:5-5-06, an Ohio broker can pay a referral fee to a broker licensed in another state for referring prospects to the Ohio broker. Under this section “refer” or “referral” is defined as the introduction or directing of a person by one broker to another broker for real estate brokerage services. The out-of-state broker who refers business to an Ohio licensee cannot perform any acts that require a license in Ohio without holding an Ohio license, i.e. show property, write an offer, etc.
The only exception to this rule is for commercial transactions. Commercial property is defined as anything other than real estate containing 1-4 residential units. Under Ohio Revised Code Section 4735.022, out-of-state brokers/agents can perform acts that would usually require an Ohio license on commercial property as long as they work with an Ohio broker and certain requirements are met. More information on these requirements can be found in the Commercial/Industrial Section of OAR’s website, www.ohiorealtors.org.
To summarize, there are two important rules regarding finder/referral fees:
An unlicensed person cannot legally accept compensation for the referral of sales or leasing prospects and a licensee may not pay an unlicensed person for such conduct.
A referral fee can only be paid to a broker licensed in Ohio or another state.
The Real Estate Settlement Procedures Act is a federal law that prohibits the payment and receipt of a fee, kickback, or anything of value in return for the mere referral of business related to settlement services in a federally related transaction. Under RESPA a settlement service is defined as any service provided in connection with a real estate settlement including, but not limited to, the following:
- Origination of a federally related mortgage loan
- Services rendered by a mortgage lender
- Services related to origination, processing, or funding of a federally related mortgage loan
- Title services (including the searches, exams, certificates, and insurance)
- Services rendered by an attorney
- Document preparation, including notarization, delivery, and recordation
- Rendering credit reports and appraisals
- Rendering inspections (including pest and fungus)
- Property surveys
- Settlement or closing
- Services involving hazard, flood, or other casualty insurance or homeowners’ warranties
- Services involving mortgage life, disability, or similar insurance designed to pay a mortgage upon disability or death of a mortgagor if required by the lender as a condition of the loan
- Services involving real property taxes or other assessments or charges on real property
- Real estate broker or agent services
- “Provision of any other services for which a settlement service provider requires a borrower or seller to pay”
Thus, under RESPA REALTORS cannot pay a lender, title company, appraiser, etc. anything of value for referring them business. Likewise, a REALTOR cannot receive a referral fee from such entities to which they refer business. This prohibition would cover anything of value in exchange for a referral, including tickets to sporting events, gift certificates, use of vacation homes, etc.
RESPA is enforced by HUD. Violations can result in criminal penalties that can include imprisonment of up to one year and fines of up to $10,000 for each violation. Each thing of value that is given or accepted is considered a separate violation. In addition to these criminal sanctions, there are also civil penalties that can be imposed.
Gifts are often given by REALTORS to thank someone for utilizing their services or sending them business. Depending on the circumstances, such tokens of appreciation may or may not be legal under Ohio license law.
“Closing gifts” are commonly given by REALTORS to a buyer or seller after the conclusion of a transaction. Such gifts are permissible under Ohio license law.
A gift is distinguishable from an inducement given to a buyer or seller to enter into a purchase contract. As discussed previously, this type of inducement must be recited in the purchase contract. A “closing gift” is not required to be disclosed in the purchase contract because the client would be unaware of the “closing gift” at the time the contract is entered into and therefore, the gift is not a part of the consideration for the purchase contract.
Gifts for referrals cannot be given to a past client or customer for referring a buyer or seller to a REALTOR. As discussed in the preceding section, that is because under Ohio license law a real estate license is required of anyone who receives anything of value for referring a prospect for the purchase, sale, exchange or leasing of real estate.
Finally, “thank you” gifts to vendors who refer business to REALTORS is prohibited by RESPA if the vendor is considered a settlement service provider. This is discussed previously in the section on RESPA. Examples of settlement providers would include mortgage brokers, title companies, appraisers, etc.